2058 1 UNITED STATES OF AMERICA Before the 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 In the Matter of: ) 4 ) UNITED SAVING ASSOCIATION OF ) 5 TEXAS, Houston, Texas, and ) ) 6 UNITED FINANCIAL GROUP, INC., ) Houston, Texas, a Savings ) 7 and Loan Holding Company ) ) OTS Order 8 MAXXAM, INC., Houston, Texas, ) No. AP 95-40 a Diversified Savings and ) Date: 9 Loan Holding Company ) Dec. 26, 1995 ) 10 FEDERATED DEVELOPMENT CO., ) a New York Business Trust, ) 11 ) CHARLES E. HURWITZ, ) 12 Institution-Affiliated Party ) and Present and Former Director ) 13 of United Savings Association ) of Texas, United Financial Group,) 14 and/or MAXXAM, Inc.; and ) ) 15 BARRY A. MUNITZ, JENARD M. GROSS,) ARTHUR S. BERNER, RONALD HUEBSCH,) 16 and MICHAEL CROW, Present and ) Former Directors and/or Officers ) 17 of United Savings Association of ) Texas, United Financial Group, ) 18 and/or MAXXAM, Inc., ) ) 19 Respondents. ) 20 TRIAL PROCEEDINGS FOR 10-7-97 21 22 2059 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire Special Enforcement Counsel 4 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire 5 and BRYAN VEIS, Esquire of: Office of Thrift Supervision 6 Department of the Treasury 1700 G Street, N.W. 7 Washington, D.C. 20552 (202) 906-7395 8 ON BEHALF OF RESPONDENT MAXXAM, INC.: 9 FRANK J. EISENHART, Esquire 10 of: Dechert, Price & Rhoads 1500 K Street, N.W. 11 Washington, D.C. 20005-1208 (202) 626-3306 16 12 DALE A. HEAD (in-house) 13 Managing Counsel MAXXAM, Inc. 14 5847 San Felipe, Suite 2600 Houston, Texas 77057 15 (713) 267-3668 16 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND CHARLES HURWITZ: 17 RICHARD P. KEETON, Esquire 18 of: Mayor, Day, Caldwell & Keeton 1900 NationsBank Center, 700 Louisiana 19 Houston, Texas 77002 (713) 225-7013 3 20 21 22 2060 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 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 19 Jerry Langdon, Judge Shipe's Clerk (Not present) 20 REPORTED BY: 21 Ms. Marcy Clark, CSR 22 Ms. Shauna Foreman, CSR 2061 1 2 EXAMINATION INDEX 3 4 DANIEL J. GOLDBERG 5 Examination by Mr. Guido....................7 6 Cross-Examination by Mr. Nickens...........51 7 Redirect-Examination by Mr. Guido..........78 8 RICHARD T. PRATT 9 Examination by Mr. Guido...................84 10 Cross-Examination by Ms. Clark............126 11 GERALD WILLIAMS 12 Examination by Mr. Guido..................134 13 14 15 16 17 18 19 20 21 22 2062 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: The hearing will come to 4 order. There is pending the respective motions on 5 access to the shareholders list and I have 6 reviewed this and I have concluded that I will 7 adopt the respondents' procedure in this matter. 8 My order is not based on any finding or 9 supposition that leaks have occurred, but the OTS 10 order is rather complex and extensive. A number 11 of persons would have access not only to the OTS 12 people and, as you know, I have limited ability to 13 impose sanctions for violations of such orders. 14 There have been representations that 15 there are interests extremists to our purposes 16 seeking access to these documents. It seems to me 17 the arrangement proposed by the respondents is 18 workable. There is no time limit. I expect the 19 parties will work out times. There is no 20 specification of the identity of the people who 21 would have access under the respondents' order, 22 but it seems to me there should be a record kept 2063 1 of who reviews these documents. I will sign the 2 respondents' order though, as I indicate, I have 3 some -- it should state who is going to review -- 4 there should be a record kept of who reviews the 5 documents. 6 MR. EISENHART: We will work out such a 7 procedure with the OTS, Your Honor. I also 8 have -- I mentioned yesterday that the order 9 submitted only really went to MAXXAM. I have a 10 parallel order for Federated which I can hand up 11 to you now. 12 THE COURT: All right. I'll sign a 13 copy and send it to Washington for the records and 14 the parties have their copies. 15 MR. EISENHART: Thank you, Your Honor. 16 THE COURT: Do you have another 17 witness, Mr. Guido? 18 MR. GUIDO: Yes, Your Honor. We call 19 Mr. Dan Goldberg to the stand, Your Honor. 20 21 22 DANIEL J. GOLDBERG, 2064 1 called as a witness and having been first duly 2 sworn, testified as follows: 3 4 EXAMINATION 5 6 THE COURT: Be seated, please. 7 Q. (BY MR. GUIDO) Will you state your 8 name for the record, please? 9 A. Daniel J. Goldberg. 10 Q. And where are you employed? 11 A. Kutak, K-u-t-a-k, Rock, R-o-c-k, law 12 firm. 13 Q. Prior to that, where were you employed? 14 A. From February 1, 1996, till 15 September 29, 1997, I was employed with the 16 Reinhart, R-e-i-n-h-a-r-t, law firm out of 17 Milwaukee. 18 Q. And prior to that, where were you 19 employed? 20 A. Prior to that, from May of 1981 until 21 February 1, 1996, I was employed with the law firm 22 of Housley, H-o-u-s-l-e-y, Goldberg which is me, 2065 1 and Kantarian, K-a-n-t-a-r-i-a-n. 2 Q. And prior to 1981, where were you 3 employed? 4 A. From December, 1977, until May, 1981, I 5 was employed with the law firm of Silver, 6 Freedman, F-r-e-e-d-m-a-n, Taff, T-a-f-f, Housley, 7 which I just spelled, and Goldberg. 8 Q. Now, were you ever employed by the 9 Federal Home Loan Bank Board? 10 A. Yes. 11 Q. During what time period? 12 A. From May, 1967, until December, 1977. 13 Q. And what position did you hold when you 14 left the bank board? 15 A. I was general counsel when I left. 16 Q. And how long had you held that 17 position? 18 A. General counsel, a month or two. 19 Acting general counsel, about two years. I held 20 other positions before that. 21 Q. Now, when you were with the Housley, 22 Goldberg law firm, did you or did the firm do any 2066 1 work for MCO with regard to the filing of the 2 H(e)-1 application -- 3 A. Yes. 4 Q. -- to obtain control? 5 A. Yes. 6 Q. And what work did the firm do? 7 A. I didn't handle the application so I 8 cannot give a definitive answer. But I believe 9 the law firm filed the H(e)-1 application. 10 Q. And do you know who the law firm was 11 contacted by on behalf of MCO to file that 12 application? 13 A. I would have to assume -- this was in 14 '82 -- that I was probably initially contacted by 15 Sonny Bentley or Tom King or Jim Pledger or 16 someone I knew in Texas from my being a special 17 counsel of Texas League. They asked me if I was 18 interested in representing MCO, and then I don't 19 recall who at MCO contacted me if anybody. I 20 think probably -- it probably was the Kramer Levin 21 firm that contacted us. We represented the firm 22 initially, not MCO. So, that's how it started in 2067 1 '82. 2 Q. So, you were contacted by the firm? 3 A. Yes. 4 Q. Of Kramer Levin? 5 A. Yes. And I'm assuming that they 6 learned of us through my -- 7 Q. But you don't know? 8 A. I have a vague feeling it was mentioned 9 to me, but I don't recall specifically. 10 Q. Now, did your firm draft the H(e)-1 11 application? 12 A. I don't know. I would assume so, but I 13 don't know. Volin handled that. Leonard Volin, a 14 shareholder in our firm. 15 Q. Did you attend any meetings, any 16 drafting sessions for the drafting of the H(e)-1 17 application? 18 A. I don't recall any. 19 Q. And who were the people at the Kramer 20 Levin law firm that you dealt with? 21 A. Well, I had limited dealings then. And 22 I can tell you who I dealt with, but that doesn't 2068 1 mean Mr. Volin and others. I think I dealt with 2 Richard Marlin primarily. That's the name that 3 comes back to me. 4 Q. Did you deal with Ezra Levin? 5 A. I may have. I don't recall. Again, 6 not having worked on the H(e)-1, I don't know who 7 Volin dealt with. But certainly I knew of Ezra 8 and I'm sure I talked to him, but I recall mainly 9 talking to Marlin originally. This is at the 10 beginning now. 11 Q. Now, you mentioned Mr. Volin as being 12 at the Housley, Goldberg firm with you. What was 13 his background? 14 A. He was at the bank board. He was in 15 the division called the general division and was a 16 technician on regulatory matters. 17 Q. Did you take him to the Housley, 18 Goldberg law firm when you went there? 19 A. There was a gap from my joining the 20 Housley firm -- oh, from Silver, Freedman you 21 mean? 22 Q. Yes. 2069 1 A. Oh, yes, I did. 2 Q. So, you recruited him to go with you to 3 the Silver, Freedman firm? 4 A. There was a gap of several months but 5 yes, I'd say the answer is yes. 6 Q. And you brought him with you when you 7 went to the Housley firm and joined it as a 8 partner? 9 A. Well, everyone left the Housley firm 10 except Bob Freedman. In that sense, the answer is 11 yes. 12 Q. You mean left the earlier firm to go to 13 Housley? 14 A. Everyone except Bob Housley left the 15 Silver, Freedman firm to go to Housley. So, the 16 answer would have to be yes. 17 Q. And what kind of work did he do at the 18 Housley firm? 19 A. Mergers and acquisitions, regulatory 20 matters, application matters, holding company 21 matters, technical branch matters. He was 22 basically a technician. 2070 1 Q. Now, did the Housley firm do any work 2 with regard to the extension of the time period 3 for acquisition of control under the resolution 4 passed in response to the H(e)-1 application by 5 MCO in 1982? 6 A. Volin told me that he -- that he was 7 involved in extensions. That's the only way I can 8 answer that question. 9 Q. Now, was the Housley firm ever 10 consulted with regard to the -- a put call 11 arrangement between Drexel Burnham Lambert and MCO 12 Holdings? 13 A. To my knowledge, no. Best of my 14 information and belief, no. 15 Q. Now, what other work did the Housley 16 firm do for MCO? 17 A. At the very beginning of the 18 application, before it was filed, we were 19 consulted about net worth maintenance agreements 20 and then I got involved in the Castle & Cooke 21 matter. And voluntarily, even obviously, may have 22 done other things. I don't know everything he 2071 1 did. 2 Q. Were you the billing partner for MCO? 3 A. Yes. I don't know if I sent all the 4 bills out, but I sent most of them. 5 Q. But you were the designated billing 6 partner? 7 A. In a small law firm, you don't have 8 such a thing. Everybody rushes to bill as much as 9 they can. I generally step back and let other 10 people bill. I think I sent bills out for MCO, 11 but there was no such thing as a designated 12 billing officer. 13 Q. Now, who did you send the bills to for 14 Castle & Cooke work? 15 A. I sent to whoever we sent -- I assume 16 it was Barry Munitz. I just don't remember. But 17 whoever was the normal recipient of bills received 18 the Castle & Cooke bill, and the work I did for 19 United Savings Association of Texas I sent to 20 United Savings Association of Texas. 21 Q. With regard to the Castle & Cooke 22 matter, did you bill MCO for that work? 2072 1 A. Part of it. Most of it. Not all of 2 it. 3 Q. Now, who contacted you and asked you to 4 represent MCO in the Castle & Cooke matter? 5 A. It didn't happen that way. I can tell 6 you how it happened. 7 Q. I'd like to know how it happened. 8 A. On -- in February of 1984, I called C. 9 Thomas Long, who was deputy general counsel of the 10 bank board, to inquire why there was such a delay 11 in processing the H(e)-1 application of MCO 12 Holdings. And we discussed a net worth 13 maintenance issue and I sent him various documents 14 in the Belzberg transaction. 15 I called him back on March 1, 1984, to 16 see if he had any reaction to the documents I sent 17 him in the middle of February. And he indicated 18 to me that in addition to policy issues with 19 respect to debt approval and policy issues with 20 respect to the net-worth maintenance agreement, 21 there was a further policy issue that was delaying 22 the application in that MCO Holdings, according to 2073 1 him and United Financial Corporation, had been 2 purchasing shares of Castle & Cooke. And he said 3 "If you want to discuss this, I can't discuss it 4 with you. You need to talk to Norman Raiden," who 5 was then general counsel. 6 I then called Barry Munitz I believe 7 the same day, March 1, 1984, to advise him that -- 8 of what Mr. Cooke -- excuse me -- of what Mr. Long 9 said to me regarding the Castle & Cooke matter. 10 And that led to my being asked to do other things 11 with the bank board, but I don't recall at any one 12 time being asked to represent him. Having 13 reported the matter and being told to do other 14 things, I just continued to engage in the matters 15 requested of me. 16 Q. Let's back up to the February 17 conversation with Mr. Long. 18 A. Right. 19 Q. Did anyone ask you to make that call? 20 A. Leonard Volin asked me to make that 21 call. 22 Q. Did he indicate to you who had 2074 1 requested from the client to make that call? 2 A. He primarily dealt with -- no, I don't 3 remember. 4 Q. And when you made that call, what did 5 you specifically say to Mr. Long? 6 A. I asked him why it was taking so long 7 and pointed out that I knew there was a net worth 8 maintenance issue and I tried to explain the issue 9 to him and I sent him then the bank board 10 operative documents in the Belzberg matter, 11 B-e-l-z-b-e-r-g. 12 Q. And what was the Belzberg matter? 13 A. In 1975, probably January, 1975, the 14 Belzberg brothers, who were major financiers in 15 Canada, became the first foreign nationals to seek 16 to acquire an FSLIC insured financial institution. 17 They held less than 25 percent of the stock of the 18 institution that they were seeking to acquire 19 through the holding company which was called Far 20 West, and they asked for approval to buy slightly 21 over 25 percent and to take actual control of that 22 institution even if they had less than 25 percent 2075 1 under Section 408(a)2(d) of the National Housing 2 Act as amended. 3 There was a major dispute within the 4 bank board as to what to do and, ultimately, the 5 view of the general counsel prevailed and the bank 6 board authorized them to acquire actual control 7 and definitional control with the net-worth 8 maintenance agreement kicking in only when they 9 had more than the majority of the stock and 10 nothing before that. So I regarded since they 11 only intended to take slightly over 25 percent as 12 to not to impose a net-worth maintenance agreement 13 in the Belzberg situation. 14 Q. And did you do that in an attempt to 15 persuade the Federal Home Loan Bank Board to only 16 require net worth maintenance condition if MCO 17 held more than 50 percent of the stock? 18 A. I did it to -- yes. And to say the 19 minimum you should give them is what you gave the 20 Canadians in Belzberg at a minimum. That's I 21 didn't talked too long about it, and that's why I 22 sent to Tom Long the Belzberg approval documents 2076 1 because he might not have known about them. This 2 was '84. This happened in '75. 3 Q. And then you testified, I think, that 4 you had a subsequent conversation with Mr. Long? 5 A. It was on March 1. 6 Q. Okay. On March 1, you called him back 7 and said, "I spoke to you. I sent you this 8 material." What's your response? Is that 9 essentially what you said? 10 A. Yes. 11 Q. And what did he say to you? 12 A. He brought up that there was another 13 polish that was delaying the application. That is 14 that MCO and United Financial Corporation were 15 purchasing shares of Castle & Cooke. He did not 16 tell me anything about it, but he said I had to 17 talk to Norm Raiden who was handling it. 18 Q. And who was Norm Raiden? 19 A. Norm Raiden was then the general 20 counsel of the Federal Home Loan Bank Board. 21 Q. And you then subsequently reported that 22 to Mr. Munitz? 2077 1 A. I reported it on March 1, '84. 2 Q. On March 1? The same day? 3 A. Yes. 4 Q. Was Mr. Munitz an officer of MCO? 5 A. I believe he was an officer of MCO. 6 Q. Was he an officer of a company called 7 Federated Development? 8 A. I don't know. 9 Q. Now, what did Mr. Munitz say to you 10 when you told him that you had received this 11 information from Mr. Long regarding the 12 acquisition of stock in Castle & Cooke? 13 A. On March 1 -- 14 MR. NICKENS: Your Honor, I believe 15 that MAXXAM would assert the privilege. And to 16 the extent that this witness can relate the 17 conversation without relating privileged 18 communications, we have no objection. But we do 19 have an objection to the disclosure of privileged 20 communications on behalf of MAXXAM or what was 21 then MCO. 22 MR. GUIDO: Your Honor, I can rephrase 2078 1 the question to avoid the problem. 2 Q. (BY MR. GUIDO) Did Mr. Munitz 3 indicate that he wanted you to do anything in 4 addition to what you had already done in response 5 to the report you had given him? 6 A. Said he'd get back to me on it. 7 Q. Okay. Now, did he subsequently get 8 back to you? 9 A. Either he got back to me or I called 10 him on March 7th, 1984. 11 Q. March 7th of 1984? 12 A. That's correct. 13 Q. And what did you discuss in that 14 conversation? 15 A. The only thing I recall is that he 16 wanted a meeting with Raiden. He wanted me to 17 arrange a meeting with Raiden. 18 Q. And did you arrange a meeting with 19 Mr. Raiden? 20 A. After making many phone calls, I 21 finally did. 22 Q. And this was on March 7th? 2079 1 A. No. It took me till March 9 to arrange 2 a meeting for March 13, 1984. 3 Q. March 15th? 4 A. No. March 9 was when I finally, after 5 making several phone calls, arranged a meeting for 6 March 13, 1984. 7 Q. Excuse me. And did you meet with 8 Mr. Raiden on March 13th, 1984? 9 A. Yes, with Barry Munitz, Dr. Munitz. 10 Q. And did anyone else attend that meeting 11 with you and Barry Munitz? 12 A. Norman Raiden's administrative 13 assistant, Rosemary Steidel, S-t-e-i-d-e-l, was in 14 and out during the meeting and she's the one that 15 arranged the meeting. She wasn't there for the 16 whole meeting, but she was -- I think she drifted 17 in and out. It was really hard to say how much 18 she was there because she'd come into the meeting 19 and whisper in his ear about other things but she 20 was there in and out of that meeting. 21 Q. Now, you're very precise about the 22 dates -- 2080 1 A. Yes. 2 Q. -- in your testimony. Have you 3 testified about this matter previously? 4 A. Yes. 5 Q. And -- 6 A. Twice. 7 Q. Twice? 8 A. (Witness nods head affirmatively.) 9 Q. And one was in the administrative 10 deposition that the OTS took, right? 11 A. I need to correct my testimony. I was 12 deposed twice. It's the first time I've 13 testified. 14 Q. Okay. Excuse me. You were deposed 15 twice? 16 A. Yes. 17 Q. And you were deposed by the OTS in the 18 administrative deposition in this proceeding? 19 A. Yes. 20 Q. And you were also deposed in another 21 proceeding? 22 A. Yes. 2081 1 Q. When was that? 2 A. August 3, 1989. 3 Q. 1989? 4 A. That's correct. 5 Q. Now, when you prepared for those 6 depositions, did you review any documents? 7 A. Yes, for the '89 deposition. And 8 probably not for the OTS deposition. I discussed 9 things with my counsel, but I'm not sure I 10 reviewed documents for the OTS deposition. 11 Q. For the 1989 deposition, did you review 12 time records? 13 A. I did for -- I reviewed time records to 14 the extent they were available for both 15 depositions but not other documents for the OTS 16 deposition. 17 Q. Now, when you met with Mr. Raiden, did 18 you ask him what was his concern about the 19 acquisition of Castle & Cooke stock? 20 A. Are we talking about -- we have more 21 than one meeting. Are we talking about the 22 meeting of March 13? 2082 1 Q. March 13. 2 A. Yes. 3 Q. And what did he tell you? 4 A. About the Castle & Cooke? 5 Q. Uh-huh. 6 A. He told -- he talked to us generally, 7 both Dr. Munitz and myself, and then pulled me 8 aside several times. I can't a hundred percent 9 tell you what he told me together with what he 10 pulled me aside, but let me just said what he said 11 at the meeting. That he was getting great 12 political pressure from Senator Proxmire and the 13 two Hawaiian senators about insured deposits being 14 used to purchase a public company, that he was 15 critically concerned that if this situation 16 continued, there would be an investigation by the 17 general accounting office and he was concerned of 18 the adverse legislation which could materially 19 impact the continuation of the service corporation 20 concept used by federal savings and loan 21 associations and that he wanted the activities 22 stopped. He was quite general on the -- on the 2083 1 13th, and there was a dialogue about the Castle & 2 Cooke investment. 3 Q. Did he mention the 13D that had been 4 filed by MCO and United Financial Group or United 5 Financial Corporation? 6 A. Not to my recollection. 7 Q. So, he didn't mention the 13D at all at 8 that meeting? 9 A. Not to my recollection. 10 Q. Did he mention to you that he felt that 11 this was a hostile takeover attempt? 12 A. No, not at that meeting. We had other 13 meetings. I don't recall him ever saying it was 14 hostile. It was an activity that he was -- that 15 was unacceptable to the bank board and putting 16 intense political pressure on him. 17 Q. Did he indicate that the intense 18 political pressure came at Castle & Cooke's 19 instigation? 20 A. Absolutely not. Had he said that, I 21 think I would have discounted everything he said 22 at the meeting. 2084 1 Q. Now -- 2 THE COURT: Why is that? 3 THE WITNESS: He would have been taking 4 sides, and I don't know that -- there may not have 5 been political pressure. If he was being pushed 6 by the other side to be raising that point, then I 7 would have questioned whether there was political 8 pressure and would go on out and ascertain for 9 myself. I had access to the hill, if there was, 10 in fact, political pressure. I assumed it was 11 political pressure on him as a regulator as 12 opposed to political pressure being generated by 13 one of the two contestants in a takeover matter, 14 Your Honor. 15 THE COURT: All right. Thank you. 16 Excuse me, Mr. Guido. 17 Q. (BY MR. GUIDO) Did he indicate to you 18 that he was concerned that this matter, the Castle 19 & Cooke matter, would result in legislation that 20 would curtail the direct investment powers of 21 savings and loans in their service corporations? 22 A. No. He didn't indicate. He referred 2085 1 to service corporation. 2 Q. What was he referring to, to your 3 recollection, when he said that it was going to 4 curtail service corporation's powers? 5 A. The federal savings and loan 6 associations had the power to invest up to 7 3 percent of their assets in service corporations 8 which could engage in a much broader class of 9 activities than the savings and loan. State 10 savings and loan associations had the power to 11 engage in whatever activities the state 12 legislators in their judgment sought to authorize 13 the institutions to do. 14 I envisioned based on my conversation 15 with him a concern, one, that it would eliminate 16 the federal 3 percent window and, two, would 17 attempt for the first time to regulate state S&Ls 18 by imposing it as part of the National Housing 19 Act. 20 Q. Now, did Mr. Munitz speak at that 21 meeting on March 13th? 22 A. He did. 2086 1 Q. And what did he say? 2 A. Well, we talked about two different 3 areas -- Castle & Cooke and we talked in very 4 great length about the net worth maintenance 5 issue. Which do you want to hear? 6 Q. Let's talk about Castle & Cooke. 7 A. Okay. 8 Q. Let's hear what he said about Castle & 9 Cooke. 10 A. He explained to Mr. Raiden why MCO and 11 United Financial Corporation were investing in 12 Castle & Cooke. 13 Q. And what did he say? 14 A. To the best of my recollection, he said 15 that Castle & Cooke -- back up. He said that the 16 service corporation -- that United Financial 17 Corporation had come to MCO Holdings and indicated 18 whenever they had an investment that they liked to 19 please share it with the service corporation and 20 that they had shared several speculative stocks 21 with United Financial Corporation that United 22 Financial Corporation did not choose to invest in. 2087 1 But when they came to Castle & Cooke, there was 2 extreme interest on the part of United Financial 3 Corporation because Castle & Cooke had huge land 4 investments throughout Hawaii with an emphasis on 5 the island of Maui plus throughout California and 6 that it appeared to be a savings and loan-related 7 investment. 8 The idea was to acquire -- maybe even 9 acquire the company and eventually be able to 10 acquire the land, develop it for houses and 11 condominiums and office buildings and may take out 12 loans of United Savings Association of Texas so 13 that they saw this as a long-term viable business 14 opportunity to move the association further ahead 15 in housing and to get out of the corner or the 16 crowded Texas market. 17 Q. Did he tell Mr. Raiden who had actually 18 purchased the stock on behalf of United Financial 19 Corporation? 20 A. No, I don't recall him saying that. 21 Q. Did he tell Mr. Raiden who had 22 authorized the purchase of the stock in Castle & 2088 1 Cooke? 2 A. These matters weren't discussed, either 3 this or the other matter you just referred to. 4 Q. Now, you said he also addressed the net 5 worth maintenance issue? 6 A. We addressed it. He did, too. 7 Q. You both addressed it? 8 A. Yes. 9 Q. And did you both argue that the Federal 10 Home Loan Bank Board should change its mind and 11 amend its net worth maintenance condition that it 12 imposed? 13 A. I don't think that one had been 14 necessarily imposed then. We were -- Mr. Munitz 15 was arguing for something broader than Belzberg. 16 I was arguing that you've got to give us at least 17 Belzberg and I pointed out what had happened at 18 the bank board hearing at Belzberg and how there 19 was a huge staff split and what legal concerns we 20 expressed at Belzberg. 21 Mr. Raiden -- and as a preface for 22 this, Mr. Raiden never expressed his view with 2089 1 respect to the net worth maintenance. He 2 constantly referred to OESs. And I remember 3 telling Mr. Raiden that this was the same thing 4 OTS did in '75 and it was necessary for the 5 general counsel to stand up to it and how we 6 related to -- we discussed the general counsels' 7 concern that the -- in '75 that the proposed 8 Belzberg solution originally presented was -- 9 would not stand up in court. 10 Q. Now, you -- at the time you were 11 speaking with him, the resolution had been passed 12 by the bank board approving the H(e)-1 13 application, had it not? 14 A. I don't think so. I don't think it was 15 approved until the end -- no. It couldn't have 16 been. One of the issues was -- the whole thing -- 17 the whole purpose of the meeting originally, you 18 have to understand, was why was this application 19 taking so long? No. It was months and months 20 afterwards it was approved by the bank board. 21 Q. But you were proposing certain language 22 for a net worth maintenance condition? 2090 1 A. No. We weren't doing that. We were 2 discussing concepts. I was not happy with the 3 language. I think Dr. Munitz was discussing a 4 little broader than Belzberg and I probably was 5 maybe fouling him up by saying at least Belzberg 6 and why that was the only lawful thing you could 7 do in light of the Belzberg decision. 8 Q. Now, after Mr. Munitz spoke and 9 explained the reasons for the purchase of the 10 Castle & Cooke stock, did you address the issue of 11 the purchase of the Castle & Cooke stock. 12 A. Only -- yes, only in one sense. 13 Q. And what was that? 14 A. That -- I argued that you could 15 consider this a savings and loan type investment 16 that would basically maybe not even be a spiritual 17 non-direct investment. That was one thing I 18 argued. Two, it was generally within a thrift 19 type of acquisition; that is, the stock because if 20 it was housing related. And, three, I asked 21 Mr. Raiden if his only concern was political, what 22 would happen if we applied political 2091 1 counterpressure? And he told me that would at 2 least resolve part of the problem. 3 Q. That would what? 4 A. Resolve part of the problem. 5 Q. What did you understand him to mean by 6 that? 7 A. Oh, I said, "What if we had a couple 8 Texas senators and a couple senators from other 9 states come in and say what a great idea?" We 10 have real problems in the S&L industry. This is 11 one way to solve them. And I said if we did that 12 and it works that may take some of the pressure 13 off of us. And he said it would take some of the 14 heat off. That's what I said. 15 Q. Now, what was his response to your 16 request or your explanation, Mr. Munitz's 17 explanation for the purchase of the Castle & Cooke 18 stock? 19 A. He didn't care what the purpose was. 20 He wanted us out, that there was too much danger 21 of adverse legislation and the board did not like 22 this as a matter of policy. They did not like 2092 1 insured deposits being used in any respect to 2 finance the acquisition of stock in a public 3 company and particularly in large amounts. 4 Q. Now, Garn-St. Germain had been passed 5 at that time, had it not? 6 A. I don't remember when Garn-St. -- I 7 remember Garn-St. Germain. My best recollection 8 is yes; but, you know, I can't tell you -- I can 9 tell when you some statutes are passed like 10 FIRREA, but I can't be sure. My best recollection 11 is yes, it had been. 12 Q. Did you point out to him when he said 13 that the bank board as a matter of policy didn't 14 like the idea of savings and loans investing in 15 public corporations that Garn-St. Germain had 16 authorized such acquisitions? 17 A. No, I didn't. 18 Q. Now, after he told you what his 19 conclusions were after hearing you out, what did 20 you do? 21 A. After the March 13 meeting? 22 Q. Yeah. 2093 1 A. Okay. It's important for me to note -- 2 and I'll answer the question -- that he was still 3 general on March 13th. His tone changed later. 4 We went back and discussed the matter. Without 5 going into discussion, we discussed whether it was 6 a good idea to have political counterpressure and 7 my view is they didn't think it was a good idea 8 and it was dropped. And basically, we waited to 9 see what would happen with Raiden. I did not 10 discuss Castle & Cooke with him. 11 Q. Okay. So, you waited. And did you 12 hear back from Mr. Raiden? 13 A. Yes. 14 Q. When? 15 A. Through a series of events on March 30, 16 1984. 17 Q. And what did he tell you when he got 18 back to you? 19 A. Well, I had heard on March -- well, 20 this was at home, Friday night. We had a very 21 short conversation because I had to go to Temple. 22 It was the anniversary of my brother's death. We 2094 1 took the conversations up in great detail on 2 Saturday. I can't tell you what was said Friday, 3 March 30, 1984, as opposed to Saturday, March 31, 4 '84. I can tell you what was said on those two 5 days combined. 6 Q. What was said on both those days? 7 A. This has reached a boiling point. It 8 absolutely has to stop. That's the holding Castle 9 & Cooke stock, that unless we were prepared, both 10 institutions -- that is, MCO and United financial 11 Corp. -- to divest, he would take one of the 12 following options or more: He would bring a 13 temporary cease and desist order proceeding and 14 institute permanent cease and desist proceedings 15 or go to Federal District Court or -- or -- and 16 institute administrative proceedings under the APA 17 under section 4082(d) to declare that MCO had 18 actual control over United Financial Group and 19 United Savings Association, that he would seek a 20 divestiture of all the Castle & Cooke stock and he 21 may also seek a divestiture of all the MCO 22 Holdings stock held by MCO -- all the United 2095 1 Savings Financial Group stock held by MCO. He 2 indicated during this series of conversations that 3 he would also seek to impose the bank board's loan 4 to one borrower limit on any loans made by United 5 Savings Association of Texas to its service 6 corporation, United Financial Corporation. 7 And either at this meeting or on 8 April 2nd, he told me that the Office of 9 Examination and Supervision already concluded that 10 MCO had crossed the 25 percent line and that some 11 of the purchases of stock were nominees for MCO 12 and it was a parking operation and that if he was 13 forced to bring action, he'd throw this in, too. 14 And I responded to some but not all of his 15 comments. 16 Q. Did he indicate where the stock had 17 been parked that he was referring to? 18 A. I believe -- no. The answer is no. He 19 said it. He probably -- he probably said it on 20 April 2nd. He probably got me alone when there 21 was another meeting which we'll get to. And I 22 remember he may have said it twice. He may have 2096 1 said it on the telephone conference as well as at 2 the meeting, but I distinctly remember he had an 3 unlit cigar and he pulled me aside as he tended to 4 do and said, "Dan, your client could have serious 5 problems over this and you better advise him of 6 that." 7 And I told him since he was pushing 8 this non-APA hearing that, "Norman, you wouldn't 9 be going to an APA hearing if you really felt 10 this" and it was completely dropped. He never 11 brought that up again, but he did say it to me. 12 Q. Now -- and he did tell you that he was 13 going to take this spectrum of action unless the 14 Castle & Cooke stock had been sold by both MCO and 15 United Financial Corporation? 16 A. Unless it was disposed of, yes. He 17 said he would take -- those were his options. 18 He'd select from that menu pushing, pushing -- we 19 had extensive conversations only about one of 20 them, and that was the APA hearing. We discussed 21 that in length. 22 Q. The actual control hearing? 2097 1 A. The actual control hearing. And I -- 2 Q. Now, you -- this is the 30th and the 3 1st? Is that -- 4 A. The 30th, the 31st continuing over to a 5 meeting on April 2nd. 6 Q. Now -- and this was the context of 7 those conversations? 8 A. Right. I say I was home on my Sabbath, 9 and he was -- he was either at home or in the 10 office. We talked on the phone on the night of 11 the 30th, throughout the day of the 31st; and then 12 we met on April 2nd. 13 Q. Was anyone else with you when you met 14 with him on the 2nd? 15 A. Yes. 16 Q. Who? 17 A. Ezra Levin. 18 Q. Is he the Ezra Levin from the Kramer 19 Levin law firm? 20 A. Yes. 21 Q. Is that the law firm who represents MCO 22 and Federated? 2098 1 A. Yes. 2 Q. Now -- and what transpired at that 3 meeting? 4 A. At the April 2nd meeting? 5 Q. Uh-huh. 6 A. He basically repeated the actions that 7 he discussed with me on the 30th and 31st to 8 Mr. Levin and indicated what he'd do if there was 9 not an immediate divestiture. 10 Q. How did Mr. Levin come to attend that 11 meeting with you? 12 A. On the morning of the 31st of March, 13 1984, I tried to get the people from United 14 Savings of Texas; but it was a Saturday. I didn't 15 have their home phones. I tried to get Mr. Levin 16 on the phone. I didn't have his phone. For some 17 reason, I had Barry Munitz'; or Lenny Volin had 18 it. I called Dr. Munitz in Houston, related 19 carefully what happened at the conversations with 20 Raiden, and said we needed to meet with him first 21 thing Monday morning. And I asked for authority 22 to arrange that meeting, and I asked Munitz to try 2099 1 and get in touch with people down in Texas and 2 tell them about it and that we needed to meet -- 3 it was so serious, we needed to meet with Raiden 4 early Monday morning first thing. And I was then 5 told Sunday, April 1st, that -- well, no. I had 6 to know it on Saturday -- that the person 7 attending the meeting would have been Levin, but I 8 did not talk to him on Saturday. I talked to him 9 Sunday. 10 Q. Who told you Mr. Levin would be 11 attending the meeting? 12 A. Oh, I guess Barry Munitz did. 13 Q. Now -- and then you had this meeting 14 and -- did Mr. Raiden repeat what he had said to 15 you over the telephone over the weekend? 16 A. If not verbatim, he -- in substance, 17 yes. 18 Q. And did you essentially reiterate your 19 positions from that weekend's conversations? 20 A. I did not argue with Raiden on the 21 phone on the 30th or 31st. I hadn't talked to the 22 client. On the 2nd, I expressed some opinions 2100 1 that certain of the actions such as the APA 2 hearing were not feasible because I had been 3 involved in a non-APA hearing on actual control 4 and I had firsthand experience that Norman did not 5 have. 6 Q. And you lost that hearing; is that 7 correct? 8 A. No. 9 Q. No? 10 A. In that hearing, First Surety, the bank 11 board was ruling on an application and the 12 application decision was challenged and there was 13 a request by the protestant for an APA hearing. 14 We determined not to give it to them because of 15 the fact -- we took the position and the bank 16 board formally said in their resolution that they 17 couldn't have an APA hearing unless they already 18 had grounds to believe that actual control existed 19 and that we didn't in that case. They challenged 20 us in the Court of Appeals. And I can't find -- I 21 read the briefs, but I can't find that there was 22 ever a decision issued by the United States Court 2101 1 of Appeals for the District of Columbia Circuit in 2 1973 or '74 on the First Surety matter. So, I 3 have to assume -- and I don't remember that the 4 appeal was withdrawn; but, no, I did not lose it. 5 We held -- we need not hold an APA hearing because 6 there was no evidence that -- we had to have 7 evidence that there was actual control before we 8 could order a hearing and that there wasn't in 9 this case and that's what the board resolution 10 said. 11 Q. They had to have reasonable grounds to 12 proceed. Is that what you mean? 13 A. They had to have evidence that the APA 14 hearing would lead to actual control, and they 15 determined there wasn't any in that case. 16 Q. Now, did you subsequent -- after you 17 met with Mr. Raiden on the 2nd, the end of that 18 meeting, did he continue to -- 19 A. I didn't get to finish my question -- 20 my answer. I also explained to Mr. Raiden how 21 difficult it would be to hold an APA hearing to 22 determine whether there was non-definitional 2102 1 control; that in that case, First Surety, we were 2 not -- we were -- and he was saying the same 3 thing, how difficult it would be for us. I was 4 then pointing out how difficult it would be for 5 the bank board to hold a hearing where there was 6 no sign posts, no guides, no familiar grounds. 7 And after you assemble all the evidence, what is 8 it you look for for control? I recall I expressed 9 to him my views as I was handling that hearing as 10 lead counsel for the bank board -- I wasn't 11 actually handling it, but I was supervising it -- 12 that as I looked at it, I determined it would be 13 very difficult to do. And I indicated to him that 14 I probably recommended to the board some 15 presumptions they used instead of ever going into 16 that APA hearing. That was on April 2nd. 17 Q. And so, you explained to him that such 18 a hearing would be very difficult? 19 A. He was telling me how difficult it 20 would be for us. My response is, "I agree. But, 21 Norman, it's going to be that difficult for you." 22 And he said, "Well, let's try to work 2103 1 this out where we don't have to use it." 2 And then the other thing -- then there 3 was some further dialogue about -- about Castle & 4 Cooke. And Mr. Levin asked Mr. Raiden that 5 instead of -- would it be acceptable to sell the 6 stock back to Castle & Cooke instead of otherwise 7 disposing of it on the market. And Raiden said, 8 "Yes, that's the way it's ordinarily done. I 9 prefer that you do it." 10 And Mr. Levin then said, "Well, you 11 know, we don't want to be accused of green mail." 12 And he said, "Well, you're big boys. 13 You can handle yourself. You get out of the 14 stock. I don't care how you get out of it. I 15 don't care whether you sell it back to the 16 company. That would be the preferred way. But I 17 want to see you out of the stock quickly," and 18 that's how the meeting ended. 19 Q. Now, did you subsequently meet with 20 Mr. Raiden? 21 A. Yes, I did. 22 Q. And when was that? 2104 1 A. April 6th. 2 Q. Had you had any conversations with 3 Mr. Munitz or Mr. Levin prior -- between the 4 April 2nd and the April 6th meeting? 5 A. Yes, I did. 6 Q. And what transpired in that 7 conversation or those conversations? 8 A. Well, they dealt with on April 5th a 9 settlement of the -- with Castle & Cooke of the 10 controversy. 11 Q. Okay. So, in other words, they told 12 you that they had reached an agreement with 13 Castle & Cooke to sell the stock to Castle & 14 Cooke? 15 A. They said they were trying to. I 16 should not contact Raiden until it was -- 17 everything was signed. And the -- later in the 18 day, they said it had been signed; and I scheduled 19 a meeting for the 6th. And before I did that, I 20 know I checked all along about everything with 21 United Savings of Texas. And having checked with 22 both of them and making sure they had settled, I 2105 1 went -- I met with Raiden on April 6th. 2 Q. And what transpired at that April 6th 3 meeting? 4 A. I informed him that there was a 5 settlement, that it was official. He excused 6 himself and went upstairs. He went somewhere and 7 then came back and wanted then the meeting. I 8 wanted to then discuss the holding company 9 application. 10 Q. Did you discuss the holding company 11 application? 12 A. Yes. 13 Q. And then -- 14 A. Well, I -- he told me that he would see 15 to it that it was speeded up -- that is, the 16 decision had been taking so long -- and he'd do 17 what he could on the policy issues but he'd give 18 me no guarantees on the policy issues. The only 19 thing he promised me was that he'd speed up the 20 application. 21 THE WITNESS: And, you know, that was 22 in April, Your Honor. And towards the end of the 2106 1 year, this expedited application was finally acted 2 on. 3 Q. (BY MR. GUIDO) Now, at that meeting, 4 did anything else occur? 5 A. We discussed the net worth maintenance 6 issue and I again argued Belzberg and that he 7 ought to do what general counsel did in the past. 8 And he said he'd take it under advisement but that 9 he was giving me no guarantees. 10 Q. Now, at the time of that meeting, did 11 you inform him that an agreement had been reached 12 with Castle & Cooke for the sale of the stock back 13 to Castle & Cooke? 14 A. I did. 15 Q. And then when you left that meeting, 16 did you report the results of your meeting with -- 17 to anyone? 18 A. I -- with who? 19 Q. To anyone. 20 A. Yes, I did. 21 Q. To who? 22 A. I reported it to, I believe, 2107 1 Dr. Munitz, Ezra Levin, and Jim Pledger, general 2 counsel of United Financial Group. 3 Q. And did you report that to Jim Pledger 4 in response to his request that you keep him 5 informed of the conversations that were taking 6 place with the Federal Home Loan Bank Board? 7 A. I reported to him in response to a 8 United Financial Group request. I believe it was 9 made originally by Sonny Bentley after the 10 March 13th meeting. But the answer is pursuant to 11 his client's request. I don't know whether he 12 personally made the request. 13 Q. Did you have anything more to do with 14 the Castle & Cooke matter after those 15 conversations? 16 A. No, I did not. 17 MR. GUIDO: Thank you very much. 18 THE COURT: Cross-examination? 19 20 CROSS-EXAMINATION 21 22 2108 1 Q. (BY MR. NICKENS) Mr. Goldberg, let me 2 reintroduce myself. I am J.C. Nickens. I think 3 we met for the first and only time at your 4 deposition back in April. 5 Do you recall that? 6 A. Yes. I had never spoken to you, and I 7 don't think we did at that deposition. You just 8 introduced yourself. 9 Q. Yes. I was there -- 10 A. Yes, sir. 11 Q. -- when the deposition was taken. I've 12 got just a few questions for you. 13 With regard to your communications with 14 Mr. Bentley or Mr. Pledger, what did they indicate 15 to you as the reasons why you should keep them 16 informed? 17 A. My initial conversation was probably 18 with Sonny Bentley and it was probably after the 19 March 13 meeting. He said -- and Mr. Pledger said 20 it later -- that they wanted to be completely 21 independent from MCO in the matter, that they 22 wanted to hear from me directly what happened at 2109 1 the meeting without, you know, it going through a 2 third party and that I should just report to them 3 as accurately as possible what happened at the 4 various meetings and telephone conferences with 5 the officials of the Federal Home Loan Bank Board. 6 So, it was -- they knew me. They trusted me. We 7 were friends. They wanted to hear it from me. 8 That's what I understood. 9 Q. With regard to the Castle & Cooke 10 matter -- well, let me -- with regard to this 11 controlling influence hearing, you had had some 12 previous experience with that, right? 13 A. Yes. 14 Q. What was your reaction to the threat 15 that was stated that such a hearing might be held? 16 A. I had -- my immediate reaction, even 17 though I think that the bank board will regret it, 18 it could put MCO in a very expensive and very 19 time-consuming mode. They would be a guinea pig, 20 so to speak, going into a huge swamp where there 21 were no sign posts and that while I felt that it 22 would not be successful, it would take a prolonged 2110 1 period of time, could be extremely costly, and be 2 very, very difficult and that this would -- this 3 could put the application on hostage for a very 4 prolonged period of time. 5 So, I felt that even if the threat 6 wasn't one that would result in victory, the 7 damage would be initiating it. 8 Q. Now, you indicated that at some point, 9 Mr. Raiden stated to you that it was his belief 10 that -- or that he had evidence that MCO already 11 had control of UFG or USAT. 12 A. What he said to me was -- I think it 13 was at the April 2nd meeting. He pulled me aside. 14 He had a big cigar. It was unlit. And said, 15 "Dan, OES thinks that your boys" -- those are the 16 words he used or words similar to that -- "have 17 already acquired 25 percent and they are engaging 18 in nominees in parking." 19 And I said, "That's for the OES, 20 please, Norman. You know OES believes that in 21 every case. That does not mean you believe it. 22 Lord, you wouldn't be threatening me with an APA 2111 1 hearing if you had evidence of that." 2 Q. Explain that to the Court. Why was 3 that your reaction? 4 A. Well, when you're an agency of the 5 United States government and it's the year 1984 6 and you had a power on your books, savings and 7 loan holding company amendments in 1968, and 8 you've never used it because it's so difficult, so 9 time-consuming, and you're charting new grounds, 10 if you had evidence that definitional control 11 already existed and that you had nominees that 12 were parking the stock, it would defy logic and 13 judicial discipline to go through this difficult 14 proceeding when you had a proceeding that was 15 filled with precedents, filled with evidence, 16 filled with guide posts of past agency actions. 17 If you had that evidence, you'd go the safe path 18 that you had precedents and guide posts. You 19 wouldn't initiate a new proceeding. So, I felt 20 that Norman didn't have the evidence; but he said 21 he did. 22 Q. In all of these conversations, 2112 1 Mr. Goldberg, was the name of Drexel ever brought 2 up? 3 A. No. I never heard of the name all 4 through my representation of MCO. 5 Q. If the Federal Home Loan Bank Board had 6 had credible evidence to support a belief or 7 finding that MCO and Federated had controlled UFG 8 or USAT, would that belief or evidence have 9 affected their consideration of the H(e)-1 10 application? 11 MR. GUIDO: Objection, Your Honor. 12 It's asking a purely hypothetical question that 13 there are no facts in the record to support. 14 MR. NICKENS: Your Honor, there has 15 been testimony today from Mr. Goldberg that it was 16 stated Mr. Raiden to Mr. Goldberg asserted 17 evidence of that nature. And he's just testified 18 as to his skeptical reaction to that. But the 19 application was then pending and was later 20 approved and it is appropriate for this witness to 21 comment based upon his experience as to what the 22 effect of that evidence would have been upon the 2113 1 consideration of that H(e)-1 application. 2 MR. GUIDO: Your Honor, this asks for 3 pure speculation based on absolutely no facts that 4 are in the record. 5 THE COURT: Well, we have a pretty 6 knowledgeable witness. I'll deny the objection. 7 A. Could you repeat the question? 8 Q. (BY MR. NICKENS) Yes, sir. If there 9 had been credible evidence or a belief that would 10 have supported the finding that MCO or Federated 11 had actual control of UFG or USAT, would that have 12 affected the bank board's consideration of the 13 H(e)-1 application? 14 A. The answer is yes. In the First Surety 15 cases, the bank board took a position in court 16 that if they had -- they would have to hold an APA 17 hearing if they had actual evidence. But there is 18 no way that any general counsel could approve a 19 holding company application of an institution that 20 was already in control. 21 THE WITNESS: The normal procedure, 22 Your Honor, would be to require divestiture in 2114 1 1984. If they already had control unlawfully, the 2 last thing you could do was approve them to have 3 control. You'd make a mockery of your laws. 4 You'd just -- it's just something you'd never, 5 ever do. The contrary would have been done. The 6 application would have been denied and enforcement 7 action would have been instituted in 1984 that 8 required them to divest control and to adjoin them 9 from future purchases. I now refer to MCO 10 Holdings Company acquiring any additional shares 11 of United Financial Group. That's what -- that's 12 what past general counsel have done and, in my 13 knowledge, what's always happened. 14 THE COURT: Could they deny the 15 application for control based on their suspicion 16 that actual control had already been accomplished? 17 THE WITNESS: No. They would have to 18 hold an APA hearing before they could deny it, but 19 the other -- but if they -- the other allegation 20 made was that there was already definitional 21 control; and they could have clearly done that, 22 Your Honor. The two things Raiden said to me is 2115 1 you have actual control and you have -- OES -- 2 that's the Office of Examinations and 3 Supervision -- thinks you have definitional 4 control. 5 Yes, they could have denied the 6 application on the basis they had definitional 7 control. They couldn't have granted the 8 application if they felt they had actual control. 9 They would have had to have ordered an APA 10 hearing. So, either one of two actions should 11 have resulted if that's what OTS believes. Then, 12 one, you deny on the basis of definitional control 13 or, two, you put -- you hold it in advance pending 14 an APA hearing on actual control under 408(a)2(d), 15 Your Honor. One of the two actions would not 16 approve it. It normally wouldn't have happened. 17 THE COURT: Excuse me, Mr. Nickens. 18 MR. NICKENS: Yes, Your Honor. 19 Q. (BY MR. NICKENS) Now, Mr. Goldberg, 20 with respect to the Castle & Cooke matter, you 21 indicated it was your supposition that this had 22 not been coming -- this pressure was not generated 2116 1 by Castle & Cooke? 2 A. I didn't have any thought that it was 3 generated by Castle & Cooke. I thought Norman was 4 getting heat -- I thought Castle & Cooke may have 5 contacted the senator, but I didn't think they 6 contacted Raiden. That's just what I believe, but 7 I had no basis. That was just what I felt. And 8 Raiden never told me he had been contacted by 9 Castle & Cooke. 10 Q. But you were told that the -- part of 11 the pressure was coming from the two Hawaiian 12 senators? 13 A. And Senator Proxmire, more importantly. 14 Q. Had you known previously that the 15 Hawaiian senators had taken a special interest in 16 banking regulatory matters? 17 A. No. But I know Senator Proxmire did. 18 Q. Yes, sir. But did you think it was 19 merely a coincidence that this particular 20 acquisition involved Castle & Cooke stock which 21 was based in Hawaii and that the political 22 pressure was coming from Hawaiian senators? 2117 1 A. Oh, I had assumed -- I had assumed for 2 the purposes of this meeting, because I hadn't got 3 involved in legislative matters, that the Castle & 4 Cooke representatives had complained to their 5 senators and the senators had complained to 6 Raiden. What I didn't know is whether Castle & 7 Cooke had contacted Raiden. I had no information 8 about that. 9 Q. Were you aware of the fact that 10 attorneys for Castle & Cooke had submitted a brief 11 to the bank board in which they argued that it 12 would be a support for a controlling influence 13 hearing? 14 A. Absolutely not. If I had known that, I 15 either would have -- I would have submitted a 16 brief then. 17 Q. Would that have been proper? I'm not 18 talking about your submitting a brief but the 19 submission by a private party to try to use the 20 regulatory framework, the banking regulatory 21 framework to achieve their goals. 22 A. I can't answer that question. It was 2118 1 done, though, in the past. 2 MR. NICKENS: Your Honor, if I could 3 ask the Court's indulgence, there is a document 4 that I would like to introduce through this 5 witness and I don't have a copy of it. If we 6 could just have a few minutes to locate this 7 document, it is the -- it is the bank board's 8 consideration of the H(e)-1 application in which 9 there is a specific reference to lobbying activity 10 by attorneys representing Castle & Cooke. And I'd 11 like to make that a part of the record at this 12 time if I can find it. 13 THE COURT: All right. We'll take a 14 short recess. 15 16 (A break was taken at 10:05 a.m. ) 17 18 (10:18 a.m.) 19 THE COURT: Back on the record. 20 Mr. Nickens, you may continue. 21 MR. NICKENS: Thank you, Your Honor. 22 Q. (BY MR. NICKENS) Mr. Goldberg, I've 2119 1 placed in front you two exhibits, Exhibits B372 2 and Exhibit B3757. Could you identify 3 Exhibit B372 for the record? 4 A. B372 is a memoranda to J.J. Finn who is 5 the secretary to the bank board dated 6 September 25, 1984. It's from Joe Arendes, 7 A-r-e-n-d-e-s, and it relates to the holding 8 company applications of MCO Holdings, Inc. 9 MR. NICKENS: Your Honor, we offer 10 Exhibit B372. 11 MR. GUIDO: Your Honor, I have no 12 objection to -- 13 THE COURT: Received. 14 MR. GUIDO: -- Exhibit B372. 15 Q. (BY MR. NICKENS) Now, Mr. Goldberg, 16 this, of course, occurred after your conversations 17 with Mr. Raiden, correct? 18 A. Yes. 19 Q. And let me ask you to look over at 20 page -- it's the bottom. It's going to be 21 OW120252. 22 A. Is that the footnote? 2120 1 Q. At the top, it says footnotes. 2 A. I have that page. 3 Prepared for the FHLBB on Castle & 4 Cooke Inc.'s behalf. The complete memoranda will 5 be filed with the MRS, all caps, after board 6 action on this application. 7 Q. What is the MRS? 8 A. That's a record unit of the bank board, 9 I believe. 10 Q. Do you know of any reason why you'd 11 want to file the complete memoranda after action 12 on the application? 13 A. Normally, you wouldn't. Let me 14 rephrase my question. It is extraordinary in a 15 bank board proceeding to have a reference 16 memoranda of a party -- an entity that's not even 17 a party to the proceeding entered into the record. 18 The only reason I could even think of it is to 19 somehow strain to make this part of the 20 administrative record on appeal. 21 Q. Would there be some reason why someone 22 would not want that memorandum to be made a part 2121 1 of the official record of the consideration of the 2 H(e)-1 application? 3 A. If MCO were to sue the bank board and 4 treat the condition as tantamount to denial, a 5 litigator may want that. I, if I were the 6 litigator, would not want it. I wouldn't want it 7 in the record. I would be very angry with whoever 8 put it in the record. 9 Q. Let me ask you to look at 10 Exhibit B3757. And first, will you hold your 11 place there? The two pages referenced by the 12 footnote are the page -- footnotes and the chart 13 before that constitute Exhibit A. Do you see 14 that? 15 A. I'm looking at -- yes, I am. 16 Q. And that's the reference to these two 17 pages? 18 A. Right. 19 Q. Okay. Now -- 20 A. Understand, I did not know that Castle 21 & Cooke had some memoranda to Raiden. If I knew 22 it, then I would have regarded some of the 2122 1 statements he made to me as a bluff. But there is 2 one thing to have senators really angry about 3 something. They are going to follow through. But 4 if they are helping a constituent, then they will 5 only go so far. Senators help constituents. So, 6 I would have taken a different legal position had 7 I known about the memoranda. 8 Q. Let me ask you to compare B3757 and if 9 you'll go over about six pages, do you find a 10 chart? 11 A. Uh-huh. 12 Q. And can you compare that chart to the 13 first page of Exhibit A? 14 A. It looks like -- I mean, obviously, I 15 have to read the whole page. But on surface, it 16 looks like B372 was -- is identical to B3757. 17 Looks that way. 18 Q. Yeah. There are a few markings on the 19 exhibit at 3757, but basically the same chart? 20 A. The numbers are the same, and the 21 blocks appear to be the same. I haven't gone over 22 each block; but just to look at it, it looks like 2123 1 they are identical. 2 Q. And if you turn to the next page in 3 both documents, can you look at the footnote page? 4 A. Right. 5 Q. And with the exception of Footnote 14 6 which occurred after the memorandum, are they the 7 same? And, of course, the footnote reference. 8 A. They are the same except for the 9 footnote reference and the one has an additional 10 footnote. That's 14. 11 MR. NICKENS: Your Honor, we offer 12 Exhibit B3757. 13 MR. GUIDO: Your Honor, I object, but I 14 would like a clarification first. What is -- we 15 have these Bate-stamp numbers that identify where 16 the document came from. This does not appear to 17 come from the supervisory file because it does not 18 have an OWO Bates stamp number. I have -- 19 MR. NICKENS: Yeah, it does. 20 MR. GUIDO: No. It has an OW. OWO is 21 the supervisory file from the OTS. 22 MR. NICKENS: Your Honor, this was -- 2124 1 if I might clarify, some people may know this 2 better than I do; but this was filed -- this was 3 given to us as a part of the Washington regulatory 4 file and denominated Castle & Cooke, and this 5 document came from that filing. These are 6 documents that we believe are incomplete, and we 7 have sought help from the Court to get the other 8 documents. But this is what -- this is part of 9 what was produced to us as a partial of the 10 Washington file on this matter. 11 MR. GUIDO: Can I ask a question, Your 12 Honor -- 13 THE COURT: Yes, you may. 14 MR. GUIDO: -- to ask Mr. Nickens to 15 clarify? It's always been my understanding that 16 the supervisory files that were duplicated out -- 17 or imaged from the OTS had an OWO number on it. 18 Now, that may be that every one that I've ever 19 looked at just starts with a zero. 20 MR. GRIFFITH: Correct. OW -- 21 MR. GUIDO: We will stipulate -- 22 MR. NICKENS: We have to get a record. 2125 1 MR. GUIDO: If someone can clarify that 2 for me, I have no objection to this document being 3 introduced. The only question then is whether or 4 not this document is the document that's being 5 described and that the Court can decide itself. 6 MR. GRIFFITH: The OW -- 7 THE COURT: Would you identify 8 yourself. 9 MR. GRIFFITH: David Griffith 10 representing Federated Charles Hurwitz. OW is the 11 prefix. The numbers follow after OW, and you're 12 exactly right. The OWO was simply a leading zero. 13 MR. GUIDO: Okay. So that this 14 document came from the OTS set of supervisory 15 files -- 16 MR. GRIFFITH: Based on Bates numbers. 17 MR. GUIDO: -- that I produced in this 18 case? 19 MR. GRIFFITH: Based on the Bates 20 number. I was never there, but that's what the OW 21 prefix is attached to. 22 MR. GUIDO: Just so it's clear that 2126 1 this is the representation. 2 MR. NICKENS: This is a part, Your 3 Honor, I believe the record will show, of the 4 incomplete microfiche files produced by OTS but 5 definitely part of the Washington files. 6 THE COURT: All right. B3757 is 7 received. 8 Q. (BY MR. NICKENS) Now, based upon your 9 comparison of the two documents, what conclusion 10 would you reach, Mr. Goldberg, concerning the 11 reference to the legal memorandum? 12 A. I would reach the conclusion that other 13 than it was copied that some -- that whoever 14 drafted the bank board memorandum may have relied 15 on the -- for some of their conclusions on the 16 Castle & Cooke memorandum. I'd have to read them, 17 but certainly those are identical. 18 Q. Let me ask you to look at the -- first 19 of all, the first page of B3757 is titled UFGI 20 File No. 13584. 21 Now, how does that date correspond to 22 your meetings with Mr. Raiden? 2127 1 A. What am I looking at now? 2 Q. Pardon me. The very first page of 3 Exhibit B3757. 4 A. Right. 5 Q. And you see it's a file -- all it is is 6 a file description. 7 A. Oh, it's March 5, 1984. Right? 8 Q. How did that relate to the dates of 9 your meeting with Mr. Raiden? 10 A. Well, it was eight days before my first 11 meeting with Mr. Raiden. It was four days after 12 C. Thomas Long, deputy general counsel, told me in 13 1984 that there were policy implications 14 delaying -- with respect to Castle & Cooke 15 delaying the processing of the H(e)-1. I now see 16 the policy applications. Is this a Castle & 17 Cooke -- 18 Q. Well, Mr. Goldberg, let me ask you to 19 turn to the next page. And it says "memorandum of 20 law." 21 A. Right. 22 Q. But do you see anywhere where it 2128 1 identifies the author of the memorandum? 2 A. No, I don't. That's why I asked. 3 Q. Is that usual or unusual in your 4 experience? 5 A. Highly unusual. I don't think I've 6 seen it before. 7 Q. And -- 8 A. Lord. Attorneys want their names on 9 everything. 10 Q. Okay. And let me ask you to go over 11 and -- let's see here. Look at Page 10 of the 12 memorandum. 13 A. Yes, sir. 14 Q. You see there at the third full 15 paragraph just above the carry-over paragraph? 16 "The author concludes that Castle & Cooke is an 17 affiliated person of USAT"? It's the very last -- 18 A. Yes, I do. 19 Q. And do you see someone has written out 20 there beside that "no"? 21 A. Yeah. 22 Q. And if you go over to Page 14 -- 2129 1 A. I see that. 2 Q. Yes. 3 A. Okay. 4 Q. And just below the quoted line, it says 5 "The term affiliate" and then the second sentence, 6 it says "Each of Hurwitz, Federated, and MCO 7 appears to be an affiliate of USAT under the 8 quoted definition by reason of the exercise by 9 Hurwitz through Federated and MCO of a controlling 10 influence over the management and policies of 11 USAT." Do you see that? 12 A. Uh-huh. (Witness nods head 13 affirmatively.) 14 Q. Now -- 15 A. I do. 16 Q. If the bank board had reached that 17 conclusion in March of 1984, could they have 18 granted the H(e)-1 application with the condition 19 as was done in December of 1984? 20 A. My answer is no. They would either -- 21 assuming this was the only basis, they would have 22 to hold it in advance and hold an APA hearing in 2130 1 order to determine actual control. They couldn't 2 grant it. 3 Q. Let me ask you to look over to B372 4 again. 5 A. B372? 6 Q. Yes. The -- 7 A. Okay. 8 Q. -- September 25 memo and look at the 9 third page. 10 A. Okay. 11 Q. At the very bottom, the last paragraph. 12 A. Page 3? 13 Q. Yes, sir. And at the top, it's got 14 Page 3. 15 A. Okay. I'm looking at it. 16 Q. And at the bottom, it says "The SA" -- 17 now, that would be the supervisory agent? 18 A. Right. 19 Q. -- "has concluded in his attached 20 digest that the financial and managerial resources 21 and future prospects of Federated and MCO are 22 adequate and that the blanket debt approval would 2131 1 not be injurious to the operations of United 2 Savings provided there is compliance with the 3 conditions in the attached proposed resolution." 4 You see that? 5 A. Yes, I do. 6 Q. Now, is that conclusion consistent with 7 a conclusion -- with another conclusion that these 8 people had obtained, illegally, control of the 9 institution? 10 A. No. You have two concepts: Financial, 11 managerial resources. It would be fundamentally 12 lacking managerial resources to have acted in a 13 manner contrary to the savings and loan holding 14 company amendments of 1967 and '68. 15 Q. Now, let me ask you to look over in the 16 same document to -- and this is -- it's Exhibit C. 17 And the Bates reference, if this helps, is at 18 OW120254. 19 A. 254? Okay. 20 Q. And you see Exhibit C? 21 A. I do. 22 Q. And it's entitled "net worth 2132 1 maintenance requirements regarding savings and 2 loan holding companies that own less than 3 50 percent of the insured association"? 4 A. Right. 5 Q. And what is the very first one listed? 6 A. The very first one listed is Belzberg 7 First City Financial, Vancouver, Canada. 8 Q. Is that the Belzberg matter that you 9 earlier referenced? 10 A. It is. 11 Q. Okay. Then let me ask you to turn over 12 a few more pages to 120262. It's about seven or 13 eight pages. 14 A. Okay. How many pages? 15 Q. It's about seven or eight. At the 16 bottom, it's 120262 and at the top, it says memo 17 to -- 18 THE COURT: Wait. 19 A. Okay. Hold on. Yeah. 226, there is 20 an A and 262 -- hold on. I'm with you. 21 Q. (BY MR. NICKENS) Okay. At the top, 22 it says memo to J.J. Finn, secretary to the board? 2133 1 A. Right. Page 4? 2 Q. Yes, sir. 3 A. Right. 4 Q. Now, if you look at the earlier -- if 5 you look at the first -- the earlier page, the 6 next page, earlier page? 7 A. Right. 8 Q. It's describing the options available 9 approving the application with standard 10 conditions? 11 A. Right. 12 Q. Thereby denying Federated and MCO's 13 request for special treatment? 14 A. Right. 15 Q. And the advantages for doing so are 16 listed as follows: "Federated and MCO's 17 investment in UFG will enable them to participate 18 in an increasingly diversified financial services 19 industry. And, in turn, UFG and United will 20 benefit from MCO's and Federated's experience in 21 real estate development and sales as well as 22 Federated and MCO's investment expertise in the 2134 1 financial markets. In addition, Federated has 2 developed commercial relationships with certain 3 segments of the Texas business and financial 4 community which will be of benefit to United." Do 5 you see that? 6 A. Yes, I do. 7 Q. And is it your understanding that it's 8 these -- what is described here in the memorandum 9 granting -- well, preparatory to granting the 10 H(e)-1 application as advantages is what the OTS 11 has sued these respondents over in this matter? 12 A. You'll have to ask that question again. 13 MR. NICKENS: I'll reserve the question 14 for another time. Thank you very much, 15 Mr. Goldberg. That's all my questions. 16 THE COURT: Any other questions from 17 the respondents for this witness? 18 MR. BLANKENSTEIN: No questions, Your 19 Honor. 20 MS. CLARK: No, Your Honor. 21 THE COURT: Redirect? 22 MR. GUIDO: Thank you, Your Honor. 2135 1 2 REDIRECT-EXAMINATION 3 4 Q. (BY MR. GUIDO) Did the Federal Home 5 Loan Bank Board approve the H(e)-1 application 6 that was filed by MCO in December of 1984? 7 A. I believe they did with conditions. I 8 know that from Mr. Volin. 9 Q. And did they impose a net worth 10 condition? 11 A. Yes, I believe they did. 12 Q. Now, you testified that if MCO had been 13 determined to be in control in March of 1984, in 14 your opinion, the bank board would not have 15 granted the change of control application. Is 16 that your testimony? 17 A. Could not have granted it. 18 Q. Could not have granted it. Do you know 19 of any situation where an application had been 20 denied by the Federal Home Loan Bank Board because 21 the acquirer had exercised actual control prior to 22 the granting of the application? 2136 1 A. I know of cases where they were denied 2 because they exercised control through 3 definitional. I don't know of any -- on the 4 actual control, you couldn't deny it without an 5 APA hearing. So, the answer is yes on 6 definitional. Your question can't be answered as 7 to actual. You could not deny it without the APA 8 hearing. 9 THE WITNESS: And, Your Honor, I know 10 of no APA hearing. 11 Q. (BY MR. GUIDO) And did the Federal 12 Home Loan Bank Board have the authority not to 13 hold the hearing and grant the application? 14 A. In our briefs to the Court, we have 15 said in the First Surety case where we believe 16 there is actual control, we must hold the hearing. 17 So, I would have to conclude that if they believed 18 it, they would have to hold a hearing. If they 19 didn't, then they clearly could approve it. 20 Q. No. My question was: Did they have 21 the authority not to exercise its discretion to 22 bring an actual control hearing and grant the 2137 1 application? That's my question. 2 A. No, if they believed there was actual 3 control. The answer is two ways. 4 Q. Do you know of any situation where the 5 agency, the Federal Home Loan Bank Board, general 6 counsel's office, had determined that an entity 7 had control but chose not to take any action 8 because of that? 9 A. I don't know of a situation other than 10 this and Kaufman & Broad that involved -- the 11 First Surety -- that involved the actual control 12 issue. 13 Q. Have you ever reviewed the 14 correspondence with Julie Williams about the 15 conversion of the preferred C stock to D stock by 16 MCO in this case? 17 A. No, I haven't. I don't know what 18 you're talking about. I mean, I've never heard of 19 that subject. 20 Q. Now, you testified about the difficulty 21 of holding an actual control or controlling 22 influence hearing? 2138 1 A. Yes, I did. 2 Q. Do you recall that testimony? 3 A. Yes, I do. 4 Q. And that is -- is that something that 5 falls within the term "enforcement authority" of 6 the Federal Home Loan Bank Board? 7 A. No, it doesn't in my view. It falls 8 within the decision making on, originally, holding 9 company applications. In the one case, there was 10 a non-APA hearing. 11 THE WITNESS: It was handled by the 12 office of general counsel litigators, Your Honor, 13 not by enforcement. 14 Q. (BY MR. GUIDO) When Congress passed 15 FIRREA, was one of the reasons that it passed 16 FIRREA that it had determined that the Federal 17 Home Loan Bank Board's exercise of its discretion 18 to bring actions such as a 408 hearing that you 19 testified to was too lax? 20 A. I think the purposes of FIRREA probably 21 went well beyond any issue like that. The answer 22 is I can't answer that question other than to say 2139 1 I am convinced, having been involved in FIRREA, 2 that it had nothing to do with the bigger issues 3 in FIRREA. 4 Q. So, you're telling me that your 5 testimony today is FIRREA was passed for reasons 6 that did not include Congress' view that the 7 Federal Home Loan Bank Board's enforcement of 8 policies were too lax? 9 A. Oh, you're talking about all 10 enforcement policies? 11 Q. Yes. 12 A. Yeah, I think the major emphasis of 13 FIRREA were other than directed on the bank 14 board's enforcement policy. I think there was a 15 need for -- there were needs for agency 16 reorganizations, needs to propose new capital 17 requirements, needs to revise the agencies. I 18 think that was an issue that was way down the 19 list, Your Honor. 20 Q. But you do agree it was an issue? 21 A. I'm not sure. I just -- to me, you 22 know, compensation of supervisory goodwill and 2140 1 stealing money was an issue. To me, if it was 2 down, it was way, way down. There were big issues 3 involved in FIRREA: Agency jurisdiction, 4 supervisory goodwill, new capital standards that 5 would look like the banks' risk space capital, 6 having a tier capital, having new core capital, 7 having drastically new regs. If it was just a 8 matter of enforcement policies being too lax, Your 9 Honor, I think they could have solved that in ten 10 seconds. Appoint a good chairman of the bank 11 board. 12 MR. GUIDO: Your Honor, no further 13 questions. 14 MR. NICKENS: We have nothing further, 15 Your Honor. We'd like the witness to be released. 16 THE COURT: All right. Thank you, 17 Mr. Goldberg. You may step down. 18 Enforcement is calling another witness? 19 MR. GUIDO: Yes. Calling Mr. Pratt, 20 Your Honor. 21 THE COURT: Mr. Pratt, would you take 22 the oath, please? 2141 1 2 RICHARD T. PRATT, 3 called as a witness and having been first duly 4 sworn, testified as follows: 5 6 EXAMINATION 7 8 (10:42 a.m.) 9 THE COURT: Be seated, please. 10 Q. (BY MR. GUIDO) Will you state your 11 name for the record, please? 12 A. Richard T. Pratt. 13 Q. What is your occupation? 14 A. Well, I am a professor at the 15 University of Utah; and I have a consulting 16 company by the name of Richard T. Pratt Associates 17 that does various types of financial and economic 18 consulting. Those would be my two primary 19 activities. 20 Q. Were you a member of the Federal Home 21 Loan Bank Board at any time? 22 A. Yes, sir. 2142 1 Q. What time period? 2 A. Approximately early 1981. I think 3 March or April through, I believe, the 1st of May 4 1983. 5 Q. And what was your position on the board 6 of the Federal Home Loan Bank Board during that 7 time period? 8 A. I was chairman. 9 Q. And what did you -- where did you go to 10 work after you left the Federal Home Loan Bank 11 Board? 12 A. I went to Merrill-Lynch Capital Markets 13 in New York City. 14 Q. And what did you do for Merrill-Lynch? 15 A. I worked originally as chairman of the 16 Merrill-Lynch mortgage securities area. 17 Merrill-Lynch Mortgage Capital, Incorporated, I 18 believe, was the name of the subsidiary. And 19 later, I was a managing director in Merrill-Lynch 20 Capital Markets. 21 Q. And what was Merrill-Lynch Capital 22 Markets? 2143 1 A. Merrill-Lynch Capital Markets is the 2 investment banking and trading side of 3 Merrill-Lynch & Company which is the umbrella. 4 Q. Now, did the focus of your 5 responsibilities at all times involve 6 mortgage-backed securities? 7 A. I was -- there was some involvement 8 with mortgage-backed securities at all times. The 9 focus certainly wasn't always necessarily on 10 mortgage-backed securities. 11 Q. Did -- 12 A. In fact, probably never was. 13 Q. Did you in the position at 14 Merrill-Lynch Capital Markets make any 15 presentations to any savings and loan executives 16 regarding the advantages of mortgage-backed 17 securities? 18 A. I personally probably never did but 19 would have attended presentations made by 20 personnel of Merrill. 21 Q. Did you ever attend any of the Drexel 22 high-yield bond conferences? 2144 1 A. No. I never did. 2 Q. Did you ever speak at any of those 3 conferences? 4 A. No. 5 Q. Now, you were the chairman -- let me 6 rephrase. 7 MR. GUIDO: Your Honor, I'd like to 8 offer into evidence Exhibit No. seven for from Mr. 9 Pratt's deposition which is the resolution of the 10 Federal Home Loan Bank Board dated November -- 11 dated April 29th, 1983. It's resolution No. 83272 12 which is the resolution authorizing the merger of 13 United Financial Group and First American Federal, 14 if I may. 15 MS. CLARK: Your Honor, Mary Clark. We 16 object to the questions that Mr. Guido is 17 embarking on here as irrelevant to Mr. Pratt's 18 involvement in this case. And I would like to be 19 heard on this point now because I think what 20 Mr. Guido is embarking on threatens to seriously 21 disrupt the presentation of the respondents' case. 22 Mr. Pratt has been engaged as an expert 2145 1 witness for the respondents. He prepared a 2 report. He has been deposed as an expert. And 3 Mr. Guido is now trying to cross-examine Mr. Pratt 4 before we have even had a chance to put in his 5 direct testimony. 6 Mr. Pratt did serve as chairman of the 7 Federal Home Loan Bank Board. It is conceivable 8 that he has some factual information that is 9 relevant to this case, I suppose. But the OTS did 10 not designate Mr. Pratt as a fact witness. We 11 could have objected on procedural grounds. They 12 have missed the deadline designate him and bring 13 him in here as a fact witness, but we tried to be 14 cooperative. We did not make a procedural 15 objection. 16 Once Mr. Guido informed us that they 17 were planning to bring him here to testify, I 18 asked him what the subject matter of the 19 examination would be. And Mr. Guido told me that 20 the purpose of his bringing Mr. Pratt here to 21 testify was to explore the grounds for possible 22 disqualification motion. In other words, he wants 2146 1 to ask these questions to lay a foundation for 2 disqualifying Mr. Pratt as our expert witness. 3 And that does appear to be where he's going at 4 this point and I think that is highly improper. 5 There is a history on this, Your Honor, 6 and you should be aware of it. And I would like 7 to provide the Court with a memorandum that I 8 prepared in case Mr. Guido did embark on this 9 course. It provides the background of the issue 10 and also some key documents that are relevant to 11 it. If I may hand the memorandum up to the Court. 12 Mr. Pratt is an essential witness for 13 the respondents on the standard of care. He was a 14 former chairman of Federal Home Loan Bank Board. 15 That is part of the reason why his testimony for 16 the respondents in this case is so powerful. It 17 is part of his qualification to offer the expert 18 testimony that he will be offering on behalf of 19 the respondents. OTS has known about Mr. Pratt's 20 serve as chairman of the Federal Home Loan Bank 21 Board at least since Mr. Pratt filed his expert 22 report which was last May. 2147 1 Mr. Guido thoroughly explored the 2 question of what actions Mr. Pratt took during his 3 service on the bank board when he deposed 4 Mr. Pratt in July. The testimony is at the 5 document that I've provided to the Court at Tab B 6 of the memorandum and the references are Pages 31 7 and 32 and Page 86. Briefly, Mr. Guido asked 8 Mr. Pratt what actions, if any, he had taken as 9 chairman of the Federal Home Loan Bank Board with 10 respect to USAT and Mr. Pratt couldn't remember. 11 But he did confirm that he voted on the resolution 12 that Mr. Guido is introducing as an exhibit just 13 now, which is the resolution approving the 14 UFG/First American merger. The documents that 15 Mr. Pratt turned over prior to his deposition in 16 May also confirmed that he had voted on that 17 resolution. And, as you know, that resolution is 18 the basis for one of the claims in this case, the 19 second claim on the UFG net worth maintenance 20 obligation. 21 After his deposition, we heard nothing 22 more until early September when Mr. Pratt got a 2148 1 letter from Carolyn Buck, OTS chief counsel. She 2 wrote to him to say that she had reviewed the 3 entire record and the facts and the law relevant 4 and she had determined that Mr. Pratt would be 5 disqualified from testifying on the net worth 6 maintenance issue as it related to USAT. The 7 letter is at Tab C of the memorandum that I just 8 provided to you. 9 Ms. Buck asked Mr. Pratt to confirm 10 that he wasn't going to testify on that issue, and 11 he did so. He wrote back a letter saying he would 12 not testify on net worth maintenance issues. The 13 fact is that net worth maintenance issues have 14 never been a part of Mr. Pratt's expert testimony. 15 It was never part of his assignment. So, he 16 simply confirmed back to Ms. Buck that he was not 17 planning to testify on any net worth maintenance 18 issues and, as far as we are concerned, that was 19 the end of the issue. 20 Now Mr. Guido has told me just last 21 week that he intends to use this appearance of 22 Mr. Pratt during his case in chief to explore the 2149 1 basis for a possible disqualification motion. If 2 Mr. Guido believes that he has any information 3 that could serve as a basis for disqualifying 4 Mr. Pratt, he could have raised it and he should 5 have raised it prior to the second week of this 6 hearing. As you know, Your Honor, we have been 7 diligent in raising questions about the OTS's 8 expert as soon as we found there were questions. 9 We have filed motions in limine. We have filed 10 other motions. We have raised issues concerning 11 Mr. Twomey, Mr. Hargett, Mr. O'Connoll, 12 Mr. McBride. And each time we raised the issue so 13 that it could be resolved promptly so that it 14 wouldn't disrupt the orderly presentation of the 15 evidence at the hearing. And here what OTS is 16 doing is just exactly the opposite. They waited 17 to raise these issues, to bring Mr. Pratt in 18 during their case in chief to raise these issues 19 with you until two weeks after the hearing has 20 already been going on. 21 As far as we know, there is absolutely 22 nothing new about Mr. Pratt's role at the Federal 2150 1 Home Loan Bank Board that would justify bringing 2 this issue up in the middle of the hearing. There 3 is no reason they couldn't have raised it before. 4 The deadline for the motions in limine or at least 5 prior to the hearing. Instead, they are calling 6 Mr. Pratt in their own case. They are trying to 7 ask him questions that they hope will keep you 8 from hearing from Mr. Pratt as our expert witness. 9 Obviously, they don't want you to consider their 10 opinions. 11 Mr. Pratt's report which was filed with 12 the court in May makes it very clear that he is 13 not going to be testifying about the resolution in 14 question, which is the '83 resolution approving 15 the merger that contained the net worth 16 maintenance condition. As far as he knows, that's 17 the only matter involving USAT that he ever dealt 18 with at the Federal Home Loan Bank Board. 19 And as far as we know, there is no 20 disqualification issue. There certainly is no 21 disqualification issue that is apparent from the 22 record and we think it's just disruptive of our 2151 1 ability to present our defense through our own 2 expert witness to bring Mr. Pratt in here two 3 weeks into the hearing and try to establish a 4 basis for disqualification. 5 So, we object to this line of 6 questioning and ask the Court not to allow 7 Mr. Guido to go down this path. 8 MR. GUIDO: Your Honor, I'd like to 9 respond. Ms. Clark got the facts wrong, Your 10 Honor. In my conversation with her, I indicated 11 that I wanted to explore a potential 12 disqualification because of the correspondence 13 that she's now given you. In addition, I also 14 told her that I had some factual matters that I 15 felt were appropriate to raise at this point in 16 time in our case. And as Ms. Clark fails to tell 17 the Court, Mr. Pratt has been designated as a fact 18 witness on behalf of the OTS in this proceeding 19 and that she is incorrect when she says he's not 20 been designated. 21 I was offering this resolution and I 22 was going to go into Mr. Pratt's engagement by the 2152 1 respondents so that I could seek two purposes: 2 One to explore what his testimony would be so that 3 we could get a resolution of that matter at this 4 time, Your Honor, but also, I was doing it to seek 5 to have this witness declared an adverse witness 6 so I could ask him leading questions if necessary 7 to explore his factual knowledge as the chairman 8 of the Federal Home Loan Bank Board at the time, 9 1981 through 1983. 10 And so, therefore, I don't think that 11 my questions are inappropriate at this time and 12 this is not an effort to disrupt counsel's -- 13 respondents' presentation of their case. This is 14 only an attempt to put this witness on to prove 15 facts which we believe are relevant to the OTS' 16 portion of the case and, if necessary, to explore 17 it. 18 Ms. Clark failed to tell you, Your 19 Honor, that when I had the conversation with her a 20 few days ago when she asked me why I was putting 21 Mr. Pratt on, I told her that there were two 22 reasons. She asked me what the factual matters 2153 1 were and I told her that I would not tell her, 2 that she would hear them when I asked the witness 3 the questions on the stand. I don't think I'm 4 obligated to tell opposing counsel what my 5 questions are for a witness before they get on the 6 stand. And this is just an effort to prevent the 7 OTS from putting on a witness that it believes is 8 relevant to the factual matters that are raised in 9 this case as a fact witness, Your Honor, and also 10 to explore the question of the scope of his 11 testimony on behalf of the respondents. 12 So, therefore, I don't think that the 13 motion is appropriate and should be denied, Your 14 Honor. 15 THE COURT: Well, there seems to be two 16 issues. One is whether this witness should be 17 disqualified and the other one is the timeliness 18 at this point whether he should be questioned. 19 I'm not -- I'm going to hold in abeyance the issue 20 of whether he should be disqualified and I'm going 21 to allow the questioning to proceed on the lines 22 you have suggested on factual matters. 2154 1 MR. GUIDO: I will save to the end the 2 whole question of qualification, Your Honor, and 3 just focus on the factual matters to start with. 4 MS. CLARK: Your Honor, I'm sorry, but 5 to the extent your ruling is based on Mr. Guido's 6 representation that they designated Mr. Pratt as a 7 factual witness in a timely fashion, I would like 8 to correct that. He was not listed on their 9 witness list. He was not even mentioned on their 10 witness list. He was mentioned as an expert 11 witness, not a fact witness, on our witness list. 12 And to the extent he's arguing that he has no 13 obligation to provide us advanced notice of what a 14 witness will testify to as a factual witness, that 15 is contrary to the regulations and to this Court's 16 scheduling order. This is a factual witness who 17 is being -- if it is his purpose to offer his 18 factual testimony, he's being proffered with no 19 advanced notice, no prior designation, and in 20 violation of the Court's scheduling order. 21 THE COURT: Well, we seem to have a 22 conflict in representations here. I'd like to 2155 1 hear what OTS -- 2 MR. GUIDO: Your Honor? 3 THE COURT: The proposed testimony. 4 MR. GUIDO: What the proposed testimony 5 is, Your Honor? 6 THE COURT: Yes. 7 MR. GUIDO: The proposed -- 8 THE COURT: If he's on your fact 9 witness list. 10 MR. GUIDO: It says the OTS 11 incorporates into this list any person listed on 12 another party's witness list, Your Honor. We 13 believe that entitles us -- that entitles us under 14 the Rules to call this witness as a fact witness, 15 Your Honor. There is nothing in the Rules to 16 prohibit that. 17 THE COURT: And what's his proposed 18 testimony? 19 MR. GUIDO: His proposed testimony will 20 be about -- 21 THE COURT: But weren't you supposed to 22 give advanced notice to the respondents of the 2156 1 proposed testimony? 2 MR. GUIDO: The subject matter of the 3 testimony, Your Honor? 4 THE COURT: Yes. 5 MR. GUIDO: Yes, Your Honor, we were. 6 And the proposed testimony is in the deposition of 7 this witness, the administrative deposition. 8 THE COURT: Well, I don't think that 9 complies with the Rules, but I'll allow your 10 questions. Please proceed. 11 (10:59 a.m.) 12 Q. (BY MR. GUIDO) Now, as the chairman 13 of the Federal Home Loan Bank Board, you voted on 14 the resolution that is marked as Exhibit No. 7 to 15 your deposition, did you not, Mr. Pratt? 16 A. That's my understanding from checking 17 with the OTS, yes. 18 Q. Okay. And you also have been retained 19 by the respondents to testify in this matter as an 20 expert on their behalf? 21 A. Well, I have been retained to testify 22 in this proceeding, not in the matter reflected in 2157 1 the resolution. 2 Q. But you've been asked to testify by the 3 respondents as an expert? 4 A. Yes, sir. 5 MR. GUIDO: Your Honor, I'd like to 6 have this witness declared an adverse witness, if 7 I may. 8 THE COURT: All right. So designated. 9 Q. (BY MR. GUIDO) Now, when you were the 10 chairman of the Federal Home Loan Bank Board, what 11 was the condition of the thrift industry at that 12 time? 13 A. It was very much imperiled. We had had 14 a period of escalating inflation, escalating 15 interest rates, virtually every savings and loan 16 in the country was losing money. They were all in 17 very deep difficulty, the most difficulty they had 18 been in in the history of the industry. 19 Q. And what did you do as the chairman in 20 efforts to ameliorate the problems in the thrift 21 industry at the time? 22 A. Well, that's a substantial question, 2158 1 counselor, but I'll try and address it as briefly 2 as possible. Obviously, as the head of a small 3 administrative agency, we did not have control 4 other the interest rates in the United States and 5 were interest rates to continue at the level and 6 circumstance that they were at at the time that I 7 went to the Federal Home Loan Bank Board, there is 8 nothing that could have been done probably to save 9 any single savings and loan in the United States. 10 Every one of them would have failed. I never 11 believed that interest rates could be forecast so 12 I didn't know what the course of interest rates 13 would be. I looked at the structure of the 14 industry which was immensely disadvantaged at that 15 time. I believe in 1981, small and regional 16 commercial banks were setting profit records in 17 terms of their performance. They were in much the 18 same business as the savings and loan business, 19 which was in a catastrophic situation. 20 So, the main actions that I understand 21 took during my tenure were to modernize the 22 charter of the savings and loan industry so that 2159 1 in -- over periods of economic cycles, it could be 2 a survivor. It had been structured and positioned 3 in such a fashion that it was extremely vulnerable 4 to extinction in a period such as 1979, '80, '81, 5 '82. 6 Q. Now, is that because its traditional 7 charter limited it to lending -- taking in retail 8 deposits and lending money for the purchase of 9 single-family homes? 10 A. Again, there is a substantial history 11 but the structure of the industry was extremely 12 rigid and had several major strikes against it. 13 It was -- the regulation of it was rule based. It 14 had had a history of inception of being an 15 industry that started without capital in the 16 institutions and it was immensely compromised on 17 both its ability to invest in assets and the 18 source of its funds so that it had no flexibility 19 to adapt to changing economic conditions, 20 including those that you have alluded to. 21 Q. And so, what steps did you take as the 22 chairman to modernize or to have the charter 2160 1 modernized? 2 A. Well, I don't know that I can remember 3 all of them, and I would just preface this by 4 saying not having been given any guidance as to 5 what questions you might ask, I, of course, am 6 doing this entirely from recollection. But the 7 first issue that came up was this incredibly 8 strange prohibition which required only single -- 9 essentially only single-family, long-term fixed 10 rate mortgages to be issued on the asset side of 11 the institution. And the first major reform that 12 we did was to instigate a very flexible variable 13 rate mortgage which allowed institutions to change 14 interest rates as economic scenario changed and 15 this, of course, has become a very major product 16 in the savings and loan industry that survives 17 today. That was probably the single biggest step 18 in terms of providing some future for an industry 19 of this time, and it was done over the objections 20 of Congress who had blocked this for a very long 21 period of time. 22 In addition to that, if you look at 2161 1 the -- again, the structure of the savings and 2 loan business, on the asset side and compared to a 3 commercial bank, I think that's most illustrative. 4 On the asset side, commercial banks have very 5 broad powers. They can make all the real estate 6 loans that a savings and loan essentially can 7 make. They can make consumer loans. They can 8 make commercial loans secured or unsecured. They 9 can do receivables, financing and so on. So, if 10 we look at a major set of activities and then look 11 at what the savings and loan business could do, it 12 was a very tiny subset of those activities. 13 On the liability side was sort of the 14 opposite situation. Commercial banks had the 15 right to take in interest-free checking deposits 16 which accounted for 39 percent of their 17 liabilities during this period of stress whereas 18 for the most part savings and loans had short-term 19 variable rate deposits. This was a structure that 20 was absolutely designed to be non-viable in the 21 changing world that we lived in. 22 And so, in addition to the variable 2162 1 rate mortgage, we took other actions to provide a 2 broader category of assets that could be invested 3 in by thrifts. My goal was to essentially 4 eliminate the differences between the bank charter 5 and the thrift charter. And so, all of the 6 actions that I took in that regard were 7 essentially to move the asset and liability 8 structure of the banks to the same set of 9 opportunities that -- excuse me -- of the savings 10 and loans to the same set of opportunities that 11 commercial banks had. 12 Q. Now, were there statutory restrictions 13 that you also sought to have changed? 14 A. At various -- there was certainly a 15 number of statutory restrictions affecting a 16 number of aspects of the business that we felt 17 needed change and worked on changing those where 18 we could. 19 Q. Was one of those Garn-St. Germain? 20 A. No, sir. Garn-St. Germain was a bill 21 that we were instrumental in pushing forward, at 22 least portions of it. Some of it was done over 2163 1 our objections to deal with statutory problems. 2 It was not the problems we were trying to 3 eliminate. That is, it was our legislative 4 attempt and others to solve legislative and 5 regulatory problems. 6 Q. Did you advocate the passage of 7 Garn-St. Germain? 8 A. Yes. 9 Q. Did you testify in favor of its 10 passage? 11 A. I don't remember, but I'm sure that I 12 did. 13 Q. And what were the basic provisions that 14 broadened the charter for the savings and loans 15 that were included in Garn-St. Germain -- 16 A. Well -- 17 Q. -- in terms of investment power? 18 A. A little background on Garn-St. Germain 19 just to set that stage. Garn-St. Germain, of 20 course, was not a bill of the Federal Home Loan 21 Bank Board but was a bill passed by the Congress 22 of the United States and as all bills especially 2164 1 of that type do, it reflected various interests. 2 And primarily, the interests of the American 3 Bankers Association, Independent Bankers 4 Association, the savings and loan industry, the 5 Federal Home Loan Bank Boards, the FDIC, and the 6 controller of the currency. 7 But as my recollection would serve, I 8 believe Garn-St. Germain on the asset side for 9 savings and loans again moved it closer to the 10 commercial bank setting as I recall would have 11 increased the ability to make unsecured loans, 12 would have increased the ability to make 13 commercial loans, et cetera. Again, generally 14 moving it in most cases closer to a bank lending 15 charter. 16 Q. So, did it expand its authority to make 17 direct investments? 18 A. I believe that it did. I don't -- I 19 don't remember. But my recollection is that it 20 did. 21 Q. Did it have any effect on the liability 22 side of savings and loans balance sheets? 2165 1 A. I recall that it did, but I don't 2 recall the provisions. 3 Q. Did it -- one of the effects it have is 4 it allowed out-of-state deposits or broker 5 deposits? 6 A. Not to the best of my knowledge. That 7 legislation or regulation would have preceded 8 Garn-St. Germain. 9 Q. And what was that legislation? 10 A. I don't know that it was legislation. 11 If my memory serves me correct -- and again, 12 obviously, I'm just talking from memory here. But 13 subject to check, broker deposits had been allowed 14 for some years in the savings and loan business 15 and had been restricted to some small number, five 16 or 15 percent of the deposits which an institution 17 could have. Then either under Press Martin -- it 18 would either be under Jay Janice or John Dalton 19 who were -- John Dalton was my immediate 20 predecessor. Jay Janice was his predecessor. The 21 prohibition on the limit of broker deposits was 22 removed. 2166 1 So, during that period of time, there 2 went from a limitation of something like 10 or 3 15 percent of deposits to up to 100 percent. But 4 that's not the full story on the prohibition of 5 broker deposits in the industry. 6 Up until 1982, even though that 7 prohibition had been lifted, the rate paid had to 8 include any commission for the broker so that if a 9 5 percent rate was -- there was actually a rate 10 limitation regulation called Regulation Q of the 11 Federal Reserve. Let's say that that limited the 12 payment to 5 percent on a savings account. If a 13 savings and loan wished to employ a broker, they 14 had to deduct from the 5 percent the compensation 15 for the broker. So, that might mean that the 16 depositor using a brokerage firm to place its 17 funds would receive a 4.9 percent yield instead of 18 a 5. This, in effect, emasculated the hundred 19 percent brokerage rule. 20 And this was subject to the purview of 21 an inner agency group called the Depository 22 Institutions Deregulation Commission. And in one 2167 1 meeting of that commission, Secretary Reagan 2 decided that that was not appropriate, perhaps 3 from his own background, and wanted the 4 institution to be able to pay a separate brokerage 5 fee for broker deposits while still paying the 6 full Regulation Q rate to the depositor. 7 Q. Let me ask you a question about the 8 rate. There was a cap on the rate? Is that what 9 you're saying? 10 A. Yes, sir. For a period of time of 11 several years, I believe starting in '66, there 12 was a regulation of the Federal Reserve board 13 called Regulation Q which set limitations on the 14 rate that insured institutions could pay. 15 Q. Now, was that cap lifted during your 16 term as chairman of the Federal Home Loan Bank 17 Board? 18 A. There was an act -- and I don't 19 remember the -- I think it was the depository 20 institutions decontrol and monetary control had 21 something like that. That was about '79. And it 22 called for the creation of the inner-agency 2168 1 committee whose job it was to phase out over, 2 like, a six-year period the effects of 3 Regulation Q. 4 This is very instrumental to the broker 5 deposit issue because Don Regan decided that you 6 should be able to pay a commission plus pay the 7 full rate. And he and Paul Volker and Todd 8 Conover, the controller of the currency, over my 9 strong objection, rammed that through the DIDC, I 10 think, in one meeting with no staff work which I 11 objected to vociferously. And that opened up 12 nationwide hundred percent broker deposits with 13 commissions paid to the brokers. 14 Q. And were those deposits also insured up 15 to $100,000? 16 A. Yes, sir. 17 Q. And weren't there regulations that 18 allowed the deposits to be packaged in such a way 19 that an individual could participate in deposits 20 much greater than a hundred thousand dollars? 21 A. I don't recall that. If there were, 22 they were archaic in my opinion by that period of 2169 1 time. 2 Q. Did they exist, or did they not? 3 A. I don't know. 4 Q. Now, were -- during your time period, 5 were branches allowed or banks allowed to expand 6 beyond the traditional geographic locations of 7 savings and loans? 8 A. Well, these are substantial questions 9 you're asking me as you, I'm sure, know. The 10 history of the savings and loan business had some 11 interstate branches on a historical basis from the 12 early days, especially in the west with 13 institutions headquartered in Utah. I believe the 14 state of Washington, also. In general, federal 15 institutions were not allowed to have interstate 16 branches is the best of my recollection at the 17 time I went to the Federal Home Loan Bank Board. 18 Q. And was that changed during your time 19 period? 20 A. Yes. I believe -- I believe that it 21 was and I believe that we opened that up and 22 allowed, under some circumstances, branches across 2170 1 state lines -- or certainly to exceed the previous 2 geographical limits that the bank board had mainly 3 adhered to. 4 Q. Okay. Now, moving from that topic of 5 the legislative and the regulatory changes, were 6 any efforts made to focus on the savings and loans 7 in sort of a micro basis to shore them up 8 financially? 9 A. Well, there was, of course, strong 10 pressure from the savings and loan industry to do 11 so. And the Garn-St. Germain bill, in fact, did 12 reflect some individual shoring up of those 13 institutions. I believe the instrument that was 14 created under that bill was the -- either the net 15 worth certificate or the income capital 16 certificate. And the government itself, the FSLIC 17 under this, would become an investor in the 18 institution by providing a paper instrument which 19 was engineered in a legal fashion, my 20 understanding, to meet qualifications of net worth 21 but was kind of a strange animal and provided no 22 cash flows of any type unless insolvency of the 2171 1 institution occurred. 2 Q. But it did provide for an additional 3 capital infusion, although it wasn't in the form 4 of hard assets? 5 A. Well, it provided a piece of paper 6 which, as I recall, was engineered in such a 7 fashion as to count for regulatory capital. 8 Q. And did the bank board embark on 9 efforts to encourage institutions to merge 10 together and to allow them to have what was 11 referred to as a supervisory goodwill? 12 A. There are two questions there. If I 13 might address the first one, did we encourage 14 merger. At that time, as I said, every 15 institution was in very deep trouble. And so, you 16 couldn't -- you couldn't choose between them in a 17 fashion based simply on their economic position 18 because the industry was $175 billion under water. 19 It was a massive problem. So, the bank board had 20 to try and determine which managements were 21 competent, which managements we felt could survive 22 if interest rates came down, and which 2172 1 institutions would not be viable even in a period 2 of normal economic conditions. And yes, we did 3 encourage merger between those types of 4 institutions trying to move weaker management and 5 weaker assets into stronger hands. 6 Q. And did you allow them, when they 7 merged, to write down their assets and to fill the 8 deficit with what was referred to as supervisory 9 goodwill? 10 A. To the best of my recollection, we did 11 not. I believe during the time period that I was 12 there, we differed from the controller of the 13 currency and the FDIC in that we adhered to GAAP 14 accounting. And under GAAP accounting, you 15 created GAAP goodwill and a loan discount which 16 would then be amortized over a period of time. To 17 the best of my recollection, that supervisory 18 goodwill came in at a later point in time in the 19 history of the agency and I believe possibly after 20 GAAP had changed. 21 Q. Okay. 22 A. FASB saw this problem, and I believe -- 2173 1 or saw what they thought was a problem and later 2 addressed it. So, the best of my recollection is, 3 no, we did not have the supervisory goodwill. 4 Q. Did you seek to attract new investors 5 into the industry? 6 A. Yes, we did. 7 Q. And did you offer new investors 8 expanded investment power such as you've described 9 to encourage them to invest? 10 A. Well, no, sir, not in that sense. As 11 the law and regulation changed, it was available 12 to all parties, whether they be an existing 13 institution or investors that may not have been in 14 the savings and loan business and wished to come 15 in. That is, whatever the powers and authorities 16 allowed an operation -- operating authorities 17 allowed were available to all with the possible 18 exception of possibly some geographic situations. 19 As I recall, Citizens Savings of San Francisco was 20 the first one offered an interstate operation 21 which hadn't been generally available prior to 22 that time. Other than that, I believe all comers 2174 1 would have received the same opportunities. 2 Q. Now, you testified that you wanted to 3 attract new investors. Was that to attract new 4 capital into the industry? 5 A. Yes. New capital, new management. New 6 capital would be probably the primary goal. 7 Q. And was a net worth maintenance 8 condition an instrument that you requested or you 9 imposed as part of that bargain for the expanded 10 powers? 11 A. I don't know in each individual case. 12 My understanding is the net worth maintenance goes 13 back possibly into the Sixties. I honestly don't 14 know. So, my best recollection is, no, the net 15 worth maintenance I think precedes certainly the 16 expansion of powers that I was involved in. 17 Q. At the time that you were imposing net 18 worth maintenance conditions as the chairman of 19 the Federal Home Loan Bank Board, did you view 20 that as something that the bank board was getting 21 in exchange for granting the charters with these 22 expanded powers to new acquirers of thrifts? 2175 1 A. Could you repeat that question, sir? 2 Q. At the time you were the chairman of 3 the Federal Home Loan Bank Board, were you 4 imposing net worth maintenance conditions as part 5 of an exchange with new acquirers for giving them 6 the authority to control savings and loans? 7 A. Well, not to the best of my knowledge 8 in that sense. As I said, my understanding is the 9 net worth maintenance agreements go back well 10 before the expanded powers and had been 11 incorporated in some contracts and probably not in 12 others. I don't know the individual details. 13 Q. I'm asking about the time that you were 14 the chairman. 15 A. Well, not -- yes, I'm answering that, 16 sir. I'm saying that I never -- that question 17 never arose in my mind that I can remember. And 18 staff would bring to us transactions which may or 19 may not have included net worth maintenance 20 agreements. I don't know what the negotiation 21 procedure was in determining whether they were 22 involved or not. 2176 1 Q. What did you think the purpose of the 2 net worth maintenance condition was that you were 3 imposing at the time you were chairman? 4 A. Well, I don't know that I ever really 5 thought about it. I certainly would have had some 6 thoughts as to what it might be, but I don't 7 remember -- during the time I was chairman, to the 8 best of my knowledge, no case ever came up where 9 we were attempting to enforce some sort of net 10 worth situation. 11 Q. Now, I'm not asking you about 12 enforcement because of the problem with the 13 resolution. I'm asking about the time that you 14 were sitting on that board and you were passing 15 resolutions authorizing people to obtain control 16 of savings and loans. Why was it that you were 17 imposing a net worth maintenance condition? 18 A. Well, I don't -- 19 Q. You could have chosen not to, could you 20 have not? 21 A. Well, the question never arose. 22 Q. Never arose? 2177 1 A. No. It had been -- as I said, it was 2 not something -- had it been a policy that we 3 brought in, then I'm sure it would have been given 4 substantial thought in that regard. I don't know 5 what the policy decision was at the time that net 6 worth maintenance was incorporated. As I'm sure 7 you're aware in very dim history of the United 8 States, bank shares were accessible. And whether 9 it goes back to that or something else, I have no 10 idea. But it would not have been a major issue to 11 me as chairman of the bank board. My thought 12 would have been at the worse, it doesn't hurt us. 13 Q. Did you view the net worth maintenance 14 condition to be a substitute for infusion of 15 capital? 16 A. I don't know that I ever really 17 considered that. I don't recall considering that 18 question. 19 Q. Do you ever recall making a statement 20 that you thought that that was the case? 21 A. No, sir, I don't recall it. 22 Q. Now, in the 1981 time period, did you 2178 1 have concerns about the size of the examination 2 staff that was available to the Federal Home Loan 3 Bank Board to examine thrifts? 4 A. Yes, I did. And my staff had greater 5 concern than I did. 6 Q. And what efforts -- what steps did you 7 take to strengthen the examination staff? 8 A. I don't recall at this time. 9 Q. Did you request authorization to expand 10 the budget of the Federal Home Loan Bank Board to 11 hire additional examiners? 12 A. That's my recollection. I believe we 13 went to the Office of Management and Budget and 14 asked for additional budget, but this is -- you 15 know, that's again subject to check. 16 Q. And they turned you down, didn't they? 17 A. That's my recollection. 18 Q. And at that time, you felt that the 19 staff was not adequate for supervision purposes? 20 A. Well, I thought that we had then as I'm 21 sure exists today a very fine staff, but the 22 number and magnitude of problems had escalated 2179 1 massively and the staff had not, yes. So, the 2 answer would be, yes, we felt additional staff was 3 necessary. 4 Q. And would it be fair to say that you 5 felt the staff was overwhelmed by the magnitude of 6 the number of thrifts that they had to examine? 7 A. I don't think that -- that I would have 8 characterized it in that fashion. I don't ever 9 remember thinking of it in that way. 10 Q. But you did feel that you didn't have 11 adequate staff for the purposes of supervision and 12 examination? 13 A. No. I think I would characterize it as 14 saying that additional staff would have been 15 highly beneficial. Now, I hesitate to use the 16 word inadequacy there given the efforts of those 17 people. 18 Q. Have you testified regarding the causes 19 of the thrift crisis that Congress addressed in 20 the 1989 legislation, FIRREA? 21 A. I have testified to Congress regarding 22 the causes of the thrift problems and our actions. 2180 1 I don't know if that's responsive or not. I've 2 testified to Congress about the condition of the 3 thrift industry, the problems of the thrift 4 industry, and what my solutions were if that is 5 responsive to your question. 6 Q. In 1989? 7 A. As I recall, yes. 8 Q. And part of doing that, did you attempt 9 to ascertain what the failure rate was for those 10 traditional thrifts that existed before the 11 expanded powers that you've testified about, what 12 the failure rate of those thrifts had been? 13 A. No. I think others have done that and 14 I think have come out with some facts and figures 15 on it, but we did not. 16 Q. What are those facts and figures? 17 A. Well -- 18 MS. CLARK: Excuse me, Your Honor. 19 He's now getting into testimony that Mr. Pratt 20 gave in 1989 long after he left the Federal Home 21 Loan Bank Board. I don't believe this is within 22 the scope of his factual testimony. He's really 2181 1 trying to use him as a expert witness at this 2 point. 3 MR. GUIDO: Your Honor, I'm just trying 4 to ask this witness to explain something that he 5 testified earlier. He testified earlier that any 6 traditional thrift that existed prior to 1981 7 would not exist today, and I'm just trying to 8 explore the factual predicate for that statement. 9 As an adverse witness, I think I'm entitled to 10 probe that question. 11 THE COURT: Denied. 12 A. I don't think I ever testified that. 13 As I have explained today, I think that the 14 charter of 1981 was not a viable or tenable 15 charter and, of course, I don't think there are 16 any savings and loans that came through this 17 period operating the same as they did in 1981. If 18 there are, I would like to see them -- see, the 19 variable rate mortgage was a massive, massive 20 change. And if you're telling me that there are a 21 substantial number of institutions operating as 22 they did in '81, I would be very surprised. The 2182 1 studies that have been done on traditional versus 2 new powers I believe showed that there was a 3 higher failure rate among those incorporating new 4 powers, but these studies were terribly flawed 5 because the failure rates were highly 6 geographically concentrated and very much a 7 function of the local economic conditions in which 8 the institutions operated. 9 Q. (BY MR. GUIDO) But those studies 10 showed that the failure rates for those thrifts 11 that maintain the traditional role as opposed to 12 the expanded role was less than for those with an 13 expanded role? 14 A. Well, that's my understanding, but I'm 15 testifying that there are probably no thrifts that 16 operate today or after this period in the manner 17 they did previously which would be a major flaw in 18 the study and, second, that the study did not 19 attempt to incorporate pre-existing conditions of 20 the institutions or geographic and economic 21 impacts. 22 MR. GUIDO: No further questions, Your 2183 1 Honor. 2 THE COURT: Do you have questions, Ms. 3 Clark? 4 MS. CLARK: Yes, Your Honor. 5 6 CROSS-EXAMINATION 7 8 Q. (BY MS. CLARK) Mr. Pratt, in light of 9 the issues that have been raised concerning your 10 testimony, I would simply like you to describe for 11 the Court what the nature of your expert 12 assignment was in this case. 13 A. Well, the nature of my assignment was 14 to look at the institution and examine the conduct 15 of directors and senior management and to come to 16 a conclusion as to whether that conduct would be 17 what we would normally expect under the 18 responsibilities and obligations which directors 19 have both in common law and to some extent perhaps 20 in regulated industries, whether they were 21 appropriately fulfilling their roles. 22 Q. What information or materials did you 2184 1 consider in performing this assignment, Mr. Pratt? 2 A. I don't know if I can remember it all. 3 I can give you an approximate weight. But we 4 first looked at the -- or I first reviewed the 5 complaint of the OTS, looked at pre-hearing 6 statements, looked at the indices of governance of 7 this institution, what the records would show of 8 how an institution was governed. So, I started, 9 for instance, with the annual reports, with the 10 10Ks, and then went to the governance structure of 11 the institution which would be its committee 12 structure under the board of directors such as the 13 investment committee, the asset liability 14 committee, the compensation committee, the 15 executive committee, all of the normal governance 16 functions there. I then looked at the interface 17 with outside evaluators. This would be the 18 reports and correspondence with the auditors and 19 accountants, people of that type. I then also 20 looked at the interface between the regulatory 21 authorities, the exam reports, and the 22 correspondence associated with that. I also 2185 1 looked at the depositions of the regulatory and 2 bank people and the exhibits attached to those, 3 looked at depositions of experts and fact 4 witnesses. That would be the bulk of material. I 5 am not prepared to really go through my expert 6 report today because I had no idea for what reason 7 I was called and didn't prepare in that manner. 8 Q. Yes. 9 MS. CLARK: Your Honor, we will save 10 his expert testimony until our case in chief. So 11 I do not intend to go through his expert testimony 12 with him. 13 Q. (BY MS. CLARK) But I just wanted to 14 clarify, in the course of your engagement, did you 15 use or rely on any information about USAT that you 16 obtained in the course of your service as the 17 Federal Home Loan Bank Board chairman? 18 A. No. 19 Q. At any point, have you been asked in 20 this case to testify about net worth maintenance 21 issues as they might apply to USAT? 22 A. Absolutely not. 2186 1 Q. At this point, do you even recall any 2 information that you learned about USAT in the 3 course of your tenure as bank board chairman? 4 A. No. You know, obviously when you have 5 looked at as many records and so on, you forget 6 where you remember what from. But to the best of 7 my recollection, I don't know that I remember the 8 name USAT from the time I was at the bank board. 9 Q. So, the -- did you form conclusions as 10 a result of the work that you performed in this 11 matter as an expert witness for the respondents? 12 A. Yes, I did. And those are contained in 13 my expert report which I assume will be presented 14 to the Court at some future time. 15 MS. CLARK: Thank you. No more 16 questions. 17 THE COURT: Let me ask you. There has 18 been some reference to a letter you received from 19 Carolyn Buck who was -- which was kind of a 20 warning as a former employee or something. Is 21 that -- 22 THE WITNESS: Yes, sir. 2187 1 THE COURT: And you responded to that; 2 is that correct? 3 THE WITNESS: Yes, sir. She wrote me a 4 letter and said that there would be -- and there 5 were various time periods of prohibition, but 6 apparently that in the opinion of OTS I would be 7 prohibited from testifying about a specific 8 agreement or specific issue of net worth 9 maintenance that may have existed between the 10 regulatory authority and this institution. And 11 then she specifically stated that I would not be 12 prohibited from testifying about net worth 13 maintenance in general, sir. 14 THE COURT: And you -- 15 THE WITNESS: I responded and said, 16 "That's fine with me." I had never been asked to 17 address that issue in any fashion, didn't intend 18 to, and would have had a problem doing so without 19 any communication from her. 20 THE COURT: And you didn't receive a 21 response to your communication; is that right. 22 THE WITNESS: No. She didn't ask -- 2188 1 well, all she asked for was my acceding to that 2 prohibition, sir. 3 THE COURT: All right. 4 MR. GUIDO: Your Honor, I think that 5 the witness has clarified -- I mean, there is a 6 letter and you have copy of the letter. It says 7 "Dear Ms. Buck, in response to your letter of 8 September 3, 1997, I will not be testifying 9 concerning any net worth maintenance obligation 10 which may have existed in the above-mentioned 11 case." 12 We felt that that was quite ambiguous 13 and needed clarification and wanted to do it at 14 the outset. And this witness has testified that 15 he is not going to testify about the 16 enforceability of the net worth maintenance 17 conditions that are at issue in this case and that 18 clarifies the issue. 19 We have no objection to him testifying 20 as an expert witness. We may have -- and we will 21 have questions about his qualification, the extent 22 of his knowledge, and the basis for his decision, 2189 1 but the fact that he is going to testify as an 2 expert is going to be up to the respondents we 3 don't have an objection to, Your Honor. 4 MS. CLARK: Your Honor, just for your 5 information, the two pieces of correspondence are 6 included in the materials that I handed up as 7 Exhibits C and D. 8 THE COURT: All right. Thank you. I 9 just haven't had an opportunity to review that. 10 Thank you, Mr. Pratt. You may step 11 down. 12 THE WITNESS: Thank you, sir. I will 13 ask Mr. Guido, do you wish to put on another 14 witness before lunch. 15 MR. GUIDO: Or do you want to break for 16 lunch, Your Honor, now? 17 THE COURT: Well, who is your next 18 witness? 19 MR. GUIDO: My next witness is Gerald 20 Williams, who was the president of the 21 association, Your Honor. It will be quite a bit 22 of testimony. 2190 1 THE COURT: All right. Maybe we should 2 adjourn until 1:00 o'clock. 3 4 (Luncheon recess.) 5 6 THE COURT: We'll be back on the 7 record. I had a question about the exhibits this 8 morning, B372 and 3757. Could I have two more -- 9 another copy of each of those? 10 MR. NICKENS: Yes, Your Honor. Here's 11 372. 12 THE COURT: Thank you. And we had 13 Exhibit 7 identified. Was the OTS going to offer 14 that one? 15 MR. GUIDO: Yes, Your Honor. We move 16 Exhibit No. 7 into the record. 17 MR. NICKENS: No objection, Your Honor. 18 THE COURT: Received. 19 MR. GUIDO: Ready, Your Honor? At this 20 time, OTS would like to call Mr. Gerald Williams, 21 please. 22 2191 1 GERALD WILLIAMS, 2 called as a witness and having been first duly 3 sworn, testified as follows: 4 5 EXAMINATION 6 7 THE COURT: Be seated, please. 8 MR. GUIDO: Mr. Guido. 9 (1:03 p.m.) 10 Q. (BY MR. GUIDO) Will you please state 11 your full name for the record? 12 A. It's Gerald R. Williams. 13 Q. And can you tell us your -- where you 14 are presently employed? 15 A. Yes. I'm an executive vice president 16 with Huntington Bancshares in Columbus, Hawaii. 17 Q. And what are your responsibilities at 18 Huntington Bancshares? 19 A. I'm the chief financial officer of that 20 corporation. 21 Q. And prior to being with Huntington 22 Bancshares where were you employed? 2192 1 A. I had my own company for two years here 2 in Houston. 3 Q. And what did that company do? 4 A. I worked with the -- a number of 5 failing savings and loans and I had contracts with 6 the Home Loan Bank Board. I represented potential 7 buyers of savings and loans and I had -- and I 8 worked on other situations that the commissioner's 9 office and the Home Loan Bank asked me to help 10 with. 11 Q. And prior to that, where were you 12 employed? 13 A. I was with United Savings for three 14 years from August of 1983 until December of 1986. 15 Q. Is that United Savings Association of 16 Texas? 17 A. Yes, sir. 18 Q. And is that the wholly-owned savings 19 and loan of United Financial Group? 20 A. Yes, sir. 21 Q. And prior to that, what was your 22 background? 2193 1 A. I had spent ten years with First City 2 Bank Corporation, a bank holding company here in 3 Houston. 4 Q. And what was your position there? 5 A. I was executive vice president and 6 chief financial officer of that corporation. I 7 was chief financial officer until three years 8 before I left when we promoted somebody else. 9 Q. Now, were you approached by anyone from 10 United Financial Group or United Savings 11 Association to become an employee of United 12 Savings Association of Texas? 13 A. Yes. I had known Mr. Hurwitz from my 14 First City days. Not well. But we made contact 15 with each other and he told me of a situation at 16 United that existed that was as a result of the 17 merger between Houston First and United. This was 18 in, I guess, early 1983, but he made it clear he 19 couldn't hire me and I would have to meet 20 Mr. Coles. 21 Q. Did he tell you what the problems were 22 that he thought that you could help address 2194 1 because of the merger? 2 A. Yes. There was -- the merger had left 3 the combined companies with a lot of operational 4 overlaps. Excess branches forms were effectively 5 two mortgage servicing companies, computer 6 problems, and the like and they were looking for 7 someone and he thought I might be a good candidate 8 if, in fact, I could -- was interested and they 9 were interested in me. 10 Q. How did you know him at the bank that 11 you were at? 12 A. He was, I think, a customer of the bank 13 and I just happened to see him one time and met 14 him through I think one of the other lending 15 officers there. 16 Q. And did he suggest that you speak to 17 anyone at USAT about the potential job that he was 18 talking to you about? 19 A. Yes. He said I'd have to meet 20 Mr. Coles, who I knew of just from the newspaper. 21 I did not know Mr. Coles. And he said that if I 22 was interested, he would mention my name to 2195 1 Mr. Coles and Mr. Coles would -- if he was 2 interested would call me, and he did. 3 Q. And were you subsequently interviewed 4 by Mr. Coles and Mr. Bentley? 5 A. Yes, sir. 6 Q. And you were hired? 7 A. I was hired in August of 1983. 8 Q. And Mister -- did Mr. Coles sign your 9 hiring letter? 10 A. Yes, sir. 11 Q. Now, what position did you assume at 12 United Savings Association of Texas? 13 A. The presidency of it. 14 Q. So, you became the president. Did you 15 become an officer of United Financial Group? 16 A. Yes. I was an executive vice president 17 of UFG. 18 Q. And what were your responsibilities as 19 the president for United Savings Association of 20 Texas? 21 A. The items I described where there were 22 problems, I looked over those, the operational 2196 1 issues of the new company, of USAT. The branch 2 network, the mortgage operations, mortgage 3 servicing, the financial activities, and all -- 4 and the computer operations. 5 Q. Did your responsibilities include 6 budgeting? 7 A. Yes, sir, and planning. 8 Q. Did they include preparing performance 9 reports for any of the other officers? 10 A. Performance reports monthly of the 11 company, yes. That was done through the financial 12 people, but they reported through me. 13 Q. Now, who reported to you at USAT? 14 A. Well, the head of marketing, Mr. Gubitz 15 did. Mr. Barrett, who was treasurer at that time. 16 Subsequently, we hired Mr. Crow, but he was not 17 there -- I brought him in later. 18 Q. Mr. Who? 19 A. Michael Crow. 20 Q. And had you known him previously? 21 A. Oh, yes. We worked together at First 22 City. 2197 1 Q. Okay. And you eventually hired him at 2 USAT? 3 A. Yes, sir. 4 Q. Did you hire him as the chief financial 5 officer of USAT? 6 A. I did. 7 Q. Now, who else reported to you? 8 A. Well, I think there was a man named 9 Schmidt who ran -- or Smith who ran the computer 10 operations, and there was a marketing person. I 11 can't recall his name at the time. 12 Q. Now, who did you report to at USAT when 13 you first became the president? 14 A. To Mr. Coles. 15 Q. And he was the chairman of the board of 16 USAT at the time? 17 A. Yes, sir. 18 Q. And who did you report to at 19 United Financial Group? 20 A. To Mr. Coles. 21 Q. At United Financial Group, as well? 22 A. Yes. 2198 1 Q. And who did you report to -- let me 2 back up. 3 Did Mr. Coles leave at the end of 1983? 4 A. Yes. It was in early -- end of '83, 5 early '84 he left. 6 Q. Do you know why he left? 7 A. He said that he was just going to move 8 on. It was time for him to go. 9 Q. Did he ever indicate to you that anyone 10 had asked him to leave? 11 A. No. 12 Q. Had you ever heard that anyone had 13 asked him to leave? 14 A. Well, I think he was having 15 difficulties -- he expressed some difficulties 16 maybe with Mr. Hurwitz, but nothing specific. He 17 was pretty closed-mouth about it. 18 Q. After he left, who did you report to at 19 USAT? 20 A. Well, Mr. Bentley, he stepped back in 21 as the chairman of the company. 22 Q. And who did you report to at UFG? 2199 1 A. Mr. Bentley. 2 Q. Okay. Now, at some point in time, 3 Mr. Bentley ceased to be the chairman of USAT in 4 1985. Do you recall that? 5 A. Yes. Early '85. 6 Q. Did you -- who did you report to after 7 that? 8 A. Mr. Gross. 9 Q. Mr. Gross? 10 A. Yes. 11 Q. At USAT? Who did you report to at UFG? 12 A. Mr. Gross. 13 Q. Mr. Gross. Now, I'd like to hand you 14 Exhibit No. 303 -- 3013 and I'd like to move its 15 admission, as well, Your Honor. Your Honor, I've 16 cut back the number of exhibits since I've given 17 the exhibit list to opposing counsel. Unless they 18 have them numerically, I can give them 19 Mr. Langdon's copy and then make another copy for 20 him so that we can avoid people have having to 21 rummage around for documents like we had to do 22 yesterday if that's acceptable to Your Honor. 2200 1 MR. VILLA: Mine are in numerical 2 order, but I don't see A3013. 3 THE COURT: Can you make a copy of this 4 and have it for me? 5 MR. GUIDO: Yes, Your Honor. I'll make 6 a whole extra set for you so you can have them. 7 THE COURT: All right. 8 MR. GUIDO: I think 3013 has been 9 admitted. It's the document that has the various 10 loans to the officers of UFG to purchase the 11 stock. 12 Q. (BY MR. GUIDO) I'd like to direct 13 your attention to Page 16, Mr. Williams. A 14 discussion of the purchase of stock by certain 15 officers. 16 Do you recall the transaction in which 17 you were offered stock in UFG sometime in 1985? 18 A. Yes, sir. 19 Q. And who offered that stock to you? 20 A. Mr. Hurwitz. 21 Q. And who financed the purchase of that 22 stock? 2201 1 A. UFG, the parent company, not the 2 thrift. 3 Q. Who offered the parent company to 4 finance that stock? 5 A. Mr. Hurwitz. 6 Q. And did you purchase that stock? 7 A. Unhappily, I did. 8 Q. And did you receive a loan of $186,250? 9 A. I did. I paid it back. 10 Q. Did you ever learn how that stock 11 became available to be purchased? 12 A. This is somewhat vague, but there was a 13 block of stock held by I believe a real estate 14 developer in the city. I don't recall his name. 15 He had all the stock and was going to sell it. We 16 became aware of it and the next thing I knew is 17 that that's when Mr. Hurwitz came to us and said 18 this would be something that might be good for the 19 executives and he offered the proposal I just 20 outlined. 21 Q. Did he make the same proposal to all of 22 the individuals that are listed on Page 16, to 2202 1 your knowledge? 2 A. Well, I can only answer that he must 3 have. I was never part of his discussion with 4 them. He talked to us all as -- I guess talked to 5 me individually. 6 Q. So, you don't know whether or not he 7 offered any stock to any other individuals? 8 A. No. Just this group here that's in the 9 proxy. 10 Q. These are the only ones you know that 11 offers were made to? 12 A. I don't know of any other offers. 13 Q. Now, do you recall the circumstances 14 surrounding the Castle & Cooke stock acquisition? 15 A. Yes, sir. 16 Q. And do you recall how the question of 17 the purchase of the Castle & Cooke stock came up? 18 A. As it related to whether United could 19 do it? 20 Q. Uh-huh. 21 A. Yes. Mr. Pledger had found -- I 22 believe Mr. Pledger had found -- who was our 2203 1 counsel -- had found that the service companies 2 that we had with state approval would be allowed 3 to buy equity securities. 4 Q. And why had he done that? 5 A. I don't recall. He -- they had come 6 across it or looking at it, but I can't recall how 7 it came up. 8 Q. Do you recall when the discussion came 9 up? 10 A. Sometime in 1984. 11 Q. 1984? 12 A. I think that's right. 13 Q. Or late '83? 14 A. Maybe late '83. 15 Q. I'd like to hand you Exhibit A-10383 16 which I understand has already been admitted -- 17 MR. GUIDO: Which has previously been 18 admitted, Your Honor. 19 Q. (BY MR. GUIDO) I'd like to direct 20 your attention to Page 2 of the document which is 21 Page 1 of the minutes of the board of directors of 22 United Financial Group of May 26th, 1983? 2204 1 THE COURT: Mr. Guido, I didn't have 2 1083 marked as received. I'll receive it at this 3 time. 4 MR. GUIDO: Well, I move its admission, 5 Your Honor. 6 THE COURT: All right. And did you say 7 3013 had also been received? 8 MR. GUIDO: 3013 I thought had been 9 admitted; but otherwise, I move its admission now, 10 Your Honor. 11 MR. VILLA: No objection. 12 THE COURT: Received. All right. 13 Excuse me. Go ahead. 14 Q. (BY MR. GUIDO) I'd like to direct 15 your attention to the middle of the page. You see 16 where it says "On motion of Mr. Putegnat and 17 seconded by Dr. LeMaistre, the following persons 18 were unanimously designated to serve on the 19 committees of the board adjacent to their names"? 20 A. Yes, sir. I see that. 21 Q. And it says "Charles Hurwitz, executive 22 committee, Barry Munitz, executive committee." Do 2205 1 you see that? 2 A. Yes. 3 Q. Now, as of that date, prior to this 4 selection to the executive committee, what was the 5 membership of the executive committee of 6 United Financial Group? 7 A. I joined the company in August of '83. 8 So, when I was -- so, at this moment, I don't 9 know. 10 Q. Okay. 11 A. But -- 12 Q. What was it when you joined? 13 A. It was Hurwitz, Coles, Munitz, and 14 Bentley, I gather. I can't recall any other 15 members. 16 Q. That's what you recall? 17 A. That's what I recall. 18 Q. And you don't know what it was prior to 19 that date? 20 A. I do not. 21 Q. Now, I want to hand you Exhibit T4620 22 which is a document that's also previously been 2206 1 admitted which is the discussion points for the -- 2 what the state savings and loan commissioner? 3 MR. VILLA: Excuse me, Mr. Guido. 4 Could you give us the number of that document 5 again? 6 MR. NICKENS: It's Tab 120. 7 MR. GUIDO: It's T 4620. 8 Q. (BY MR. GUIDO) T4620, Mr. Williams, 9 do you remember that as the talking points for a 10 meeting with the savings and loan commissioner of 11 Texas? 12 A. Yes, sir. 13 Q. And attached to that is a list of 14 companies. Do you see that? 15 A. Yes, sir. 16 Q. And that list of companies, it says 17 "Companies United Savings of Texas would be 18 interested in reviewing for possible investment 19 opportunities." Do you see that? 20 A. Yes, sir. 21 Q. Did you participate in the preparation 22 of that list? 2207 1 A. I think my contribution was the First 2 Federal of Austin. 3 Q. So, you added First Federal of Austin. 4 How come it says "not" next to that? 5 A. I don't remember that. I don't know 6 why or it may be -- I don't know why it was 7 scratched. 8 Q. Who suggested the other entities on 9 that list? 10 A. Mr. Hurwitz had some of them. I cannot 11 recall if Mr. Bentley had some or not. 12 Q. Was this a discussion between the three 13 of you? 14 A. Yes. As I recall, there was. And 15 Mr. Pledger, I think, was there. 16 Q. What was the purpose of developing this 17 list? 18 A. Well, with the foundability to invest 19 in equities, the decision was made, well, if we 20 could do that, if the thrift can do that or the 21 service company of the thrift can do that, what 22 list -- what companies might be appropriate. 2208 1 Q. And did you attend the meeting with the 2 savings and loan commission commissioner to 3 discuss that list? 4 A. No, I did not. Mr. Bentley and 5 Mr. Pledger did that. 6 Q. Was the discussion with Mr. Bentley and 7 Mr. Hurwitz about this list the first time you had 8 heard of these entities as possible investments 9 for a subsidiary of United Savings Association of 10 Texas? 11 A. Yes. 12 Q. When you discussed it with them, did 13 they discuss any of the companies in specifics? 14 A. As I recall, there were perhaps some 15 financial analysts reports on some or all, but 16 that's all I recall. 17 Q. Were these discussions with regard to 18 this list discussions about investment or 19 acquisition of the control of the company? 20 A. Investments. 21 Q. Investments. And in those discussions, 22 had either of them mentioned to you that MCO or 2209 1 Federated had made purchases in those stocks? 2 A. Not at that time. I don't recall that. 3 Q. Did you subsequently learn that MCO had 4 acquired stock in Castle & Cooke? 5 A. Yes. We had heard that, but I can't 6 remember the sequence of when I might have learned 7 that. 8 Q. Did you subsequently learn that MCO had 9 acquired stock in any of the other entities listed 10 on that list? 11 A. I don't recall. 12 Q. How did you learn that MCO had made 13 investments in the Castle & Cooke stock? 14 A. Through Bentley or Hurwitz. I can't 15 recall which. Bentley may have known from talking 16 to Mr. Hurwitz. 17 Q. Did you attend any board meetings in 18 which the board voted to acquire the Castle & 19 Cooke stock? 20 A. Well, I attended the board meetings 21 when I was there. So if it was brought up, I was 22 there when it was approved. 2210 1 Q. Was the -- did the board make the 2 decision to purchase the Castle & Cooke stock 3 prior to its being acquired? 4 A. I don't recall if the board approved it 5 or ratified it. 6 Q. What was the practice at that time with 7 regard to approval by the board or any of its 8 committees for the acquisition of stock? 9 MR. VILLA: Objection. I don't believe 10 there has been any testimony there has been a 11 practice established at this point. 12 Q. (BY MR. GUIDO) Was there a practice 13 to have either the board or a committee make 14 investments on behalf of United Savings 15 Association of Texas? 16 A. I don't recall that we made an 17 investment up to that time, this kind of an 18 investment, an equity investment. 19 Q. There was an executive committee in 20 existence at this time? 21 A. An executive committee existed, yes, 22 sir. 2211 1 Q. And was it the practice to have the 2 executive committee make investment decisions on 3 behalf of USAT? 4 A. It may have because the executive 5 committee acted many times when the board did not 6 meet. 7 Q. How often did the board meet? 8 A. I believe quarterly and there may have 9 been another meeting a year but four to six times, 10 let's say. 11 Q. At the -- had the board by the time the 12 investment in Castle & Cooke was made, had it 13 authorized the creation of an executive committee 14 and delegated its authority to that committee? 15 A. I don't recall the sequence, whether 16 the executive -- whether it had been delegated to 17 it at that time before this or not. 18 Q. Okay. Do you recall whether the 19 executive committee at any time had been 20 authorized to act on behalf of the board? 21 A. Well, I believe that it could act and I 22 don't recall what rules or bylaws allowed it to do 2212 1 so, but it did act in place of the full board. 2 Q. Okay. And it did make investments on 3 behalf of USAT, did it not? 4 A. Yes. 5 Q. Do you know whether or not the 6 executive committee acted to approve the purchase 7 of the Castle & Cooke stock prior to its being 8 acquired? 9 A. I don't recall that but it would seem 10 that it would have met to approve it but I can't 11 recall. 12 Q. You can't recall that it did? 13 A. I can't recall the specific time frame. 14 Q. Do you recall having any conversations 15 with Mr. Bentley in which you informed him that 16 the Castle & Cooke investment had been made by 17 USAT? 18 A. Yes. 19 Q. Can you tell us about that 20 conversation? 21 A. I think he was out of town, in fact. 22 And I talked with him and told him that the 2213 1 investment had been made. He asked me which 2 company had been put into and I -- and the 3 instructions we had were to put it into the 4 service company. But it actually had been put 5 into the savings and loan. So we reversed it. 6 Q. You mean you rescinded the purchase? 7 A. No. We didn't rescind the purchase but 8 we had the paperwork transferred back into the 9 service company instead of the savings and loan. 10 The service company was owned by the savings and 11 loan. 12 Q. Was the service corporation the entity 13 that purchased the stock? 14 A. Yes, sir. 15 Q. And did the executive committee of USAT 16 authorize that acquisition? 17 A. Yes. 18 Q. Where did the executive committee of 19 USAT get the authority to direct investments by 20 the subsidiary? 21 A. I don't recall. I don't recall whether 22 it had the authority to do that or whether -- if 2214 1 there was actually a delegation of that authority. 2 Q. Was it your understanding at the time 3 of the Castle & Cooke acquisition that service 4 corporations had to be operated independently of 5 the savings and loan? 6 A. It was my understanding that they 7 were -- as subsidiaries, they were operated but 8 certain things could go through them and not 9 through -- and not through the thrift but they 10 were not -- they were operated by the same 11 management. 12 Q. They were operated by the same 13 management? 14 A. Yes. 15 Q. So that your understanding was that at 16 that time, the executive committee of the savings 17 and loan could make an investment on behalf of the 18 subsidiary? 19 A. Yes. I'm not sure of those approvals 20 at that time. But whether USAT or the service 21 company executive committee had to also ratify it, 22 I don't recall. 2215 1 Q. Did you ever have any discussions with 2 Mr. Bentley about the need to sort of clean up the 3 record on the Castle & Cooke transaction? 4 A. Only as it related to the fact that we 5 initially put it into the thrift itself. 6 Q. Did you talk to him about anything 7 about who was on the papers at the brokerage 8 house? 9 A. Oh, yes. 10 Q. As the person to acquire this? 11 A. Yes. It's coming back. But I can't 12 recall whether Mr. Hurwitz was on the paper and 13 then we put Mr. Graham -- not Mr. Graham but 14 Mr. Barrett who was treasurer so he could act for 15 the savings and loan and the service company. 16 Q. How did that come about that you 17 learned that? 18 A. Either through Bentley or we learned it 19 through Bear Sterns. 20 Q. And did Mr. Bentley report to you that 21 he ascertained that the person who was authorized 22 to make transactions or to initiate transactions 2216 1 on the behalf of United Financial Corporation on 2 those papers was Mr. Hurwitz? 3 A. Yes. Mr. Hurwitz was not an officer, 4 as I recall, so we had to get Mr. Barrett to do 5 that. 6 Q. Did you have any discussions with 7 Mr. Bentley about the need to clean up the minutes 8 of the executive committee with regard to the 9 Castle & Cooke acquisition? 10 A. I don't recall that. We may have. 11 Q. Do you recall having a conversation 12 with Mr. Bentley regarding the need to change the 13 minutes of the executive committee so that it 14 didn't reflect a joint meeting but reflected a 15 meeting of one of the two entities: UFG or USAT? 16 A. I don't recall that. 17 Q. Do you recall whether it was 18 United Financial Group or the USAT executive 19 committee that had approved the purchase of the 20 Castle & Cooke stock? 21 A. It would have been USAT, but it could 22 have also -- UFG may have done the same. 2217 1 Q. Well, I mean, did UFG's executive 2 committee have the authority to make investments 3 on behalf of a subsidiary of USAT? 4 A. No. USAT had to approve its own. 5 Q. Now, when -- at some point in time, did 6 USAT's executive committee authorize purchases in 7 Castle & Cooke to be increased? 8 A. Yes. There were discussions on that, 9 yes. 10 Q. And in those discussions, what were the 11 reasons that were given for increasing UFC's 12 holdings in that Castle & Cooke stock? 13 A. As I recall, the issue related around 14 the accounting treatment of the investment. 15 Castle & Cooke, as I recall, was not a 16 dividend-paying stock and we had a cost of carry 17 on borrowed money and, therefore, if we could 18 effectively -- as an expense to the association, 19 and we felt if we could get equity accounting we 20 could then accrue the income that -- our portion 21 of the income that Castle & Cooke had. 22 Q. Did you have any discussions about 2218 1 whether or not the value of each of the shares 2 that were held by United Financial Corporation 3 would be greater if it held a greater percentage 4 of the stock? 5 A. We may have. That's hard for me to 6 remember. Repeat the question, please. 7 Q. Did you have any discussions about 8 whether the value of each share of stock held by 9 UFC would be greater if UFC increased its 10 percentage ownership of the stock? 11 A. We may have, yes. 12 Q. You may have or you did? 13 A. Well, I can't recall specifically those 14 meetings on that particular topic. 15 Q. So, you don't recall? 16 A. No. I recall us talking about 17 increasing the amount of investment in Castle & 18 Cooke. 19 Q. And I'm just asking you whether or 20 not -- 21 A. Yeah. 22 Q. -- one of the topics that was discussed 2219 1 was the increased value of each share because of 2 the increased percentage? 3 A. Specifically, I don't recall that. But 4 that could have been a dialogue we had. 5 Q. Now, at some point in time, the stock 6 was sold, was it not? 7 A. Yes, sir. 8 Q. And were you on the executive committee 9 at that time? 10 A. Yes, sir. 11 Q. Did you authorize the sale of the stock 12 in the executive committee? 13 A. We did. 14 Q. Do you recall when that stock was sold? 15 A. No, sir. It was 13 years ago. I need 16 help with the dates. 17 Q. Okay. You have been deposed previously 18 with regard to Castle & Cooke, haven't you? 19 A. Yes, sir, I was. 20 Q. And do you recall when that was? 21 A. In I think it was 1984. 22 Q. And was that in a lawsuit initiated by 2220 1 Castle & Cooke? 2 A. Yes, sir. 3 Q. Have you had an opportunity to review 4 the transcript of that deposition before your 5 testimony today? 6 A. I did, yes. 7 Q. Did you see any mention in there about 8 a meeting to authorize the sale of the Castle & 9 Cooke stock? 10 A. I believe that I did. It's a big 11 deposition. 12 Q. Now, who negotiated the sale of that 13 stock on behalf of UFC? 14 A. I don't recall specifically but I 15 believe that ultimately, myself or Mr. Barrett 16 called Bear Sterns and said to sell it. But the 17 discussions would have been in the executive 18 committee to do that. 19 Q. To sell it to whom? 20 A. Well, I don't remember that. I don't 21 remember whether we sold it to -- I don't recall 22 from my deposition yesterday, either. 2221 1 Q. So, you don't recall who the stock was 2 sold to? 3 A. No, sir. 4 Q. Wasn't it sold back to Castle & Cooke? 5 A. Well, that's what I thought but I 6 wasn't sure. I think that's right. 7 Q. Now, didn't Mr. Hurwitz negotiate with 8 Ian Wilson from Castle & Cooke for that sale? 9 A. He did. I had forgotten that. Yes, he 10 was talking to Mr. Wilson at that time. 11 Q. And he negotiated the sales price, did 12 he not? 13 A. Yes. He negotiated the sales price. 14 Q. And he came to the executive committee 15 and he said, "This is the sales price I've 16 negotiated. I recommend" -- 17 MR. VILLA: Objection. Leading. 18 THE COURT: Sustained. Can you restate 19 the question? 20 Q. (BY MR. GUIDO) Did he recommend a 21 sales price to the executive committee? 22 A. Yes. I recall now that when he was 2222 1 involved with that at that time, yes, to sell the 2 stock out. 3 Q. And did he recommend that the sale be 4 made? 5 A. Yes. 6 Q. Now, prior to that, did you attend any 7 meetings with the Federal Home Loan Bank Board 8 about -- or representatives from the Federal Home 9 Loan Bank Board about their concerns about United 10 Savings Association's subsidiary investing in 11 Castle & Cooke? 12 A. I don't -- no, I don't recall any 13 meetings with the Home Loan Bank. We owned it 14 only at the end when we talked to Mr. Green. 15 Q. To who? 16 A. Roy Green, who was president of the 17 Dallas bank. 18 Q. And what did you talk to him about? 19 A. Well, we agreed that we -- that we 20 would not do that again, would not buy again. 21 Q. But that was after the sale? 22 A. After the sale, yes. 2223 1 Q. All right. Let's go back to prior to 2 the sale. 3 A. Okay. 4 Q. Were you informed of any meetings 5 between representatives of USAT and the Federal 6 Home Loan Bank Board in which the representatives 7 of the Bank Board expressed concern about the 8 acquisition of Castle & Cooke stock? 9 A. I remember some concern about it. I 10 don't recall a meeting that I was in, though. 11 Q. Do you recall whether Mr. Munitz met 12 with anyone from the Federal Home Loan Bank Board 13 to discuss the matter? 14 A. He may have. I don't recall the 15 specifics of that. 16 Q. Well, do you recall whether or not 17 there was anyone authorized to have discussions 18 with the Federal Home Loan Bank Board from USAT 19 with regard to their concerns about USAT's 20 acquisition of Castle & Cooke stock? 21 A. I don't recall. 22 Q. Now, did you ever receive any notice 2224 1 with regard to the results of the meetings with 2 the representatives of the Federal Home Loan Bank 3 Board prior to the sale of the Castle & Cooke 4 stock? 5 A. I may have, but I just don't recall 6 them. 7 Q. Do you recall whether or not anyone 8 ever told you that the general counsel of the 9 Federal Home Loan Bank Board was threatening to 10 bring a change of control action against anyone 11 because of the Castle & Cooke acquisition? 12 A. That rings a light bell. I can't 13 recall the specifics of that, though. I just 14 remembered our meeting with Mr. Green more than 15 anything. 16 Q. Which was after the fact? 17 A. After the fact. 18 Q. And Mr. Green suggested that you not do 19 it again? 20 A. That's right. He met with Mr. Bentley 21 and I. 22 Q. Okay. And in that discussion, did he 2225 1 indicate that if there were such joint actions 2 with MCO in the future, there would be a change of 3 control action brought? 4 A. I don't recall that. 5 Q. Now, did -- in 1984, did USAT invest in 6 any mortgage-backed securities? 7 A. Yes. I believe we had invested in some 8 mortgage-backed securities in 1984. 9 Q. And was it in the range of 50 to 10 $60 million? Do you recall? 11 A. That sounds about -- I guess about 12 right. I can't recall specifically. 13 Q. Was that investment an investment in a 14 risk-controlled arbitrage? 15 A. Yes. 16 Q. Can you explain to the Court your 17 understanding of a risk-controlled arbitrage? 18 A. The investment in the securities in a 19 risk-controlled arbitrage was to effectively 20 protect the spread that you would -- because of 21 interest rate movements, that we would hedge the 22 asset and the liability side so as to effectively 2226 1 allow a stream of income that within certain 2 parameters would not vary. 3 Q. Was the concern because the funding 4 source, the liability side, were short-term and 5 they repriced on a 30- to 60-day time period 6 whereas the mortgages were long-term, fixed 7 mortgages? 8 A. Yes, which was like the assets on the 9 thrift books at the time. 10 Q. And that the concept was to figure out 11 a way to take this mismatch and close the gap; is 12 that right? 13 A. That's correct. 14 Q. And is that why the term is used "gap" 15 in savings and loan parlance? 16 A. Yes. And banking today, yes. 17 Q. And is it your understanding that that 18 gap was hedged at the time with swaps in 1984? 19 A. Yes. On the new portfolio that was 20 being purchased but not on the old portfolio. 21 Q. There was another portfolio? 22 A. Well, not a portfolio but those were 2227 1 the home -- the single-family residential loans 2 that were on the books originally. 3 Q. Okay. That first packet in 1984? 4 A. That were created on a retail basis 5 that the two associations had inherited when they 6 merged. 7 Q. Okay. And so, there were some 8 mortgage-backed securities? 9 A. No. Those were single-family home 10 loans. They are not securities. They are loans. 11 Q. Okay. What I'm asking you about is the 12 first purchases of mortgage-backed securities 13 issued by Ginnie Mae or Fannie Mae. 14 A. Right. 15 Q. And that was in 1984? 16 A. Yes, sir. 17 Q. Okay. And those, it's your 18 understanding, that they were funded with 19 short-term funding sources, they were fixed rate 20 long-term mortgages, and that the gap was hedged 21 with swap instruments? 22 A. Yes. 2228 1 Q. Is that the first purchase that USAT 2 had made in a risk-controlled arbitrage 3 mortgage-backed security portfolio to your 4 knowledge? 5 A. Yes. I believe that is correct. There 6 could have been a few before, but I believe that 7 was the first time. 8 Q. Who proposed that acquisition? 9 A. I believe at the time, we had Salomon 10 Brothers come in and discuss with us how we might 11 enact a program and have it controlled on a risk 12 arbitrage program. Joe Phillips was our 13 investment man, working with Ron Heubsch. 14 Q. At the time that portfolio was owned, 15 was Joe Phillips an employee of USAT? 16 A. I can't recall the time frame. He 17 came -- when he came and when we did that first 18 one. 19 Q. Was Ron Heubsch an employee of USAT at 20 the time? 21 A. Yes. I can't recall when Ron came on 22 our payroll, but it was during that period. 2229 1 Q. Now, did Ron Heubsch become an employee 2 of USAT prior to Joe Phillips? 3 A. I'm guessing. I don't think so. I 4 just can't recall those events. 5 Q. He came afterwards, didn't he? 6 MR. VILLA: Objection. 7 A. I can't recall it. 8 THE COURT: All right. Sustained. 9 Move on. 10 Q. (BY MR. GUIDO) I'd like to show you 11 exhibit -- did USAT invest in junk bonds in 1984? 12 A. We invested in junk bonds. We may 13 have -- that may have been the first time. 14 Q. In 1984? 15 A. Yes. 16 Q. And were those junk bonds investments 17 made before or after Ron Heubsch was an employee 18 at USAT? 19 A. I can't, again, recall those dates 20 specifically. 21 Q. Did Ron Heubsch become an employee of 22 USAT after USAT had created an investment 2230 1 facility? 2 A. He may have because it was felt that we 3 needed somebody with his expertise in the 4 investments that we were making. 5 Q. Who brought Ron Heubsch to your 6 attention? 7 A. Mr. Hurwitz. 8 Q. Where had Ron Heubsch been employed? 9 A. With Mr. Hurwitz. 10 Q. Where? 11 A. One of his companies. MCO. 12 Q. Okay. Now, did Ron Heubsch make 13 investments on behalf of USAT? 14 A. Yes. He -- with approval of 15 committees, he and Phillips made investment 16 recommendations and then executed them. 17 Q. Did Ron Heubsch have the authority to 18 make investments in securities without obtaining 19 executive committee or board approval? 20 A. I recall that he had certain parameters 21 that he could execute on that were authorized by 22 the committee, by the executive committee. 2231 1 Q. So, he had a limit on each investment? 2 A. I believe that's right. 3 Q. And he had a limit on the total 4 investments that he could make? 5 A. Yes. 6 Q. But within those parameters, he had the 7 authority to make investments on behalf of USAT? 8 A. And if he wanted to do something 9 different, he had to report back to the committee. 10 I believe that's how it worked. 11 Q. Now, when he was making investments on 12 behalf of USAT, was he also making investments on 13 behalf of MCO? 14 A. I have no idea. 15 Q. Was he also making investments on 16 behalf of Federated? 17 A. I don't know, sir. 18 Q. Was his salary split between USAT and 19 any other entity? 20 A. I don't know that. We paid him, but I 21 don't know how he was compensated elsewhere. 22 Q. Was USAT reimbursed for any of his 2232 1 salary? 2 A. No, sir. 3 Q. Now, do you know who the underwriters 4 were for the junk bonds that were purchased in 5 1984? 6 A. Well, I believe we bought them from a 7 number of investment banking houses: Drexel and a 8 few others. 9 Q. I'm talking about 1984. 10 A. I can't recall specifically. 11 Q. I'd like to show you Exhibit A-10546 12 which is part of the USAT/UFG board book of 13 11-13-84. 14 MR. GUIDO: And I move the admission. 15 It's a memorandum from Gerald Williams to the 16 executive committee dated October 25th, 1984. 17 MR. VILLA: No objection. 18 Q. (BY MR. GUIDO) Do you recall writing 19 this memorandum? 20 A. Now that I see it, yes. 21 Q. Have you seen this memorandum any time 22 in the last year? 2233 1 A. I don't recall. 2 Q. Has anyone shown you any documents and 3 asked you to review them for your testimony in 4 this matter? 5 A. Yes. I've looked at a number of 6 documents but I don't -- I may have seen this one. 7 I just don't recall it. 8 Q. Who provided you with those documents? 9 A. You gave me some and Mr. Villa gave me 10 some. 11 Q. Now, looking at the first page, you see 12 where it says operations? 13 A. Yes, sir. 14 Q. Okay. And the second sentence, "The 15 big problem is the company's inefficiency and 16 total disarray of our loan files and missing 17 documents that are fundamental to the business." 18 You see that? 19 A. I sure do. 20 Q. Is that one of the problems that 21 Mr. Hurwitz discussed with you when he met with 22 you before you joined USAT? 2234 1 A. Yes. This was one of the problems. I 2 don't know that we knew. That's why we were 3 writing it at this time, that we didn't know the 4 extent of it that existed as a result of the 5 merger of those two companies. 6 Q. When you met with Mr. Hurwitz prior to 7 being employed, did you discuss the second item, 8 the problem with the bad loans because of the 9 weakened economy? 10 A. This was not discussed when I met with 11 him before I was hired, no. 12 Q. Now, look at the second page. It says 13 "strategic redirection." It says "While we have 14 concentrated on the potential sale of half our 15 branches during 1984, other changes have been 16 taking place." You see that sentence? 17 A. Yes, sir. 18 Q. Is that the reference to the sale that 19 generated about $81 million in profit to the 20 association? 21 A. Yes, the sale at the end of 1984. 22 Q. And then the next sentence says "We 2235 1 intend to become a mortgage banking operation in 2 1985 instead of a portfolio lender." Do you see 3 that? 4 A. Yes, sir. 5 Q. And where did you get that information? 6 A. Well, that was discussed at -- at some 7 of the executive committee meetings we had. 8 Q. Prior to November, 1984? 9 A. Yes. 10 Q. Did you discuss that with Mr. Hurwitz 11 when you met with him before you became an 12 employee of USAT? 13 A. No, sir. 14 Q. Now, did you propose any steps be taken 15 at the end of 1984 as part of a strategic 16 redirection of USAT? 17 A. Well, those that we outlined in this 18 memo -- that we had continued to clean house 19 internally. 20 Q. Did you at this point in time in 1984 21 propose an increase in the investments of junk 22 bonds? 2236 1 A. I don't recall. At some point, we did; 2 and I don't recall if it was at that time. 3 Q. Did you propose the increase in 4 investments in mortgage-backed securities? 5 A. Eventually, yes. But whether it was -- 6 it may have been at this time we did or not until 7 1985. As a result of Salomon Brothers' visit, we 8 did. 9 Q. And was the first investment in 10 mortgage-backed securities by USAT at the end of 11 1984? 12 A. I believe that's the correct time 13 frame. 14 Q. And that was in response to some 15 suggestions by Salomon Brothers; is that correct? 16 A. Yes. They came and made a presentation 17 to us. 18 MR. GUIDO: I'd like to move the 19 admission of Exhibit T4069 at this point in time, 20 which is a Salomon Brothers document dated 21 October 24th, 1984. 22 THE COURT: Did you say T or A? 2237 1 MR. GUIDO: T4069, Your Honor. 2 MR. VILLA: One moment, Your Honor, so 3 we can check it. No objection. 4 THE COURT: Received. 5 Q. (BY MR. GUIDO) Now, look at the 6 second page of the document, Mr. Williams. It 7 says "strategic plan, October 24th, 1984." 8 A. Yes, sir. 9 Q. Do you see that? And it talks about a 10 growth strategy, a summary of the financing 11 alternatives, a discussion of restructuring 12 alternatives. Do you see that? 13 A. Yes, sir. 14 Q. And is this the document that reflects 15 the presentation that you say was the basis for 16 the investment in the first risk-controlled 17 arbitrage? 18 A. I believe that's the case. 19 Q. But it's your understanding that the 20 concept that was being discussed was the purchase 21 of mortgage-backed securities financed with a 22 short-term funding rate such as a reverse repo 2238 1 agreement; is that correct? 2 A. Yes, sir. And swaps. 3 Q. And swaps were being used to protect 4 against the upward movement of interest rates? 5 A. Yes, sir. 6 Q. Now, at this point in time, had anyone 7 ever discussed the risks that prepayments cause in 8 such a portfolio? 9 A. Well, yes. I recall Salomon and 10 Phillips and Heubsch discussing the fact that 11 prepayments were to be guarded against. 12 Q. And is it your understanding that the 13 portfolio was to be managed to minimize the 14 interest rate risk that was attached to 15 investments in mortgage-backed securities? 16 A. Yes, sir. 17 Q. I'd like to hand you Exhibit No. A-1102 18 which is the board of directors meeting of 19 February 14th, 1985, and move its admission if it 20 hasn't already been admitted. 21 MR. VILLA: Just a moment, Your Honor, 22 while we try to find the documents. 2239 1 MR. NICKENS: 128. 2 MR. GUIDO: 1102. 3 MR. NICKENS: Tab 128. 4 MR. GUIDO: I'm sorry. 5 Q. (BY MR. GUIDO) I want to direct your 6 attention to Page 2 of the document. 7 THE COURT: Is there any objection to 8 the receipt of that exhibit? 9 MR. NICKENS: Your Honor, it's been 10 previously offered and received. 11 MR. VILLA: As Exhibit 128. 12 MR. NICKENS: T4069 -- A-1102, Your 13 Honor, was offered and received and is now at Tab 14 128. 4069, I don't believe, has been offered 15 unless it was offered. 16 MR. GUIDO: Previously that I know of. 17 MR. NICKENS: Right. 18 MR. GUIDO: 4069 is offered, Your 19 Honor. I thought it was offered and accepted. 20 MR. NICKENS: I did, too. 21 THE COURT: Well, I didn't have A-1102 22 marked as having been received or even identified. 2240 1 I'll receive it at this time. I don't vouch for 2 the accuracy of my record. 3 Q. (BY MR. GUIDO) I'd like to direct 4 your attention to Page 2, Mr. Williams, and the 5 motion at the bottom of the page of Page 2. It 6 says "Whereas it is the intention of the board of 7 directors of United Savings Association of Texas 8 to have certain matters which would come before 9 the entire board of directors be brought before a 10 lesser number of directors and that these matters 11 be acted upon by a lesser number of directors 12 constituting a committee with the same effect as 13 if acted on by the entire board which matters 14 shall include but not be limited to the intent to 15 declare dividends on its capital stock and the 16 actual declaration of dividends." 17 A. I see it. 18 Q. And then it goes resolved and there is 19 an executive committee created. 20 Is it your understanding that at least 21 as of February 14th, 1985, that the executive 22 committee had been delegated all of the authority 2241 1 of the board of directors of USAT? 2 A. At this time. 3 Q. Right. 4 A. Yes. 5 Q. Or at least as of this time? 6 A. Yes. 7 Q. Now, it says that the members are 8 Mr. Bentley, Mr. Gross, yourself, Mr. Whatley, and 9 Barry Munitz. Right? 10 A. Yes, sir. 11 Q. And is that same group of people plus 12 Mr. Hurwitz at the time -- February 14th, 1985 -- 13 a composition of the executive committee of UFG? 14 A. Yes, sir. 15 Q. Did the executive committees of UFG and 16 USAT meet jointly? 17 A. Yes. Sometimes separately but jointly, 18 as well. 19 Q. Did they meet primarily jointly? 20 A. Primarily jointly. 21 Q. Now, was it also at this meeting that 22 Mr. Gross was made the chairman of USAT? Look at 2242 1 page -- 2 A. Yes. 3 Q. -- 4. 4 A. Yes. Made the chairman of USAT at this 5 meeting, yes, sir. I remember now. 6 Q. Was Mr. Bentley told at or about the 7 time of this meeting that he should consider 8 retiring? 9 A. I believe he learned from Mr. Hurwitz 10 prior to this meeting. 11 Q. And what did he hear from Mr. Hurwitz? 12 MR. VILLA: Objection. Pure hearsay. 13 THE COURT: Denied. 14 Q. (BY MR. GUIDO) You may proceed. 15 THE COURT: You may answer. 16 A. Mr. Bentley told me that he had lunch 17 with Mr. Hurwitz and that this change was going to 18 be made. Mr. Gross was going to come in and while 19 he was not going to be leaving right away, he was 20 going to be phasing out, to use his term, over the 21 rest of the year. 22 Q. (BY MR. GUIDO) Now, how did 2243 1 Mr. Hurwitz have the authority to tell Mr. Bentley 2 that? 3 MR. KEETON: I object, Your Honor. 4 That's not what the witness said. The witness 5 just got through saying that Mr. Bentley reported 6 what he had said and discussed with Mr. Hurwitz, 7 not that Mr. Hurwitz told him that. 8 MR. GUIDO: I'm sorry. I'm missing the 9 distinction, Your Honor. But -- 10 MR. KEETON: Well, there is a big 11 distinction, Your Honor. Counsel's trying to 12 imply that Mr. Hurwitz told Mr. Bentley to go as 13 opposed to Mr. Bentley and Mr. Hurwitz having 14 discussed the fact that Bentley was going. We've 15 heard Mr. Bentley's own testimony from the stand 16 here, not asked for third-party hearsay. 17 THE COURT: Well, we'll hear what 18 Mr. Williams has to say on the subject. 19 A. Well, it's a long time ago, but 20 Mr. Bentley came back from lunch and said he was 21 going to be moving on is the best I can describe 22 it, but not right away. He was going to stay 2244 1 around even though Mr. Gross was going to become 2 the chairman. 3 Q. Did he tell you he was going to be 4 moving on because of Mr. Hurwitz' suggestion that 5 he do so? 6 A. He, I guess, implied that it was time 7 for him to go but having -- not knowing what was 8 said at this luncheon, he did say as a result of 9 the luncheon, he would be moving on and Mr. Gross 10 was going to be named the chairman. 11 Q. Did Mr. Hurwitz at the time have the 12 authority to ask Mr. Bentley to move on? 13 A. I don't know whether he did or not. I 14 mean, the fact is that Mr. Bentley did move on. 15 Q. Now, the people on Page 4 of the 16 document listed under these various categories 17 starting with Michael Crow, executive vice 18 president, CFO, who did he report to? 19 A. Crow reported to me. 20 Q. And see the investment section on Page 21 two? It says Ron Heubsch. Do you see that? 22 A. Yeah. 2245 1 Q. Vice president. Who did he report to? 2 A. The investment side was directed by 3 Crow. 4 Q. So, the investment people reported to 5 Michael Crow? 6 A. Yes. And Jenard at that time, too, was 7 getting into it. So it was a little murky as I 8 recall; but between the two of them, they watched 9 over the investment side. 10 Q. Did Ron Heubsch report to anyone else? 11 A. In the association? 12 Q. Uh-huh. 13 A. Not that I know of. 14 Q. Outside of the association? 15 A. Well, I don't know what he was still 16 doing with Mr. Hurwitz. 17 Q. Mr. Pledger, who did he report to? 18 A. Pledger at that time was reporting to 19 Bentley, but I think he came to report to me after 20 Mr. Bentley left. I think that's right. 21 Q. How about Mr. Patterson, executive vice 22 president for lending? 2246 1 A. He was reporting to Mr. Bentley and I 2 think he reported to Mr. Gross when Mr. Bentley 3 got here or after Mr. Bentley left. 4 Q. And what about Marty Lacouture, the 5 first vice president for loan workout? 6 A. He reported through the real estate 7 people, Childress and Graham, on the next page, 8 Page 6. 9 Q. And who did Childress and Graham report 10 to? You? 11 A. No. They reported to Bentley and then 12 to Gross. 13 Q. And what about Mr. Walker? 14 A. Walker reported to me. 15 Q. He reported to you. Is it fair to say 16 that the operational people reported to you and 17 the investments people reported elsewhere? 18 A. Yes, sir. 19 Q. But Mr. Crow reported to you and 20 Mr. Huebsch, who did investments, reported to him. 21 Why was that? 22 A. Well, because Crow was knowledgeable 2247 1 and had been involved in the -- was -- had a bent 2 for the investment side and Mike was knowledgeable 3 in these areas. 4 Q. So, he not only was on the operational 5 side like yourself but he was also on the 6 investment side of -- 7 A. Yeah. Crow was responsible, right, for 8 finance and the budgeting side of the company and 9 worked with me on the planning aspects of it. 10 Q. Now, subsequent to this meeting, did 11 Mr. Berner join USAT? 12 A. Sometime later, Mr. Berner joined the 13 company. 14 Q. And do you recall who recommended him 15 to the company? 16 A. Dr. Munitz told me about him. 17 Q. And what did he tell you? 18 A. He felt that the company needed a -- 19 while we were happy with Mr. Pledger, felt that it 20 would be good to have a lawyer who had some more 21 corporate-type experience on the payroll. 22 Q. Now, did a man named Mr. Jackson I 2248 1 think Jim Jackson eventually come? 2 A. Yes. 3 Q. And how did he end up there? 4 A. Mister -- once we sold the branches and 5 we were relying on the wholesale -- part of the 6 wholesale strategy, we needed a money raiser, 7 someone who was familiar with raising wholesale 8 CDs, and Mr. Jackson had that background. 9 Q. Who brought him to your attention? 10 A. I think Dr. Munitz did, but that may 11 not be totally correct. I just can't recall how 12 we got ahold of him. 13 Q. Now, in this time period, was there an 14 effort to initiate a venture capital fund? 15 A. Yes, there was. 16 Q. Okay. And was someone hired for that 17 position? 18 A. Yes. A young man by the name of Terry 19 Dorsey. 20 Q. Terry Dorsey? 21 A. Yes. 22 Q. And how did he come to your attention? 2249 1 A. He came to our attention through 2 Dr. Kozmetsky who had mentioned him, I think, at 3 one of the board meetings. And then we discussed 4 it at an executive committee meeting. I think he 5 was a student of Kozmetsky's. 6 Q. Now, I'd like to show you a document 7 that's marked T4061. It's dated March 29th, 1984. 8 It's a memo from Ron Heubsch to Gerald Williams 9 regarding the investment facility. 10 MR. VILLA: Your Honor, may we have a 11 moment just to check to see whether all the 12 attachments on 4061 we believe were originally 13 attached? 14 THE COURT: While we're looking at 15 documents, do you have another copy of 1102. 16 MR. GUIDO: 1102, Your Honor? Yes, I 17 do. I don't have the last page. 18 MR. VILLA: Your Honor, we have no 19 objection to this document providing that it 20 doesn't include an investment committee minutes 21 which are attached at least to my copy and which 22 are obviously prepared at least a year later. So, 2250 1 I think this is -- 2 MR. GUIDO: The last page of the 3 exhibit that I have, Your Honor, has the heading 4 "decision and information flow summary." It does 5 not have the minutes that Mr. Villa's concerned 6 about. 7 MR. VILLA: It's a six-page exhibit, 8 and to that we have no objection. It doesn't have 9 Bates stamp numbers on it so I can't give you the 10 pagination. 11 THE COURT: All right. Received. 12 Q. (BY MR. GUIDO) Do you remember 13 receiving this memorandum, Mr. Williams? 14 A. Yes. I have not seen it since then, 15 but I see it now. 16 Q. And was there set up an investment 17 facility? 18 A. Yes. But I don't know if we set it up 19 right then. 20 Q. Was it a year later? 21 A. I think it followed, yes. I think it 22 followed. 2251 1 Q. Does it follow -- I'm trying to date 2 it. Does it follow the -- 3 A. Salomon Brothers -- 4 Q. -- presentation? 5 A. -- presentation. 6 Q. So, sometime early 1985, mid-1985? 7 A. Yes. 8 Q. Is that correct? Where was it 9 physically located? 10 A. We were in two locations while we 11 were -- no. Corporate office had not moved, I 12 think, till '86 into the MCO building. So -- but 13 Heubsch himself was always in the MCO building. 14 Q. And Mr. Phillips was with him in the 15 MCO building, was he not? 16 A. Yes, although Phillips came back and 17 forth. 18 Q. But the investment department that was 19 making investments on behalf of USAT was not at 20 the corporate headquarters of USAT? 21 A. That's correct. 22 Q. They were housed in the MCO building? 2252 1 A. Right. 2 Q. And were they housed on the same floor 3 as Mr. Hurwitz? 4 A. Mr. Huebsch was. I cannot recall where 5 Mr. Phillips was, but he may have been on that 6 floor. 7 Q. But when an investment facility was 8 created, was it referred to as the trading floor? 9 A. I think that was one of the terms, but 10 we also called it the investment group. 11 Q. Okay. And they were eventually 12 consolidated in one place, were they not? 13 A. Yes. In '86, it was all moved -- all 14 the headquarters moved to the MCO building. 15 Q. But prior to 1986, the investment group 16 were primarily housed in the MCO building? 17 A. Yes. And we were going back and forth. 18 MR. GUIDO: Now, I'd like to offer into 19 evidence at this time, Your Honor, Exhibit 10560, 20 A-10560 which is a memorandum from Michael Crow to 21 Charles Hurwitz, Barry Munitz, Jenard Gross, and 22 Jerry Williams. 2253 1 MR. VILLA: No objection. 2 THE COURT: Received. 3 Q. (BY MR. GUIDO) Do you recall 4 receiving this memorandum? 5 A. Yes, sir. 6 Q. Is this memorandum the outgrowth of a 7 strategic planning meeting held the weekend of 8 April 26th, 1985? 9 A. Yes, sir. 10 Q. And is that sometimes referred to as 11 the Sandpiper retreat? 12 A. That's right. 13 Q. And that meeting, included as the 14 attendees the people on the first page of the 15 memorandum, Michael Crow, yourself, Jenard Gross, 16 Barry Munitz, and Charles Hurwitz? 17 A. As I recall, yes, we were all there. 18 Q. Anyone else there? 19 A. I don't believe so. 20 Q. Was Doug Hansen there? 21 A. He would have been had he joined the 22 company then. I can't -- if -- but he was at most 2254 1 of our meetings once he joined the company. So if 2 he was on the payroll then, he would have been 3 there. 4 Q. Were there any outside representatives 5 at the meeting that made presentations? 6 A. I don't recall any. 7 Q. So, it was essentially the five of you? 8 A. Yes, sir, that I recall. 9 Q. And the five of you came up with this 10 mission statement on Page 2? 11 A. Yes, sir. 12 Q. Now, the sentence says "The mission of 13 United Financial Group is to create a heavily 14 capitalized institution which has significant 15 market value." Do you see that? 16 A. Sure. 17 Q. And then it says "The company will 18 emphasize entrepreneurial activities and divest 19 itself of transaction-related activities which 20 involve significant overhead." 21 What did that refer to? 22 A. That referred to a couple of items. 2255 1 Even though we had the successful branch 2 transaction closed at the end of 1984, it was 3 still felt that we had additional branches that 4 perhaps we could divest and branches have a high 5 overhead cost to them and support and this would 6 be especially true if Jackson were to be 7 successful. 8 And then secondly at that time, we were 9 talking possibly about exiting the retail 10 residential mortgage activity. We never did that, 11 at least while I was there, but it was being 12 discussed. 13 Q. Did residential retail activity become 14 much less of a percentage of the assets of United 15 Savings Association after this meeting? 16 A. Well, that and not only to this meeting 17 as much as the market itself because we were in 18 the throws of a lot of loan foreclosures and the 19 question was whether we should remain in that 20 business and that it was a very difficult time for 21 us. 22 Q. Then it lists the number of activities, 2256 1 one of which is real estate and real estate joint 2 ventures. Then it says "essentially the same 3 function as we have today." Do you see that? 4 A. Yes, sir. 5 Q. Now, were the real estate and real 6 estate joint venture activities increased 7 substantially subsequent to this meeting? 8 A. I don't know they were increased 9 substantially. I don't recall the numbers. I 10 think that we continued to stay in that business, 11 of course. 12 Q. Okay. It says "Merchant banking. 13 Financing activities with profit participation on 14 the part of United." Do you see that? 15 A. Yes. 16 Q. Did that occur? 17 A. Late in my tenure, I think we tried to 18 do some. I don't believe that while I was there 19 we really were successful at many of those 20 activities. 21 Q. Then it says "venture capital 22 investment and startup situations." 2257 1 Is that the position or the function 2 that Terry Dorsey was hired for? 3 A. Yes, sir. 4 Q. And did that ever get going? 5 A. As I recall, we made a few investments 6 but I don't know that they were material or of 7 significance. 8 Q. And Terry Dorsey was eventually asked 9 to leave because of that, was he not? 10 A. I couldn't recall if he left before me 11 or not on that time frame. We may have had him 12 leave. 13 Q. The next one says "marketable 14 securities. Investment in non-hostile takeover 15 situations that offer the potential of significant 16 return." Do you see that? 17 A. Yes, sir. 18 Q. Why the term non-hostile takeover 19 situations? 20 A. Well, this was subsequent to Castle & 21 Cooke, I believe. And having been told and warned 22 not to do this again, we were not going to get 2258 1 into hostile situations. 2 Q. Mr. Green told you, "Don't get in any 3 more hostile situations like did you with Castle & 4 Cooke," right? 5 A. That's correct. 6 Q. Now, it says the last is "Creation of 7 excess funds from deposit-gathering activities or 8 other financing techniques which would not be used 9 by the above functions." 10 What was that referring to? 11 A. Well, if we were not investing in 12 retail activities and we are creating cash from 13 our branch system, those were viewed as excess 14 funds that could perhaps be used in other 15 investments. 16 Q. Then there are a number of points. 17 It's Roman Numeral I through Roman Numeral XVII. 18 Do you see those? 19 A. I do. 20 Q. And I direct your attention to 21 No. XIII. It says "Investment in securities was 22 discussed and it was agreed that this was a very 2259 1 sensitive area. It would be inadvisable for 2 United to engage in a takeover type activity 3 because of probable unfavorable press and pressure 4 from regulators." 5 Is that again making reference to the 6 problems that Castle & Cooke generated? 7 A. Sure. Absolutely. 8 Q. Okay. And it says "It was determined 9 that our strategy should involve non-takeover 10 scenarios where United would take a major stake, 11 say, 20 percent where profit potential appeared to 12 be extraordinary." Then it says "Several possible 13 candidates were discussed." 14 Do you recall what candidates were 15 discussed? 16 A. I cannot. 17 Q. Do you recall who suggested the 18 investment in securities as a role? 19 A. No, I cannot recall that. 20 Q. Now, I'd like to show you Exhibit 21 A-10561 which I think is has previously been 22 introduced. It's a May 16th, 1985, meeting of the 2260 1 board of directors of United Savings Association 2 of Texas. 3 MR. VILLA: Do you know what exhibit 4 number that is? 5 MR. GUIDO: You mean what tab? 6 MR. VILLA: Yes. 7 MR. GUIDO: No. 8 THE COURT: Well, I don't have that as 9 having been admitted. 10 MR. EISENHART: We don't either, Your 11 Honor. 12 THE COURT: Any objection? 13 MR. BLANKENSTEIN: A-10561? 14 MR. GUIDO: Yes. I thought I recalled 15 discussing the Bane & Company presentation with 16 Mr. Bentley and using this document, but I move 17 its admission now. 18 THE COURT: Received. 19 Q. (BY MR. GUIDO) This is the meeting of 20 the board of directors of United Savings 21 Association of Texas and I direct your attention 22 to Page 5 of the document. You see the first full 2261 1 paragraph that says "Mr. Williams advised the 2 board of the status of the current effort to sell 3 21 branches in the Houston area. Bids are 4 expected by the end of the week but as yet, there 5 have been no firm offers made." Do you see that? 6 A. I'm sorry. I missed you on the page. 7 Q. Page 6. 8 A. Oh, 6. Okay. 9 Q. Do you see that? 10 A. Yes, I do. 11 Q. Is that referring to the sale of 12 branches in addition to the 1984 branch sale that 13 we discussed earlier? 14 A. Yes, it did. We -- yes. 15 Q. Now, then it goes on and says 16 "Mr. Hurwitz briefed the board on the recent 17 planning meeting with Bane & Company regarding the 18 profitability of the association." Do you see 19 that? 20 A. I do. 21 Q. Was Mr. Hurwitz a member of the board 22 of directors of USAT at that time? 2262 1 A. I don't know when he -- I can't recall 2 those time frames, if he was. 3 Q. Well, it says -- let's go back to Page 4 1. In the first paragraph after it goes through 5 the notice and where the meeting is held, it says 6 "All members of the board were present when the 7 meeting was called to order. Also present was" -- 8 A. Oh, Hurwitz, yes. 9 Q. Borman, Crow, and Pledger. Then it 10 says "The meeting was conducted as a joint meeting 11 of the board of directors of the association and 12 its parent company, United Financial Group." 13 Was Charles Hurwitz the president of 14 United Financial Group at this time? 15 A. I thought he became chairman in 16 February. 17 Q. February, he became chairman? 18 A. Yes. 19 Q. And CEO? Excuse me. 20 A. Yes. 21 Q. And Mr. Gross became the president of 22 United Financial Group? 2263 1 A. Right. And chairman of USAT. 2 Q. Right. And then you became president 3 of USAT in February? 4 A. I was president of USAT. 5 Q. At that time? 6 A. Nothing changed. 7 Q. Okay. For you? 8 A. For me. 9 Q. Except who you reported to? 10 A. Yes. 11 Q. Now, it says "Mr. Hurwitz briefed the 12 board on the recent planning meeting with Bane & 13 Company regarding the profitability of the 14 association." 15 Was Bane & Company at the meeting that 16 was referred to in Mr. Crow's memorandum that we 17 just discussed, the mission statement? 18 A. I don't believe so. I believe -- and 19 my memory is failing me. I think the meeting with 20 Bane -- and I did not attend it -- was held at a 21 different time. 22 Q. Later in October? 2264 1 A. May have been later or -- but a 2 different time. I was not present. 3 Q. All right. Well, was the Sandpiper 4 retreat in Austin, Texas? 5 A. No. It's Corpus Christi. 6 Q. Okay. This paragraph makes reference 7 to a meeting in Austin, Texas, and that may help 8 clarify. 9 A. Couldn't have been, that's right. 10 Q. So, this is discussing a different 11 meeting? 12 A. That's correct. 13 Q. And you were not at this separate 14 meeting? 15 A. I was at Sandpiper. I was not at the 16 Bane & Company meeting. 17 Q. Okay. Then the next sentence -- next 18 paragraph says "Mr. Crow showed several slides 19 which compared income for '84, the fourth quarter 20 of '84 and the first quarter of '85." Then it 21 says "The association lost 6.4 million in '84 when 22 the impact of the branch sales eliminated and 2265 1 5 million in the first quarter of '85." Do you 2 see that? 3 A. Yes. 4 Q. Then it says "Mr. Crow also displayed a 5 proposed mission statement for the association 6 which reflected the conclusions reached in the 7 Austin meeting." 8 Now, that appears to be very similar to 9 the mission statement that we've talked about. 10 A. Well, the Sandpiper meeting is in 11 Corpus Christi and whether it's a misprint or 12 Pledger who is taking the minutes did not know 13 or -- 14 Q. Okay. It could be an error? 15 A. It could have been an error. 16 Q. And you believe it was an error? 17 A. Yeah. If there was a meeting in 18 Austin, I wasn't there. But -- and Bane -- but I 19 don't recall Bane & Company meeting with us at 20 Sandpiper. 21 Q. Okay. Now, if you flip the page to the 22 last page, after a discussion of the various 2266 1 things, it says "Dr. Kozmetsky recommended and the 2 board agreed that no action should be taken until 3 a more definitive plan of operation is established 4 detailing the method of attracting deposits and 5 investment plans and until such plan is presented 6 to and approved by the board." Do you see that? 7 A. I do. 8 Q. Did the mission statement that Mr. Crow 9 prepared subsequent to the Sandpiper meeting ever 10 go back to the board? 11 A. I just don't recall if it did. 12 Q. Now, was there created at some point in 13 time an entity called the strategic planning 14 committee? 15 A. Yes. Yes, there was. 16 Q. Who were the members of that committee? 17 A. The same members that were on the 18 executive committee. 19 Q. So, essentially, the strategic planning 20 committee was the executive committee? 21 A. Yes. 22 Q. And the executive committee at that 2267 1 time was you, Mr. Gross, Mr. Hurwitz, Mr. Whatley, 2 and Mr. Munitz? 3 MR. NICKENS: Your Honor, I would 4 object. He's not making clear whether he's 5 talking about the executive committee of USAT or 6 of UFG. And the record needs to be made clear as 7 to which committee he's talking about. 8 Q. (BY MR. GUIDO) I'm talking about the 9 executive committee of UFG when I add Mr. Hurwitz 10 given the organizational structure. 11 A. Yes. I guess the answer is yes, it was 12 the same members that were on the executive 13 committee were on the strategic planning 14 committee. 15 Q. The UFG executive committee? 16 A. I'm getting them confused. It may have 17 been a USAT strategic planning committee. 18 Q. Well, it was a strategic planning 19 committee. Whether it was USAT or UFG isn't clear 20 at the present time -- 21 A. Yes. 22 Q. -- in the record? 2268 1 A. It has to be in some records that it 2 is, but I just don't know. I can't recall which 3 ones. 4 Q. The strategic planning committee was 5 never specifically authorized by either the board 6 of directors of UFG or USAT, was it? 7 A. It was a planning committee to take 8 recommendations, I guess, to the board. 9 Q. It was a management committee, right? 10 A. Yes. 11 Q. And it included you, right? 12 A. Yes. 13 Q. It included Mr. Crow, right? 14 A. Right. 15 Q. It included Mr. Gross, right? 16 A. Right. 17 Q. It included Mr. Munitz, right? 18 A. Right. 19 Q. And it included Mr. Hurwitz? 20 A. Right. And I think later, Mr. Berner 21 after he joined the company. 22 Q. Now -- 2269 1 THE COURT: We'll take a short recess. 2 3 (A break was taken at 2:33 p.m.) 4 5 THE COURT: We'll be back on the 6 record. Mr. Guido. 7 MR. GUIDO: Thank you, Your Honor. 8 (2:51 p.m.) 9 Q. (BY MR. GUIDO) I'd like to show you 10 two documents, Mr. Williams. They are both 11 marked -- one's marked A-1109 and the other is 12 marked A-1110. They are board minutes of -- 1109, 13 the board minutes of United Financial Group, 14 February 13th, '86, and 1110 is the February 13th, 15 '86, board meeting of United Savings Association 16 of Texas. 17 MR. GUIDO: It's my understanding that 18 these have been previously introduced into 19 evidence, Your Honor. 20 MR. VILLA: Can you tell us the date so 21 we can -- 22 MR. NICKENS: They are 132 and 133. 2270 1 THE COURT: I don't need copies of 2 those. 3 Q. (BY MR. GUIDO) Were the February 4 meetings usually the organizational meetings of 5 the board of directors of USAT, Mr. Williams? 6 A. I think that's correct because it was 7 close to the shareholders meeting. 8 Q. Was it usually the meeting just prior 9 to the shareholders meeting? 10 A. Yes. 11 Q. Now -- and is it the meeting in which, 12 if there are any changes in the personnel or the 13 officers and directors of the association or the 14 holding company, that they are made at that point 15 in time? 16 A. Although they could happen other times, 17 too. 18 Q. Now, if you look at Page 6 of 19 Exhibit No. A-1109, it talks about the creation of 20 the executive committee and it says Barry Munitz, 21 Jenard Gross, Charles Hurwitz, James Whatley, 22 Gerald Williams. 2271 1 A. Yes. 2 Q. Do you see that? And is that that same 3 group of people minus Charles Hurwitz who were the 4 members of the executive committee of United 5 Savings Association at that time? 6 A. I believe that's correct. 7 Q. Now, I'd like to move a packet of 8 documents into evidence, Your Honor, to speed this 9 up, which are documents that are marked A-11566 -- 10 I'm sorry -- A-10566, A-10568, A-10575, A-10577, 11 A-10634, A-10636, A-10658, A-10664, and A-10663, 12 and then a packet of letters on October 20, 1986, 13 which are A-10683. 14 MR. VILLA: May we have a moment just 15 to review these? 16 THE COURT: Let's take these one at a 17 time. Are you moving them all in at one -- 18 MR. GUIDO: Yes, Your Honor. I'm 19 moving them all in as a packet of exhibits. 20 MR. NICKENS: Your Honor, two of the 21 documents, A-10636 and A-10664, were not on our 22 document pulls and they are now being copied. So 2272 1 we don't have those, but I think we're in the 2 position to be able to respond as to the others. 3 THE COURT: Do you have another set of 4 these exhibits? 5 MR. GUIDO: Your Honor, I have a set 6 right here. 7 THE COURT: All right. Let's take them 8 one by one. 10566, any objection? 9 MR. VILLA: No objection. 10 THE COURT: Received. 10568? 11 MR. VILLA: No objection, Your Honor. 12 THE COURT: Received. 10575? 13 MR. VILLA: No objection. 14 THE COURT: Received. 10577. 15 MR. VILLA: No objection. 16 THE COURT: Received. 10634 and 10636 17 you indicated were forgotten. 18 MR. VILLA: No objection to 10634, Your 19 Honor. 20 THE COURT: Received. 21 MR. VILLA: No objection. 22 THE COURT: 10636 is received. 10658? 2273 1 MR. NICKENS: Your Honor, I have -- 2 this document appears to be a compilation of 3 documents that at least superficially wouldn't 4 appear to have gone together originally. I have 5 not had a chance to read them, but we would object 6 to their going in in this form because we don't 7 think they go together. 8 MR. GUIDO: Your Honor, my copy says at 9 the bottom of the first page "Attached please find 10 the certified resolution of the executive 11 committee and the board of directors." And the 12 three pages following that are what's mentioned in 13 the last paragraph on the first page. I only have 14 five pages. You may have more pages than I do in 15 your set. 16 MR. NICKENS: We're looking at 658? 17 THE COURT: 10658 is -- has got a lot 18 of handwritten stuff. 19 MR. NICKENS: It's right here that's -- 20 MR. GUIDO: Your Honor, I -- the -- in 21 my copy, I do not have -- and I don't think you 22 do -- you do not have pages that start CN053204. 2274 1 You should have a five-page document. 2 THE COURT: I have a lot more than 3 that. Does this letter to Mr. Berner from 4 Mr. Anderson, is that a part of the exhibit? 5 MR. GUIDO: No. That part of it, Your 6 Honor, is not a part of the exhibit. I don't know 7 how that came into it. The rest of that can be 8 discarded, Your Honor. 9 MR. NICKENS: We have no objection to 10 the portion of the document that is represented by 11 CN53199 through CN53203. 12 THE COURT: All right. 13 MR. GUIDO: That's all I'm offering, 14 Your Honor. 15 THE COURT: Received. 10663? 16 MR. VILLA: No objection. I think this 17 is already in evidence. 18 THE COURT: 10664? 19 MR. VILLA: No objection. 20 THE COURT: Received. Is that all you 21 offered? 22 MR. GUIDO: That's 10683 was the last 2275 1 one, Your Honor? 2 THE COURT: 10664. 3 MR. STEARNS: One more. 10683. 4 MR. NICKENS: 10683 is also a 5 composite, but we have no objection to this 6 particular compilation. 7 THE COURT: All right. Received. 8 MR. GUIDO: May I proceed, Your Honor? 9 THE COURT: You may. 10 (3:07 p.m.) 11 Q. (BY MR. GUIDO) Mr. Williams, I'm 12 going to walk you through various paragraphs in 13 this packet of materials that I've just given you 14 and then ask you a series of questions -- 15 A. Yes, sir. 16 Q. -- with regard to them. But let's take 17 the first page of Exhibit A-10566. Do you see the 18 paragraph numbered 1 in the middle of the page? 19 A. Yes. 20 Q. It says "The association's growth 21 during the first half of '85 was primarily due to 22 two factors -- the association's use of reverse 2276 1 repurchase agreements and the purchase of 2 mortgage-backed securities has increased from 3 60 million at the base period of November 30, 4 1984, to 535 million at June 30, 1985." 5 Do you see that sentence? 6 A. I do. 7 Q. Is that the -- the 60 million, is that 8 the initial risk-controlled arbitrage portfolio 9 that was purchased subsequent to the Salomon 10 Brothers meeting that you had talked about? 11 A. I believe so, yes. 12 Q. So, as of November 30, there was 13 $60 million in the portfolio? 14 A. Right. 15 Q. And then it was increased to 16 535 million at June 30, 1985? 17 A. That's correct. 18 Q. And then it says "All of these 19 investments are fully hedged and the related 20 interest rate gap exposure has been reduced to the 21 maximum amount possible." 22 A. That's correct. 2277 1 Q. What's your understanding of how that 2 was done? 3 A. That was done through the use of swap 4 activities. 5 Q. And were the swaps designed to match 6 the duration of the short-term liability to the 7 duration of the long-term liability? 8 A. That was the intention, yes. 9 Q. And it's your understanding that those 10 swaps were in place? 11 A. Yes. 12 Q. Now -- then, the second paragraph says 13 "The association began issuing long-term jumbo 14 deposits in December, '84, that have increased to 15 295 million on June 30, '85. These retail 16 deposits have been invested in high-yield 17 corporate securities with matching maturities and 18 built-in interest rate spread of approximately 19 2.59 percent." 20 A. Right. 21 Q. Do you see that? 22 A. I do. 2278 1 Q. Is that referring to high-yield debt 2 securities? 3 A. Yes. I think those are the junk bonds. 4 Q. Okay. Some people have objected to the 5 use of "junk bonds" in this proceeding, 6 Mr. Williams. 7 A. All right. 8 Q. I will use the term. I just wanted to 9 let you know that. The -- are those high-yield 10 debt bonds that are referred to there, were they 11 as much as the $295 million as of June 30, 1985? 12 A. I don't recall. It's -- may have 13 raised excess funds at that point in time. I 14 don't recall. 15 Q. And how were they -- how were they -- 16 the corporate bonds matched with the maturities of 17 the interest rate instruments, the debt 18 instruments? 19 A. Well, the securities -- the assets had 20 a certain maturity on them and then we'd buy -- 21 would raise the CDs in the market that would 22 attempt to match them. 2279 1 Q. Okay. So, you bought certificates of 2 deposit to match the duration -- 3 A. The duration of varying interest rate 4 maturities. 5 Q. Now -- then, the last paragraph says 6 "United management believes its growth is 7 consistent with the principles of safety and 8 soundness and provides a stable income with very 9 limited interest rate risk." Do you see that? 10 A. Yes. 11 Q. And that was a letter that you signed 12 as the president of USAT? 13 A. Correct. 14 Q. Now -- then there is an attachment to 15 it. Do you see the attachment which if you look 16 in the right-hand corner, CN052882? 17 A. Yes. 18 Q. And if you look back under corporate 19 strategy up at the top, it says "United's overall 20 strategy has four objectives." Do you see that? 21 A. You're reading -- yes, okay. I'm 22 sorry. I have it. 2280 1 Q. "One, reducing United's exposure to the 2 volatility of interest rates through a more 3 closely matched asset liability structure." Do 4 you see that? 5 A. I do. 6 Q. And then it has other purposes. Then 7 if you go to CN052883, see the investments, 8 mortgage-backed securities -- 9 A. Yes. 10 Q. -- section? It says "During '84, 11 United established an investment department to 12 coordinate a brokerage CD program and the 13 investment of these funds in corporate and 14 mortgage-backed securities. The deposits 15 generated by this program generally have matured 16 from two to 12 years and are matched against 17 high-yield securities with similar maturities and 18 duration. This approach virtually locks in a 19 spread between United's asset yield and funding 20 costs giving significant protection against 21 interest rate fluctuation." 22 A. Yes. 2281 1 Q. Was that USAT's stated objective to the 2 regulators at the time? 3 A. Yes, it was. 4 Q. Look at Exhibit A-10568, Page 2. I'm 5 sorry. It's Page 3. It's CN056089. 6 A. I have it. 7 Q. It says -- see the heading "program for 8 matching maturities and controlling interest rate 9 risk"? 10 A. Yes. 11 Q. "The impetus for United's liability 12 growth during the first half of '85 was 13 attributable to a program in which investments in 14 mortgage-backed and corporate securities were 15 matched with liabilities of similar maturity and 16 duration." Do you see that? 17 A. I do. 18 Q. And then you see the bullet point? It 19 describes the mortgage-backed securities financed 20 with reverse repurchase agreements and hedged with 21 interest rate swaps? 22 A. That's correct. 2282 1 Q. And that was done to match the 2 duration; is that correct? 3 A. That's correct. 4 Q. Then look at 10575. On Page four of 5 the letter, the next to the last paragraph, it 6 says "We would like to believe that all of this 7 confusion can be solved by your approving the 8 enclose the growth application." 9 Was the confusion concern that the 10 growth application had been exceeded by USAT? 11 A. Yes. There was some concern that when 12 we went back and forth that we actually had 13 exceeded liability growth parameters. 14 Q. It says "The essence of United's 15 request is to continue to grow in our, quote, 16 wholesale basis, unquote, with, quote, gap, close 17 quote, control of mortgage-backed securities 18 investments locking in an interest rate spread 19 over a future period of time." 20 A. Right. 21 Q. What did you mean by "locked in 22 spread"? 2283 1 A. Well, after hedging the portfolio, an 2 interest rate income that was dependable could be 3 relied upon. 4 Q. And -- but it would require some degree 5 of adjustment if prepayments be exchanged? 6 A. That's correct. 7 Q. So, it would have to take some 8 adjustment and some flexibility and monitoring of 9 that portfolio? 10 A. Constantly examining it. 11 Q. So, you weren't arguing that it was 12 just locked in that you put it on, you can close 13 your eyes and walk away from it? 14 A. No. It has to be watched, but 15 basically it would give a dependable spread, 16 though, over a period of time. 17 Q. And that you could anticipate changes 18 well enough to avoid any risks to the association? 19 A. And try to, yes. If rates didn't move 20 too dramatically. 21 Q. Right. But that was your 22 representation to the regulators? 2284 1 A. Yes. 2 Q. Now, A577 is additional correspondence 3 to you from the regulators asking or notifying you 4 that based on previous discussions, that they 5 would withdraw what I think that they had termed 6 as supervisory agreement subject to the board of 7 directors agreeing to fix the liability growth at 8 a certain figure? 9 A. I believe that's correct. 10 Q. And that was done in response to the 11 representations that you made in the liability 12 growth applications? 13 A. That's right. 14 MR. NICKENS: Your Honor, for the 15 record, I think Mr. Guido meant A-10577 and I 16 believe he said A-577. 17 MR. GUIDO: I'm sorry. A-10577, Your 18 Honor. 19 THE COURT: Thank you. 20 Q. (BY MR. GUIDO) Now, the next document 21 is 10634. It's a May 9th, 1986, letter 22 application for the issuance of senior 2285 1 subordinated notes. Do you see that, 2 Mr. Williams? 3 A. I have it. 4 Q. And it talks about on Page 2 the 5 corporate bond strategy. Do you see that? 6 A. I do. 7 Q. And that's the high-yield bonds or junk 8 bonds as I refer to them? 9 A. Yes, sir. 10 Q. Now, the third paragraph under 11 corporate bond strategy says "The association has 12 implemented its program of investing in corporate 13 bonds in order to maintain an interest rate spread 14 between the high-yield corporate bonds and 15 duration matched-long term certificates of 16 deposit. By building in this matched spread, the 17 association has been able to increase its capital 18 and profitability through what we believe to be a 19 balanced portfolio of corporate debt." 20 Do you see that? 21 A. I do. 22 Q. And that was intended to be essentially 2286 1 a portfolio that was placed -- it was -- to have a 2 pre-determined spread. I think an earlier letter 3 mentioned it as being 2.68 percent. And it was to 4 be managed to maintain that spread in that 5 portfolio? 6 A. That's correct. 7 Q. Then if you look at Page 4, it talks 8 about gap management in the association. 9 A. Yes. 10 Q. And that is talking about -- it says in 11 the first paragraph under the last sentence, "USAT 12 has instituted a program of utilizing Ginnie Mae, 13 Fannie Mae" -- and I never get what FHLMC is. 14 A. Federal Home Loan Mortgage Company. 15 Q. -- "Mortgage Company, securities to 16 match its assets and liabilities in a 17 sophisticated government securities matched 18 investment program." And then it says "These 19 matching techniques eventually result in long-term 20 assets and liabilities being duration matched with 21 a built-in spread such that this association has 22 significantly reduced the risk of interest rate 2287 1 fluctuations." 2 Do you see that? 3 A. I do. 4 Q. Okay. And then it's very interesting. 5 If you look at the very last paragraph, it says 6 "While utilization of these techniques has 7 resulted in the association not taking full 8 advantage of the recent dramatic declines in 9 interest rates, USAT's management believes that 10 USAT should not be in the business -- should not 11 be in the interest rate speculation business." 12 Do you see that? 13 A. I do. 14 Q. "Rather, management believes we should 15 protect our interest rate spread and reduce our 16 gap to the fullest extent possible in all interest 17 rate environments." 18 Do you see that? 19 A. I do. 20 Q. Did you -- it says that you got copied 21 on that letter. 22 Do you recall getting a copy of that 2288 1 letter? 2 A. Yes. 3 Q. Do you recall the discussion of the 4 interest rate gap management in that letter? 5 A. Yes. 6 Q. Then the document that's marked A636, 7 it says "United Financial Group, Inc. investment 8 policy dated 5-27-86." 9 Do you see that? 10 A. I do. 11 Q. Do you recall that document being 12 adopted by USAT? 13 A. Yes. 14 Q. And look -- it says "The objective. 15 The objective of this investment policy is to 16 manage and control the company's resources through 17 the most effective asset mix and funding sources 18 to provide for optimum and stable earnings within 19 constraints of prudent risk management, strong 20 liquidity position, and an adequate capital base." 21 A. Yes. 22 Q. Is your understanding that that was to 2289 1 be done in the manner described in the previous 2 exhibits that I've just read from? 3 A. I do. 4 Q. Now, look at Exhibit No. A-658 which is 5 a letter to Mr. Borman and it is from Mr. Berner. 6 And it deals with the creation of a new service 7 corporation. 8 Do you see that? 9 A. I do. 10 Q. Was that new service corporation United 11 Mortgage -- United MBS? 12 A. I think that's correct, yes. 13 Q. And that is the entity that Sandy 14 Lawrenson was hired to manage; is that correct? 15 A. Yes. 16 Q. Now, again, look at the second full 17 paragraph. It says "The service corporation 18 subsidiary will acquire the mortgage-backed 19 securities through reverse repurchase 20 transactions. As a result, the subsidiary expects 21 to earn a spread between the rate received on the 22 mortgage-backed securities and the rate paid on 2290 1 the reverse repurchase transaction." 2 It then goes on to say "There are no 3 supervisory problems which would affect the 4 ability of the association to properly supervise 5 and operate such a subsidiary corporation. The 6 association has adequate income in reserves to 7 support the proposed investment and the operations 8 of the proposed subsidiary will be clearly 9 distinguishable from those of the association. 10 The subsidiary should be profitable immediately 11 and should continue to earn the spread described 12 above." 13 And was that represented to be a 14 portfolio which was going to be hedged so as to 15 match the duration of the liabilities and the 16 assets? 17 A. Yes. 18 Q. The next exhibit is 10664 and I direct 19 your attention. It's also to Mr. L.A. Anderson 20 from Mr. Berner. And I direct your attention to 21 the last paragraph on the first page. It says 22 "United MBS Corporation will acquire 2291 1 mortgage-backed securities by engaging in reverse 2 repurchase transactions. The association may 3 further hedge these acquisitions either directly 4 or through general hedges held by the association 5 on a consolidated basis. It is not expected that 6 such activities will create any direct, indirect, 7 or contingent liabilities of the association. 8 However, under repurchase transactions, broker 9 dealers may call for increase in collateral which 10 a subsidiary may not have the ability to satisfy. 11 In such event, the would have to supply such 12 collateral, thus creating a direct liability of 13 the association to fulfill the requirements of the 14 subsidiary." 15 Do you see that? 16 A. Yes, I do. 17 Q. And was it the representations there 18 that it would be a hedged portfolio, to your 19 understanding? 20 A. Yes. 21 Q. Then I'd like to direct your attention 22 to the business plan which is 10663 which is dated 2292 1 8-29-86. Is that the business plan as you 2 understand it that was submitted to the Federal 3 Home Loan Bank Board in August of 1986? 4 A. Yes, it is. 5 Q. And look at Page 3 and 4 of that 6 document. I think it's 3 and 4 of the text of the 7 report which is K006775 is 4 and 3 is K006744. 8 A. All right. 9 MR. NICKENS: 774. 10 MR. GUIDO: 74. Thank you. 11 Q. (BY MR. GUIDO) It talks about 12 interest rate risk management and it talks about 13 making sure that the association is attempting 14 only to profit from the spread between the 15 liabilities and the assets. 16 Do you see that? 17 A. Yes. 18 Q. Okay. And then it says -- if you look 19 on Page 4 it says "In 1985, in fact, that the 20 result of the strategies described" -- you see 21 that in the second -- 22 A. I do. 2293 1 Q. -- "as being to more closely match the 2 interest rate sensitivity of the association's 3 liabilities. While the strategy has resulted in 4 the association not obtaining the maximum benefit 5 of recent declines in interest rates, management 6 believes that the effect of more closely matching 7 the interest rate sensitivity of the association's 8 assets and liabilities? 9 THE COURT: Maybe you could go a little 10 slower. 11 MR. GUIDO: I'm sorry. I'm trying to 12 get it finished. 13 A. You're reading the second paragraph? 14 Q. (BY MR. GUIDO) "It is the interest 15 rate management believes that the effect of more 16 closely matching the interests rate sensitivity of 17 the association's assets and liabilities will 18 provide a significant long-term benefit to the 19 association." 20 Do you see that? 21 A. I do. 22 Q. Do you recall discussing that before it 2294 1 was included in the business plan? 2 A. Not that specifically. But we had a 3 lot of meetings on the whole plan, so it probably 4 came up. 5 Q. Now, there is a caveat when you look at 6 the structured arbitrage program which we've 7 talked about a little bit before. And in the 8 second paragraph under "structured arbitrage 9 program," see the first sentence? 10 A. Yes. 11 Q. It says "While the structured arbitrage 12 program is an attempt to provide earnings with a 13 reasonable level of risk, the success of the 14 program depends, among other things, upon the 15 accuracy of certain assumptions regarding 16 prepayment of the mortgages underlying the 17 mortgage-backed securities and their related 18 reinvestment risk." 19 You see that? 20 A. Yes, I do. 21 Q. That is the risk that you indicated 22 that you would attempt to manage by keeping 2295 1 oversight over the portfolio and not just turning 2 your back on it? 3 A. That's right. 4 Q. Now, Exhibit A-10683 is a packet of 5 identical letters, from what I can tell. It 6 says -- this is dated October 20th and this is 7 talking about United MBS again, right? 8 A. Yes. 9 Q. And it says in the second full 10 paragraph, "The subsidiary will be capitalized at 11 10 percent through contributions and advances from 12 USAT which would be subordinated to other debt 13 such as reverse repos." 14 Do you see that? 15 A. Yes. 16 Q. Then it says "The primary activities of 17 the subsidiary will involve investments in 18 mortgage-backed securities funded with reverse 19 repurchase agreements. It is planned that the 20 arbitrage portfolio will be substantially hedged 21 utilizing a combination of futures, options, and 22 interest rate swaps." 2296 1 A. Sure. 2 Q. Is that the intention that you 3 understand was also reflected in the letters to 4 the regulators? 5 A. Yes. 6 MR. GUIDO: Now, Your Honor, I would 7 like to offer into evidence a packet of exhibits. 8 The first one is marked A-10643. The second is 9 A-10649. The third is Exhibit T4310. And the 10 fifth is T4311. 11 MR. VILLA: That's only four. Did you 12 mean to include five or four? 13 MR. BLANKENSTEIN: You only gave us 14 four numbers. 15 MR. GUIDO: Then it's only four. I 16 miscounted in there. 17 MR. VILLA: Can you tell us what T4310 18 is so we can have copies made? 19 MR. GUIDO: T4310 is Bruce Williams' 20 memo on the result of the gains of the portfolio. 21 It's the November 24th memo. 22 MR. NICKENS: Do we have the T 2297 1 documents here? 2 THE COURT: We'll be off the record. 3 4 (A break was taken at 3:32 p.m..) 5 6 THE COURT: All right. Let's go back 7 on the record. 8 MR. NICKENS: Your Honor, we have no 9 objections to A-10643. 10 THE COURT: Received. 11 MR. NICKENS: A-10649. 12 THE COURT: Received. 13 MR. NICKENS: T4310. 14 THE COURT: Received. 15 MR. NICKENS: Or T431. 16 THE COURT: Received. 17 (3:36 p.m.) 18 Q. (BY MR. GUIDO) Now, I'd like to 19 direct your attention to Exhibit A-10643, 20 Mr. Williams. 21 A. I have it. 22 Q. Now, that's a memo to you, Mike Crow, 2298 1 and Jenard Gross from a fellow named Bruce 2 Williams? 3 A. Yes. 4 Q. Who is Bruce Williams? 5 A. He worked for Mike Crow. He was the 6 treasurer of United. 7 Q. Now, this is an analysis of the 8 mortgage-backed securities arbitrage portfolio at 9 USAT at the time, is it not? 10 A. Yes. 11 Q. And it indicates that the spread -- 12 that is, the net return -- in April or May was 13 .67 percent negative in April and .03 in May, 14 right? 15 A. Yes. 16 Q. And that -- it talks about excess 17 swaps. Why were there excess swaps in the last 18 sentence there? 19 A. The only thing I can recall is we -- 20 I'm guessing here. I don't know whether we sold 21 securities or not in this period of time. 22 Q. Okay. 2299 1 A. We may have left liabilities in place. 2 Q. So, what happened was there were sales 3 when there were liabilities in place -- 4 A. Or prepayments. I'm sorry to 5 interrupt. Could have been prepayments. 6 Q. But whatever it was, that the portfolio 7 ended up being mismatched in some way in the 8 duration? 9 A. Somehow it happened. 10 Q. And then if you look at Paragraph 6, it 11 also talks about the spread being negative because 12 the decline in interest rates -- 13 MR. NICKENS: I'm not sure where we 14 are, Your Honor. 15 MR. GUIDO: Subparagraph C. 16 Q. (BY MR. GUIDO) It says "The fixed 17 spread difference between the MBS yield and fixed 18 rate paid on interest rate swaps is negative and 19 reflects the yield loss during the rapidly-falling 20 rate environment and coupon rolldown efforts." 21 You see that? 22 A. I do. 2300 1 Q. So, something happened to interest 2 rates and the manager of the portfolio wasn't able 3 to adjust quickly enough; is that right? 4 A. That's right. 5 Q. Now, look at the next exhibit which is 6 a memorandum dated July 3rd, 1986, to you and 7 Jenard Gross from Mike Crow. And it's a summary 8 of a Smith Breedan presentation. 9 Do you recall what the Smith Breedan 10 presentation was? 11 A. Smith Breedan was brought in. They are 12 one of the experts we had to attempt to analyze 13 the whole mortgage-backed portfolio. 14 Q. And did they come in and analyze that 15 portfolio? 16 A. They did. 17 Q. And they gave you some advice, did they 18 not? 19 A. They did. 20 Q. And at the foundation of that advice, 21 if you'll look to the next to the last page, is 22 their conclusion that because of the failure to 2301 1 anticipate changes in prepayment rates, 2 schedule -- I think it says Schedule D. 3 MR. VILLA: What page? 4 Q. (BY MR. GUIDO) Well, look at the 5 image number. OWO05978. 6 A. Oh, I'm sorry. I have it. 7 Q. You see that chart? 8 A. Yes. 9 Q. It shows that at the base rate, no 10 change. Current rate, that the market value of 11 the portfolio is -- looks like a negative of about 12 $58 million. 13 Do you see that? 14 A. Let's see. I'm trying to follow this 15 chart. 16 Q. Look at the circled portion. 17 A. Yes, I do. 18 Q. That looks like the base. 19 A. Yes, I have that. 20 Q. And you see the figure total, a million 21 dollars? 22 A. Right. 2302 1 Q. And that is the difference between the 2 gain on the mortgage pools of about -- looks like 3 23 and the loss on the swaps of about $86 million. 4 You see that? 5 A. Yes. 6 Q. And then if you look, as you move to 7 the right there is a change in interest rates in 8 one direction and as you move to the left, it's a 9 change of interest rates in the other direction. 10 Right? 11 A. That's correct. 12 Q. And that shows that that figure, except 13 for the first year, moving to the left will 14 increase. The negative figure will increase no 15 matter which way the interest rates move? 16 A. That's correct. 17 Q. Now -- and if you'll look at the last 18 page, the last bullet point, it says "The change 19 in the value of the mortgage prepayment option is 20 not being hedged with swaps, caps, and collars. 21 Portfolio losses for interest rate moves in either 22 direction increases." Right? 2303 1 A. Yes. 2 Q. The portfolio loses. 3 A. Portfolio loses. 4 MR. NICKENS: Your Honor, I'll object. 5 He read everything but the parenthetical. 6 MR. GUIDO: "Except for 1 percent 7 decline in rate level." Excuse me, Your Honor. 8 Q. (BY MR. GUIDO) And then he suggests 9 hedging the prepayment option via the purchase of 10 options contracts. You see that? 11 A. Yes. 12 Q. Were those option contracts purchased? 13 Do you know? 14 A. I don't recall. 15 Q. He also in the first paragraph has some 16 caveats about doing anything additionally at the 17 institution until the sensitivity of the entire 18 institution is known. 19 Do you see that paragraph? 20 A. First paragraph that you're referring 21 to? 22 Q. First paragraph. 2304 1 A. Yes. 2 MR. NICKENS: Your Honor, I object to 3 that question. What the documents says is not 4 doing anything. It says "I would advise against 5 micro hedging particular subsets of the firm. It 6 does not say about doing anything. 7 MR. GUIDO: Excuse me, Your Honor. 8 I'll read the whole paragraph. It was a 9 characterization. 10 Q. (BY MR. GUIDO) "Until analyzing the 11 interest rate sensitivity of the entire firm, 12 micro sensitivity, I would advise against micro 13 hedging particular subsets of the firm. One runs 14 the risk of increasing the overall interest rate 15 risk of the firm by hedging a subset of the 16 company. Similarly, securities swaps which change 17 the interest rate sensitivity of the firm must 18 also be advised against until the interest rate 19 sensitivity of the entire firm is known." 20 What did you understand that advice to 21 be at the time, Mr. Williams? 22 A. Just what it says, not doing any micro 2305 1 hedging right at the moment. 2 Q. Not until you knew what the sensitivity 3 of the entire firm was, right? 4 A. That's right. 5 Q. And was that done, to your knowledge? 6 A. I can't recall if any action was taken. 7 I recall that we did wait. 8 Q. And Smith Breedan was -- sometime in 9 the fall was fired, were they not? 10 A. They were let go, yes. 11 Q. Now, I'd like to direct your attention 12 to T4310. And look at the first full paragraph on 13 Page 1. "Since the inception of the 14 mortgage-backed security arbitrage program, the 15 association has recognized approximately 16 $60 million in gains on sales through October, 17 1986." 18 MR. VILLA: I believe that's 19 67 million, right? 20 MR. GUIDO: I'm sorry. 67 million. 21 Q. (BY MR. GUIDO) "These gains were 22 largely attributable to the MBS roll-down program 2306 1 from high coupon to current coupon securities." 2 That roll-down that's being referred to 3 there, is that the roll-down that was done at the 4 beginning of 1986 because of the rapid increase in 5 prepayment rates because of the decline in 6 interest rates? 7 A. Yes. 8 Q. Were other gains taken out of the MBS 9 portfolio, to your knowledge? 10 A. I can't recall at that time. 11 Q. Then it says "When combined with 12 current unrealized gains of 12 million, the MBS 13 arbitrage program has provided about $70 million 14 in total gains compared to the interest rate swap 15 mark-to-market loss of $122 million." 16 MR. VILLA: I believe you mean 17 79 million, right? 18 MR. GUIDO: 79 million. I'm sorry. 19 What did I say? 20 MR. BLANKENSTEIN: 70 million. 21 MR. VILLA: We're losing 9 million 22 every time. 2307 1 MR. GUIDO: I'm sorry. I don't do it 2 intentionally. These numbers are very large for 3 me. 4 Q. (BY MR. GUIDO) So that this 5 memorandum dated November 24th, 1986, has 6 concluded that the net result of the 7 mortgage-backed security portfolio is a loss of 8 the difference between 79 million and 122 million? 9 A. That's correct. 10 Q. And that the portfolio has a net 11 negative spread at that time so that it is 12 essentially generating an outflow of funds? 13 A. Yes, that's correct. 14 Q. Is that reflected on Page 2 of the 15 memorandum where it talks about the net spread? 16 Do you see that? 17 A. I see that. 18 Q. As a minus .99 percent. You see that? 19 A. I see it. 20 Q. With an annualized net income of a 21 negative 11,000,164? 22 A. Yes. 2308 1 Q. Okay. Now, this is the portfolio that 2 the USAT had represented to the regulators would 3 be managed in a way to minimize the damage to the 4 portfolio by changes in interest rates, right? 5 A. That's correct. 6 Q. Now, you also wrote a memorandum on 7 November 24th, 1986. And that memorandum is 8 Exhibit T4311. You see that? 9 A. Yes. 10 Q. And that memorandum is to Charles 11 Hurwitz, Jenard Gross, and Barry Munitz. Do you 12 see that? 13 A. I do. 14 Q. Okay. Did they ask you for that 15 memorandum? 16 A. They did not. 17 Q. Why did you send it to them? 18 A. Well, I think as a result of the 19 previous memorandum we talked about in discussions 20 that actually Jenard and Crow and I were having as 21 a result of the situation, we thought we ought to 22 put it all into perspective of where we were. And 2309 1 this -- my memo was attempting to be a capsule of 2 the situation at that time including everything. 3 Q. Why to those three individuals? 4 A. Part of the executive committee. 5 Q. So, these were the decision makers 6 within the organization? 7 A. Yes. 8 MR. KEETON: I object, Your Honor, 9 although the witness -- he didn't say that. He 10 said they were part of the executive committee. 11 You're leading this witness and this witness is a 12 very nice man, but I wish you'd quit leading him. 13 MR. GUIDO: Your Honor, I'll rephrase 14 the question. 15 THE COURT: Well, it's been answered. 16 Let's move on. Denied. 17 Q. (BY MR. GUIDO) The -- look at the 18 second full paragraph in the memorandum. It says 19 "The writing next to the monthly numbers on the 20 product income statement is the annual effect of 21 the September numbers." 22 Is that a reference to anything that's 2310 1 attached to this document? 2 A. Yeah. That's Schwenkle's memo that's 3 attached. 4 Q. The charts are Kurt Schwenkle's charts. 5 Is that what you mean? 6 A. Yes, that's correct. The second page 7 of the attachment. 8 Q. Well, let's describe the document. The 9 memorandum is a two-page memorandum. That's 10 right? 11 A. That's right. 12 Q. And it -- then it has a memorandum 13 attached to it which is marked T4312. You see 14 that at the bottom? 15 A. Yes. 16 Q. But that was an attachment to your 17 memorandum; is that correct? 18 A. That's correct. 19 Q. Okay. And that's dated November 24th, 20 1986, and that's from Mike Crow to you, Barry 21 Munitz, and Jenard Gross? 22 MR. NICKENS: Your Honor, T4312 is not 2311 1 attached to our copies. We would ask that it be. 2 A. I have a memo from Schwenkle and Ert to 3 me attached. 4 Q. (BY MR. GUIDO) Dated November 18th; 5 is that correct? 6 A. Yes. 7 MR. GUIDO: My copy doesn't have that 8 that, but we'll -- does your copy have the 9 Schwenkle attachment to it? 10 MR. NICKENS: No. We have, Your Honor, 11 for the record, US795 and 796 as comprising all of 12 T4311. 13 MR. GUIDO: Your Honor, why don't we 14 just take off everything but the two pages because 15 I'm only going to ask him about the two pages? 16 Q. (BY MR. GUIDO) Now, was the -- now, 17 we've pulled the Schwenkle memorandum from yours 18 since counsel didn't have it and it's not 19 essential to the questions that I have for you. 20 And T4311 is a two-page document now without the 21 attachments. It says in the second sentence of 22 the second paragraph, "The most dramatic 2312 1 observation is that primarily as a result of 2 selling the mortgage-backed securities in June, 3 the net interest spread on the total assets 4 classified as investments is now in a negative 5 position including the cost of swaps." 6 Do you see that? 7 A. Yes. 8 Q. And it then goes on to say "Due to a 9 decline in interest rates, the interest rate 10 swaps, caps, and collars now cost us about 11 $42 million annually." 12 Do you see that? 13 A. I do. 14 Q. Okay. Now, did you have any subsequent 15 discussions with Charles Hurwitz, Jenard Gross, or 16 Barry Munitz about your observations in this 17 memorandum? 18 A. No. I may have talked to Jenard about 19 it, but there was no meeting on it. 20 Q. Now, did you subsequently leave USAT? 21 A. About a month later. 22 Q. About a month later you left? 2313 1 A. Yes. 2 Q. And you hadn't had any discussions with 3 anyone about this memorandum? 4 A. No. I say I may have talked to Jenard 5 about it, follow-up. 6 Q. Now, did anyone ask you to leave? 7 A. Dr. Munitz visited with me and said 8 that my contributions essentially had been 9 completed and probably I was duplicating what 10 Mr. Gross was doing and it would be best that -- 11 time for me to go. 12 Q. Did you indicate to him you didn't 13 think that your work had been completed? 14 A. He knew there were a number of things 15 still open to do. We had branch sales pending. 16 We were still discussing the possible sale of the 17 mortgage operation and he understood that but 18 still said, regardless, those could be carried on 19 and that I would no longer be needed to fulfill 20 those. 21 Q. So, he told you that you were being 22 terminated? 2314 1 A. Yes. 2 Q. Okay. And did he negotiate a 3 termination agreement with you? 4 A. He honored my contract. He was very 5 fair about it. 6 Q. Okay. So, he said, "I'll honor your 7 contract but we want to terminate you"? 8 A. Yes. 9 Q. Did he say who the "we" was? 10 A. Well, he just discussed -- he said he 11 had discussions with the executive committee, 12 including Mr. Gross. 13 Q. Did he indicate he had had discussions 14 with Mr. Hurwitz? 15 A. Yes, he did. 16 Q. And did he subsequently arrange for a 17 meeting with you with Mr. Hurwitz? 18 A. He did. In fact, the next day or two 19 days later, I met with Mr. Hurwitz before I left. 20 Q. Was that at your request? 21 A. Yes. I thought I should say goodbye. 22 I wanted to see him and I guess kind of review my 2315 1 tenure with him. 2 Q. And did you ask him whether or not he 3 concurred with Mr. Munitz' views? 4 A. I did, and he said he did, he thought 5 it was best, that Jenard could handle it all. And 6 he thanked me for what I had contributed but there 7 was no need for me to remain. 8 MR. GUIDO: Thank you very much, 9 Mr. Williams. No further questions, Your Honor. 10 THE COURT: Cross-examination? 11 MR. VILLA: Thank you, Your Honor. 12 THE COURT: Mr. Villa? 13 MR. VILLA: Yes. Your Honor, if I may 14 just have a moment to get some documents in order 15 here to perhaps facilitate the examination. 16 THE COURT: How long is your cross 17 going to take? 18 MR. VILLA: I hesitate to say this 19 because I know how badly we want to get Mr. 20 Williams out, but I would not anticipate that it 21 will be completed today. 22 THE COURT: All right. We'll take 2316 1 about a ten-minute recess. 2 MR. VILLA: Thank you. 3 4 (A break was taken at 3:54 p.m..) 5 6 THE COURT: I believe the understanding 7 we reached off the record is that Mr. Williams 8 will be available sometime after the 15th and we 9 will arrange to fit his cross-examination into the 10 schedule at that time. With that condition, you 11 may leave. 12 THE WITNESS: Thank you all very much. 13 MR. STEARNS: Your Honor, one 14 housekeeping matter. 15 THE COURT: Yes, Mr. Stearns. 16 MR. STEARNS: Respondents served three 17 subpoenas within the past few days, Your Honor. 18 We have a very brief motion to quash that was 19 filed in Washington. I'd like to pass a copy to 20 you and to counsel on the subpoenas to Mr. Rex 21 Cool. This was filed in Washington. 22 Thank you, Your Honor. 2317 1 MR. NICKENS: Your Honor, Mr. Williams 2 can leave? 3 THE COURT: Yes. 4 MR. GUIDO: Thank you, Your Honor. 5 THE COURT: 9:00 o'clock tomorrow. 6 7 (Whereupon at 3:58 p.m. 8 the proceedings were recessed.) 9 10 11 12 13 14 15 16 17 18 19 20 21 22 2318 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 7th day of October, 17 1997. 18 ____________________________ MARCY CLARK, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 4935 Expiration Date: 12-31-97 21 22 2319 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Shauna Foreman, the undersigned Certified 5 Shorthand Reporter in and for the State of Texas, 6 certify that the facts stated in the foregoing 7 pages are true and correct to the best of my ability. 8 I further certify that I am neither 9 attorney nor counsel for, related to nor employed 10 by, any of the parties to the action in which this 11 testimony was taken and, further, I am not a 12 relative or employee of any counsel employed by 13 the parties hereto, or financially interested in 14 the action. 15 SUBSCRIBED AND SWORN TO under my hand 16 and seal of office on this the 7th day of October, 17 1997. 18 _____________________________ SHAUNA FOREMAN, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 3786 Expiration Date: 12-31-98 21 22