9742 1 UNITED STATES OF AMERICA Before the 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 In the Matter of: ) 4 ) UNITED SAVINGS ASSOCIATION OF ) 5 TEXAS, Houston, Texas, and ) ) 6 UNITED FINANCIAL GROUP, INC., ) Houston, Texas, a Savings ) 7 and Loan Holding Company ) ) OTS Order 8 MAXXAM, INC., Houston, Texas, ) No. AP 95-40 a Diversified Savings and ) Date: 9 Loan Holding Company ) Dec. 26, 1995 ) 10 FEDERATED DEVELOPMENT CO., ) a New York Business Trust, ) 11 ) CHARLES E. HURWITZ, ) 12 Institution-Affiliated Party ) and Present and Former Director ) 13 of United Savings Association ) of Texas, United Financial Group,) 14 and/or MAXXAM, Inc.; and ) ) 15 BARRY A. MUNITZ, JENARD M. GROSS,) ARTHUR S. BERNER, RONALD HUEBSCH,) 16 and MICHAEL CROW, Present and ) Former Directors and/or Officers ) 17 of United Savings Association of ) Texas, United Financial Group, ) 18 and/or MAXXAM, Inc., ) ) 19 Respondents. ) 20 21 TRIAL PROCEEDINGS FOR 12-10-97 22 9743 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire (Not present) Special Enforcement Counsel 4 PAUL LEIMAN, Esquire SCOTT SCHWARTZ, Esquire 5 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire (Not present) 6 and BRYAN VEIS, Esquire (Not Present) of: Office of Thrift Supervision 7 Department of the Treasury 1700 G Street, N.W. 8 Washington, D.C. 20552 (202) 906-7395 9 ON BEHALF OF RESPONDENT MAXXAM, INC.: 10 FRANK J. EISENHART, Esquire 11 of: Dechert, Price & Rhoads 1500 K Street, N.W. 12 Washington, D.C. 20005-1208 (202) 626-3306 16 13 DALE A. HEAD (in-house) 14 Managing Counsel MAXXAM, Inc. 15 5847 San Felipe, Suite 2600 Houston, Texas 77057 16 (713) 267-3668 17 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND CHARLES HURWITZ: 18 RICHARD P. KEETON, Esquire 19 KATHLEEN KOPP, Esquire of: Mayor, Day, Caldwell & Keeton 20 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 21 (713) 225-7013 22 9744 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 Jerry Langdon, Judge Shipe's Clerk 19 REPORTED BY: 20 Ms. Marcy Clark, CSR 21 Ms. Shauna Foreman, CSR 22 9745 1 2 EXAMINATION INDEX 3 4 Page 5 KENNETH GINDY 6 Continued Examination by Mr. Leiman......9746 7 Cross-Examination by Mr. Keeton..........9784 8 Cross-Examination by Mr. Nickens.........9830 9 Cross-Examination by Mr. Blankenstein....9839 10 Redirect-Examination by Mr. Leiman.......9841 11 REX COOL 12 Examination by Mr. Schwartz..............9860 13 Voir Dire Examination by Mr. Villa.......9894 14 Continued Examination by Mr. Schwartz....9897 15 Cross-Examination by Mr. Villa...........9979 16 17 18 19 20 21 22 9746 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Mr. Leiman, you may continue with your 6 examination of the witness. 7 MR. LEIMAN: Thank you, Your Honor. 8 9 CONTINUED EXAMINATION 10 11 12 Q. (BY MR. LEIMAN) Good morning, 13 Mr. Gindy. 14 A. Good morning. 15 Q. When we stopped yesterday, we were 16 going to discuss Exhibit T7238. 17 A. I don't have it here. 18 Q. You don't have a copy? 19 A. It's not here. 20 MR. LEIMAN: Mr. Langdon, do you have a 21 copy? 22 MR. LANGDON: I have a copy. It's not 9747 1 been moved. It's not in evidence. 2 THE WITNESS: Yes, I have it. 3 MR. KEETON: Mr. Leiman, we don't have 4 one. 5 MR. NICKENS: Is there a tab number? 6 MR. LEIMAN: No, it doesn't, and this 7 was on the list. 8 THE WITNESS: It's the financial 9 statement. 10 MR. LEIMAN: The financial statement of 11 Mr. Rosenberg. So, you do have a copy; is that 12 right? 13 MS. KOPP: That you passed out 14 yesterday. 15 THE COURT: Let's proceed. 16 Q. (BY MR. LEIMAN) Mr. Gindy, do you 17 remember sending a copy of Mr. Rosenberg's 18 financial statement to Mr. Seidman? 19 A. Yes, I do. 20 Q. Why did you do that? 21 A. We were required -- requested to submit 22 financial statements by United with regard to each 9748 1 of the partners, as well as some extensions of 2 some letters of credit before Mr. Seidman would 3 proceed with some negotiations for restructuring 4 the loan. 5 Q. Okay. Before we broke yesterday for 6 the day, I had withdrawn a question that I had 7 asked you which related to whether or not you had 8 ever discussed with Mr. Rosenberg -- the operative 9 word would be "ever discussed" with Mr. Rosenberg 10 whether or not his personal guaranties had 11 exceeded his available assets. 12 Do you remember that question? 13 A. Yes, I do. 14 Q. Okay. I'd like to modify the question 15 and ask you if prior to your working on a personal 16 matter for him as an attorney, did you ever have 17 an opportunity to discuss with Mr. Rosenberg 18 whether or not he had sufficient assets to cover 19 his guaranties? 20 A. We discussed his guaranties and his 21 ability to pay. 22 Q. And in that regard, what did he tell 9749 1 you? 2 A. 1989, in this time frame, our 3 discussions were that Stanley had concerns as to 4 whether he could pay or didn't feel that he could 5 pay a 5-million-dollar guaranty if it was called. 6 Q. What about other guaranties? Was he 7 concerned about them, or did he not mention them 8 to you? 9 A. Our discussions were oriented around 10 whether he could pay a 5-million-dollar call at 11 one time. 12 Q. And the 5-million-dollar call would 13 have been in connection with 410? 14 A. Yes. There were other guaranties that 15 were small, some that were large. It would 16 depend. 17 MR. LEIMAN: Your Honor, I move T7238. 18 MR. KEETON: No objection. 19 THE COURT: Received. 20 Q. (BY MR. LEIMAN) T7239, please. 21 Mr. Gindy, T7239 is a May 18th, 1989 letter 22 directed to you from the law firm of Rhodes, 9750 1 Heatherly & Myers signed by Dusty Rhodes. 2 Have you seen this before? 3 A. Yes, I have. 4 Q. In what context? 5 A. It was sent to me by Mr. Rhodes. I 6 received it. 7 Q. Look with me, if you would, please, at 8 the fourth full paragraph -- 9 A. Yes. 10 Q. -- in which Mr. Rhodes states that "It 11 doesn't appear that Mr. Rosenberg, individually or 12 through his personal attorney, should recognize, 13 as does Gulf Management Resources, that a 14 contingency plan should be in existence to protect 15 the letters of credit and guaranties if the note 16 is accelerated and the collateral called to be 17 paid." 18 Do you see that, what I've just read? 19 A. Yes. 20 Q. What did you understand Mr. Rhodes to 21 be talking about? 22 A. Mr. Rhodes was interested in preparing 9751 1 a petition and have a plan to file suit to enjoin 2 collection of the letters of credit if efforts 3 were made to collect on them. 4 Q. And yesterday, we talked about concerns 5 that were raised regarding the appraisal that had 6 been done by Mr. Ed Schulz of Houston. 7 Is that what this is about? 8 A. In part, that was going to be one of 9 the bases of the complaint that he intended to 10 file. 11 Q. Do you recollect what other bases 12 Mr. Rhodes had? 13 A. He asserted -- I believe he was going 14 to assert a usury claim, which was the other major 15 issue that I can recall. 16 MR. LEIMAN: Your Honor, I move T7239 17 into evidence. 18 MR. KEETON: I object. This one 19 clearly is hearsay. It's after the institution 20 was taken over. It's contemplating litigation. 21 Irrelevant. 22 THE COURT: Received. 9752 1 Q. (BY MR. LEIMAN) T7242. T7242 is a 2 cover memo from you to Stanley Rosenberg; is that 3 right? 4 A. Yes. 5 Q. And it's forwarding a May 24, 1989 6 letter; is that right? 7 A. Yes. 8 Q. And that's from Jeff Seidman of United 9 Savings to you as well as the Park 410 West Joint 10 Venture. Right? 11 A. Yes. 12 Q. Did you get a copy of this? 13 A. I received a copy of it. 14 Q. Okay. Would you take a minute to look 15 it over, please? I'd like to ask you what 16 Mr. Seidman's point was in sending you this 17 letter. 18 A. (Witness reviews the document.) I've 19 read it. 20 Q. Mr. Gindy, first of all, was this the 21 only letter you received from Mr. Seidman in this 22 format? 9753 1 A. I received lots of letters from 2 Mr. Seidman addressed to Park 410 and to me. 3 That's the way the notices were set up under the 4 loan documents. 5 Q. I'm sorry? 6 A. That's the way the notices were set up 7 in the loan documents, addressed to Park 410's 8 office and then I received a copy as counsel. 9 Q. Those copies of the notices were 10 related to -- 11 A. Park 410's loan -- anything that 12 involved the Park 410 transaction. 13 Q. Okay. What did you understand 14 Mr. Seidman to be saying in this May 24th, '89 15 letter? 16 A. There had been requests to pay some 17 bills of some third party -- of some contractors 18 that had worked on the property. I believe one of 19 them was the sign contractor that was not being 20 paid or funded by United. Bobby Smith was 21 requiring an instrument he refers to here as a 22 non-ratification letter. I don't recall it 9754 1 being -- I just remember there was a document that 2 they wanted signed before they would go forward or 3 before they would consider funding. There was 4 discussion going back and forth with Mr. Rhodes 5 and the other parties that said "If we sign these, 6 will you fund to pay these bills or not?" And I 7 think it was a chicken and the egg fight or some 8 people on the borrower's side felt maybe it was an 9 effort to hold them up or force them to sign this 10 document. 11 There was also discussions that at this 12 point the institution had closed and there were 13 still efforts to try to renegotiate the loan 14 transaction before there was a foreclosure. And 15 they wanted to do that. Jeff said that if we did 16 that -- it says that he would require certain 17 documents or a release that there would not be any 18 claim made that the delay in foreclosure would 19 have an adverse effect on the note holder. And I 20 understood that to mean that -- with regard to the 21 bidding process, that interest would continue to 22 accrue on the note and, if there was a delay, the 9755 1 interest would be higher possibly. The market 2 value of the land could decline more and they 3 would bid less for the property. And they wanted 4 to be relieved of any claims with regard to that. 5 Q. Was the Park 410 West Joint Venture in 6 active negotiations at this point with Bank 7 United? 8 A. They were trying to deal with Jeff. I 9 mean, they were talking to him on a regular basis, 10 Noel and Stanley. 11 Q. Was the Park 410 80-million-dollar loan 12 in default at that point, by May 24th, 1989? 13 A. I believe that the -- well, I think 14 that under the loan documents, it probably was in 15 default at almost any point. But as far as having 16 been -- specific items not having been dealt with, 17 I don't recall if they had declared it to be in 18 default. The letters of credit were in place. I 19 don't remember the exact date the interest reserve 20 ran out. 21 Q. So, you don't remember if it was before 22 or after May of '89? 9756 1 A. I think it was before, but I'm not 2 positive. 3 Q. Okay. 4 MR. LEIMAN: Your Honor, I move T7242 5 into evidence. 6 MR. KEETON: No objection. 7 THE COURT: Received. 8 Q. (BY MR. LEIMAN) T7157. Mr. Gindy, 9 I've handed you T7157, which states it's a 10 September 30, 1990 statement of financial 11 condition on audit of Stanley D. Rosenberg. 12 A. Yes. 13 Q. Have you seen this document before? 14 A. I don't recall. I believe this -- I 15 believe this is the statement that we sent in. 16 Just a moment. 17 Q. Why don't you take a few minutes to 18 look it over. 19 A. (Witness reviews the document.) Yes. 20 Going back to the back of it, the letter I've 21 seen -- if this is the statement that was attached 22 to the letter at the back, yes, I have, and they 9757 1 are dated the same or close to it, yes. 2 Q. Were you representing Mr. Rosenberg in 3 a personal capacity as of September 30th, 1990? 4 A. No. 5 Q. You were not? 6 A. (Witness shakes head negatively.) 7 Q. I'd just like to ask you a couple of 8 questions about a few of the entries, specifically 9 about the fourth page. And in particular, looking 10 at -- under Note C, the entry regarding MAXXAM 11 acquired as director and then there is a reference 12 to 2,000 shares. 13 A. Yes. 14 Q. Did Mr. Rosenberg ever talk to you 15 about his work as a director at MAXXAM or MCO 16 Holdings? 17 A. He often visited with us. He was 18 involved with MAXXAM. He was a director or a 19 member of, I think, the compensation committee. 20 It often came up that he was going or coming to or 21 from meetings. 22 Q. When did that -- when did he raise 9758 1 those issues? 2 A. Probably as long as I can remember. 3 Going back 10 years or more. 4 Q. Starting when? 5 A. Probably nineteen -- early 1980s. 6 Q. What did Mr. Rosenberg tell you that he 7 was doing as a MAXXAM director or as a member of 8 the compensation committee? 9 A. He would -- frequently, he would tell 10 us in his scheduling that he had to go to a 11 meeting here for MAXXAM or he was working on -- he 12 didn't discuss the specific business. He just 13 would let us know that he was either working on 14 something for MAXXAM or MCO. We would have to 15 often schedule meetings around his schedule, that 16 he would use that as a reason or instructions that 17 we had to attend -- schedule something at a 18 different time. 19 Q. Where did he go for those meetings? 20 A. Most of the ones that I recall would be 21 in Houston. 22 Q. Would he go for a day visit, or do you 9759 1 know if he went overnight? 2 A. I can think of both situations. I can 3 think of him going over for the day and I can 4 think of him going over back and forth and I can 5 think of him staying longer. 6 Q. Do you remember if he ever discussed, 7 when he was mentioning having to go to a meeting 8 in Houston for MAXXAM or MCO Holdings, anything 9 related to Charles Hurwitz? 10 MR. DUEFFERT: Your Honor, I am sorry 11 but I can't remember what Mr. Leiman said. 12 MR. LEIMAN: Could you read it back? 13 THE COURT: Pardon? 14 MR. LEIMAN: Could you read it back, 15 please? I'm having a lot of trouble with this. 16 17 (Whereupon the requested portion 18 was read back by the reporter.) 19 20 A. I mean, he would say that he was -- he 21 would see Charles or he was going to see him or on 22 occasions he would talk about -- that he might 9760 1 go -- that he was going to a meeting and he might 2 play tennis with him. But other than that, he 3 never discussed the business. 4 Q. (BY MR. LEIMAN) You mean he never 5 discussed what he was going to do at MCO Holdings 6 or MAXXAM in an official capacity? 7 A. That's correct. 8 Q. Do you know -- did he ever tell you why 9 he was -- did you ever inquire as to why he was 10 telling you or other members of the firm that he 11 was going to go play tennis with Mr. Hurwitz or 12 visit with Mr. Hurwitz? 13 A. I never inquired. I mean, it was just 14 his nature. 15 Q. What do you mean? 16 A. Just the way he would talk to us. I 17 mean, converse. I mean, he didn't say, "I'm going 18 to New York." He would say, "I'm going to New 19 York to visit Mr. X" or "I'm going to New Orleans 20 to visit Mr. Y" or "I'm going to Philadelphia for 21 a meeting." He didn't say, "I was going." He 22 always let you know where he was going. It's just 9761 1 the way he is. 2 Q. Would you look, please, at Note H in 3 the personal guaranty section of this exhibit, 4 which is four pages from the last page of it? 5 A. Okay. I'm looking at the page. 6 Q. Looking over these personal guaranties 7 under Note H, were the two projects that we talked 8 about that involved Mr. Hurwitz and Mr. Rosenberg 9 listed here as Culebra/1686? Is that one of them? 10 A. Yes. 11 Q. And also, MRD, JV, the joint venture? 12 A. MRD Joint Venture was involved with 13 Culebra at the bank; but yes, it's on there. 14 Q. Mr. Gindy, do you happen to know if 15 Mr. Rosenberg listed all of the enterprises in 16 which he had a financial interest on his financial 17 statements? 18 A. I would have to go through his 19 statement to see if I could recall something that 20 was left off on the ones that I worked on. I 21 always tried to make sure everything that was 22 there was there. Without going through them and 9762 1 starting to compare them, I couldn't tell you. 2 MR. LEIMAN: Your Honor, I move T7157 3 into evidence. 4 MR. KEETON: No objection. 5 THE COURT: Received. 6 Q. (BY MR. LEIMAN) T7248. Mr. Gindy, 7 T7248 is a fax cover page attached to which is a 8 typed list of letters of credit related to Park 9 410 West Joint Venture. The cover page on the fax 10 is dated October 8, 1992. 11 A. Yes. 12 Q. It's directed to you. 13 A. Yes. 14 Q. From Jeff Seidman. Have you seen this 15 before? 16 MR. KEETON: Your Honor, we don't have 17 this document. 18 THE COURT: We'll be off the record for 19 a moment. 20 21 (Discussion off the record.) 22 9763 1 THE COURT: Let's proceed. 2 Q. (BY MR. LEIMAN) Mr. Gindy, looking at 3 this fax and the attachment, can you tell me what 4 the circumstances were under which you received 5 it? 6 A. This is to advise me of the letters of 7 credit that they were holding that had been 8 renewed. We were confirming the list of the 9 letters of credit and, in particular, I believe, 10 expiration dates. 11 Q. I notice that Mr. Rosenberg is not 12 listed here on this page for letters of credit. 13 A. That's correct. 14 Q. Why is that? 15 A. Mr. Rosenberg -- well, Mr. Rosenberg is 16 listed. 17 Q. Where is that? 18 A. The second one down. 19 Q. For $100,000? 20 A. Yes. 21 Q. Was that his full letter of credit? 22 A. That was the only letter of credit he 9764 1 provided. 2 Q. What was his -- do you recollect what 3 his ownership interest was in the Park 410 Joint 4 Venture? 5 A. 25 percent. 6 Q. Why was his letter of credit only 7 $100,000? 8 A. Under the terms of the Rosenberg P 410, 9 Ltd. -- I believe that is the correct name for the 10 Rosenberg limited partnership. I could be 11 incorrect with regard to that. It's something 12 like that -- the partnership agreement -- the 13 limited partners in that partnership agreement, 14 being Wulfe family entities and Mr. Kelleher and 15 First State Savings, Mr. Cadwallader's savings and 16 loan, provided the letters of credit, not execute 17 guaranties. 18 Their letters of credit totaled 19 $5 million. Mr. Rosenberg's obligation for his 20 partnership on the United loan, 80-million-dollar 21 loan, was to put up -- was to guaranty $5 million 22 of the loan, which he -- I mean, $10 million of 9765 1 the loan or the formula that was set forth in that 2 limitation was approximately $10 million and he 3 had to provide $5 million worth of letters of 4 credit to secure payment of that. 5 He provided the letters of credit by -- 6 through his limited partners providing those 7 letters of credit. They had not signed any 8 guaranties or were otherwise liable on the 9 indebtedness. 10 Q. Are the letters of credit that are 11 shown in Exhibit 7248 an incomplete list of the 12 letters of credit that were required to be 13 provided by Rosenberg pursuant to the agreement? 14 A. Well, these are the letters of credit 15 that were in place at that time. I think the 16 one -- I don't know -- is your question why they 17 don't add up to the $5 million? If that's the 18 question -- 19 Q. Why don't they? 20 A. It's because the First State Savings 21 3-million-dollar letter of credit that would have 22 been one of Rosenberg's letters of credit was 9766 1 presented for payment and was being held -- the 2 cash was being held by United under an agreement 3 of cash deposit in lieu of a letter of credit. 4 Q. And the letter of credit that's laid 5 out here as 6262 by Alamo Aircraft Supply, that's 6 the Wulfe family letter of credit? 7 A. Yes. That's our family's letter of 8 credit. 9 Q. And Herb Kelleher, that's a personal 10 letter of credit by him? 11 A. That was his personal investment. 12 Q. Is that also true with regard to 13 Mr. Dawson? 14 A. Mr. Dawson was a personal investment by 15 him. He was in the Grieshaber group. 16 Q. Yes. 17 A. And that was his -- that was his, yes. 18 MR. LEIMAN: Your Honor, I move T7248 19 into evidence. 20 MR. KEETON: No objection. 21 THE COURT: Received. 22 Q. (BY MR. LEIMAN) T7249. Mr. Gindy, 9767 1 T7249 is a memo from you to Stanley Rosenberg 2 dated March 25th, 1993. 3 A. Yes. 4 Q. The subject is Park 410 settlement. 5 A. Yes. 6 Q. Why did you write this memorandum? 7 A. We had received proposed settlement 8 documents from United or the successor with regard 9 to the transaction. Stanley wanted me to start to 10 proceed with review, comment, and finalization of 11 the documents. In light of the concerns that had 12 been raised in the past by Mr. Rhodes and 13 Mr. Faris, I had met with Mr. Blend, who was now 14 head of the -- who was then head of the law firm 15 and is now, and told him that I didn't -- I was 16 concerned about various conflicts. At this point, 17 Stanley had already purchased First State Savings' 18 position in the Rosenberg P 410, Ltd. partnership. 19 He had gone to the receiver or the entity that had 20 succeeded to First State Savings' assets and had 21 acquired the partnership interest. And I didn't 22 know -- that presented another conflicting 9768 1 interest. He was no longer just the general 2 partner. I don't want to say conflicting, but 3 possible variance in positions. 4 And in light of all the concerns that 5 had been raised in the past by Mr. Faris, I didn't 6 really care to become involved in the middle and 7 try to look at the different positions as to how 8 things were being treated. I didn't want to have 9 to deal with the issues of whether the First State 10 acquisition interest was something that Stanley 11 needed to allocate out. He just had had enough, 12 and we had written off extensive attorneys' fees 13 within the firm and I had suggested to him that he 14 needed to go somewhere else. 15 Q. For what? 16 A. For his -- for legal advice and review 17 of the documents to complete the settlement or to 18 negotiate and finalize a settlement with regard to 19 the 80-million-dollar loan on Park 410. 20 Q. Did there come a time when 21 Mr. Rosenberg left the law firm? 22 A. Yes. 9769 1 Q. Do you remember when that was? 2 A. Just subsequent to -- not far after 3 this. Several months -- well, not actually -- 4 almost a year after this. 5 Q. In 1994? 6 A. I'm having to think about it. It was 7 in -- I'm trying to -- I believe it was the spring 8 of '90. Late spring of '93, I believe. I'm 9 sorry. I believe it was the late spring, early 10 summer of '93. 11 Q. Okay. Just to clarify for me and for 12 the record, this was written in March of '93. 13 A. It was after this. 14 Q. Okay. And you think it was about a 15 month or two after -- 16 A. I think it was probably three or four 17 months or longer after that. 18 Q. Okay. What did Mr. Rosenberg do? Do 19 you know? 20 A. He contacted Robert Goldberg to assist 21 him in connection with the transaction. 22 Q. And who is Robert Goldberg? 9770 1 A. He's a real estate attorney in 2 San Antonio. He was one of the gentlemen I had 3 suggested that he might contact in the last couple 4 of lines on the first page. 5 Q. And after this time, after March 25th, 6 1993, did you in any way represent Mr. Rosenberg 7 or any of his interests? 8 A. Not with regard to the Park 410 9 project. 10 MR. LEIMAN: Your Honor, I move T7249 11 into evidence. 12 MR. KEETON: No objection. 13 THE COURT: Received. 14 Q. (BY MR. LEIMAN) Mr. Gindy, I'd like 15 to talk with you about the real estate market that 16 was prevailing -- we spoke a little bit about that 17 yesterday -- in San Antonio during the period 1985 18 to 1986. 19 In that regard, I'd like to show you a 20 few newspaper articles and ask you if you have -- 21 if you would be familiar with these or if you've 22 ever seen them. The first one I'm going to show 9771 1 you is T7005. 2 Are you familiar with the newspaper the 3 San Antonio Light? 4 A. Yes. 5 Q. Is that a regular daily newspaper in 6 San Antonio? 7 A. It was a daily paper in San Antonio 8 for -- I know it was there when we moved there in 9 the 1950s. It was there up until several years 10 ago when it was merged with the San Antonio 11 Express News. It was the daily evening paper. 12 Q. Did you have occasion to read it on a 13 regular basis in 1985? 14 A. I subscribed to it. 15 Q. I'd like you to look, please, at the 16 third, fourth, and fifth paragraphs on -- in the 17 first column on the first page. If you would, 18 just read those to yourself. 19 A. (Witness reviews the document.) Yes, 20 I've read them. 21 Q. Would you have been aware of the 22 conditions that are expressed in this first column 9772 1 in Paragraphs 3, 4, and 5, that the real estate 2 boom was on a downward slope? 3 MR. KEETON: Your Honor, if he's going 4 to ask him about the newspaper article, this man 5 not being presented as a marketing expert, I'd 6 like him to read the whole article so he has the 7 context before he answers that question. 8 MR. LEIMAN: Your Honor, I have no 9 objection to him reading the entire article. 10 However, I only intend to ask him about whether or 11 not he was aware of these conditions -- 12 THE COURT: Well, if he is to read the 13 article, that's going to take an inordinate time. 14 I'm not sure what the question was, but I think we 15 can -- 16 MR. KEETON: I'd like to object to 17 anything asking about the article of this witness 18 as being irrelevant, Your Honor. 19 THE COURT: Denied. What's your 20 question, Mr. Leiman? 21 MR. LEIMAN: I want to know, Your 22 Honor, whether or not he had been aware of the 9773 1 conditions that are set out in this article, as 2 well as two other articles that we have seen that 3 are admitted into evidence, whether or not he 4 believes, in his opinion, those accounts 5 accurately or fairly reflect prevailing 6 conditions. 7 I'd like to ask him, in that regard, 8 what the context and perspective of his outlook 9 was as of that time in order to follow up on his 10 testimony of yesterday. And that's what I -- 11 MR. KEETON: Your Honor -- 12 MR. LEIMAN: And that's what I plan to 13 ask him about. 14 MR. KEETON: Your Honor, that's trying 15 to get into marketing and market expertise, which 16 this man is coming here as a lawyer and a fact 17 witness. That's the very reason I said he needs 18 to read the whole article. But more importantly, 19 I think all of this line ought to be deemed 20 irrelevant and out of order. 21 THE COURT: Well, the witness seems to 22 have some knowledge of the real estate situation 9774 1 at the time and whatever he knows. But I don't 2 know why we have to have these newspaper articles. 3 He seems -- why don't you ask him what he knows 4 and let's get on with this? 5 MR. LEIMAN: I will do that, Your 6 Honor. 7 THE WITNESS: I'm almost finished 8 reading it. I was just trying to -- go ahead. 9 I'm sorry. 10 Q. (BY MR. LEIMAN) All right. As far as 11 you have read in the article in the San Antonio 12 Light, were you aware of the conditions that are 13 described in the newspaper as of December of '85? 14 MR. DUEFFERT: Your Honor, once again, 15 so the record is clear, I'd ask Mr. Leiman to 16 specify what conditions he's talking about. 17 THE COURT: I think that's a pretty 18 general question. 19 MR. LEIMAN: Well, then I'm going to 20 have to ask about the newspaper article, I guess. 21 THE COURT: Well, you just did. You 22 asked him about the newspaper article. Why don't 9775 1 you just ask him what you want to know about the 2 real estate market at that time that this witness 3 knows about? I don't know why we have to filter 4 it through the newspaper article. 5 Q. (BY MR. LEIMAN) Mr. Gindy? 6 A. Yes. 7 Q. Do you believe that the real estate 8 market in San Antonio as of December of 1985 was 9 showing signs that it was overbuilt, specifically 10 with regard to office buildings? 11 A. Yes. 12 Q. Do you agree that the cost of holding 13 land contributed largely to many of the 14 foreclosures that were prevalent in the 15 San Antonio area in and around 1985 and 1986? 16 A. Holding cost was a very significant 17 factor in projects not succeeding or in 18 determining if you would do a project or were they 19 failed. 20 Q. And let me ask whether or not you were 21 aware -- you personally were aware of the -- of 22 proposed tax legislation which ultimately became 9776 1 the Tax Act of 1986, which we did discuss, and the 2 potential effects that it would have on buying 3 activity in connection with real estate? 4 A. Yes. 5 Q. Among the developers that you knew, 6 were they aware of the potential consequences that 7 were being proposed regarding the Tax Act of 1986? 8 A. Both developers and private investors 9 that invested -- that would be deemed passive 10 investors: Physicians and other clients that were 11 the partners that provided the funding. We were 12 aware of it and starting to try to adjust our 13 plans for them. 14 Q. Professionally, what were you doing 15 during the summer, fall, and the winter of 1985 16 and into 1986? 17 A. The bulk of my time was on the Sea 18 World project, and probably the rest of the time 19 was on Park 410 with a few other small 20 transactions. But by far, the majority of my time 21 was devoted to Sea World, probably 85 percent. 22 Q. How much time were you spending at the 9777 1 Sea World site during the week? 2 A. I would frequently go there -- probably 3 several days a week, I would go to a temporary 4 office I had there at the park site in the morning 5 at the construction facility, and then would spend 6 the rest of the day at the office. 7 Q. Is it fair to say you were immersed in 8 your Sea World enterprise, your workload? 9 A. Accepting the pun, yes. 10 Q. Did all of the work that you were doing 11 for Sea World and for Mr. Jovaniach influence your 12 outlook and beliefs about the San Antonio real 13 estate market? Did they color your beliefs in any 14 way? 15 A. Well, I was a true believer and 16 believed -- wanted to believe and did believe that 17 Sea World would be a very positive influence to 18 help us -- to help the city establish and expand 19 its tourism. I wanted to believe in it. It was 20 the most important thing we had going and the only 21 major new project we had in San Antonio in '85 and 22 '86. I was definitely a believer, and I was a 9778 1 spokesman. I spoke frequently on the benefits of 2 it. I was out selling the benefits it would have 3 to the community, in part, obtaining benefits back 4 for the project from the community, from the 5 state. I was a definite advocate and a believer. 6 Q. Do you think that affected your 7 objectivity with regard to some of the other 8 factors that were going on in the real estate 9 market at the time? 10 A. I'm sure it did. I'm sure that I 11 spent -- I'm sure that my attention spent to that 12 made me not as observant of other activities or 13 see things as easily as I might have looked at 14 them. I certainly would have -- if I had -- my 15 attention was devoted to that. And it and I and 16 others that were involved in the Westplex corridor 17 area believed that we were going to see a 18 significant change. We wanted to. It was what 19 was happening, and we believed in it. And I'm 20 sure it affected what I saw elsewhere. You don't 21 spend two or three years working on a project that 22 you don't think is going to be significant and 9779 1 successful, or five years. 2 Q. Given the other matters that were going 3 on in the real estate market, the oversupply of 4 office space, the change in the tax laws, do you 5 believe that the Park 410 West Joint Venture would 6 have settled this 80-million-dollar loan in March 7 of 1986 in light of the fact that it had an 8 additional year on the Alamo notes within which -- 9 before they matured had it not been rushed to 10 settle by United Savings? 11 A. For instance, this article references 12 Omni Interest and foreclosures that we started to 13 see in '85 on real estate land projects. I 14 believe it probably would have influenced us 15 significantly. I mean, when you ask me if I'm 16 aware of the facts in this article, a lot of the 17 comments are Omni. Omni is a company that Stanley 18 had a substantial position in. And these types of 19 losses, I'm sure -- and these types of 20 foreclosures on these projects started to have an 21 effect on him and be noticed, and we noticed them. 22 But clearly, it could have -- you know, as those 9780 1 foreclosures started to occur in '85 and '86, they 2 may have changed their mind and chose not to go 3 forward. It would be something they would have to 4 look at, and these types of things did come to our 5 attention and especially to Stanley's because he 6 owned a big portion of that company. 7 Q. Was there pressure to settle? 8 A. To settle? 9 Q. The 80-million-dollar loan with United. 10 A. We put tremendous pressure -- we tried 11 to put big pressure on United to make a settlement 12 with us in '88 or '89. Is that what you mean? 13 Q. No, no. I'm talking about in 1986. 14 A. You mean to the loan? 15 Q. Yes, sir. 16 A. I think David Graham made it clear to 17 us that we needed to close the loan in March of -- 18 by the end of March 1986 or United was not 19 interested in going forward. Since they were 20 supporting Stanley, it was of concern. 21 MR. LEIMAN: If I may have a moment, 22 Your Honor. 9781 1 Q. (BY MR. LEIMAN) I only have one or 2 two more questions. 3 I'd like to ask you, Mr. Gindy, 4 specifically with regard to the Tax Act of 1986 5 what you understand the impact has been and 6 what -- before you answer that, I'd like to know 7 what you understood the impact would be in 1985 8 before it was actually put into -- enacted. 9 MR. DUEFFERT: Your Honor, again, I 10 can't hear what Mr. Leiman is saying. I'm sorry. 11 Q. (BY MR. LEIMAN) Before the Tax Act of 12 1986 was enacted, I'd like to get your -- what 13 your understanding was as to what it would be 14 doing, what effects it would have, and a follow-up 15 question to that. 16 MR. DUEFFERT: So, you're asking for 17 his understanding as of what date? 18 THE COURT: Prior to its enactment? 19 MR. LEIMAN: Yes, sir. Prior to its 20 enactment. 21 A. My comment, sir, is as a layman, not as 22 a tax attorney. Prior to the enactment of the '86 9782 1 act, in the real estate area, we had deductibility 2 of interest. We saw many of our land 3 developments, subdivision developments, building 4 developments were structured by high-income 5 earners who were able to use the initial startup 6 expenses, deductions, interest expense to offset 7 other income. 8 The 1986 Act changed that to where it 9 was no longer attractive to them to do that. And 10 as a result, a very significant source of equity 11 funding very quickly dried up or disappeared. 12 Q. (BY MR. LEIMAN) In -- 13 A. And that's the best explanation I can 14 give of what it did to the market and us. 15 Q. All right. That's your understanding 16 as to what would happen and what actually did 17 happen; is that right? 18 A. Yes, yes. 19 Q. Okay. 20 MR. LEIMAN: Unless the witness has 21 some -- 22 THE WITNESS: I do have one item if 9783 1 you're finished. I wanted to correct an answer 2 that I gave before. 3 THE COURT: All right. 4 THE WITNESS: On Monday, I was asked 5 some questions with regard to -- you had asked me 6 about individuals that were investing with 7 Mr. Rosenberg in some of the business ventures. 8 And I had mentioned that Mr. Gross was involved in 9 some stock offerings. I believe it was Handy 10 Dan -- a predecessor to Handy Dan, Builders 11 Square, and the IPRO transaction. And, in fact, 12 if I believe that was Mr. Levin, not Mr. Gross. 13 THE COURT: All right. Thank you. 14 MR. LEIMAN: I have no further 15 questions for this witness at this time. 16 THE COURT: Who is going to 17 cross-examine? Do you want to take a recess 18 before you start? 19 MR. KEETON: Well, I guess so because 20 then we can move things and get organized. 21 THE COURT: All right. Let's take a 22 short recess. 9784 1 (A short break was taken 2 at 9:55 a.m.) 3 4 THE COURT: Be seated, please. We'll 5 be back on the record. 6 Mr. Keeton, are you going to 7 cross-examine? 8 MR. KEETON: Yes, Your Honor. Thank 9 you. 10 11 CROSS-EXAMINATION 12 13 (10:18 a.m.) 14 Q. (BY MR. KEETON) Mr. Gindy, do you 15 recall that the Tax Act of '86 was not passed 16 until October of '86? 17 A. I recall it was not passed until the 18 fall of '86. 19 Q. All right. And do you recall there was 20 a great deal of speculation as to what would or 21 would not be in that act, including those 22 provisions as might impact on real estate 9785 1 investments? 2 A. There was a great deal of speculation. 3 Q. And indeed, it was a surprise when it 4 finally got passed with the stringent restrictions 5 on real estate deductions that were in there; 6 isn't that correct? 7 A. I believe that it was more stringent 8 than many people thought it would come out or the 9 industry was lobbying for. 10 Q. Industry had been lobbying for much 11 different provisions and, indeed, thought that 12 they would get different provisions? 13 A. That's correct, from my memory. 14 Q. And then in '87 and years thereafter 15 when people who were investors in real estate 16 started filing tax returns, they started realizing 17 the impact of that act on their investments. 18 Right? 19 MR. LEIMAN: Object to the question. 20 He said he's not a tax attorney, and he's asking 21 about other people. I don't know what people he's 22 asking about, the general population of 9786 1 developers. 2 MR. KEETON: Mr. Leiman opened this up. 3 THE COURT: All right. Denied. You 4 may answer. 5 A. Would you ask the question again, 6 please? 7 Q. (BY MR. KEETON) Yes. When investors 8 started filing returns in '87 and '88 is when the 9 real impact of the tax return started hitting home 10 in the real estate business, isn't that true, 11 because then investors realized what it did to 12 deductibility? 13 A. That may be true in the general 14 population. I can't say that's true to all of our 15 clients or to others because we made an effort to 16 inform people in advance and we were aware of the 17 discussions in advance. I think there were people 18 that were aware in advance, well-informed. 19 Q. No one in advance of October of '86, 20 though, knew exactly what was going to be in that 21 bill, did they? 22 A. Before '86, no one knew for sure. You 9787 1 only saw what was filed and discussed. 2 Q. In the fall of '86 specifically when 3 the act was passed -- 4 A. When the act was passed is when we knew 5 for sure what it said. 6 Q. All right. Now, in the '85, '86 time 7 frame, you thought the Park 410 property was 8 actually a wonderful property and project, didn't 9 you? 10 A. I thought the project was good, and I 11 thought the area would go forward and be 12 successful. 13 Q. You didn't have any reservations about 14 it yourself, did you? 15 A. I did not. 16 Q. Okay. And that's both when the deal 17 was done with Alamo and when the deal was done 18 with United, correct? 19 A. That's correct. 20 Q. Okay. Now, in point of fact, the Alamo 21 joint venture -- and I think that's how you 22 characterized them to keep the two transactions 9788 1 clear -- the one that was entered in April of 2 '85 -- really did not have a two-year term without 3 penalty, did it? 4 A. Without penalty? 5 Q. Yeah. 6 A. The longer you kept that in effect, the 7 less the discount was available to you. 8 Q. And in point of fact, after one year, 9 meaning after March 31 of '86, the borrowers in 10 the Alamo transaction would have had to come up 11 with about $4 million at that time and renew their 12 letters of credit? 13 A. I'm sorry. Would you repeat that? 14 Q. Yes. Assume Alamo -- and I'm not sure 15 it's exactly this date. Maybe it's March 29th of 16 '85 that it was entered. As of March 29 of '86, 17 the borrowers would have to come up with 18 approximately $4 million and renew the $4 million 19 worth of letters of credit for another year or 20 Alamo would take down the $4 million of letters of 21 credit that were up? 22 A. The borrowers had to pay the accrued 9789 1 interest, which was approximately $4 million, and 2 I believe it was due March 31st, 1986. 3 Q. Right. 4 A. Which is what they paid. And then they 5 also had to renew their current letters of credit. 6 Had they not paid the interest or had they not 7 renewed the letters of credit, the letters of 8 credit would have been called. 9 Q. Okay. So, really, if you sat there two 10 years and at the end walked away, you would have 11 paid $8 million. Right? Maybe even a little 12 more? 13 A. In round figures. (Witness nods head 14 affirmatively.) 15 Q. Do you agree with me? 16 A. In round figures, I would agree with 17 you. 18 Q. Now, I have placed in front of you, 19 Mr. Gindy -- and I would hand the Court and 20 counsel -- what has been marked as B3952. This is 21 the entire bill from your law firm dated -- let me 22 find the date. It goes -- okay. It appears the 9790 1 date is April 23rd, 1986, but it goes all the way 2 back to work in 1985 relating to Park 410. 3 Do you see that? 4 A. Yes, sir. 5 Q. Now, you saw one page of this document 6 yesterday. Right? 7 A. Yes. 8 Q. And that was Page 8? 9 A. No, sir. Page 7 is what I saw 10 yesterday. I believe what you're looking at is 11 the bottom line that says "continued on Page 8" is 12 the text. 13 Q. That's what's confusing me. Thank you. 14 A. At the top of the page is Page 7. It's 15 a problem people frequently have in reading our 16 software. 17 Q. Thank you. All right. Page 7. I've 18 asked you prior to commencing this session to look 19 through the entire bill. 20 Do you find Charles Hurwitz' name 21 mentioned anywhere else in this 27-page document? 22 A. No. 9791 1 Q. Now, let's turn to the issue of getting 2 this transaction closed by March 31 and who was 3 really pushing for it. 4 THE COURT: Are you going to move -- 5 MR. KEETON: Yes. I would like to 6 offer that exhibit, Your Honor. 7 MR. LEIMAN: No objection. 8 THE COURT: Received. 9 Q. (BY MR. KEETON) Mr. Gindy, I want you 10 to look at what has been marked as T7334. 11 MR. KEETON: And this has actually been 12 admitted, Your Honor, as kind of an omnibus 13 exhibit, which is B466 found at Tab 767. I 14 thought it was easier to deal with just this one 15 document. 16 Q. (BY MR. KEETON) What is T7334, 17 Mr. Gindy? 18 A. It is a letter from Noel Simpson to 19 Stanley and John Grieshaber. 20 Q. And it shows you as receiving a copy? 21 A. That's correct. 22 Q. And what is the date of this letter? 9792 1 A. This letter is dated June 28th, 1985. 2 Q. All right. Would you turn with me to 3 Page 1 and Item 1.1? 4 A. Yes. 5 Q. Read that item, if you would. 6 A. "The foremost priority of the joint 7 ventures is to have arranged development financing 8 and land note payments before the first interest 9 payment under the note becomes due on 31 10 March '86. It is highly desirable that this be 11 achieved before the first price hike hits on 12 January 1, '86" -- or "1 January '86." 13 Q. And as far as you know, that foremost 14 priority of the venture didn't change at any time, 15 did it? 16 A. No. 17 MR. KEETON: I want to show you 18 Exhibit T7371 which, Your Honor, has already been 19 admitted and is at Tab 954. I need -- well, I'm 20 told I ought to offer T7334. I guess it's 21 probably safer to get it in this way as well as 22 the omnibus, if you would, Your Honor. 9793 1 MR. LEIMAN: No objection. 2 THE COURT: Received. 3 Q. (BY MR. KEETON) What is T7371, 4 Mr. Gindy? 5 A. Notes of the meeting at -- of the 6 partnership at our offices and Stanley's office on 7 September 717th -- 8 Q. Wait. That's the wrong document here. 9 I've definitely got the wrong document. Hold that 10 one. We'll get to it, though. Here's the 11 document I want, which is T7077. 12 MR. KEETON: It's been admitted 13 already, Your Honor, at Tab 706. 14 Q. (BY MR. KEETON) I think we saw this 15 one yesterday or you saw it yesterday, Mr. Gindy. 16 But -- do you see that document? 17 A. Yes. 18 Q. What is that? 19 A. This is a letter from United Savings to 20 Noel Simpson dated -- 21 Q. From whom? From which person? 22 A. From -- oh, from David Graham. 9794 1 Q. Did you see this document on or about 2 this time? 3 A. Yes, I did. 4 Q. All right. Would you look at the last 5 paragraph on Page 2 of this document? Read that 6 in the record. 7 A. "One concern did arise in analyzing 8 your figures --" 9 Q. Are you reading -- I beg your pardon. 10 Are you reading Page 1? 11 A. Yes, sir. 12 Q. I wanted Page 2. 13 A. The paragraph that starts off with "I 14 will"? 15 Q. Yeah. 16 A. "I will need all information as soon as 17 possible so I can complete the approval process 18 and the legal documents in order that the loan 19 closing will not be held up. As I know, the 20 timing is critical in negotiating a discounted 21 price on the land." 22 Q. Now, if the price is negotiated so it's 9795 1 less than it would be with the bump, would that 2 benefit the venturers? 3 A. If the price is negotiated -- 4 Q. I mean, if you don't have to pay the 5 bump, does the venture benefit? 6 A. Yes, it does. 7 Q. If it's not closed, as we've already 8 seen, by March 31, we're going to get a bump. 9 Right? 10 A. That is correct. 11 Q. Now, all through the winter, efforts 12 were being made to get this closed by the end of 13 March. Right? The transaction with USAT. 14 A. Starting in December forward, yes. 15 Q. Okay. And as it got close and it 16 looked like it might close but not quite in March, 17 were you successful in negotiating an extension of 18 both the interest penalty and the price increase? 19 A. To some extent, yes. 20 Q. And we saw those documents yesterday, 21 didn't we? 22 A. Yes. 9796 1 Q. You got an extension until mid-April 2 sometime. Right? 3 A. With a daily impact. 4 Q. But the loan itself didn't close in 5 March, did it? 6 A. No. It closed and funded in April. 7 Q. And so, as far as USAT is concerned, it 8 didn't take any of this money in in the quarterly 9 statement ending in March, did it? 10 MR. LEIMAN: Object to the question. 11 He doesn't work for United Savings. He doesn't 12 know and he said yesterday that he didn't know 13 whether or not they had taken the money into 14 income. 15 THE COURT: If he knows, he may answer. 16 A. My answer yesterday was with regard to 17 the points, I did not know when they booked the 18 points. I don't know when they booked the loans. 19 But the loans were dated in April. I doubt that 20 they booked them in March. 21 Q. (BY MR. KEETON) They booked them in 22 April if they did it in April, didn't they? 9797 1 A. They should. 2 Q. You have accountants auditing. They 3 are not going to let you backdate things, are 4 they? 5 MR. LEIMAN: Object, Your Honor. 6 THE COURT: Sustained. 7 Q. (BY MR. KEETON) Now, in preparation 8 for testimony, you've spent many hours with the 9 OTS counsel, haven't you? 10 A. I spent several hours with OTS counsel. 11 I probably spent about equal time with both. 12 Q. Did they suggest to you that one of 13 Graham's motivations was to get it in for the 14 quarterly statement? 15 A. I don't believe so. 16 Q. Did Mr. Graham specifically say he 17 needed this closed on that quarter for his 18 financial results? 19 A. Mr. Graham's -- it's my recollection 20 Mr. Graham pushed us very hard that he wanted this 21 loan closed in March. 22 Q. I understand that. But we've agreed 9798 1 that closing it in March would also help the 2 lender, would it not, if the property were not 3 subject to the bumps and the interest penalty? 4 A. It would help -- 5 THE COURT: I think you said the 6 lender. I'm not sure you -- 7 MR. KEETON: I meant that. I meant 8 that. It helps both sides is what I was trying to 9 indicate, Your Honor. 10 A. Yes. 11 Q. (BY MR. KEETON) Okay. 12 A. It helped United in either side of it. 13 Q. And that's irrespective of what it does 14 to United on a quarterly financial statement; 15 isn't that true? 16 A. That is correct. 17 Q. Now, with whom did you negotiate the 18 papers, Mr. Gindy? 19 A. Ellen Lain, David Graham. To some 20 extent -- I still haven't recalled his name -- the 21 engineer. He was involved in some of the 22 technical -- or some -- what I call the 9799 1 technical -- having to do with the flood plain. 2 Q. And the papers which ultimately 3 resulted and we saw that as part of your closing 4 binders, how would you characterize those? As 5 very tough papers from the borrower's standpoint? 6 A. They were a very stringent set of 7 documents. 8 Q. In fact, you said in your deposition it 9 was the toughest set of documents you've seen in a 10 long time. Right? 11 A. That's correct. 12 Q. USAT was vigorously advocating its 13 position in these negotiations? 14 A. Ellen Lain put forth a very -- was a 15 very strong lender's counsel. 16 Q. And neither she nor Mr. Graham gave 17 easily on anything in this negotiation, did they? 18 A. I would not say "on anything," but it 19 was a very strenuous process. 20 Q. In fact, you also characterized it as a 21 nightmare and very difficult negotiations? 22 A. The loan closing itself was also a 9800 1 nightmare, just the different pieces that were 2 there; but, yes. 3 Q. Now, on the one occasion where 4 Mr. Rosenberg called you into his office -- and 5 you said you thought that was January of '86 when 6 he had a gentleman on the phone who he identified 7 as Charles Hurwitz? 8 A. Yes. 9 Q. I didn't remember how you date that as 10 January. 11 A. I believe it was after we had started 12 to discuss the loan terms, and that's how I dated 13 it in January. It could have been February. But 14 we didn't start to talk about or be -- I mean, the 15 issue of the points was raised in the January, 16 February period. It may just as well have been 17 February. 18 Q. All right. And the subject matter that 19 you were asked about is "What are the points to be 20 paid at closing on this transaction"? 21 A. That is correct. 22 Q. And you said what? 3 percent? 9801 1 A. I told him that the loan documents or 2 the -- from Mr. Graham at that point were at 3 3 points. 4 Q. And how would you characterize -- tell 5 us again what a point is paid at closing. 6 A. It's 1 percent of the loan -- 1 point 7 is 1 percent of the loan amount. It's a fee that 8 is paid to the lender. It's additional -- it's 9 additional compensation to the lender. Besides 10 interest, many times it's a form of interest 11 depending on how you -- what you call it and how 12 you structure it. If it's a commitment fee or 13 standby fee, you try to make it -- but it's 14 compensation to the lender for the loan. 15 Q. And in the '85 and early '86 time 16 frame, how did 3 points on a transaction rank or 17 line up with other transactions you had seen or 18 were working on? 19 A. It was at the high end, but it was a 20 number that we saw. Part of the objections, I 21 believe, had to do with the fact that portions of 22 the loan might not be funded. Part of the 9802 1 discussions were whether or not there should have 2 been a point -- points charged on the -- initially 3 up front on the uncommitted portion of the loan or 4 the soft commitment, the $7 million that we 5 mentioned yesterday. 6 Q. So, the money that was put out, though, 7 you ended up paying what? 3 percent? 8 A. 3 points. 9 Q. Didn't change? 10 A. Didn't change. 11 Q. And that was at the high end of what 12 the lenders were asking at that time, wasn't it? 13 A. Yes. It was -- yes. 14 Q. Now, the liability in the guaranties 15 that the borrowers assumed under the USAT 16 transaction were tougher than those under the 17 Alamo transaction, were they not? 18 MR. LEIMAN: I'm going to object to the 19 question as being too vague and general. 20 MR. KEETON: Okay. 21 Q. (BY MR. KEETON) They had guaranties 22 that made them personally liable on a portion of 9803 1 the loan under the USAT transaction as well as the 2 letters of credit. That wasn't true under Alamo, 3 was it? 4 A. Under Alamo, the parties' exposure was 5 limited to the letters of credit. Under the USAT 6 or United loan transaction, there were letters of 7 credit and additional liability in the form of 8 guaranties. 9 Q. So, that would mean the borrowers were 10 much more -- or had more risk under the USAT 11 transaction than the Alamo transaction, correct? 12 A. The borrower -- yes. 13 Q. And conversely, the lender had somewhat 14 more protection under the USAT transaction, 15 correct? 16 A. Yes. 17 Q. Now, in requesting both the letters of 18 credit and the guaranties in the amount that they 19 were being requested, isn't it true that that also 20 was more than you were seeing on development loans 21 in that time frame? 22 A. The 20 percent coverage? 9804 1 Q. Well, is it 20 percent or is it 2 25 percent? 3 A. 25 percent coverage. I'm sorry. It 4 would be. It was definitely more than we had seen 5 in the early 1980s. By that time frame, loans 6 were becoming more expensive and difficult. 7 Q. But still, this was more than you were 8 seeing even at the time frame of when this loan 9 was closed; isn't that true? 10 A. I believe so. 11 Q. And you have no reason to think that 12 the lender was not looking to those guaranties as 13 part of his protection on this transaction, do 14 you? 15 A. No. 16 Q. The fact is you characterized that 17 "They wrote it, so they want it." Right? 18 A. That's correct. 19 Q. Release prices. Isn't it customary for 20 the borrower to propose the release prices to the 21 lender in the initial instance so that the 22 borrower is comfortable with the way the pricing 9805 1 is arranged? 2 A. I would ask you to clarify for me. Are 3 you talking about the release prices that were 4 paid to United or the lender for the release, or 5 are you talking about the sales prices for the 6 property? 7 Q. I understand a release price -- and I 8 could be wrong -- to be the amount that would be 9 paid to United on a particular parcel if there 10 were a sale to free it from, in effect, the lien. 11 Am I incorrect? 12 A. I was thinking -- I view that as the 13 partial release price for the property. I was 14 thinking that you meant the release price, the 15 3 percent fee, which I thought was different. And 16 I was trying to clarify what you meant. 17 Q. No. I'm not talking about the points. 18 A. No, sir. There was a -- the unusual 19 feature in this loan was that there was a 20 3 percent -- additional 3 percent fee that had to 21 be paid to United every time a piece of land was 22 sold. That was proposed by the borrower, and that 9806 1 was -- that was -- I mean, if that's what you're 2 talking about. 3 Q. No. I'm talking about the prices that 4 were attached and would be paid to United in 5 addition to that 3 percent every time a parcel was 6 sold. 7 A. They were originally proposed by the 8 borrower. 9 Q. Yes. That's what I said. And United 10 accepted the borrower's figures, didn't they? 11 A. I believe they were discussed back and 12 forth and agreed upon. 13 Q. But ultimately, what was agreed upon 14 were the borrower's figures? 15 A. The borrower's and the lender's 16 figures. They were done together. 17 Q. In any event, USAT didn't cram down 18 those prices onto the borrowers, did they? 19 A. At that point, USAT was also the 20 borrower. That's where I'm -- you've got me in a 21 little bit of a box in the question, sir. USAT 22 was a borrower at that time. 9807 1 Q. I'm talking about when you were 2 negotiating the USAT loan that closed in '86. 3 A. In 1986 when the USAT loan was closed, 4 United Savings Association was a borrower. 5 Q. In the joint venture, but it was 6 also -- it was going to end up as a lender. 7 Right? 8 A. Yes, sir. But -- 9 Q. In fact, USAT improved its position 10 materially, moving from a venturer to a lender, 11 didn't it? 12 A. Yes. 13 Q. Okay. Now, when we later had seen some 14 correspondence talking about release prices being 15 too high, we're talking about these numbers that 16 are attached to the specific tracts, aren't we? 17 A. Yes. 18 Q. And yet we saw that USAT, on a number 19 of -- on a number of tracts, those that were 20 expected to be marketed initially, agreed to 21 reduce prices from $5 a square foot to 2.50 a 22 square foot, cut it in half. Right? 9808 1 A. They agreed to reduce them on several 2 tracts to be sold. 3 Q. And yet that ultimately proved not to 4 help the project. Right? 5 A. Those tracts didn't sell. 6 MR. KEETON: Your Honor, I want to hand 7 the witness B3953. I believe this is a new 8 exhibit. 9 Q. (BY MR. KEETON) Mr. Gindy, look at 10 B3953 and tell me what that is, sir. 11 A. Just a moment. It's a letter to 12 Stanley from David Graham. 13 Q. January 6th, 1986? 14 A. Yes, sir. 15 Q. And it shows you as having received -- 16 or having been sent a copy. 17 Did you receive it? 18 A. Yes. 19 MR. KEETON: Your Honor, I'll offer 20 3953. 21 MR. LEIMAN: I'd like to ask a question 22 of the witness as to whose handwriting this is up 9809 1 in the upper right-hand corner, if it's his. 2 THE WITNESS: It's not mine. 3 MR. LEIMAN: And this appears to be a 4 fax copy. Was this letter faxed to you or do you 5 know if it was -- how you received it? 6 THE WITNESS: Generally, David's 7 letters came to me by mail separate from the 8 letters that went to Stanley. They didn't come in 9 the same package. 10 MR. KEETON: Your Honor, we can ignore 11 the fax information in the letter. I suspect 12 that's Noel Simpson's handwriting faxing it to 13 Charles White, but I -- it doesn't matter. That's 14 unimportant for my purposes. 15 MR. LEIMAN: Your Honor, without the 16 handwriting and fax information, we have no 17 objection. 18 THE COURT: Received. 19 Q. (BY MR. KEETON) You do see that 20 Mr. Simpson also was sent a copy of this letter? 21 A. Yes. 22 Q. At the bottom in the last paragraph 9810 1 beginning after the first sentence, Mr. Graham 2 says, "Additionally, I have checked into the 3 appraisal problem your group seems to be having. 4 And our appraisers here in Houston feel there is 5 something significantly wrong with your 6 appraiser's approach. I would like to help you on 7 this matter if I can or suggest you use another 8 appraiser who is more understanding." 9 Do you recall there were problems of 10 getting an as-developed versus an as-is appraisal 11 from the Love & Dugger organization? 12 A. Yes. 13 Q. And Mr. Graham is addressing that 14 problem, isn't he? 15 A. He's addressing the appraisal. 16 Q. Okay. Now, Mr. Gindy, let me now 17 direct your attention to a letter I gave you a 18 moment ago that's in evidence, T7077, the 19 February 6th, 1986 letter. 20 A. Yes. 21 Q. This is from Mr. Graham to Mr. Simpson, 22 copies to you, Mr. Rosenberg, Charles White, Steve 9811 1 Lerner, and Ellen Lain? 2 A. Yes. 3 Q. Mr. Lerner and Ms. Lain were the two 4 lawyers representing United Savings in the loan 5 negotiation? 6 A. They are the two principals, yes. 7 Q. Okay. Look the first paragraph now of 8 that letter. 9 A. Yes, sir. 10 Q. It relates to the fact that there still 11 appears to be a problem getting an appraisal. 12 Right? 13 A. Just a moment. (Witness reviews the 14 document.) Yes. 15 Q. Down a sentence or two in that 16 paragraph, Mr. Graham, after referencing the 17 problem, says, "Accordingly, we will need and, 18 quite frankly, you should not have a major problem 19 obtaining, based on your sales projections of 20 $120,289,938, an appraisal indicating a 41B 21 regulatory value of $98 million, which would 22 indicate the loan to be 80 percent of appraised 9812 1 value, which is typical. I really do not believe 2 Ed Schulz should have a problem achieving this 3 figure or at least something close to it." 4 Now, the sales projections were being 5 paid up constantly and updated and studied by 6 Mr. White, Mr. Simpson, and others, weren't they? 7 A. Yes. 8 Q. And they applied whatever information 9 and studies they thought relevant in order to come 10 up with those studies. Right? Numbers. 11 A. Yes. 12 Q. I don't -- did you ever work on any of 13 those projections yourself? 14 A. No, sir. 15 Q. Okay. Now, Mr. Graham says, based on 16 those numbers, he can't understand why we can't 17 get an appraisal that will be okay for purposes of 18 the loan. Right? 19 A. That's what the first paragraph says. 20 Q. And nothing hidden about all of this, 21 is there? Sending it to everybody. 22 A. No, sir. 9813 1 Q. Did it seem reasonable to you, based on 2 those projections, that the property would 3 appraise out at that? 4 A. I didn't question it. 5 Q. You actually met with Mr. Schulz 6 yourself, you said, didn't you? 7 A. Yes, sir. 8 Q. How many times did you meet with him? 9 A. Including telephone conferences? 10 Q. Yeah. 11 A. I'd say more than ten, then. Three or 12 four times in person and significantly more by 13 telephone. 14 Q. Were some of those times at the site or 15 what? 16 A. I'm sorry. I just -- 17 Q. Were you at the site with Mr. Schulz -- 18 A. I just need to correct something. I 19 was thinking of the engineer. Mr. Schulz, the 20 appraiser? 21 Q. Right. 22 A. I was confused in my answer. 9814 1 Mr. Schulz, the appraiser, I met with him, I 2 believe, two or three times. 3 Q. Did the engineer come over with 4 Mr. Schulz on occasion? 5 A. On one occasion, I believe. 6 Q. And you had extensive contacts with 7 this unnamed engineer? 8 A. I had approximately ten. 9 Q. Okay. Now, what about Mr. Schulz? 10 A. I had, I believe, two or three visits 11 with him. 12 Q. Do you have any recollection of any of 13 those visits? 14 A. Yes, sir. 15 Q. Tell me about them. 16 A. One visit was in my office where we 17 went through the area of the highway where the 18 road was to be built, and we had discussion with 19 regard to how much land was going to be taken and 20 how it was going to be adjusted and other issues 21 involving the highway that was to be built. 22 Q. That was a feature you were intimately 9815 1 familiar with? 2 A. That's correct. Later on, we -- later 3 on, we had a discussion with regard to the 4 drainage, and that was the one that the engineer 5 was present with and -- 6 Q. And the drainage was significant for a 7 number of reasons, wasn't it? 8 A. Yes, sir. 9 Q. One, just to get the water off the 10 land? 11 A. Yes, sir. 12 Q. Two, because you were going to have to 13 take some portion of the property and dedicate it 14 to the drainage. So, that acreage would not be 15 available? 16 A. That is correct. 17 Q. Three, wherever it went might affect 18 how it would develop and, therefore, affect the 19 value? 20 A. Yes. 21 Q. And, of course, the 100-year flood 22 plain and FEMA that we've already talked about? 9816 1 A. Yes, sir. 2 Q. And probably things I don't know about? 3 A. Just people don't like wet feet. 4 Q. Okay. And so, that was a matter of 5 some importance and a matter that the engineer and 6 Mr. Schulz came over and talked to you about at 7 length? 8 A. Yes, sir. We were -- primarily at that 9 meeting it's my recollection discussing the time 10 frame for approvals and when we expected them to 11 be back, working with the local engineer. I 12 believe it was Pape-Dawson. 13 Q. And what was your opinion, by the way, 14 of the job that Pape-Dawson did in this? 15 A. I thought they were fine. They were an 16 excellent engineering firm. 17 Q. Okay. That's two times. Do you 18 remember any others where you met or talked with 19 Mr. Schulz? 20 A. I believe Mr. Schulz asked me again 21 about -- one other time regarding the Sea World 22 project and a signed location agreement that was 9817 1 being circulated. There was some use restrictions 2 that had been generically mentioned as to what 3 would be included in them and if they would have 4 any real effect or adverse effect on the property. 5 Q. Let me see if I understand that. Sea 6 World, as part of agreeing to go into this area 7 knowing it would greatly benefit landowners in the 8 adjacent vicinity, required that those landowners, 9 in effect, put restrictions of certain types on 10 their land? 11 A. There were certain restrictions that 12 were sought to try to prevent activities or 13 certain businesses to come into the area that they 14 had encountered in other areas. And also a couple 15 of uses that would be damaging. 16 Q. And it was important for Mr. Schulz to 17 understand what those restrictions were because, 18 again, they might have a negative impact on the 19 value of the land? 20 A. He asked what they would be. 21 Q. Okay. And did you give him the 22 details? 9818 1 A. Yes, sir. 2 Q. Any other occasion where you met or 3 talked with Mr. Schulz? 4 A. I don't recall any others. 5 Q. In all of your contacts with 6 Mr. Schulz, did you find him to be professional? 7 A. Yes. 8 Q. Did you find him to be attentive to 9 what you were saying? 10 A. Yes. 11 Q. Did you feel that he was trying to do a 12 quality job? 13 A. He was putting -- I mean, he was 14 attentive. I don't have any reason to believe he 15 wasn't. 16 Q. Did he seem prepared on the various 17 subjects that you were discussing? 18 A. He usually had very precise questions 19 to ask. 20 Q. Did you review the appraisal after it 21 came in? 22 A. No, sir. 9819 1 Q. You never reviewed it? 2 A. I don't recall reviewing it. 3 Q. Did you get a copy of it? 4 A. I believe so. 5 Q. Now, as the years went on, this 6 project, like most others in Texas, started having 7 some problems. Right? 8 A. Yes, sir. 9 Q. And as you said, in hindsight, if we 10 look back, maybe we could have seen that happening 11 in '85. But nobody at the time was looking back. 12 Right? 13 A. I certainly wasn't. 14 Q. Okay. Mr. Gindy, do you have exhibits 15 from yesterday up there? 16 A. I have several. 17 Q. I want 7371. Otherwise, I'll get -- 18 MR. KEETON: And Your Honor, that was 19 admitted yesterday and it's now Tab 954 in ours, 20 but it was this. 21 A. I do not appear to have it. 7371? 22 Q. (BY MR. KEETON) Yes. 9820 1 A. Yes, sir, I do. 2 Q. Now, 7371 was an exhibit admitted 3 yesterday. It's meeting notes or matters for the 4 majority venturers. Looks like it was a meeting 5 that Mr. Rosenberg, Mr. Simpson, Gindy, Faris. 6 Mr. Faris is the one that you said 7 replaced Noel Simpson? 8 A. Yes, sir. 9 Q. And Dusty Rhodes was his 10 brother-in-law? 11 A. Yes, sir. 12 Q. This lawyer? 13 A. Yes, sir. 14 Q. -- and Charles White attended in 15 September of '87. And there is an entry down 16 there, "1.4" it says. "SDR" -- that's 17 Mr. Rosenberg. Right? 18 A. Yes. 19 Q. -- "to contact Charles Hurwitz to 20 introduce the topic of loan renegotiation." 21 A. Yes. 22 Q. Was this kind of an initial time when 9821 1 people have said, "Well, maybe we ought to start 2 looking at renegotiating this loan"? 3 A. I believe that we had already -- it was 4 close to the beginning of renegotiation. I think 5 there were discussions before that time generally 6 with David. 7 Q. Now, I've seen meeting notes around 8 this time and going forward for years where you 9 seem -- where you attended loan renegotiation 10 meetings. 11 A. Yes, sir, with -- on our efforts. I 12 don't believe there were very many with United. 13 Q. There were -- well, Mr. Simpson and 14 Mr. White did some negotiations with United. 15 A. Yes, sir. 16 Q. And you got copies of their notes of 17 the meetings, didn't you? 18 A. Yes, sir. 19 Q. At any meetings with United, did 20 Mr. Hurwitz attend those negotiation -- 21 renegotiation meetings? 22 A. Not that I'm aware of. 9822 1 Q. And in point of fact, the loan was 2 never renegotiated for -- until prior to the time 3 the institution failed, which was a year and four 4 months later? 5 A. At least over a year later, yes, after 6 they failed. It was closed. 7 Q. Do you know for a fact that 8 Mr. Rosenberg even contacted Mr. Hurwitz on this? 9 A. For a fact, no. 10 Q. Okay. You talked about non-judicial 11 foreclosure yesterday with Mr. Leiman. 12 A. Yes. 13 Q. You gave him the timetables that the 14 Texas statutes provided for which, if everything 15 went perfectly, meant a lender could foreclose in 16 21 days or so? 17 A. Approximately a month, yes. 18 Q. In point of fact, though, by the time 19 the late Eighties came around, every borrower, the 20 minute he got a notice of acceleration or default 21 and I'm going to post you for foreclosure, not 22 every borrower but most borrowers of any size 9823 1 would file what was known as lender liability 2 suits, wouldn't they? 3 A. Many would -- 4 MR. LEIMAN: Object to the question, 5 Your Honor. The question is completely imprecise 6 as to "most lenders" or "every lender" or "every 7 borrower." I'm not sure what Mr. Keeton is asking 8 here, and I'd ask that he define the question or 9 at least lay a foundation to see if Mr. Gindy can 10 answer it in a more precise way. 11 MR. KEETON: Mr. Gindy answered the 12 question. 13 A. I hadn't finished yet. 14 THE COURT: Let's get the answer. I 15 will deny the objection. 16 A. I probably conducted more than several 17 hundred foreclosures in that time frame. And I 18 would say that in approximately 10 percent of the 19 situations, I received a restraining order or 20 liability suit to stop the foreclosure sale. And 21 in an equal percentage of the cases, another 22 10 percent, I would find myself with a Chapter 11 9824 1 filing on the eve. 2 Q. (BY MR. KEETON) And the larger and 3 more sophisticated the borrower, the more likely 4 you were going to get that injunction against you 5 or get the Chapter 11. Right? 6 A. I would say it would go up to 7 50 percent. 8 Q. Right. So, on the lender liability 9 cases, with or without merit, was almost a cottage 10 industry in Texas in that time, wasn't it? 11 A. It was a very common event. And I 12 don't know if I'd characterize it as a cottage 13 industry, but it was a very common event. 14 Q. Some lawyers just cranked them out by 15 the score, didn't they? 16 A. Yes. 17 Q. Okay. Irrespective, almost, of the 18 facts? 19 A. I would hope that members of the Bar 20 would not do things irrespective of the facts, but 21 there were lots of lawsuits filed. 22 Q. Right. And courts were very 9825 1 sympathetic towards issuing at least initial 2 injunctions, weren't they? 3 A. Texas judges were elected by the 4 people, and they recognized that. 5 Q. The lenders weren't real popular, but 6 those borrowers voted, didn't they? 7 A. That is correct. 8 Q. So, while theoretically you had this 9 procedure that could go quickly, in point of fact, 10 you had to really know and maybe have an agreement 11 before you started in with a large, sophisticated 12 borrower? 13 A. Or be prepared to -- 14 Q. Litigate? 15 A. -- to litigate the issues and deal with 16 them if -- bankruptcy was less of a problem. 17 Q. And litigating took a lot of time and 18 money and exposed you to juries in many cases. 19 Right? 20 A. It did, but it also required bonds. 21 Q. Right. Now, no case was ever filed 22 relating to the Park 410 borrowers despite all of 9826 1 Mr. Rhodes' letters and other studies. Right? 2 A. Mr. Rhodes did not file suit, that I'm 3 aware of. 4 Q. And Mr. Rosenberg sought counsel from 5 the firm of Jones, Day and whatever the rest of 6 their name is. 7 He didn't file suit, did he? 8 A. That is correct. 9 Q. Now, Mr. Gindy, I want to direct your 10 attention to T7157. That was the financial 11 statement of Mr. Rosenberg dated September of '90 12 that was discussed -- 13 A. T what? 14 Q. -- this morning. 15 A. T7157? 16 Q. 7157. 17 A. Yes, sir. 18 Q. Before I get into the specifics of 19 this, tell me whether or not it is true that 20 Mr. Rosenberg probably had literally dozens, 21 scores of business deals he was doing as reflected 22 on all these various financial statements. 9827 1 A. That is correct. 2 Q. And the two or three that he had where 3 there was some involvement by Federated is all 4 that you know of that he had with Mr. Hurwitz? 5 A. That is correct. 6 Q. And there was one of them on here that, 7 I think, is really one transaction that you said 8 it was broken down as Culebra Road and then MR -- 9 A. MRD. 10 Q. That's a real estate deal? 11 A. Culebra/1686, Ltd. was the actual 12 venturer that I believe Federated was involved in. 13 Its lender -- there was a separate transaction 14 with MRD that Federated or Mr. Hurwitz was not at 15 all involved in. As time went down and real 16 estate problems started to occur, in some debt 17 restructuring, the MRD property and the Culebra 18 property ended up with some encumbrances jointly 19 between them. He had no ownership interest. 20 That's why I kept trying to refer to it, that it 21 was involved in the transaction with Laredo 22 National Bank. They were concerned with the 9828 1 outcome because it had an impact on them. But he 2 had no ownership interest in MRD. His ownership 3 interest was in the Culebra portion of that 4 transaction. And the only other one that's on 5 that statement that I'm aware of besides the -- 6 besides the company itself was the Sage. 7 Q. And in the Culebra, as I understood it, 8 Federated had been brought in after the deal had 9 originally been structured? I thought you said 10 one of the partners sold part of their interest. 11 A. That would be -- that would be some of 12 the involvement of the MRD transaction. 13 Q. Okay. 14 A. I believe Federated was an original 15 partner in the Culebra transaction. 16 Q. And was Federated a major player in 17 that transaction or a minor one? 18 A. It was -- it was not a majority player. 19 It didn't have more than -- it had less than 20 50 percent. I believe it had less than 21 25 percent. 22 Q. All right. Now, turn, if you would, to 9829 1 Note G of this financial statement in the second 2 page of that note. 3 A. Note G? 4 Q. G. Actually, it may be the third page. 5 I want Item -- third page of the notes receivable, 6 yeah. Notes payable. Third page of notes 7 payable, the one that ends with Item 14. 8 A. Yes, sir. 9 Q. Do you see that? 10 A. Yes. 11 Q. I'll direct your attention to Item 13. 12 A. Yes. 13 Q. And here is the Sage Southwest stock or 14 what used to be Children's World or -- 15 A. Yes, sir. 16 Q. That's the second one that 17 Mr. Rosenberg was in with Mr. Hurwitz -- with 18 Federated? 19 A. With Federated. 20 Q. And Mr. Rosenberg apparently has a note 21 payable of 500,000 to Federated? 22 A. Yes. 9830 1 Q. Prime plus 2? 2 A. Yes. 3 Q. Are you aware that that note was 4 foreclosed on and Mr. Rosenberg was required to 5 pay his money? 6 A. Yes. 7 Q. Federated didn't forgive that note? 8 A. They did not. 9 MR. KEETON: I have no further 10 questions, Your Honor. 11 THE COURT: Do any of the other 12 respondents have questions? 13 MR. NICKENS: I have a few questions, 14 Your Honor. 15 THE COURT: Mr. Nickens. 16 17 CROSS-EXAMINATION 18 19 (11:10 a.m.) 20 Q. (BY MR. NICKENS) Mr. Gindy, you have 21 discussed with Mr. Leiman and with Mr. Keeton the 22 deadlines that the venturers faced in late March 9831 1 of 1986. 2 A. Yes, sir. 3 Q. And those deadlines included the fact 4 that the venturers would have to renew their 5 letters of credit? 6 A. Yes. 7 Q. $4 million. They would have to make an 8 interest payment of approximately $4 million? 9 A. Yes. 10 Q. And basically, their financial exposure 11 to the project would, in effect, double from about 12 $4 million to about $8 million; is that correct? 13 A. That is correct. The transaction was 14 structured so that it would go up about $4 million 15 a year. 16 Q. And as you faced that deadline, 17 Mr. Rosenberg was seeking to -- you had been 18 negotiating with United as to the terms of a loan? 19 A. That is correct. 20 Q. And Mr. Rosenberg was seeking to have 21 some of his obligations in connection with that 22 deadline relieved by selling some portion of his 9832 1 interest to others? 2 A. That is correct. 3 Q. And, indeed, he offered one half of his 4 interest in return for somebody else posting the 5 guaranties and the letters of credit? 6 A. I do believe that's correct. 7 Q. You recall that? And I'll briefly show 8 you -- it's Exhibit 7190, which was a letter to 9 First Texas Savings and Loan where that offer was 10 set out. 11 A. I believe there is a slight difference 12 between the question you asked and this. 13 Q. Okay. 14 A. You said Stanley was expecting that he 15 would have liability on the guaranty. This says 16 "and/or the guaranties." He was looking to have 17 someone post the letters of credit or provide 18 guaranty for it for half of it. 19 Q. And he was willing -- in order to avoid 20 that obligation that he was anticipating with 21 United, he was prepared to sell half of his 22 interest in the project? 9833 1 A. That is correct. 2 Q. And in addition to that, he and the 3 other venturers were looking for other lenders 4 that might offer more favorable terms than you 5 were hearing from United? 6 A. That is correct. 7 Q. And some of those institutions were too 8 small to handle a loan of this nature, weren't 9 they? 10 A. That is correct. 11 Q. But Gibraltar showed an interest? 12 A. That's correct. 13 Q. But their interest -- part of the 14 problem with the Gibraltar proposal was that they 15 were unable to meet the March deadline; isn't that 16 correct? 17 A. It was near -- that was one issue. 18 Q. And let me ask you to look -- and I'll 19 just show it to you -- at Exhibit 7189 and in 20 particular -- 21 MR. NICKENS: Is 7189 in evidence? 22 MS. KOPP: Yes. 9834 1 Q. (BY MR. NICKENS) 7189. And I'm 2 referencing the second paragraph. Could you just 3 read for the Court what it says with regard to 4 Gibraltar's timetable for their loan? 5 A. "The proposed timetable which was 6 included in your application listed a loan closing 7 date by March 31st, 1986. I would be kidding both 8 you and myself if I said that we could analyze, 9 approve, and close this loan by that date. If the 10 closing date is somewhat flexible and can be moved 11 back to allow a more realistic review period, I 12 would be happy to proceed." 13 Q. And so, part of the problem with 14 Gibraltar's proposal was they could not meet the 15 March deadline? 16 A. That is correct. And in looking at 17 that, we looked at it -- they considered it as a 18 possibility for staying in it for the full year 19 and Gibraltar might be an alternate lender. 20 Q. If you were willing to put up yet 21 another $4 million and -- with that additional 22 obligation and forego the bumps. That is, the 9835 1 price would increase? 2 A. You would forego the bumps. The 3 interest was paid, and you would incur another 4 year's interest on the notes, which would be 5 another $4 million. That same $4 million of 6 interest would be accrued under the loan if you 7 closed it with United. It didn't make any 8 difference there. The real decision was did you 9 take United, which was being offered and pursued 10 right then, or did you take a chance on Gibraltar 11 going forward. 12 Q. And part of the reason for not going 13 forward with Gibraltar is you didn't want to take 14 that chance? 15 A. And -- that's correct. United was 16 there at that point wanting to change it to a 17 loan. 18 Q. Now, let me ask you a few questions 19 about the -- thank you -- about the Document 20 T7157, Mr. Rosenberg's financial statement that 21 Mr. Keeton was just asking you about. And if you 22 would turn over to the Note G -- the notes 9836 1 payable. 2 A. Yes. What page? 3 Q. It's -- I don't have a numbered page, 4 but it's the first page with 1A under Note G. 5 A. All right. Yes. 6 Q. We see there that First City of 7 Texas -- of Houston had loaned Mr. Rosenberg 8 something in excess of $5 million? 9 A. That is correct. 10 Q. And Frost National Bank had loaned 11 Mr. Rosenberg something around $2 million or in 12 excess of $2 million? 13 A. That is correct. 14 Q. The Groos National -- Groos Bank -- 15 that's a bank there in San Antonio? 16 A. Yes. 17 Q. -- had loaned Mr. Rosenberg upwards of 18 $2 million? 19 A. Just a moment. (Witness reviews the 20 document.) 21 MR. LEIMAN: Mr. Nickens, are you on 22 Note G, Item 2A? 9837 1 A. I don't believe Groos is that high. 2 Q. (BY MR. NICKENS) I'm sorry. I was 3 looking at the combination of 3A, B, C, D, and E, 4 which is a million 4, a million 6 -- say, a 5 million 8. 6 A. Point 3A is -- 1.5, 1.6, 1.7. About 7 1.8? 8 Q. Yes. 9 A. I'm sorry. I thought you said a larger 10 number. 11 Q. I may have. I meant -- Mr. Gross had a 12 substantial business relationship with Groos Bank. 13 Would you say that? 14 A. He was one of the principal 15 stockholders and a major depositor there. 16 Q. And they had loaned him, these papers 17 would reflect, about a million 8? 18 A. That is correct. 19 Q. Laredo National Bank had loaned him 20 approximately $500,000? 21 A. Yes. 22 Q. NBC Bank had loaned him about a million 9838 1 3? 2 A. That is correct. 3 Q. NCNB had loaned him about $300,000? 4 A. That is correct. 5 Q. First National Bank of Kerrville had 6 loaned about $150,000? 7 A. That is correct. 8 Q. The International Bank of Commerce of 9 Laredo had loaned approximately $450,000? 10 A. That is correct. 11 Q. Kelly Field National Bank, something a 12 little under $200,000? 13 A. That is correct. 14 Q. First National -- First NBC of 15 New Orleans, something under -- around 175,000? 16 A. That is correct. 17 Q. Then Texas Commerce Bank, half a 18 million dollars? 19 A. That is correct. 20 Q. And then if we come down, skipping over 21 Federated, Pontchartrain State Bank, $130,000? 22 A. These are not all loans to just 9839 1 Stanley. Many of these are partnership loans that 2 we referred to when you were speaking to me 3 before. 4 Q. Is it fair to say that Mr. Rosenberg 5 had numerous connections with financial 6 institutions in his efforts to raise money for his 7 business interests? 8 A. Yes. 9 Q. And none of which that we've listed 10 here had anything to do with Charles Hurwitz or 11 MAXXAM or any of those entities? 12 A. That's correct. 13 MR. NICKENS: No further questions, 14 Your Honor. 15 MR. BLANKENSTEIN: Just brief -- 16 THE COURT: Mr. Blankenstein. 17 18 CROSS-EXAMINATION 19 20 (11:18 a.m.) 21 Q. (BY MR. BLANKENSTEIN) Mr. Gindy, my 22 name is Paul Blankenstein and I represent 9840 1 Jenard Gross in this matter. 2 If I heard your testimony earlier 3 today, you know of no business relationship 4 between Mr. Rosenberg and Mr. Gross; is that 5 correct? 6 A. The only relationship I know is social. 7 Q. And the Groos Bank, you know of no 8 relationship between Mr. Jenard Gross and Groos 9 Bank; isn't that right? 10 A. I know that to be a fact. 11 Q. And the Groos Bank is spelled 12 G-R-O-O-S; isn't that right? 13 A. The Groos Bank is an old family bank in 14 south Texas, and it's my understanding that your 15 Mr. Gross is not an old south Texas banking 16 family. 17 Q. Thank you, Mr. Gindy. 18 MR. BLANKENSTEIN: No questions, Your 19 Honor. 20 MR. DUEFFERT: No questions. 21 MR. EISENHART: I have none, Your 22 Honor. 9841 1 THE COURT: All right. Do you have any 2 redirect, Mr. Leiman? 3 MR. LEIMAN: I just have a few 4 questions, Your Honor. 5 6 7 REDIRECT-EXAMINATION 8 9 (11:19 a.m.) 10 Q. (BY MR. LEIMAN) Mr. Nickens asked you 11 about the financial statement that was labeled 12 T7157, and he read you a number of loan amounts 13 that Mr. Rosenberg had been involved with. Right? 14 A. That is correct. 15 Q. To your knowledge, was the 16 80-million-dollar loan that Mr. Rosenberg was 17 involved with with United Savings the -- one of 18 the largest loans that Mr. Rosenberg had ever been 19 involved in? 20 A. If it -- I believe it was the largest 21 that I'm aware of. 22 Q. It would certainly have been bigger 9842 1 than any of the loans that were listed in this 2 financial statement as of 1990. Right? 3 A. Yes, sir. 4 Q. Isn't it true that the only institution 5 willing to make the 80-million-dollar loan that 6 was -- that applications had been submitted to by 7 the Park 410 West Joint Venture was United Savings 8 Association of Texas; isn't that right? 9 A. It's the only loan they had -- that 10 they had an agreement with to fund the loan. 11 Q. Mr. Keeton asked you a number -- 12 Mr. Keeton asked you a number of questions that 13 related to the relationship between Mr. Hurwitz 14 and Mr. Rosenberg. 15 One of those questions related to a 16 specific item in the financial statement that 17 we've just been talking about in which you 18 mentioned that Federated had not forgiven the note 19 that -- the half-million-dollar note that had been 20 provided; is that right? 21 A. That's my understanding, yes. That was 22 the question -- he asked the question, yes. 9843 1 Q. Was there -- are you aware of some 2 other accommodation that was made in connection 3 with that foreclosure? 4 A. I am not. 5 Q. Do you know how much money was actually 6 paid in regard to that note? 7 A. I do not. 8 Q. Do you know whether there were any 9 subsequent agreements made between Mr. Hurwitz and 10 Federated and Mr. Rosenberg with respect to 11 that -- to the repayment of that -- with regard to 12 the foreclosure on that note subsequent to the 13 conclusion of the foreclosure proceeding? 14 A. I do not. Stanley worked that one out 15 himself. I don't know. 16 Q. You just said that Mr. Rosenberg worked 17 out that arrangement himself in connection with 18 that particular note payable? 19 A. He handled that matter himself, to my 20 knowledge. I did not work on it. 21 Q. With regard to the other notes payable 22 that are listed in this financial statement, did 9844 1 you work on any of those? 2 A. Yes, sir. 3 Q. And looking at this statement, of those 4 listed, can you tell me whether you worked on the 5 majority of them? 6 A. When you say "worked on them," do you 7 mean the settlement or satisfaction of the notes 8 or the transactions that created them? 9 Q. Satisfaction of them. 10 A. I worked on two of the -- several of 11 the institutions. I don't know if it was a 12 majority. I worked on the Frost, the First City, 13 some of the Groos, Laredo National Bank. That's 14 all. 15 Q. But with regard to the Federated note, 16 Mr. Rosenberg handled that directly with 17 Federated? 18 A. Yes. And he worked on several of the 19 others that I mentioned with me. 20 Q. Worked on the other ones with you that 21 you mentioned? 22 A. Yes. 9845 1 Q. Mr. Keeton asked you about whether or 2 not -- if you knew whether or not any of the 3 meetings on loan renegotiation that you attended, 4 whether Mr. Hurwitz was also in attendance. 5 Do you remember that question? 6 A. Yes. 7 Q. And your response was no, you don't 8 remember him being there. Right? 9 A. That is correct. 10 Q. Were there other renegotiation meetings 11 that were held with Noel Simpson that you never 12 attended at United? 13 A. Yes. 14 Q. Do you know if Mr. Hurwitz attended any 15 of those? 16 A. I don't. I'm sorry. 17 MR. KEETON: It's all right. 18 Q. (BY MR. LEIMAN) You don't know? 19 A. I just don't know if he attended or 20 not. 21 Q. Do you know how many of those meetings 22 there were? 9846 1 A. Without -- 2 MR. KEETON: Your Honor, there is 3 nothing in the record, including those with Noel 4 Simpson, had Mr. Hurwitz in those renegotiation 5 meetings. And for him to even do this, he knows 6 is improper. He's just trying to elicit some sort 7 of speculation. 8 Q. (BY MR. LEIMAN) The matter was opened 9 up -- 10 THE COURT: Well, the witness has 11 indicated he has no knowledge of the meetings. 12 So, let's move on. 13 Q. (BY MR. LEIMAN) Mr. Gindy, are you 14 aware or were you aware in 1988 of problems that 15 United Savings Association was having in 16 connection with its ability to survive as a viable 17 institution? 18 A. I think we were aware in 1988 that most 19 major institutions were having difficulties, and I 20 think David made it clear to us that they were 21 having problems. Excuse me. I don't believe it 22 was David. I believe it was Jeff at that time, 9847 1 Jeff Seidman. 2 Q. Had Mr. Graham left the institution in 3 1987, to your knowledge? 4 A. We did not see him in any transactions. 5 I don't know when he left, but we no longer were 6 dealing with him at that point. We were dealing 7 with a gentleman named, I believe, Jeff Seidman, 8 especially towards the end of '88. I'm not 9 exactly sure of the dates. I'd have to go back 10 and look at what he signed. 11 Q. Were you aware of any financial 12 problems or regulatory issues that had arisen in 13 connection with United Savings Association of 14 Texas in the second half of 1987? 15 A. Without looking at the correspondence, 16 we had received some -- we had received some 17 inquiries with regard to the disbursement of 18 assets. I'd have to look at the documents to 19 determine if it was in '87 or '88 exactly when 20 those inquiries were starting to be made by 21 Shirley Sturgeon and others regarding the original 22 loan closing and disbursement of funds. I believe 9848 1 that was in late 1987 or early 1988, but I would 2 need to refresh my recollection on the date. 3 Q. Do you know if that was in response to 4 a heightened regulatory oversight of United 5 Savings Association of Texas? 6 A. If that is the correspondence in the 7 correct time period that we were told that that 8 was as a result of inquiries being made by 9 regulatory authorities and we started to go back 10 and have to answer questions about what had 11 happened and provide documents. 12 Q. Mr. Keeton showed you, I believe, 13 Exhibit T7189, which you should have in front of 14 you still. 15 A. T7189? 16 Q. And if he didn't show it to you, he 17 might have spoken to you about it. That related 18 to Gibraltar Savings' response to an application 19 that you and I had talked about yesterday. 20 A. Yes. 21 MR. KEETON: That was Mr. Nickens. 22 MR. LEIMAN: Oh, I'm sorry. 9849 1 Q. (BY MR. LEIMAN) It was Mr. Nickens. 2 A. I don't see it here, T7189. But I 3 recall him showing it to me. It was highlighted. 4 Q. His copy was highlighted? 5 MR. NICKENS: Here's the one. 6 Q. (BY MR. LEIMAN) Do you have a copy of 7 T7189 in front of you? 8 A. Yes. 9 Q. The Gibraltar profit participation of 10 30 to 40 percent was higher than the profit 11 participation that was required by United Savings, 12 wasn't it? 13 A. Yes. 14 Q. The equity investment by the borrower 15 was also higher, too, wasn't it? 16 A. Yes, sir. About -- yes. It was 17 16 million. 18 Q. Would those additional requirements be 19 considered to be more stringent in connection with 20 making a loan? 21 A. They were more expensive. They would 22 be more stringent to me. 9850 1 Q. Would those requirements, had they been 2 imposed, have provided a greater level of safety 3 to Gibraltar Savings than the requirements that 4 were set out in the United Savings transaction by 5 United? 6 A. They would have had more equity or -- 7 in the forms of additional letters of credit 8 posted than they had under the United transaction. 9 So, they would have had additional assets besides 10 the land. 11 Q. Now, with regard to the repayment by 12 United Savings and reimbursement of United Savings 13 to the joint venture of the interest payments of 14 $2 million -- of some $2 million that had been 15 made and other expenses, do you remember we talked 16 about that yesterday? 17 A. Yes. 18 Q. I believe it was -- I think it was 19 Mr. Keeton who asked you whether or not -- 20 actually, both gentlemen asked you whether it 21 was -- would have been an 8-million-dollar 22 expenditure by the first Park 410 venture with 9851 1 Alamo. 2 Do you remember that? 3 A. Yes. 4 Q. In fact, United Savings reimbursed the 5 joint venturers and reimbursed itself in 6 connection with the amount -- with the $2 million 7 of interest that had been paid, as well as the 8 letter of credit fees and other fees. Right? 9 A. That's correct. 10 Q. And we see that in Tab 7130 -- I'm 11 sorry -- in Exhibit 7130, Tab 1. And we see 12 that -- let me show it to you -- right here in the 13 settlement statement? 14 A. Yes. This is a settlement statement 15 for closing the 80-million-dollar loan, and the 16 4 million 454 was repaid or refunded. 17 Q. And so, how much was the joint venture 18 out of pocket in connection with interest that it 19 had paid to Alamo in that regard? 20 A. On the day that this loan was closed? 21 Q. Yes. 22 A. They were not out of pocket cash, but 9852 1 they had the financial obligation because the debt 2 at the United loan had gone up by that amount of 3 money. So, I mean, I'm at a loss -- it's 4 difficult to answer the question. There was no 5 cash out of pocket. They had not made any 6 additional equity advances. Their equity 7 investment of $10 million in the loan was still 8 out there and a portion of it was now at risk 9 because there was more advanced. But they had 10 reduced their overall exposure by having gotten 11 back portions of that money that they might -- 12 than if they had just closed the United loan, had 13 not borrowed against it, they would have had more 14 money in it. 15 Q. And what about with regard to United 16 Savings? 17 A. United got back over $2 million of 18 money in connection with the closing of the loan 19 so that it -- it recovered all of the interest 20 that it had advanced as a partner and now became a 21 lender. 22 Q. Mr. Keeton asked you if United Savings 9853 1 had improved its position with regard to the 2 80-million-dollar transaction as opposed to its 3 original involvement in -- with the Alamo loan. 4 Do you remember that question? 5 A. Yes. 6 Q. What was your answer? 7 A. I answered that it did improve its 8 position. It had recovered cash and other sums 9 that it had advanced while it was a partner. And 10 so, in that regard, it improved its position to 11 become -- in becoming a lender. It also had made 12 the commitment to make an 80-million-dollar loan 13 at that point so that, I guess, its obligation to 14 fund might possibly have been -- could be viewed 15 as being taking on additional responsibility, but 16 there were conditions to the funding. 17 Q. Would the lending of the initial -- 18 draw of the initial advance of $45 million have 19 been more than the money that United had put into 20 the original Alamo deal? 21 A. Yes, obviously. They had -- they had 22 invested a little over $2 million plus the letters 9854 1 of credit obligation. So, they had 4 million at 2 risk. And when they went into the United 3 80-million-dollar loan, they had over 40 million 4 at risk. If you offset the letters of credit, 5 that still would be more money. 6 Q. And ultimately, how much money did 7 United put at risk in connection with Park 410? 8 A. Advanced funds -- 9 Q. Yes. 10 A. -- or funds with interest and accrued 11 added to it? 12 Q. Both. 13 A. I haven't looked at the budget figures 14 for some time; but it's my recollection the hard 15 investment dollars were something in excess of 16 $55 million, between 55 and 60, and the balance of 17 it was accrued interest that was paid by advances 18 on the loan. 19 Q. Mr. Gindy, with regard to other lenders 20 that might have been contacted by you, we went 21 over those yesterday. Right? 22 A. Yes. 9855 1 Q. Did Mr. Rosenberg work hard to find 2 another lender besides United Savings? 3 A. I believe most of the contacts -- or I 4 think all the contacts that we talked about 5 yesterday were contacts that I had made to people, 6 with the exception of contacting Mr. Kosberg and 7 First State Savings, and Mr. Cadwallader, which 8 Stanley worked on. 9 Q. You mentioned that the loan closing -- 10 I think you said you had a very difficult time 11 with the loan closing of the Park 410 12 80-million-dollar loan; is that right? 13 A. Yes. 14 Q. Why? 15 A. There was a great deal of pressure to 16 get it done in a short period of time. We tried 17 strenuously to resolve certain issues and get it 18 closed before April the 1st as we were being 19 pressed to do. There were some things that were 20 beyond our control that we could not satisfy or 21 get achieved, and we ultimately were able to work 22 out the issues with -- the issues on the Alamo 9856 1 Savings to defer the bumps partially because it 2 was obvious that some of the things we couldn't 3 get done and they were beyond our control and 4 beyond all the parties' control. It didn't have 5 anything to do with any player in the -- or 6 anybody involved in the group. Mostly, it had to 7 do with trying to determine the FEMA issues. 8 Q. Was United Savings aware of that? 9 A. Yes. They were involved both as the 10 lender in the discussions and wanting to convert 11 it, and they were concerned with it as a partner 12 in the borrower before. 13 Q. With regard to the statement -- I'd 14 like to refer you back to the closing statement 15 you have in your hand now. 16 What is the amount set forth there as 17 the amount of money that United Savings recovered 18 both in connection with the loan and how much it 19 received in fees? 20 MR. KEETON: Your Honor, is there no 21 end? We did this yesterday, and none of us asked 22 any questions about this. 9857 1 MR. LEIMAN: This relates directly to 2 the amount of money that Mr. Keeton was discussing 3 with Mr. Gindy, about the $8 million and whether 4 they -- if they had sat on that. What Mr. Gindy 5 was talking about was that they had to pay that 6 money to somebody, and I'd just like to ask this 7 one last follow-up question. 8 MR. KEETON: There is no way, Your 9 Honor, that relates to this $8 million. That 10 related to Alamo when we went through this closing 11 statement yesterday. 12 THE COURT: You've got one more 13 question? 14 MR. LEIMAN: This is the question. 15 This is my last question, Your Honor. 16 A. Approximately 4 and a half -- a little 17 bit more than that. It would be $2.4 million plus 18 half of the 4 million and 4. So, it would be 19 about 4.8 if I did the arithmetic correctly. 20 4 million 8. 21 Q. Is what? 22 A. What went to United. 9858 1 MR. LEIMAN: No further questions, Your 2 Honor. 3 THE COURT: Any recross? 4 MR. KEETON: No, Your Honor. 5 MR. NICKENS: No, Your Honor. 6 MR. DUEFFERT: No, Your Honor. 7 MR. EISENHART: No, Your Honor. 8 THE COURT: All right. Thank you, 9 Mr. Gindy. 10 THE WITNESS: Thank you, Your Honor. 11 MR. LEIMAN: Your Honor, at this time, 12 we have another witness that's ready to take the 13 stand. Given the proximity of the lunch hour, we 14 can start a new witness now and break in 15 15 minutes or, if you wish to break now, whatever the 16 Court's preference is. 17 THE COURT: All right. We'll adjourn 18 until 1:00 o'clock. 19 20 (Luncheon recess taken at 11:40 a.m.) 21 22 THE COURT: Be seated, please. 9859 1 Good afternoon. The hearing will come 2 to order. Do you have a witness? 3 MR. SCHWARTZ: We do, Your Honor. 4 MR. VILLA: Your Honor, a moment before 5 we begin. I had promised to report back to the 6 Court on my trial schedule. I have a letter here 7 that lays it out. I thought I might submit it to 8 the Court now and we can discuss it whenever it's 9 at the Court's convenience. 10 THE COURT: All right. 11 MR. RINALDI: Was a copy of this 12 provided to Mr. Guido and Mr. Stearns? 13 MR. VILLA: I thought Mr. Guido was 14 going to be here today, and that's why the CC says 15 Mr. Guido. And therefore, I'm handing it to you 16 as his agent for service. 17 MR. RINALDI: As you know, John, he has 18 taken the lead on this, and I thought he was in 19 communication with you on this subject. That's 20 why I inquired with you about it, but I will 21 certainly see that it's faxed to him. 22 THE COURT: Well, I'll take a look at 9860 1 this and see where we're going. 2 Mr. Schwartz. 3 MR. SCHWARTZ: Thank you, Your Honor. 4 The Office of Thrift Supervision calls 5 Mr. Rex Cool. 6 7 8 REX COOL, 9 10 called as a witness and having been first duly 11 sworn, testified as follows: 12 13 THE COURT: Be seated, please. 14 15 EXAMINATION 16 17 (1:05 p.m.) 18 Q. (BY MR. SCHWARTZ) Good afternoon, 19 Mr. Cool. 20 Would you state your full name for the 21 record? 22 A. Rex Wayne Cool. 9861 1 Q. And where are you employed? 2 A. The Office of Thrift Supervision. 3 Q. Any particular office? 4 A. Yes. Kansas City. 5 Q. What position do you hold at the Office 6 of Thrift Supervision? 7 A. I am a compliance examiner. 8 Q. And how long have you been employed by 9 OTS? 10 A. Since November of 1989. 11 Q. Prior to 1989, where did you work? 12 A. For the Texas Savings and Loan 13 Department. 14 Q. And what is the Texas Savings and Loan 15 Department? 16 A. It's an examination agency and 17 supervisory agency for state-chartered 18 institutions in Texas. 19 Q. How long did you work for the Texas 20 State Department of Savings and Loans? 21 A. About four and a half years. 22 Q. And so, that brings us back to 9862 1 nineteen -- help me out with this. 2 A. '85. 3 Q. Prior to your working for the Texas 4 Savings and Loan Department, what did you do? 5 A. I was an independent enterprise. 6 Q. How long were you in the -- the private 7 sector? 8 A. Yes. Between 1980 and April of '85 9 when I went to work for the State of Texas. 10 Q. Prior to that employment, the private 11 sector, what did you do? 12 A. I was a field examiner for the Federal 13 Home Loan Bank Board. 14 Q. And what's a field examiner? 15 A. Safety and soundness field examiner. 16 Q. Is that different from compliance? 17 A. Yes. 18 Q. That's different from what you do now? 19 A. That's correct. 20 Q. What's the basic difference? 21 A. Compliance deals with civil rights laws 22 and regulations and consumer rights and laws. 9863 1 Q. And safety and soundness? 2 A. Deals with the assets and safety and 3 soundness of institutions. 4 Q. When did you start your employment with 5 the Federal Home Loan Bank Board? 6 A. 1968. 7 Q. And how long were you employed by them? 8 A. 12 years. 9 Q. So, from '68 until 1980; is that right? 10 A. That's correct. 11 Q. And when you went to work for the Texas 12 Savings and Loan Department, were you a compliance 13 examiner or a safety and soundness examiner? 14 A. No. I was a safety and soundness 15 examiner. 16 Q. During your employment with the Texas 17 Savings and Loan Department, what title did you 18 hold? 19 A. I was a senior field examiner. 20 Q. And what are the responsibilities of a 21 senior field examiner? 22 A. Generally, he's in charge of 9864 1 examinations of larger institutions or smaller 2 institutions with complex problems. 3 Q. Did there -- when you say "in charge of 4 examinations," what do you mean by that? 5 A. I'm the person that runs the 6 examination. 7 Q. Did there come a time when you 8 participated in an examination of United Savings 9 Association of Texas? 10 A. Yes, there was. 11 Q. When was that? 12 A. That was in 1986. 13 Q. Do you recall what month that would 14 have started? 15 A. April, I believe. 16 Q. And what was your role in that 17 examination? 18 A. I was the examiner in charge. 19 Q. Okay. What is an examiner in charge? 20 A. He has the duties of assigning 21 assistants their responsibilities, the areas that 22 they need to review. He's also responsible with 9865 1 meetings with senior management and making sure 2 that the examination is conducted in an orderly 3 fashion. 4 Q. And do you supervise the assistant 5 examiners, as well? 6 A. That's correct. 7 Q. What do you do to supervise the 8 assistant examiners? What's involved in that? 9 A. Well, first, they are assigned their 10 tasks. And then on an ongoing basis, I was there 11 to answer questions, to cite certain regulations 12 that they needed to look at with respect to the 13 particular area that they were assigned. 14 Q. What else would you do as the examiner 15 in charge with regard to supervising the 16 examiners? 17 A. Well, I met with them nearly on a daily 18 basis concerning the areas that they were 19 assigned, answering questions, going over 20 particular areas of records, write-ups, et cetera. 21 Q. Was this -- the United Savings 22 Association of Texas examination in 1986, was that 9866 1 the first time that you had been the examiner in 2 charge of a safety and soundness examination? 3 A. For the State of Texas, yes. 4 Q. And what about during your experience 5 with the Federal Home Loan Bank Board? 6 A. Many times. The number, I don't know. 7 But I would assume 50 to 100. 8 Q. As examiner in charge? 9 A. As examiner in charge, that's correct. 10 Q. Now, with regard to the 1986 11 examination of -- are you comfortable with my 12 saying USAT or USAT? 13 A. That's fine. 14 Q. With regard to the 1986 USAT 15 examination, how many examiners were there 16 assigned to that examination for the State of 17 Texas? 18 A. Myself and three assistants. 19 Q. I'd like you to walk us through, 20 generally, the process of how an examination is 21 conducted. How do you actually go about doing the 22 examination? 9867 1 A. You open the examination. You meet 2 with any of the management people that you need to 3 speak with on that particular day. 4 Q. Let me back you up a little bit. Start 5 with the process of -- even before the examination 6 starts. Do you -- is there -- when do you find 7 out that you're going to be conducting the 8 examination of, say, USAT? 9 A. Usually, as I recall, approximately a 10 week before the examination. 11 Q. And during that week beforehand, do you 12 have time to prepare for the examination? Is 13 there any preparation that's done? 14 A. No, because we were generally 15 completing another examination at the time. 16 Q. So, walking through the process, you 17 learn that you're going to be doing an examination 18 and then what happens the day the examination is 19 scheduled to start? 20 A. You walk in, announce yourself, ask for 21 either a representative of management or 22 management themselves. 9868 1 Q. And do you recall with regard to the 2 USAT examination, is that what you did? 3 A. As I recall, yes. 4 Q. Okay. What happens -- what happened 5 next? 6 A. We met with a representative of 7 management. We were shown our working area. 8 Q. Okay. Who was the representative of 9 management, if you recall? 10 A. Vice president, James -- I can't recall 11 the last name offhand. 12 Q. Pledger? 13 A. Pledger, yes. 14 Q. And do you know what Mr. Pledger's 15 function was at USAT? 16 A. I believe he was vice president and 17 attorney. He was also responsible for being the 18 representative of the institution in providing us 19 the materials that we needed to work with. 20 Q. Was he the liaison? 21 A. Yes. 22 Q. Was it unusual to have the liaison -- 9869 1 in your experience, to have the liaison be an 2 attorney? 3 A. Yes. I don't recall another instance. 4 Q. You went -- so, you get to the 5 institution and Mr. Pledger, you said, showed you 6 the work area? 7 A. That's correct. 8 Q. Okay. And would you describe the work 9 area? 10 A. It was an area approximately the size 11 of this room that contained tables and chairs, 12 adding machines, various articles of -- that we 13 needed during the examination, such as pencils and 14 so on. 15 Q. And what's the next step in the 16 process? You said -- well, first of all, you said 17 you met with Mr. Pledger. 18 Did you meet with any other officials 19 of USAT? 20 A. I don't remember at this time, but I 21 don't believe so. 22 Q. Okay. Did you request to? 9870 1 A. It was our general thing to meet with 2 management, yes. 3 Q. So, you're now in the work space. 4 What's the next step in the process? 5 A. At that point in time, you meet with a 6 representative and discuss the areas of 7 examination that you will -- will be primarily the 8 first concern. That generally is financial 9 records, operating records, board of directors 10 minutes, various files concerning investments, and 11 real estate. 12 Q. Is this -- do you have a list of things 13 that you ask for? 14 A. Generally, we jot down, yes, a listing 15 of what we will be starting on. 16 Q. And did you provide that to 17 Mr. Pledger? 18 A. Yes, I believe I did. 19 Q. Then how -- what's the next step? Do 20 you assign different areas of the examination? 21 A. Yes. At that point, I assign the 22 assistants various records and areas that they had 9871 1 to be concerned with during the examination. 2 Q. And what are the various areas of the 3 examination that were conducted then? 4 A. Our primary concern was financial, 5 major loans, investments, and real estate owned. 6 Q. What is the financial section of the 7 examination? 8 A. Well, it's the financial records that 9 make up their assets and liabilities. 10 Q. And the major loans? 11 A. Major loans -- from review of a loan 12 register, we determine those loans which we choose 13 to review during the examination. 14 Q. How do you make that determination? 15 A. One of several ways: Either by size or 16 by borrower name or perhaps by address of 17 property. 18 Q. Address of property? 19 A. That could be one of the areas that we 20 would be looking into. But generally speaking, it 21 was the size of the loan and the borrowers. 22 Q. So, with regard to the USAT examination 9872 1 in 1986, how would you go about deciding which 2 major loans to review or what did you do, if you 3 recall? 4 A. We reviewed the loan register and 5 picked out those loans which we wanted to review, 6 which would include, primarily, loans in excess 7 of -- I don't recall the exact amount, but I would 8 suspect that it would be $1 million and above. 9 Q. Who was responsible for doing the major 10 loan portion of the examination? 11 A. One of my assistants named Jeff Nunn. 12 Q. Okay. There were two other areas that 13 you talked about that were part of the 14 examination. One is the investments area? 15 A. That's correct. 16 Q. Okay. What is that? 17 A. That's investments in stock. Any type 18 of investments that they had on their books. 19 Q. And then the last section you mentioned 20 was the REO or real estate owned? 21 A. Yes. 22 Q. What is that? 9873 1 A. That would have been parcels that were 2 acquired through foreclosure. 3 Q. Talking about the major loan review 4 portion of the examination, how do you go about 5 doing that portion of the examination? You've now 6 identified a list of loans that you want to 7 review. 8 Do you provide that list to management? 9 A. Yes, that's correct. 10 Q. And then what happens? 11 A. Once we've given them the list of the 12 loans that we want to review, then the particular 13 loan files are pulled from their records and 14 brought to us. 15 Q. And who pulls those loan files? 16 A. Employees of the institution. 17 Q. And when you ask for loan files, do you 18 ask for all of the loan files related to a 19 particular loan? 20 A. Yes. 21 Q. At some -- and then they would bring 22 those files to you? 9874 1 A. That's correct. 2 Q. Okay. And what's the process of -- 3 what does the examiner do when they get the file? 4 A. He reviews all the documents and the 5 contents that are in the loan file or files, 6 whichever the case may be. 7 Q. And for what purpose? 8 A. In determining if the records contain 9 documents that are required by regulations. 10 Q. At some point after you started the 11 examination process of USAT for the State of 12 Texas, did another examination team also come in 13 to work on an examination of USAT? 14 A. Yes, that's correct. 15 Q. Who was that? 16 A. The Federal Home Loan Bank Board. 17 Q. Okay. Was there an examiner in charge 18 of the team -- 19 A. There was. 20 Q. -- for the Federal Home Loan Bank 21 Board? Who was that? 22 A. Her name was Vivian Carlton. 9875 1 Q. You testified earlier that you started 2 your examination in April? 3 A. Yes. 4 Q. How long did your examination last? 5 A. I believe we exited in September of 6 that year. 7 Q. And about how long after you had 8 started the Texas examination did the federal 9 examiners show up? 10 A. Two to three months. 11 Q. By the time the federal examiners had 12 arrived at the institution, was the review of 13 the -- was your examination well underway? 14 A. Yes. My examination date was, as I 15 recall, April 30th. Theirs was approximately June 16 the 30th. So, during that time period, we had 17 sufficient time to get into their records. 18 Q. And with regard to the major loan 19 portion of the -- of your examination, was that 20 also well underway by the time the regulators from 21 the Federal Home Loan Bank or bank board had 22 arrived? 9876 1 A. Yes. As I recall, it was. 2 Q. Would you describe the examination 3 process for the federal examiners? And 4 specifically, I'm talking about the setup. Were 5 they in the same room? Were they in different 6 rooms? What was the -- 7 A. They were adjacent to us, in the same 8 room. The area was large enough to support all of 9 us. 10 Q. And did you communicate with each 11 other? 12 A. Oh, yes. On a daily basis. 13 Q. Did you communicate with each other 14 concerning the findings that you had in your 15 examination? 16 A. It was my experience that during an 17 examination, I tried to provide every piece of 18 material that we examined or -- in this instance, 19 if we would write up a particular loan -- and I 20 mean "write up" by -- it sets out the terms and 21 conditions, the borrowers' names, and all of the 22 existing documents that are in the loan file. 9877 1 Q. Did the federal examiners also 2 communicate their findings with you? 3 A. Yes, they did. 4 Q. Did the team from the Federal Home Loan 5 Bank of Dallas or the Federal Home Loan Bank 6 Board -- and I don't know at that particular time 7 as to when they came in whether they were Federal 8 Home Loan Bank Board or Federal Home Loan Bank of 9 Dallas employees -- did they work on any specific 10 problems at USAT that you can recall? 11 A. Yes. They -- primarily, they had to do 12 nearly the same work that we did. However, since 13 we had already begun the review of major loans, 14 they went into other areas. In this instance, it 15 happened to be loans that were purchased from a 16 mortgage company. 17 Q. What mortgage company was that? 18 A. That was Couch Mortgage. 19 Q. What do you recall about the Couch 20 Mortgage loan problem? 21 A. I don't know at this time how many loan 22 files they reviewed, but they did find that a 9878 1 numerous amount of those files, perhaps a 2 majority, had whiteouts on the title policies. 3 Q. Is that unusual? 4 A. Very unusual. 5 Q. You mean like the paint whiteout? 6 A. Yes. It was -- the whiteout was over 7 the title where it was invested in a particular 8 company or person or -- in this case, it would 9 have been Couch Mortgage -- and/or if it was a 10 purchase loan, of course it would be -- or should 11 have been USAT. 12 Q. Were these -- what kind of loans were 13 these? 14 A. These were single-family dwellings. 15 Q. Were they loans that typically the 16 Texas state examiners would look at? 17 A. Not generally. 18 Q. Why is that? 19 A. Well, because our major areas that we 20 wanted to cover concerned major loans and all of 21 the other areas that I named before. In normal 22 circumstances, we didn't have time to get into 9879 1 single-family dwellings. 2 Q. How did you know or learn that the 3 Federal Home Loan Bank examiners were interested 4 or looking at or dealing with the Couch Mortgage 5 loan problem, if you will? 6 A. Well, the federal EIC told me that they 7 were reviewing some loans that were purchased. 8 Q. Did she specifically refer to the -- 9 that's Ms. Carlton. Right? 10 A. Yes. 11 Q. Did she specifically refer to the Couch 12 problem? 13 A. As I recall, yes. 14 Q. What's the significance of whiteout 15 being on the title page -- excuse me -- on the 16 title policy? 17 A. In this case, the end result was that 18 the loans had been sold previously and that title 19 was not vested into the institution and they had 20 no security. 21 Q. In your experience examining savings 22 and loans, had you uncovered whiteout on title 9880 1 policies before -- 2 A. To my knowledge -- 3 Q. -- with regard to the name of the title 4 holder? 5 A. Not to my knowledge. 6 Q. In your experience, is that something 7 that management at United Savings should have 8 noticed? 9 A. Yes. In purchasing these loans, they 10 should have had some type of an internal control 11 or monitoring system established to make sure that 12 the file was sufficient in detail and correct. 13 Q. So, your team was looking at the major 14 loans and the investments and those other areas, 15 financials and REO, and the Federal Home Loan Bank 16 examiners were looking at, among other things, 17 perhaps the Couch problem, in particular. 18 What were the -- other than the fact 19 that there was -- that they were mostly involving 20 on to four family residences, were there any other 21 reasons why you didn't -- your examination didn't 22 go into the Couch problem? 9881 1 A. Well, we wouldn't have gotten into it 2 simply because they had already begun the review 3 of those particular loans. 4 Q. To your knowledge, was the reverse also 5 true, that the federal examiners wouldn't look or 6 didn't do independent reviews of major loans or 7 other areas because your examination team was 8 working on that? 9 MR. VILLA: Objection. Leading. 10 THE COURT: Denied. 11 Q. (BY MR. SCHWARTZ) You can answer. 12 A. Generally speaking, they would not go 13 back and review the loan files unless a specific 14 area was incomplete or they wanted more knowledge 15 of that particular loan. 16 Q. Do you recall a loan on USAT's books 17 related to a project called Park 410? 18 A. Yes, I do. 19 Q. Was that one of the transactions that 20 your team looked at? 21 A. Yes, it was. It was an 22 80-million-dollar loan. 9882 1 Q. Is that a major loan? 2 A. The biggest one I had ever seen at that 3 time. 4 Q. And do you recall who on your team 5 reviewed the Park 410 transaction? 6 A. Yes. Jeff Nunn. 7 Q. Exhibit 7500. Mr. Cool, do you 8 recognize Exhibit 7500, T7500? 9 A. Yes, I do. 10 Q. What is it? 11 A. It's a major loan review sheet that I 12 prepared as a guideline to assist us in reviewing 13 loan files. 14 Q. Okay. When you say you prepared, what 15 do you mean? 16 A. I established the contents of the major 17 review list. 18 Q. Is that the typed portion of the form? 19 A. That's correct. 20 Q. Is the handwriting yours? 21 A. No, it is not. 22 Q. Whose handwriting is that? 9883 1 A. That's Jeff Nunn's handwriting. 2 Q. And up at the top, there is a signature 3 on the left corner. 4 Do you recognize that signature? 5 A. Yes, that's Jeff's signature, as well. 6 Q. What was the purpose of the major loan 7 review form? 8 A. Primarily, it dealt with regulatory 9 requirements with respect to a loan file, what 10 documents needed to be in and were required by 11 regulations. 12 Q. And so, how would the examiner, in 13 doing the review of the loan file, go about 14 filling out this form? 15 A. Well, after obtaining the loan file, of 16 course, he opened the file, went through the 17 contents, and then described in these areas what 18 he found in the loan file. 19 Q. Okay. There are certain line items 20 that are blank. For example, financial statement 21 or credit report. 22 Do you see that about a third of the 9884 1 way down the first column? 2 A. Yes, I do. 3 Q. Okay. What does that indicate to you 4 concerning a financial statement or credit report? 5 A. With that being blank, it would 6 indicate to me that there was no credit report or, 7 in this case, audited financial statement. 8 Q. In the loan file; is that right? 9 A. That's correct. 10 Q. And with regard to the -- further down 11 on the page -- attorney's opinion or title policy, 12 was -- 13 A. That would indicate that there was not 14 one in the file or at least that he did not find 15 one. 16 Q. There is also -- in the portions that 17 are written in, it says "name" up at the top of 18 the left-hand column. "Park 410 West Joint 19 Venture." 20 What is that? 21 A. That's the name of the joint venture 22 that -- the borrower's name, in other words. 9885 1 Q. And then the line underneath that is 2 "principals," and I guess squeezed in around that, 3 there's three lines. 4 Do you see that? 5 A. Yes. 6 Q. Okay. What does that indicate? 7 A. That those are or were the principals 8 of the loan. They were the borrowers. 9 Q. And then there is a line for appraisal 10 date, amount, and appraiser. 11 Do you see those? 12 A. Yes. 13 Q. Does that indicate to you whether there 14 was an appraisal in the file? 15 A. Yes, it does. 16 Q. Do you recall there being an appraisal? 17 A. Yes, I do. 18 Q. Okay. Down at the bottom, towards the 19 bottom, I guess more like the halfway point, there 20 is a line that says "participation sold." 21 Do you see that? 22 A. Yes. 9886 1 Q. "USAT has 25 percent of net proceeds" 2 is handwritten in there? 3 A. Yes, I do. 4 Q. What does that indicate to you? 5 A. That there would have been some type of 6 an agreement in the file that indicated that USAT 7 would receive 25 percent of the net proceeds. 8 Q. Now, you testified the examiner that 9 worked on this was Jeff Nunn? 10 A. That's correct. 11 Q. Who was Jeff Nunn? What was his 12 experience at that point in time, 1986? 13 A. As I recall, he had been an examiner 14 with our department approximately four or five 15 years. 16 Q. Had you worked with him prior to this 17 examination? 18 A. Yes, I had. 19 Q. Did you have confidence in his work? 20 A. Yes. He was a very good examiner. 21 Q. I'm sorry? 22 A. He was a good examiner. 9887 1 Q. Exhibit 7501. 2 MR. VILLA: Mr. Schwartz, do you want 3 to move 7500 into evidence? 4 MR. SCHWARTZ: Yes, I do. 5 MR. VILLA: No objection. 6 THE COURT: Received. 7 Q. (BY MR. SCHWARTZ) Do you recognize 8 Exhibit T7501, sir? 9 A. Yes, I do. 10 Q. What is it? 11 A. It is a preliminary write-up of Jeff's 12 review of the Park 410 loan. 13 Q. What was your role in the creation of 14 this document? 15 A. I didn't have anything to do with the 16 creation of the document. However, we discussed 17 certain points during his review of the loan; and, 18 of course, I had final say-so as to the contents 19 in the write-up. And if it lacked something, of 20 course, it was added. 21 Q. Did you review this -- 22 A. Yes. 9888 1 Q. -- this write-up? Can you identify all 2 of the handwriting that's on the exhibit? 3 A. I believe so. 4 Q. Okay. Whose handwriting -- 5 A. The majority of it was Jeff Nunn's. 6 Q. Okay. Do you see any other 7 handwriting? 8 A. Mine. Just a couple of notations, 9 changes in wording, or an addition of -- in this 10 instance, at the bottom of the first page I added 11 "San Antonio, Texas." 12 Q. Are there other instances of your 13 participating in this -- in the preparation of 14 this, as well? 15 A. I don't see any other additions, 16 corrections, or deletions that I can specifically 17 identify. But this is, I believe, one of the 18 final write-ups on the loan review. 19 Q. Would you describe the process by which 20 this document gets written? 21 A. Yes. The examiner looks at all of the 22 documents in the loan file. That's preliminary, 9889 1 and that's, of course, what's appeared on the 2 exhibit that you showed me earlier. He then goes 3 about writing up a history of the loan, and that 4 would include documentation he found in the loan 5 file, who were the principals on the loan, and any 6 documentation deficiencies that he would have 7 noted. 8 Q. And during the course of -- well, how 9 long a period of time does it -- is the review 10 process, looking at a major loan file? 11 A. On a major loan file? 12 Q. Yes, sir. 13 A. It could be anywhere from a week to a 14 month. 15 Q. On one file? 16 A. On one file. 17 Q. During the course of that week or -- do 18 you recall with regard to the Park 410 loan how 19 long that review process was? 20 A. No, I don't. 21 Q. During the course of the time that 22 Mr. Nunn was reviewing the Park 410 loan, did he 9890 1 have discussions with you about what he was 2 finding? 3 A. Yes. Not necessarily on a daily basis, 4 but specifically those areas that he had concern 5 with. 6 Q. In your experience with Mr. Nunn, did 7 he have a practice of bringing things to your 8 attention, concerns? 9 A. Yes. He had a practice of doing that, 10 and it was also an operating procedure that the 11 examiner in charge review all of the assistants' 12 work. 13 Q. Do you recall any of the specific areas 14 that Mr. Nunn brought to your attention concerning 15 the Park 410 loan during his review? 16 A. One specific area was the appraisal 17 report. 18 Q. Anything else? 19 A. And I'm sure the lack of documentation 20 was brought to my attention, as well. 21 Q. Anything else? 22 A. Not offhand, no. 9891 1 Q. Okay. 2 MR. SCHWARTZ: Your Honor, at this 3 point, I would move the admission of 4 Exhibit T7501. 5 MR. VILLA: Your Honor, T7501 is a very 6 important exhibit and we have requested that the 7 Office of Thrift Supervision provide the original 8 of this document because written along the side of 9 this document is the words of the federal examiner 10 who passes this loan, Vivian Carlton. It's almost 11 illegible in this version, and we have requested 12 at her deposition that they provide the original 13 or a legible copy of this document that says 14 something more than "We will pass loan. No 15 material violation," something, as you see it on 16 the left-hand side. 17 So, we object to the introduction of 18 this copy and we would request the Office of 19 Thrift Supervision to provide the original so this 20 critical language can be before the Court. 21 MR. SCHWARTZ: Mr. Villa, you've 22 adequately, I think, testified concerning what you 9892 1 believe may come out in future testimony of 2 another witness. I don't believe that there has 3 been any testimony concerning whose handwriting 4 that is or what it says, Your Honor, Mr. Villa's 5 testimony notwithstanding. 6 MR. VILLA: I renew my objection to -- 7 objection to other than the original of this 8 document. 9 THE COURT: Well, do you have a better 10 copy of this? Do you have the original? 11 MR. SCHWARTZ: Presumably, we have the 12 original work papers, Your Honor, and presumably 13 it's in there. I can't say with certainty as I 14 stand here today. Certainly if we have a more 15 legible copy, we will provide it. I don't know if 16 my colleagues -- 17 MR. LEIMAN: Your Honor, we will seek 18 to get the original copy -- the original version 19 of this if we have it in our files. If Mr. Villa 20 intends to question Mr. Cool -- 21 THE COURT: Well, if there is some 22 dispute or controversy with it, we should have the 9893 1 original and we should have a legible copy. 2 MR. SCHWARTZ: Well, considering -- may 3 I ask the witness a question concerning at least 4 the handwriting that Mr. Villa is referring to? 5 THE COURT: Yes, you may. 6 Q. (BY MR. SCHWARTZ) Mr. Cool, do you 7 see the handwriting on Exhibit 7501 on the first 8 page against the left margin? 9 A. Yes, I do. 10 Q. Do you recognize that handwriting? 11 A. No. 12 Q. It's not yours? 13 A. It is not mine. 14 Q. It's not Mr. Nunn's? 15 A. No, it is not. 16 Q. Okay. 17 MR. SCHWARTZ: Your Honor, I don't 18 intend to question Mr. Cool about anything 19 concerning that handwriting or that portion of the 20 exhibit. If I can proceed with the examination 21 with the exhibit as it stands, the rest of the 22 exhibit that he has been able to identify -- 9894 1 THE COURT: All right. You can proceed 2 with -- 3 MR. VILLA: Your Honor, may I ask the 4 witness one voir dire question further? 5 THE COURT: Yes. 6 7 VOIR DIRE EXAMINATION 8 9 (1:42 p.m.) 10 Q. (BY MR. VILLA) There is the word, 11 Mr. Cool, up in the upper right-hand corner that 12 says "pass." 13 A. Yes, sir. 14 Q. Is that your handwriting, sir? 15 A. No, it is not. I don't know where it 16 came from. It was not on my copy. 17 Q. So, they haven't shown you your copy of 18 this document? 19 A. I have not seen the original that we 20 prepared when I did the examination, no. 21 Q. I see. 22 MR. VILLA: Your Honor, we renew our 9895 1 objection and we ask them to provide an original. 2 I don't want to stop his examination of this 3 witness on this issue, but we request and I think 4 that we're entitled to an original of that 5 critical information. 6 THE COURT: It should be produced. 7 MR. RINALDI: Your Honor, let me say 8 that we endeavored to provide the best copies or 9 the originals of all documents with respect to the 10 examination of this institution. I will now exit 11 the courtroom and, once again attempt to ascertain 12 whether there is a better copy of this. I would 13 say that if these were generated by the Texas 14 Savings and Loan Department, I'm not sure that the 15 OTS would necessarily have an original of what 16 they prepared. Presumably, we got a copy in the 17 first instance. 18 MR. VILLA: Your Honor, let me make 19 this clear. This was Exhibit 51 to the Carlton 20 deposition, the Vivian Carlton deposition. And 21 she testified that this was her handwriting on the 22 document passing the loan for the federal 9896 1 examiners. 2 THE COURT: Well, wait. I think we're 3 going to have to have one counsel for the OTS and 4 I'll recognize -- 5 MR. VILLA: If I could complete my 6 statement, Your Honor. 7 THE COURT: All right. 8 MR. VILLA: She testified that this was 9 her handwriting passing the loan here and the 10 words "pass" here. Consequently, although the OTS 11 may or may not have the original of the text, they 12 should have the original of her handwritten notes 13 passing the loan, and that's what we would like if 14 they seek to introduce this document. 15 MR. SCHWARTZ: Mr. Villa for now the 16 third time has testified what he believes future 17 testimony will be. We will endeavor to provide 18 the most legible copy that we can -- that we can 19 locate of this document. 20 Mr. Villa will have full opportunity to 21 question Ms. Carlton when she is called to testify 22 regarding what she may or may not have written and 9897 1 what she may or may not have meant by whatever 2 comments she -- Mr. Villa's referring to. But I 3 think at this point, we should proceed with the -- 4 THE COURT: Well, let's proceed. 5 MR. SCHWARTZ: Your Honor, could the -- 6 will the document be received and a legible copy 7 substituted in? 8 THE COURT: Well, I think we should 9 have a legible copy first. I mean, I hate to say 10 well, I'll receive it and we'll substitute it 11 later. I think we ought to have the original copy 12 be received. 13 MR. SCHWARTZ: Yes, Your Honor. 14 15 CONTINUED EXAMINATION 16 17 (1:45 p.m.) 18 Q. (BY MR. SCHWARTZ) Would you turn to 19 the eighth page in, Mr. Cool? I believe it's -- 20 A. Yes. 21 Q. There is reference on that page to an 22 appraisal. 9898 1 MR. VILLA: Scott, could you give us 2 the Bates stamp numbers on the pages? 3 MR. SCHWARTZ: Yes. I'm looking at 4 OW156427. 5 Q. (BY MR. SCHWARTZ) Do you recall -- 6 you said earlier that you recalled Mr. Nunn 7 approaching you and commenting that he had 8 problems with the appraisal? 9 A. Yes, that's correct. 10 Q. Does his writing here describe the 11 problems that he reflected to you? 12 A. Yes. 13 Q. What do you recall Mr. Nunn telling you 14 were the basic problems that he had with the 15 appraisal? 16 A. Generally speaking, it's written here, 17 that the appraisal report didn't contain certain 18 approaches to value that he expected to find in an 19 appraisal report. 20 Q. If there had been any other appraisals 21 in the Park 410 loan files, would that have been 22 something that the examiners would have been 9899 1 interested in? 2 A. Yes, definitely. 3 Q. Why is that? 4 A. Well, we would have wanted to know if 5 the other appraisal report had additional 6 information that we would have needed to 7 substantiate the value. And, of course, we would 8 have been interested in the final value. 9 Q. So, if there had been an appraisal in 10 the files for a lower amount of money than the 11 $88 million, would that fact have been significant 12 to the examiners? 13 A. Very significant and it would, as well, 14 be presented in the write-up. 15 Q. Would it also have been presented in 16 the earlier exhibit we saw, 7500, the first 17 exhibit we looked at? 18 A. Yes. 19 Q. Do you recall whether there were any 20 additional appraisals that were found in the 21 Park 410 loan file? 22 A. To my knowledge, there were no other 9900 1 appraisal reports, nor were we provided any 2 additional appraisal reports. 3 Q. The second paragraph on that page says, 4 "In arriving at his value, the appraiser, quote, 5 'neglected to explain why he didn't offer the cost 6 approach or the income approach.'" 7 What does that mean? 8 A. That refers to a specific requirement 9 of federal regulations, namely R-41B, which 10 requires that the appraiser use the three 11 approaches to value. And if one is not 12 applicable, then there should be some type of 13 statement in there with regard to it not being 14 applicable. 15 Q. What do you mean, "not being 16 applicable"? 17 A. If he felt that it did not give enough 18 value to the appraisal process, he may have used 19 that. 20 Q. Are you referring to the approaches? 21 A. Yes. But generally speaking, the 22 approaches to value are used in a summation of 9901 1 value; and one offsets the -- or is used in 2 guidance of the other approaches. And if you have 3 one that's significantly different, then it raises 4 a question. 5 Q. And the comment that Mr. Nunn wrote, 6 "In arriving at his value, the appraiser neglected 7 to explain why he didn't offer the cost approach 8 or the income approach." 9 He goes on and says "Pro forma 10 financial statements were prepared for the 11 project, which justified using the income 12 approach." 13 What does that mean? 14 A. It means exactly that, that there were 15 some type of records within the appraisal report 16 that justified using the income approach to value. 17 Q. The next page -- the bottom of the page 18 and continuing on the next page discusses the 19 direct sales comparison approach, and he goes on 20 to criticize the comparables the appraiser used. 21 Do you see that? 22 A. Yes. 9902 1 Q. What was wrong, from an examiner's 2 perspective, with the comparables that USAT's 3 appraiser was using? 4 A. Well, in this instance, the size of the 5 tracts, in this instance, the number of acres as 6 well as -- I guess what I want to say, the size -- 7 the square foot value of the various tracts or 8 acreage varied so much that it gave concern to 9 whether or not the value was applicable as 10 assigned. 11 Q. How does that affect the appraisal 12 value in your experience? 13 A. Well, since the property was the major 14 source of repayment for the loan, you would expect 15 and demand that there would be an appraisal in the 16 file that would support that. 17 Q. The report goes on to comment that "14 18 out of the 18 comparables are over one and up to 19 three years old. This has caused distortion when 20 subjecting the subject property to the 21 assumptions." 22 A. I believe that's what it says. 9903 1 Q. What's the significance of the age of 2 the appraisals -- of the comparables? Excuse me. 3 A. Well, it indicates that at that 4 particular time, the sales of property in that 5 particular area were not going well. 6 Q. How so? 7 A. Well, because there hadn't been any 8 sales, in some instances, from one to three years. 9 Q. Would you turn to Page 10, the last 10 page of the exhibit, OW156430? Are you there, 11 sir? 12 A. Yes. I'm sorry. 13 Q. Okay. About a third of the way down 14 the page, there is a line that starts "Management 15 feels --" 16 Do you see that? 17 A. Yes, I see it. 18 Q. -- that the borrowers have brought 19 significant" -- excuse me -- "have brought 20 strength to the transaction, both financially as 21 well as by reputation." 22 Do you see that? 9904 1 A. Yes, I do. 2 Q. Who was management that's referred to 3 there? 4 A. In this case, it would have been senior 5 management. And as I recall, it would have been 6 Mr. Gross. 7 Q. Did you meet with management during the 8 preparation of the report examination and the 9 components of it? 10 A. Yes. It was our agreement which we 11 made at the commencement of the examination that 12 we have a meeting either on a weekly or bi-weekly 13 basis to update management with what we were 14 finding, what our concerns were, and how the 15 examination was going in general. 16 Q. And who would you meet with? 17 A. Mr. Gross. 18 Q. Would Mr. Gross come down to your work 19 area or would you go to him or how would it work? 20 A. No. We met with him in another 21 building. 22 Q. Mr. Gross was located in another 9905 1 building? 2 A. Yes. I don't recall the address at 3 this point in time, but it was not where the 4 records were of the institution. 5 Q. Where were you located? 6 A. On Harwin Street. 7 Q. And why were you at that location? 8 A. Because that's where all the financial 9 records as well as loan files were contained. 10 Q. How did you know that? 11 A. The address of the institution 12 signifies where the financial records and any 13 other records are to be in existence. 14 Q. So, once a week or once every other 15 week -- was Mr. Gross' office located nearby? 16 A. I would say several miles. 17 Q. So, would -- did you have a regular 18 meeting time with him? 19 A. We tried to set up an examination and 20 management review time on -- usually on a Thursday 21 after lunch. No specific exact time, but at least 22 on that particular day. 9906 1 Q. And how long did those meetings last on 2 average? 3 A. I would say at least an hour. 4 Q. And what would you discuss? 5 A. Our findings to date. 6 Q. If you were having any problems, would 7 you relay them to him? 8 A. Yes, that's correct. 9 Q. If there were documentation missing, 10 would you relay that to him? 11 A. Yes, I would. 12 Q. What was -- this phrase "Management 13 feels that the borrowers have brought strength to 14 the transaction," was that subsequent to a meeting 15 with Mr. Gross? Was that written -- excuse me. 16 Was that put into this report subsequent to a 17 meeting with Mr. Gross as opposed to anyone else? 18 A. As best I recall, it was. 19 Q. Do you know what Mr. Gross meant when 20 he relayed that to you? 21 A. Well, it's my opinion that -- 22 MR. VILLA: Objection. Unresponsive. 9907 1 And besides, it calls for speculation on the part 2 of the witness. If he wants to ask him what 3 Mr. Gross said, certainly we could be a lot 4 farther off than what his opinion is of what 5 Mr. Gross meant. 6 MR. SCHWARTZ: Very well, Your Honor. 7 Q. (BY MR. SCHWARTZ) What did Mr. Gross 8 tell you concerning the borrowers on the Park 410 9 loan? 10 A. The only thing I recall at this 11 particular time is the fact that what's presented 12 on that page represents their financial condition 13 and that he felt that, as stated, they brought 14 strength to the transaction. 15 Q. Did Mr. Gross provide you with any 16 support for his statement? 17 A. I don't remember for sure. 18 Q. What did you understand Mr. Gross to 19 mean by his comments? 20 A. It would indicate that they were 21 satisfied with the loan. They felt that it was a 22 good loan. 9908 1 Q. Did you discuss the appraisal with 2 Mr. Gross? 3 A. I don't remember specifically. 4 Q. Would that have been among the topics 5 that would likely have come up, to the best of 6 your recollection? 7 A. Yes. 8 Q. Let me ask you this: Did the -- did 9 Mr. Gross, in discussing the Park 410 loan, did he 10 defend the loan other than to say that management 11 feels it's a good loan? 12 A. I don't remember that. 13 Q. Exhibit 7089. Have you seen Exhibit 14 7089 on or around August 21st, 1986? 15 A. Yes. 16 Q. What were the circumstances under which 17 you would have seen it? 18 A. In this instance, the loan would have 19 been discussed with -- and David Graham is the one 20 which the memorandum is from. And so, Jeff would 21 have discussed the loan, the contents, and in this 22 specifically, the appraisal report and some of the 9909 1 items that appeared on his original write-up which 2 are addressed under aspects of the land flip. 3 Q. Okay. There were four areas that are 4 covered by this memorandum: Land flip -- looking 5 at the top of the first page -- takeout, loan 6 disbursement, and appraisal. 7 First of all, who is David Graham? 8 A. He was the gentleman that was in charge 9 of lending, as I recall. 10 Q. Any particular kind of lending? Real 11 estate or any other -- commercial or do you 12 recall? 13 A. I don't know, not specifically. 14 Q. Did you deal with Mr. Graham regularly, 15 or did Mr. Nunn deal with Mr. Graham regularly? 16 A. Mr. Nunn did with -- in review of the 17 major loans. 18 Q. Do you know the circumstances under 19 which this document was provided to Mr. Nunn? Did 20 he request a memorandum from Mr. Graham, if you're 21 aware? 22 A. This indicates that Mr. Graham was 9910 1 given a copy of Jeff's analysis of the loan and 2 the contents of the loan file. 3 Q. And when Mr. Nunn showed this to you, 4 what was -- what did you think of it, this 5 memorandum? 6 A. We discussed certain areas and their 7 opinions and comments and in some instances, 8 changed the write-up specifically with respect to 9 the land flip. We agreed that it did not meet the 10 definition of a land flip. 11 Q. What are the other areas? 12 A. We also discussed the takeout, the 13 disbursements, and the appraisal. We were 14 concerned with the content of No. 4, the appraisal 15 report. We were not sure that we agreed with it; 16 and, therefore, the write-up and analysis of the 17 loan file was not changed. 18 Q. Okay. 19 A. Not significantly, at least. 20 Q. Exhibit 7502. 21 MR. SCHWARTZ: Your Honor, we move 22 Exhibit T7089. 9911 1 MR. VILLA: No objection. 2 THE COURT: Received. 3 Q. (BY MR. SCHWARTZ) Mr. Cool, what is 4 Exhibit T7502? 5 A. That is a completed examination report 6 containing various exhibits and our findings 7 during the examination. 8 Q. And would you turn to the second page? 9 There are two signatures on that page. 10 Do you recognize those? 11 A. Yes, I do. 12 Q. What do those signatures indicate? 13 Well, first of all, whose signature is on top? 14 A. Mr. Gross has his signature above mine. 15 Q. And what does Mr. Gross' signature 16 indicate? 17 A. He's verifying that -- to the best of 18 his knowledge, that the books and records 19 disclosed the correct position of the institution. 20 Q. And whose signature is beneath his? 21 A. That's my signature. 22 Q. And what does that indicate? 9912 1 A. Well, it indicates that he signed this 2 particular report page on September the 12th, 3 which would have been either the day before or the 4 last day of the examination report or examination. 5 Excuse me. 6 Q. And that's indicated as what date? 7 A. I beg your pardon? 8 Q. That's -- was that September 12th, 9 1986? That would be the last or the 10 second-to-the-last day of the examination? 11 A. That's correct. 12 Q. Would you turn four more pages in to 13 TXS&L 000143? 14 A. All right. 15 Q. And is that your signature again on 16 that page? 17 A. That is. 18 Q. And what does your signature there 19 indicate? 20 A. It indicates that I have completed the 21 examination and that I am providing certain 22 comments and summarizations regarding the 9913 1 examination and, in particular, also the report 2 summary which identified the major concerns that 3 we found during the examination. 4 Q. Okay. Well, let's look at the report 5 summary. The first sentence says -- first of all, 6 did you write the report summary? 7 A. I did. 8 Q. The books -- it says, "The books and 9 records of the association are not maintained in 10 accordance with Sections 563.17-1(c), 563.23-3." 11 First of all, are those federal or 12 state regulations? Are you aware? 13 A. Those are both federal regulations. 14 Q. And it continues, "and are subject to 15 intervention as provided by Statute 8.04 of the 16 Texas Savings and Loan Act." 17 What do you mean the books and records 18 of the association are not maintained in 19 accordance with those sections? 20 A. There were certain required reporting 21 procedures called recording -- excuse me -- 22 regulatory accounting practices. And in those 9914 1 regulations is specified how the institution's 2 records were to be maintained. In this instance, 3 our findings were that they were under a GAAP -- 4 in accordance with GAAP, which is 5 generally-accepted accounting practices. 6 Q. And what's the significance of USAT 7 maintaining its records under a GAAP basis rather 8 than a regulatory accounting practices basis? 9 A. You won't come up with the same numbers 10 because the one -- on one hand, the regulatory has 11 certain specific items and how they are to be 12 reported. 13 On the other basis, as I recall, it -- 14 the requirements were that certain assets and/or 15 liabilities were to be shown where unearned 16 profits, this type of thing, were reduced that 17 amount or netted out of that file number. 18 Q. So, for regulatory purposes, would the 19 books and records on a GAAP basis accurately 20 reflect the condition of the institution? 21 A. They did not meet the regulatory 22 requirements. You couldn't tell at that point in 9915 1 time without doing a consolidation. 2 Q. Further down on that page in the third 3 paragraph down, you write "Loans totaling in 4 excess of $200 million appear to be joint 5 venture/investments. A review disclosed 6 questionable security values and instances of 7 unsafe and unsound lending practices. Further, 8 reclassification of part or all of those loans to 9 investments may cause the association's aggregate 10 direct investments to exceed the limitations of 11 Section 563.9-8(c)." 12 What is that referring to? 13 A. These were loans in which the 14 institution had some type of participation or 15 ownership. The reclassification of those loans to 16 investments would require adjustments to income on 17 their operating sheet and would also change fees 18 that were obtained from granting those loans. 19 Q. Is that operating income or 20 non-operating income? Is that what that's -- what 21 you're referring to? 22 A. Generally, non-operating. 9916 1 Q. I'm sorry. Would you explain that 2 again? I'm not sure I understand. 3 A. Okay. The -- I have an operations page 4 somewhere in the report. If these loans were 5 recorded as investments, then it would change the 6 accounting of any fees, any accrued interest, any 7 income that they obtained from granting the loan. 8 Q. And in the course of your examination, 9 did you have questions about some of the loans as 10 to whether they were loans or investments? 11 A. Yes. As set out in the report, there 12 were several instances -- 13 Q. Well, you say -- 14 A. I don't have a total of loans on here, 15 but I think there was around six or seven loans 16 that we felt that they should be shown as 17 investments rather than loans. 18 Q. Okay. This line refers to loans 19 totaling in excess of $200 million? 20 A. That's correct. 21 Q. Okay. You go on in that paragraph to 22 say "A review of documentation disclosed 9917 1 violations of Statute 11.17." 2 Is that a Texas state section? 3 A. That's correct, yes. That's a State of 4 Texas statute. 5 Q. Section 563.17-1(c)(1) and Memorandum 6 R-41B, as well as a possible violation of Title 7 18. 8 What are you referring to there? What 9 documentation are you referring to there? 10 A. Well, the 563.17-1 area would be 11 documentation that's required in that particular 12 loan file. Memorandum R-41B relates or sets out 13 the conditions under how a major appraisal should 14 be set out and how it should be documented. 15 Q. You testified earlier that memorandum 16 R-41 -- that R-41B was a regulation. I think here 17 he says it's a memorandum. 18 Do you know whether R-41B was a 19 regulation? 20 A. To my knowledge, it never became a 21 regulation. It was a memorandum. 22 Q. You go on in the next paragraph, 9918 1 "Assets carried on the books of the association 2 totaling $67,455,401 that were acquired by deed in 3 lieu of foreclosure and real estate acquired by a 4 wholly-owned subsidiary of $9,428,877 are actually 5 real estate owned and should be recognized as such 6 by the association." 7 Why is that significant? 8 A. These were items that were on a 9 subsidiary's books that if they were transferred 10 to the institution's books, it would substantially 11 increase the amount of substandard assets, as well 12 as income, the non-production of income. 13 Q. By carrying these loans or properties 14 as acquired by deed in lieu of foreclosure and not 15 carrying it as real estate owned, does that 16 underreport or overreport the total REO? 17 A. It underreports. 18 Q. Would you turn to the next page? The 19 top portion -- the section of the report, I guess, 20 labeled "subsequent events." What's the purpose 21 of the "subsequent events" section of the report 22 of examination? 9919 1 A. This particular item was added prior to 2 the end of the examination, and it updated 3 information which was either obtained from the 4 federal examiners or presented other initial 5 problems or concerns. 6 Q. Would you turn to Page 2E of the 7 "subsequent events" section which, I guess, is 8 Texas S&L 000148? 9 A. Yes, I have it. 10 Q. And there is a discussion at the top of 11 the page there involving "major stockholder of 12 another savings and loan association." 13 Do you see that? 14 A. Yes, I have it. 15 Q. Would you have written that section? 16 A. I would have added that to the 17 subsequent events. Probably, it was written -- I 18 can't -- I don't know for sure. But I'm sure the 19 information was obtained from the federal 20 examiners because it was subsequent to my 21 examination date. 22 Q. When you say "subsequent to your 9920 1 examination date," what does that mean? 2 A. Well, this particular transaction 3 happened in July; and my examination date was 4 April. Therefore, anything that transpired after 5 April the 30th would not appear in my examination 6 report under anything other than "subsequent 7 events." 8 Q. I understand. You write, "On 9 July 29th, 1986, the association funded a 10 30-million-dollar loan to Norwood/United Park 11 Joint Venture. One of the individuals associated 12 with the venture is Frank P. Krasovec, a major 13 stockholder and chairman of the board of Austin 14 Savings Association, Austin, Texas. The loan 15 numbered 14-132759 was granted to pay off three 16 existing loans at USAT and provide funds to 17 develop a 99.4-acre site located in Austin, Texas, 18 into mixed-use commercial tracts." 19 What's the significance of a loan being 20 made to a major stockholder of another savings 21 association? 22 A. Those type loans are to be reported in 9921 1 the officer's questionnaire section of the report 2 either on the state side or the federal side. 3 Q. It goes on to say, "It was noted that 4 United Financial Corporation" -- well, I'm sorry. 5 You said "either on the state or the federal 6 side." 7 If a condition exists, is it supposed 8 to be reported on both? 9 A. Yes. 10 Q. Okay. What did you mean by "either on 11 the state or the federal management 12 questionnaire"? 13 A. Well, in this instance, it didn't 14 appear on the state questionnaire. This -- of 15 course, this loan was made after my examination 16 report; but the proceeds of the loan paid off 17 three existing loans that should have been 18 reported on the officer's questionnaire for the 19 State of Texas. 20 Q. Okay. Why don't we turn to Page 169. 21 Excuse me. TXS&L 169. 22 A. Okay. I have it. 9922 1 Q. And on the second page of the 2 management questionnaire -- first, let's -- strike 3 that. 4 Who prepares the management 5 questionnaire? 6 A. It's signed by Mr. Gerald R. Williams. 7 Q. Okay. And it says "of United" -- 8 you're looking at page Texas S&L 000171? 9 A. That's correct. 10 Q. Okay. And he's signing as president of 11 United Savings Association? 12 A. Yes, he is. 13 Q. It's not dated, I notice. When during 14 the course of the examination is the management 15 questionnaire prepared? 16 A. It's usually provided to management at 17 an early stage in the examination report or -- 18 excuse me -- the examination. It's returned or to 19 be returned as soon as possible. 20 Q. Would you look on the second page? 21 Question No. 15 says, "List all loans granted to 22 officers or directors or to stockholders owning 9923 1 10 percent or more of the stock of other financial 2 institutions." 3 And then typed in below it, the answer 4 is "none known." 5 Do you see that? 6 A. I see it. 7 Q. Now, the loan -- the subsequent event 8 of the Norwood loan was the loan made July 29th, 9 1986. So, would that not need to be reflected on 10 that management questionnaire since your report of 11 examination is as of April 30th, 1986? 12 MR. VILLA: Objection, Your Honor. 13 There is no date on this document. Pure 14 speculation as to when it was prepared. 15 THE COURT: Which -- the examination 16 has an "as of" date. 17 MR. VILLA: Yes, Your Honor. He's 18 calling for speculation as to when Mr. Williams 19 prepared this document. 20 MR. SCHWARTZ: I don't -- I'm not 21 asking for that at all. I'm asking whether or not 22 Mister -- whether or not management -- well, I'm 9924 1 not going to explain his testimony to you. 2 MR. VILLA: You're asking -- he's 3 asking for whether or not -- 4 MR. SCHWARTZ: Mr. Cool has explained 5 that he provided this document to management early 6 in the process of the examination. He also 7 testified that the examination started in April of 8 1986. The document itself is dated April of 1986. 9 So, he would have provided it to management after 10 April of 1986. Management would have returned it 11 to him shortly thereafter, according to his 12 testimony. 13 THE COURT: Well, let me ask you, 14 Mr. Cool: Would loans extended after the "as of" 15 date of the examination report be included? 16 THE WITNESS: No, sir. They would not. 17 But the loans that they refinanced were loans that 18 were on the books of the institution as of my 19 examination date, and they should have been 20 reported in that particular area. 21 MR. SCHWARTZ: Perhaps if we look at 22 the -- 9925 1 THE COURT: Were the existing loans 2 also loans to officers of other associations or 3 were they somebody else? 4 THE WITNESS: It's indicated that these 5 loans were made to that particular individual and 6 that the subsequent loan was a refinance of those 7 three loans. 8 THE COURT: All right. Thank you. 9 THE WITNESS: Yes, sir. 10 THE COURT: We'll take a short recess. 11 12 (A short break was taken 13 at 2:24 p.m.) 14 15 THE COURT: Be seated, please. 16 We'll be back on the record. 17 Mr. Schwartz, you may continue. 18 MR. SCHWARTZ: Thank you, Your Honor. 19 (2:46 p.m.) 20 Q. (BY MR. SCHWARTZ) Mr. Cool, before 21 the break, we were looking at Page TXS&L 000148 of 22 the report of examination as of April 1986 and 9926 1 specifically the section dealing with the loan 2 involving major stockholder of another savings and 3 loan association. 4 Do you recall that? 5 A. Yes. 6 Q. The last paragraph of that section -- 7 excuse me. I'm sorry. The second-to-the-last 8 sentence says, "Also, two of the loans" -- do you 9 see that? 10 A. Yes, I see it. 11 Q. -- "with unpaid principal balances 12 totaling $21,163,137 were four months delinquent 13 at the time of refinance and the accrued and 14 uncollected interest was paid from the proceeds of 15 the new loan. Therefore, the loan is subject to 16 classification as a scheduled item." 17 What's the significance of loan 18 proceeds of a new loan being used to pay accrued 19 and uncollected interest from prior -- previous 20 loans? 21 A. Well, it's an indication that the 22 borrower wasn't making his payments. 9927 1 Q. And when you say "Therefore, the loan 2 is subject to classification as a scheduled item," 3 what does that mean? 4 A. That means that that increases their 5 scheduled items from the already high amount as of 6 the examination date. 7 Q. Is the -- the two loans that are 8 referred to there, the loans totaling $21,163,137, 9 were four months delinquent. 10 Is there any significance to United 11 refinancing loans that were delinquent? 12 A. My opinion, it would not constitute a 13 good judgment on their part to refinance a loan 14 that was already past due. 15 Q. And the time of refinance was 16 July 29th, 1986; is that correct? 17 A. That's correct. 18 Q. And so, unpaid -- when you say "were 19 four months delinquent," so -- since when would 20 those loans have been delinquent? 21 A. It would indicate that payments had not 22 been made since approximately April. 9928 1 Q. Would you turn to Page TXS&L 000156? 2 What is this page of the examination report? 3 A. This is an income statement that's 4 taken from the financial records of the 5 institution which indicates their income and net 6 income for two fiscal year ends plus a period up 7 to the examination date. 8 Q. Okay. So, we're looking at the -- 9 there is three columns of figures labeled "current 10 period, fiscal year ending 12-11-85," and "fiscal 11 year ending 12-11-84." 12 Is that what you're referring to? 13 A. That's correct. 14 Q. About halfway down the page, there is a 15 column -- excuse me -- a category for "other 16 operating income." 17 Do you see that? 18 A. Yes, I do. 19 Q. And for the current period, what is the 20 operating income listed for loan origination fees? 21 A. $2,884,056. 22 Q. And just so it's clear, what does that 9929 1 mean, loan origination fees for the current period 2 being $2,884,056? 3 A. That would indicate the income that 4 they had received on loan fees for loans that they 5 originated during that interim period. 6 Q. That's from the -- 7 A. From January 1st through April of '86. 8 Q. Moving to the next category, "other 9 operating expenses," do you see that? 10 A. Yes, I do. 11 Q. And then the net operating income is 12 the last item in that category? 13 A. Yes. 14 Q. And what is the net operating income 15 for the period ending 4-30-86? 16 A. It's a deficit, $37,564,047. 17 Q. What does that mean? 18 A. That means that their expenses were 19 considerably larger than their income. 20 Q. And the next category down is 21 "non-operating income expense," and there is a 22 category, the third item down, that says "net 9930 1 non-operating income expense, $42,088,773." 2 What's the difference between 3 non-operating and operating income? 4 A. Operating income is those moneys that 5 are received on a consistent basis. The 6 non-operating income generally is a one-time 7 income amount that is not reoccurring. 8 Q. Is operating income generated by 9 operations of the institution? 10 A. Yes. 11 Q. Would you turn to Page TXS&L 000159? 12 What does this page represent? 13 A. It shows their -- in this instance, 14 their non-compliance with the net worth 15 requirements under the federal regulations. 16 Q. What are net worth requirements? 17 A. They are a certain dollar amount that's 18 established or required with respect to their 19 size. 20 Q. Here the indication is for the quarter 21 ended 3-31-86. That's different from the 22 examination date; is that correct? 9931 1 A. That's correct. 2 Q. And the -- what is the amount over or 3 short requirement for compliance with USAT's net 4 worth? 5 A. At the quarter ended 3-31-86, they had 6 a deficit of $20,590,000. That, of course, is 7 rounded. 8 Q. The next section of this -- on this 9 page, the last section on the page, says 10 "non-compliance with net worth requirement." 11 Did you write that section? 12 A. Yes, I did. 13 Q. It reads, "At the most recent quarterly 14 period ended March 31, 1986, the association 15 failed to meet the net -- the minimum net worth 16 level required by Section 563.13." 17 Is that a federal regulation? 18 A. That is a federal regulation. 19 Q. What's the significance of an 20 institution failing to meet its minimum net worth 21 level? 22 A. Well, it means that they are not 9932 1 producing enough income to meet the requirement. 2 Q. Would you turn to Page TXS&L 000164? 3 This section is labeled "substandard assets." 4 Did you write this section? 5 A. Yes, I did. 6 Q. You wrote, "As summarized below, assets 7 totaling $658,093,445 are considered as 8 substandard. These assets are composed of loans 9 with appraisal reports which do not meet the 10 requirements of Memorandum R-41B and for which the 11 security value is questionable, loans which are 12 delinquent from 3 to 33 payments, loans serviced 13 by others wherein the actual delinquency is not 14 known, real estate owned including 138 parcels for 15 which association records do not substantiate 16 ownership, and securities which contain potential 17 as well as unrealized losses." 18 With regard to the appraisal reports, 19 loans with appraisal reports which do not meet the 20 requirements of Memorandum R-41B of which the 21 security value is questionable, what is the 22 significance of that to the institution? 9933 1 A. Since the appraisal reports were 2 considered inadequate to meet the requirements of 3 Memorandum R-41B, then it was our feeling that it 4 indicated a problem with respect to the appraisal 5 reports and it also indicated possible losses. 6 Q. Were you able to determine what the 7 losses were? 8 A. No, not during the examination. 9 Q. Why? 10 A. Well, first off, the particular loans 11 had -- or in this case, the assets that were 12 included in here had to be reappraised. 13 Q. Did you have a concern about whether 14 the appraisals accurately reflected the value of 15 the property? 16 A. Yes, very much. Since generally the 17 value of the property is -- repays the loan, I 18 guess you -- that particular value, if they are 19 not supported and if the value isn't there, then 20 you have a problem. You've got losses involved. 21 As shown on that particular page, we had a great 22 deal of items that were questionable. 9934 1 Q. Okay. You're referring to the bottom 2 portion of the page where there is a chart 3 labeling "description and amount"? 4 A. That's correct. 5 Q. Okay. Continuing with the top portion, 6 you go on -- you said, "Loans serviced by others 7 wherein the actual delinquency is not known." 8 What does that mean? 9 A. That would have been loans that were 10 purchased -- during the process of opening the 11 examination, one of the areas that we initially 12 asked for was a delinquency report on loans 13 purchased. As I recall, we never got that until 14 nearly the end of the examination. And it showed 15 that many of the loans were delinquent. 16 Q. It says "loans serviced by others 17 wherein the actual delinquency is not known." 18 Are you referring to the amount of the 19 delinquency, if you recall? 20 A. Yes. 21 Q. Yes? You go on, "real estate owned 22 including 138 parcels for which association 9935 1 records do not substantiate ownership." 2 What does that mean? 3 A. That means during our review of the 4 approximate 2,000 parcels of real estate owned 5 that were on the books of the institution, our 6 sample included 138 parcels for which no ownership 7 was shown. 8 Q. I'm sorry. Did you review 2,000 9 parcels? 10 A. No, we did not. I said a sample of 11 2,000. We took a sample out of 2,000. 12 Q. How many would be -- how many would 13 that be comprised of approximately, to the best of 14 your recollection? 15 A. Approximately, I would say 5 to 16 10 percent. 17 Q. So -- I'm sorry. 100 to 200? 18 A. Yes. 19 Q. Well, it would obviously be more than 20 5 percent because the total -- you mentioned 138 21 parcels. 22 A. Well, I don't remember the total amount 9936 1 of parcels or loan files that were reviewed; but I 2 do know that during the review, we found that 3 there were 138 parcels for which the ownership 4 couldn't be ascertained. 5 Q. And that was out of the sample, not the 6 total? 7 A. Yes. 8 Q. What's the significance of the 9 ownership -- of the fact that you were not able to 10 ascertain the ownership of the property? 11 A. In this instance, it means that the 12 institution has additional losses. They have 13 assets on their books -- registered on their books 14 for which they don't have ownership. 15 Q. You go on to say, "It should be noted 16 that the following is presented to emphasize the 17 severity and nature of the problem rather than to 18 reclassify the assets with respect to Section 19 571.1A." And then you go into the chart that you 20 talked about earlier, the description and amount. 21 The first item on that description, "major loans 22 containing various elements of questionability, 9937 1 $176,106,064." 2 What is that category? 3 A. That would have been the major loans 4 that we reviewed. 5 Q. Are those described further on in this 6 report? 7 A. I believe they are set out 8 specifically. 9 Q. Okay. The next one is "mortgage loans 10 with four or more payments in arrears, 11 $94,053,213." 12 What is that describing? 13 A. Those are loans, in this case mortgage 14 loans, which the borrowers have not made payments 15 in four or more months. 16 Q. Okay. And there is a category beneath 17 that, "Real estate owned, 126,059,436." 18 Was that a significant number? 19 A. Yes, very. 20 Q. In your experience, for an institution 21 the size of USAT, was that number larger than you 22 had seen before for other institutions? 9938 1 A. To my knowledge, the number and dollar 2 volume was substantially above anything I had ever 3 seen. 4 Q. Would you turn to the next page, TXS&L 5 165? "Summary of foreclosed REO." 6 Did you write this section? 7 A. I made the notation on the page, yes. 8 Q. Okay. It says "Due to the 9 association's inability to substantiate required 10 documentation and proof of ownership, in addition 11 to the volume of parcels purportedly on hand, an 12 individual summary cannot be presented." 13 What is that referring to? 14 A. This page of the report usually shows 15 item by item each parcel that the institution has 16 in their real estate owned portfolio. In USAT's 17 case, since there were in the area of 2,000 18 parcels, some of which ownership couldn't be 19 ascertained, then we made the decision to cover it 20 in the general comments of the report rather than 21 by an itemization on this particular page. 22 Q. Was that just by the sheer volume -- 9939 1 for the sheer volume? 2 A. Yes. 3 Q. Is the association's inability to 4 substantiate required documentation and proof of 5 ownership a failure of the institution to maintain 6 its books and records properly? 7 A. Yes, of course. 8 Q. Is it also a failure of internal audit 9 controls? 10 A. Yes. 11 Q. How so? 12 A. The regulation, in part, is specific as 13 to what an institution is required to do when they 14 start proceedings for foreclosure, part of which 15 would be proof of ownership and, as well, an 16 appraisal report of the subject property. 17 Q. Would you turn to Page TXS&L 228? 18 A. Okay. 19 Q. There is a discussion here of books and 20 records. Did you write this section? 21 A. Yes, I did. 22 Q. You write, "A review and analysis of 9940 1 various records maintained by the association 2 revealed numerous deficiencies and 3 misclassifications, in addition to instances where 4 no records exist. As such, the records do not 5 meet the requirements of Section 8.04(3) of the 6 Texas Savings and Loan Act and FSLIC rules and 7 regulations, as well as safe and sound operating 8 policies and accounting practices." 9 What were you referring to in that 10 paragraph? 11 A. Well, the regulations are very clear as 12 to what an association has to do in maintaining 13 their books and records. And in doing so, you 14 would expect to find subsequent or associated 15 records to substantiate the values or the totals 16 or whatever was involved. 17 Q. What's the significance to the 18 institution of numerous deficiencies and 19 misclassifications, in addition to instances 20 wherein no records exist? 21 A. It would indicate that additional 22 losses could be indicated. 9941 1 Q. How so? 2 A. If, in fact, it was determined that a 3 particular -- in this instance, let's say real 4 estate owned. If you had no ownership to that 5 particular property, then you'd have to write off 6 the book value of that particular parcel of real 7 estate owned. And that would go to any item that 8 was found that way. 9 Q. And what would you be looking for in 10 the institution's books and records to help you 11 make a determination as to the reporting of the -- 12 strike that. 13 Moving on into the next section down, 14 "financial records and reports," the second 15 paragraph of that section, "During the 16 examination, a review of accounting records and 17 financial reports disclosed that the general 18 ledger is maintained on a GAAP basis." 19 Is that what you were referring to 20 earlier in the report summary? 21 A. That is correct. 22 Q. Continuing on, "And in order to compile 9942 1 data and provide reports on a regulatory basis, 2 various adjustments and reclassifications are 3 necessary. An analysis revealed that all such 4 adjustments, reconcilements or reclassifications 5 are not in some instances maintained in sufficient 6 detail to provide an audit trail from the source 7 data to the reports to supervisory agencies." 8 What's the significance of that? 9 A. If you don't have an audit trail, then 10 it's questionable as to what value you have or 11 that you're showing on your records. 12 Q. Why is it important for an institution 13 to have an audit trail? 14 A. An audit trail is part of a backup 15 record that you would expect an institution to 16 maintain which would show any adjustments to that 17 value, be it something that was added to or taken 18 away from that particular account. And starting 19 with a beginning and, of course, an ending 20 balance. If, in this instance, you were not able 21 to reconcile one balance to an -- or a beginning 22 balance to an ending balance, then it's 9943 1 questionable as to whether or not the ending 2 balance was correct. 3 Q. Did you find gaps in the audit trail? 4 A. Yes. 5 Q. Is what you described in that 6 paragraph, is that a failure of audit controls of 7 the institution? 8 A. Yes, of course. Definitely. 9 Q. Would you turn to the next page, TXS&L 10 229? There's a discussion there starting just 11 below the middle of the page, "major loans." 12 Do you see that? 13 A. Yes, I do. 14 Q. Did you write that section? 15 A. Yes. 16 Q. You write "A review of seven loans 17 aggregating $202,924,000 disclosed instances 18 wherein association records do not contain 19 documentation required by regulations and prudent 20 lending policies and practices." 21 What are you referring to in that 22 paragraph? Excuse me. That sentence? 9944 1 A. Those, of course, indicate major loans 2 that we reviewed. The 202,924,000 indicated the 3 original amount of the seven loans. With regard 4 to documentation, as stated, there were 5 deficiencies in the documentation and these were 6 considered to be inappropriate for an institution 7 of that size. 8 Q. What do you mean "inappropriate for an 9 institution of that size"? 10 A. A 5-billion-dollar or 11 4.5-billion-dollar association should have 12 sufficient detail and accounting records, 13 monitoring information, and auditing procedures to 14 preclude any problems with being able to come up 15 with detail on any specific account. 16 Q. You go on, "Furthermore, potential 17 losses exist due to lack of sufficient funds to 18 complete the projects and interest reserves which 19 are exhausted. These projects may result in 20 additional real estate owned by the association." 21 What is that referring to? 22 A. This indicates those projects where the 9945 1 funds that were set aside for completion of the 2 development, including monthly interest carry and 3 all other costs, would be insufficient to complete 4 the projects. And, therefore, there would be an 5 indicated loss. 6 Q. Moving back up to the first sentence, 7 the failure to have documentation required by 8 regulations, do you recall what regulation you're 9 referring to? 10 A. Not specifically, but -- 11 Q. Is it a federal regulation or a state 12 regulation? 13 A. It would have been a federal 14 regulation. 15 Q. Would you turn to the next page, 16 please? TXS&L 230. There is a discussion there 17 that starts just above the middle of the page for 18 real estate owned. 19 Do you see that? 20 A. Yes, I do. 21 Q. Did you write that section? 22 A. I did. 9946 1 Q. It says "According to association 2 records, real estate owned consisting of 3 approximately 2,000 parcels was composed of 4 $97,835,893 in one-to-four family dwellings, 5 $23,912,543 in apartments, $1,428,594 in office 6 buildings, and $2,882,406 in land for an aggregate 7 of $126,059,436 at the examination date. This 8 amount represents an increase of" -- and I can't 9 see. 10 Is that $88 million -- 11 A. It appears to be 88 million -- 12 Q. -- "544,141 or 336 percent since the 13 preceding examination." 14 Is that a significant finding of your 15 report? 16 A. Yes, very significant. 17 MR. VILLA: Objection, Your Honor. I'd 18 like to just put on the record our objection to 19 this line of questioning. If Mr. Schwartz wants 20 to talk about 2,000 home loans that were taken 21 back and spend a lot of time with Mr. Cool on that 22 issue, he's entitled to do it. But I want to make 9947 1 an objection that that's not the issues that are 2 set out in the notice of charges and it's not 3 being tried by consent. And frankly, it doesn't 4 appear to be relevant to the issue of the Park 410 5 loan and the Norwood/United loan. He's entitled 6 to ask the questions he wants about the report, 7 but I submit to you that it's not an issue that's 8 raised here and we'd like to put our objection on 9 the record. 10 THE COURT: What is the relevance to 11 all these other transactions? 12 MR. SCHWARTZ: The -- among the charges 13 that are raised is that the institution failed to 14 have proper documentation for maintaining its 15 loans and for underwriting its loans. And the 16 purpose of the question is to show that there was 17 a general practice of this institution and a 18 condition which existed that was prevalent 19 throughout the institution of the -- 20 THE COURT: Is it that the transactions 21 that are placed in issue by the notice did not 22 have proper documentation? Is that it? Not a 9948 1 general failure to maintain books and records? 2 MR. SCHWARTZ: We're showing a practice 3 of the institution to -- of a failure to maintain 4 proper documentation throughout -- throughout the 5 institution. It's correct, Your Honor, that 6 specifically with the notice of charges, we're 7 referring to the Park 410 and the Norwood loans. 8 However, we want to -- we would like to show by 9 example of the institution's practices throughout 10 its operations -- 11 THE COURT: Well, is that an allegation 12 in the notice? 13 MR. EISENHART: Your Honor, I'm holding 14 in my hand a copy of the notice of charges and I 15 can assure you it's not. 16 MR. VILLA: With all due respect to 17 Mr. Schwartz, I think if he tried the issues in 18 the notice of charges, we could move through the 19 case a little quicker. There was a flood of home 20 loans that came into United over a three-year 21 period when Texas economy went bad. That's not 22 the issue in this case. It's Park 410 and the 9949 1 Norwood/United loans, Your Honor. 2 MR. SCHWARTZ: Furthermore, Your Honor, 3 among the allegations that are raised in the 4 notice of charges and, indeed, among the defenses 5 that were raised by the respondents is the 6 assertion that the regulators had all the 7 information that they needed to perform their 8 functions. And what we're showing is that the 9 regulators indeed did not, that the institution's 10 books and records were completely insufficient for 11 the regulators to perform their functions. 12 THE COURT: But again, doesn't that go 13 to the transaction placed in issue by the notice? 14 MR. SCHWARTZ: We're showing a general 15 practice of the institution, a general policy. I 16 am -- I am nearly through with the REO section, 17 but I will be happy to move on. 18 THE COURT: Well, let's move on. 19 Q. (BY MR. SCHWARTZ) Would you please 20 turn to TXS&L 241? There is a discussion here of 21 major loans. 22 A. Yes. 9950 1 Q. Would you have written this section? 2 A. Yes, I would have. 3 Q. "A review of seven loans granted during 4 the review period totaling $202,924,000 indicating 5 the following primary areas of concern: The 6 association appears to lack proper internal 7 control and safeguards to protect the major loan 8 portfolio. Deficiencies include but are not 9 limited to, A, lack of project 10 analysis/feasibility studies to ensure that all 11 areas impacting the loan are addressed." 12 What's the significance of that? 13 A. A feasibility is, in essence, what the 14 statement refers to. It's a feasibility of 15 whether or not the particular project is good or 16 not. 17 Q. And what is a project analysis? 18 A. That would be a project of the analysis 19 or -- 20 Q. I'm sorry. 21 A. Excuse me. An analysis of that 22 particular loan and the project that was involved. 9951 1 Q. And you go on -- you say there, "To 2 ensure that all areas impacting the loan are 3 addressed." 4 What does that mean? 5 A. It's all areas that would be looked at 6 or concerned with of the loan. 7 Q. From the institution's perspective, why 8 is it important to have a feasibility study or a 9 project analysis in its records? 10 A. That would indicate if the project was 11 feasible, whether or not it would be a flop. 12 MR. VILLA: I'm sorry. I couldn't hear 13 the last word. 14 MR. SCHWARTZ: "Flop." 15 MR. VILLA: Thank you. 16 Q. (BY MR. SCHWARTZ) You go on to say, 17 "Lack of technical progress, inspections to assess 18 whether the project evidences satisfactory 19 completion of various stages within the required 20 time frame." 21 What does that mean? 22 A. It means that there were no inspections 9952 1 in the file that showed the progress of the 2 construction or development. 3 Q. Why is it important to have that? 4 A. If you, in fact, are disbursing amounts 5 above the progress that's done, then you have 6 indicated loss. 7 Q. The next category is "takeout 8 commitments." What's a takeout commitment? 9 A. A takeout commitment usually indicates 10 that at the end of the loan term there is 11 financing available for the -- for a permanent 12 loan. 13 Q. What -- why is that important? 14 A. Well, again, it indicates that if there 15 is not some type of financing either by the 16 institution or another entity regarding that 17 particular development, then they could be left 18 with the property, not -- 19 Q. How so? 20 A. That's not necessarily a good 21 explanation, but generally -- 22 Q. What do you mean -- 9953 1 A. -- you expect to see some type of 2 permanent financing in place for a construction or 3 a development loan. 4 Q. And what is the significance of not 5 having permanent financing or takeout financing 6 for major loans? 7 A. Well, it could indicate that the value 8 of the property may not be as set out. It could 9 also mean several other things, including the fact 10 that if they were subjected to foreclosure on the 11 property, they would have another non-earning 12 asset. 13 Q. It would be taken into REO? 14 A. Yes. 15 Q. Does it give you -- based on your 16 experience as an examiner, does it indicate 17 anything with regard to whether the project is a 18 loan versus an investment as to whether there is 19 takeout financing in place? 20 A. No, not necessarily. 21 Q. The next section is "Avoidance of cost 22 overruns. Five of the seven loans totaling 9954 1 $166,324,000 indicated that the loan funding was 2 ahead of and inconsistent with project completion, 3 contributing in two instances to misapplication of 4 loan proceeds." 5 Is that in connection, do you recall, 6 with the Park 410 and Norwood loan or at least, in 7 this case, the Park 410 loan? 8 A. I really don't remember for sure. 9 Q. Moving back up to C, takeout 10 commitments, you go on to say, "None of the 11 development loans appear to have financing in 12 place that would pay off USAT's development loan 13 upon completion of the project." 14 In your experience, had you encountered 15 institutions that were -- where none of the 16 development loans had takeout financing for major 17 loans? 18 A. Not to my knowledge. 19 Q. Would you turn to Page TXS&L 243? 20 There is a discussion that starts on Page 243, 21 continues on 244, 45, and 46 concerning Park 410 22 West Joint Venture. 9955 1 Do you see that? 2 A. Yes, I do. 3 Q. Would you take a moment to review those 4 pages, please? 5 A. (Witness reviews the document.) I've 6 looked through it. 7 Q. Would you pull out Exhibit 7501 that we 8 looked at earlier, which is the handwritten 9 write-up that Mr. Nunn wrote? Do you have that? 10 A. Yes, I have it. 11 Q. The final draft that appears in the 12 report of examination appears to contain different 13 information from what's in the write-up, the 14 handwritten write-up, 7501. 15 Why is that? 16 A. That would have occurred either in our 17 final analysis and write-up of the loan on site, 18 or it could have occurred in final analysis of the 19 report in the office. 20 Q. When you say "in the office," what are 21 you referring to? 22 A. The supervision in Austin at the 9956 1 savings and loan department. 2 Q. Well, did you write this section 3 labeled "Park 410 West Joint Venture"? 4 A. Yes. 5 Q. And I'm referring to the one that's in 6 the final report of examination. You wrote that? 7 A. (Witness nods head affirmatively.) 8 Q. Okay. 9 A. Yes, I did. 10 MR. SCHWARTZ: Your Honor, at this 11 point, I'd like to move the admission of 12 Exhibit T7502. 13 MR. VILLA: No objection. 14 THE COURT: Received. 15 Q. (BY MR. SCHWARTZ) Why are there 16 differences between the two write-ups? Strike 17 that. 18 Would you look at the two documents, 19 the two write-ups, and identify some of the 20 differences between them? 21 A. This is 7501 and 7502? Is that -- 22 Q. That's correct. And we're referring 9957 1 to -- in 7502, we're referring to Pages 2 -- TXS&L 2 243 through 246. 3 A. Initially, some of the areas were 4 interchanged. 5 Q. Okay. 6 A. (Witness reviews the document.) It 7 also looks like there were areas where there 8 were -- was additional information entered or 9 something taken out of it. 10 Q. Now, what are you referring to? 11 A. Well, there is -- 12 Q. Which exhibit are you looking at? 13 A. I'm looking at 7501. 14 Q. Okay. And what page are you looking 15 at? It has a Bates number down at the bottom. 16 It's an "OW" number. 17 A. Yeah. I'm reviewing several of the 18 pages. It isn't inconsistent that information in 19 a preliminary write-up would be somewhat changed 20 or the order changed in the final report. 21 Q. Would you look at the third page of the 22 write-up, 7501, the handwritten version? 9958 1 OW156422. And there is -- are you there? 2 A. Yes. 3 Q. There is discussion there regarding 4 possibly indicating a land flip, and I'm reading 5 the very end of the first paragraph. 6 Do you see that? 7 A. Yes, I see it. 8 Q. Is that information contained in the 9 final report? 10 A. I don't believe it is. As I recall, it 11 was taken out. 12 Q. Why would it have been taken out? 13 A. Because it was our feeling that it was 14 not indicative of a land flip. 15 Q. Would you describe the process by which 16 this handwritten write-up becomes this write-up in 17 the final report of examination? 18 A. The examiner that's assigned the task 19 of reviewing that particular loan finishes his 20 review, does a write-up on the loan, and then 21 we -- the examiner in charge and the assistant -- 22 go through the write-up and determine if the 9959 1 contents are sufficient or if additional 2 information needs to be added. 3 Q. And if information is in the initial 4 write-up that you feel is either unsupported by 5 documentation of the institution or otherwise, do 6 you make changes for the final draft? 7 A. Yes. 8 Q. The handwritten version, was this 9 provided to the federal regulators: Ms. Carlton? 10 A. To my knowledge, it was. 11 Q. And -- but this is not a final; is that 12 true? 13 A. I don't believe it was. 14 Q. Okay. The final version is what's 15 contained in the report of examination itself, 16 Exhibit 7502; is that right? 17 A. That's correct. 18 Q. Looking at 7502, the first part goes 19 through a background of -- appears to go through a 20 background of the history of the loan; is that 21 right? 22 A. That's correct. 9960 1 Q. On the second page of the write-up, 2 244, there is a chart up at the top listing 3 security for the loan and then another chart 4 listing where the loan proceeds are going 5 according to USAT's budget. 6 Do you see that? 7 A. I see that. 8 Q. What was the amount for financing 9 costs? 10 A. It's shown here as $23 million 485 -- 11 excuse me -- $23,485,971. 12 Q. And what are financing costs? 13 A. That would include interest that was 14 accruing on the disbursed portion of the loan. It 15 would also include loan fees, any item that would 16 be considered part of a cost for financing the 17 project. 18 Q. Item No. 4, you said loan fees. Item 19 No. 4 says "legal fees and expenses." 20 Is that different from the fees that 21 you're referring to in financing costs? 22 A. Yes, that's correct. Those are as 9961 1 stated, the legal fees and expenses associated 2 therewith. The financing costs relates only to 3 the financing of the loan. 4 Q. You then go on to list the 5 disbursements from the title statement. 6 Do you see that? 7 A. Yes, I see it. 8 Q. And there is a description, "Stanley 9 D. Rosenberg, loan fee, $400,000." 10 What is a loan fee? 11 A. Generally, a loan fee is a fee that the 12 institution is paid in conjunction with financing 13 the loan. 14 Q. Is there any significance to the fact 15 that Stanley Rosenberg, who is listed as one of 16 the joint venturers, is receiving a loan fee? 17 A. It would raise a question, yes. 18 Q. What question? 19 A. Why he was receiving a fee. 20 Q. Did you ask the institution why? 21 A. Not that I recall. 22 Q. Further down, you list Grieshaber and 9962 1 Roberts. 2 Do you know if Mr. Nunn asked the 3 institution why? 4 A. I don't remember. 5 Q. Further down, you list "Grieshaber and 6 Roberts, pay off" -- excuse me -- "commission 7 $386,621." On the first page of the write-up, 8 Grieshaber and Roberts is listed as one of the 9 joint venturers. 10 Does that raise a question in your 11 mind? 12 A. Yes, of course. Any fees that are paid 13 out to the borrowers raised questions. 14 Q. And further down, "Gulf Management 15 Resources developer fee, $250,000." 16 Is that the same answer? 17 A. Yes. The same answer. 18 Q. Further down, there is a listing for 19 1980, '81, and '82 rollback taxes." 20 What are rollback taxes? 21 A. Generally, they are unpaid taxes. 22 Q. And what's the significance of the loan 9963 1 from United paying off 1980, '81, and '82 rollback 2 taxes? 3 A. Those taxes should have been paid 4 previous to this loan. 5 Q. The next -- if you move down to the 6 bottom, there is an asterisk and it says "Escrow 7 invest as required, $1,300,000." 8 Do you see that? 9 A. Yes, I do. 10 Q. And then below that, there is an 11 asterisk. It says "Actual purpose, not 12 determined." 13 What does that mean? 14 A. That indicates that the purpose of the 15 proceeds were not indicated, nor could we find 16 where those proceeds went. 17 Q. Is $1,300,000 of unidentified payments 18 unusual in your experience on a -- 19 A. Yes. 20 Q. -- on a title statement? 21 A. Yes. 22 Q. Would you look back at Exhibit 7089, 9964 1 which is the memorandum from Mr. Graham to 2 Mr. Nunn? 3 A. All right. I have it. 4 Q. Okay. On the second page of that 5 document under 3, "disbursements," do you see 6 that? 7 A. Yes, I do. 8 Q. Would you take a look at that section 9 and tell me if that refreshes your recollection 10 concerning whether or not the issue of 11 Mr. Rosenberg's -- the disbursement to 12 Mr. Rosenberg was raised with United? 13 A. It appears to answer the question. 14 Q. Does the discussion that's in 15 Exhibit 7089 adequately respond to why 16 Mr. Rosenberg was receiving a 400,000-dollar loan 17 fee? 18 A. No. This is general in its 19 terminology. 20 Q. Do you recall whether you ever received 21 an adequate explanation as to why Mr. Rosenberg 22 was receiving a loan fee of $400,000? 9965 1 A. Not to my knowledge. 2 Q. Going back to TXS&L 244, the paragraph 3 at the bottom says, "As shown below, loan proceeds 4 were utilized to pay commissions and fees to 5 guarantors and venturers of the joint venture 6 totaling $3,696,416 as well as to pay delinquent 7 taxes." 8 Why is that significant? 9 A. Well, it indicates what's shown in the 10 title company's receipts and disbursements 11 statement. It also indicates that funds were paid 12 to persons involved in the loan and also, of 13 course, that paid delinquent taxes which were the 14 '80, '81, and '82 rollback taxes. 15 Q. Right. Why did you feel the need to 16 write that sentence, the last paragraph on that 17 page? Why was it significant enough to put into 18 the report? 19 A. I don't know at this time. 20 Q. Okay. On the next page, there is a -- 21 which is 245 -- there appears to be a discussion 22 of a history prior to the loan. 9966 1 Do you see that? 2 A. I see it. 3 Q. Why was it important to put a history 4 prior to United's loan into your report of 5 examination? 6 A. In the analysis of a major loan, the 7 examiner is concerned with all the elements of 8 past and present ownership. This was presented to 9 indicate prior ownership and to set out some of 10 the names that were continued into the new loan. 11 Q. Well, were some of the names the same 12 as what went into the loan? 13 A. The names were either the same or the 14 entities or -- 15 Q. Are you referring to Westplex and IPIC? 16 A. Yes. 17 Q. And with regard to Page 245, I'm 18 looking at the -- what appears to be the second 19 full paragraph where there is three entities that 20 are underlined. 21 Is that what you're referring to? 22 A. Yes. 9967 1 Q. The reference to Stanley Rosenberg -- 2 at the time of the examination, were you aware 3 that an agreement between Mr. Rosenberg and United 4 existed in which United -- in which United owned 5 50 percent of Mr. Rosenberg's 50 percent interest 6 in the Park 410 property? 7 A. I do not recall that, no. 8 Q. Would that have been significant to 9 you? 10 A. Yes. 11 Q. Why? 12 A. Of course. Well, because he was one of 13 the people affiliated with the loan. And, in 14 addition to that, it showed that the institution 15 had also purchased or somehow obtained a partial 16 ownership. 17 Q. If you had been aware of that fact, 18 would you have written it into your report of 19 examination? 20 A. Yes, of course. 21 Q. At the time that you did your review of 22 the Park 410 loan, were you aware that 9968 1 Mr. Rosenberg was a member of the board of 2 directors of MCO Holdings, Incorporated? 3 A. No, I was not aware of that. 4 Q. Do you know what MCO Holdings, 5 Incorporated is? 6 A. It's the corporation that controlled 7 the institution. 8 Q. If you had known that Mr. Rosenberg was 9 on the board of directors of MCO Holdings, would 10 that have been significant to you in your report 11 of examination? 12 A. I believe, yes, it would have been. It 13 would have been something that should have been 14 included in the write-up of the loan, as well as 15 on one of the questionnaires. 16 Q. One of the questionnaires. Are you 17 referring to the management questionnaire? 18 A. Yes. 19 Q. Would you turn to the next page, 246? 20 A. All right. 21 Q. The second paragraph starts a 22 discussion regarding the appraisal. It says, "A 9969 1 review of the appraisal prepared by Edward Schulz, 2 MAI-SRPA, indicated an as-developed value of 3 $88 million. In arriving at this value, the 4 appraiser neglected to explain why he omitted the 5 cost and the income approaches to value." 6 What does that mean? 7 A. Well, we've discussed this earlier, but 8 it basically means that he should have either 9 included the cost and income approaches or 10 included a reason or a statement regarding the 11 omission. 12 Q. What was the primary source of 13 repayment for this loan? 14 A. The security property. 15 Q. Was it important for a -- where the 16 primary source of repayment is a security 17 property, is it important to have an accurate 18 appraisal? 19 A. Yes, it is. 20 Q. Why? 21 A. You have to ascertain the value of the 22 property. Otherwise, you're submitting yourself 9970 1 to significant losses. 2 Q. You go on to say, "Pro forma financial 3 statements were" -- underlined -- "prepared for 4 the project which" -- underlined -- "justified 5 using the income approach." 6 Is that, again, what we talked about 7 earlier regarding the appraiser not using all 8 three approaches to -- 9 A. Yes. 10 Q. -- an evaluation? 11 A. Yes, that's correct. 12 Q. Continuing down on the page, the last 13 paragraph of that write-up, it says, "The review 14 also disclosed that USAT retained a 25 percent 15 profit participation in the loan. The profit 16 participation, along with the following items, 17 indicate that this loan has the characteristics of 18 a real estate investment and/or joint venture: 19 100 percent of closing costs and fees were funded. 20 USAT is a 25 percent profit participant. Any and 21 all of USAT's income is self-generated." 22 What is that paragraph referring to? 9971 1 A. Well, it is referring to the fact as to 2 whether or not the -- this particular loan was a 3 loan, in fact, or an investment. And that, again, 4 refers back to some of the areas that we 5 discussed, including income from the particular 6 loan -- 7 Q. Well -- 8 A. -- fees and -- including fees and 9 accrued interest and -- 10 Q. What impact would it have to reclassify 11 loans as investments? 12 A. In this instance, all of the fees that 13 had been previously collected would have had to 14 have been deferred. So, then the operating income 15 of the institution would have been reduced. 16 Q. Would you turn now to the last page of 17 the report of examination, TXS&L 293? Do you see 18 that? 19 A. Yes, I'm there. 20 Q. It says, "Association Evaluation." 21 What is that? 22 A. This is a form that's filled out by the 9972 1 examiner in charge to relate the findings of the 2 examination to supervision. These findings could 3 be included in written form or noted during the 4 examination and not put into the report. 5 Q. What's the purpose of this document? 6 A. It indicates my opinion as to the books 7 and records of the institution. 8 Q. Do you recognize -- there's some items 9 in handwriting on the document. 10 Do you recognize the handwriting? 11 A. At the bottom of the page? 12 Q. Well, there is handwriting at the 13 bottom of the page. There is also handwriting, 14 numerals, next to certain categories and some 15 initials, as well. 16 MR. VILLA: It might be useful if you 17 just give him the exact words that you're 18 directing him to so we know which one is his. 19 Q. (BY MR. SCHWARTZ) Up at the top, 20 there is a category, "name and addresses of 21 association." 22 Do you see that? 9973 1 A. Everything on this form was filled out 2 by me with the exception of the line designated 3 "DOE" and a notation at the bottom of the page 4 indicating "sad." 5 Q. With the exclamation point after it? 6 A. That's correct. 7 Q. Do you know whose handwriting that is? 8 A. No, not for sure. 9 Q. Who is "ART" listed as "DOE"? 10 A. That would have been at that time Art 11 Lieser, who was the director of examinations. 12 Q. And "DOE" is director of examinations? 13 A. Yes. 14 Q. And then above that, "RWC," is that 15 you? 16 A. Yes, that's me. 17 Q. Next to your initials and Mr. Lieser's 18 initials, there are numerals under items labeled 19 "MACRO." 20 Do you see that? 21 A. Yes. 22 Q. Okay. What is "MACRO"? 9974 1 A. That identifies the areas that are 2 under the factors below. 3 Q. So, does "M" correspond to management? 4 A. That's correct. 5 Q. And "A" to asset quality? 6 A. Yes. 7 Q. "C," capital adequacy. Risk management 8 and operating results accordingly? 9 A. And operating results, that's correct. 10 Q. And then for each factor -- under 11 management, for example, you have individual 12 ratings; is that right? 13 A. That's correct. 14 Q. Okay. First of all, what are the 15 ratings? How many ratings are there? 16 A. The scale goes from 1 to 5. 1 being 17 the best and 5 being the worst. 18 Q. And what does a 4 designate? 19 A. Well, it indicates that there were 20 considerable problems. 21 Q. Looking under "management" for 22 composition and effectiveness of directorate, you 9975 1 have a 4 listed. 2 What does that mean? 3 A. Well, it would indicate that the 4 directorate wasn't being responsible with respect 5 to the operation of the institution. 6 Q. And is this based on your opinion or 7 experience? 8 A. Yes, it is. 9 Q. Moving down, there is a listing 10 "capability of executive management" which also 11 lists a 4. 12 What does that mean? 13 A. That indicates the problems that were 14 found during the examination and appear in the 15 examination report. That rating is given to 16 indicate non-compliance and whatever else was in 17 the report. 18 Q. Moving down, you have "compensation." 19 What does that reflect? 20 A. A lot of these items are difficult to 21 explain simply because it's different -- it's 22 difficult to put a number under a particular 9976 1 heading. In this instance, at this point in time, 2 it would indicate that there may be compensation 3 that was more than should have been paid. 4 Q. 4, "Compliance with laws and 5 regulations" -- excuse me. "Response to 6 supervision." 7 What is that? 8 A. That indicates any response that they 9 had given to supervision on prior examinations. 10 Q. "Supervision" being who? 11 A. The department. 12 Q. And that was also a 4? 13 A. Yes. 14 Q. Compliance with laws and regulations is 15 listed as a 5. What does a 5 mean? 16 A. That's the worst-case scenario. 17 Q. And why did you rate United a 5 for 18 compliance with laws and regulations? 19 A. Because of the numerous violations of 20 the regulations that we found during the 21 examination. 22 Q. Was it your opinion that United 9977 1 disregarded the regulations? 2 MR. VILLA: Objection. Leading. 3 THE COURT: Denied. 4 Q. (BY MR. SCHWARTZ) Was it your opinion 5 that United disregarded the regulations, sir? 6 A. I can't state that they disregarded it, 7 but they surely didn't regard it very much. 8 Q. The next category is "Records, systems, 9 and controls." That also is given the worst 10 possible rating of 5. 11 What was that based on? 12 A. That would indicate the records that we 13 reviewed, including financial, the supporting 14 documentations, the documentation on real estate 15 owned, and any of the other areas. 16 Q. Under the next category, "asset 17 quality," you give the institution a 4 for 18 appraisals, feasibility studies. 19 Why did you do that? 20 A. Because of the items that we reported 21 in the examination report wherein we felt that the 22 appraisals didn't meet the regulatory 9978 1 requirements. 2 Q. And moving on, what is "credit 3 analysis"? 4 A. Credit analysis generally deals with 5 loan originations and involves analyzing the 6 borrowers or borrower on that particular loan. 7 Q. What about the borrowers on a 8 particular loan? 9 A. Well, this -- as I said, it indicates 10 that there should be some type of credit analysis 11 made in regard to all investments, loans, et 12 cetera. 13 Q. Let me ask you: With regard to the 14 items that we've discussed on this page, did the 15 Park 410 loan and your review of the Park 410 loan 16 contribute to the ratings that you ultimately gave 17 the institution? 18 A. In part, yes. 19 MR. SCHWARTZ: Your Honor, I have no 20 further questions at this time. 21 THE COURT: All right. We'll take a 22 short recess. 9979 1 (A short break was taken 2 at 3:57 p.m.) 3 4 THE COURT: Be seated, please. Back on 5 the record. 6 Mr. Schwartz, your direct is complete? 7 MR. SCHWARTZ: Correct, Your Honor. 8 THE COURT: Thank you. Mr. Villa, 9 you're going to cross-examine? 10 MR. VILLA: I am, Your Honor. 11 THE COURT: Proceed. 12 13 14 CROSS-EXAMINATION 15 16 (4:15 p.m.) 17 Q. (BY MR. VILLA) Good afternoon, 18 Mr. Cool. My name is John Villa. I represent 19 four of the respondents in this case: Mr. Berner, 20 Art Berner, Mike Crow, Ron Huebsch, and Barry 21 Munitz. 22 Let me ask you first, sir, a little 9980 1 about your background. I think you were walking 2 us through your employment history, but I didn't 3 get the time period from 1980 to 1985 or 4 thereabouts. 5 What was your employment at that point? 6 A. Part of the time, it was my intention 7 to go into a private business. Obtaining the 8 business became impossible. So, then I went to 9 work for a Ford dealership as a warranty manager. 10 Q. And what was the nature of the 11 business? 12 A. Well, it was a Ford Motor Company 13 dealership. 14 Q. No. The private business that you were 15 trying to get into before the Ford dealership. 16 A. It was what you refer to as an ice 17 station. It's a grocery store that has a 18 drive-through. 19 Q. I see. It didn't have anything to do 20 with real estate? 21 A. No, sir. 22 Q. I see. Thank you. 9981 1 Sir, do you have any special training 2 in appraising, appraising real property? Do you 3 hold a certification, MAI certification? 4 A. No, sir. 5 MR. SCHWARTZ: Objection, Your Honor. 6 Compound question. 7 Q. (BY MR. VILLA) Let's start out with 8 the first question. 9 Do you hold an MAI certification for 10 appraising real property? 11 A. No, I do not. 12 Q. Do you hold any certification by any 13 professional association in appraising real 14 property? 15 A. No, I do not. 16 Q. Do you hold yourself out to be an 17 expert in the appraising of real property? 18 A. No, I wouldn't say that. 19 Q. You were telling us about the 20 examination of United that began in 1986. And I 21 think you were going through the people and the 22 different positions they held in the examination 9982 1 at the Texas Savings and Loan Department. 2 You were the examiner in charge; is 3 that right? 4 A. That's correct. 5 Q. And who was the assistant -- is there 6 an assistant examiner in charge? Is that what -- 7 A. Yes, sir. There were three. 8 Q. And who were they, sir? 9 A. Jeff Nunn, Steve Harper, and Clark 10 Johnson, as I recall. 11 Q. What areas did Mr. Harper and 12 Mr. Johnson work on? 13 A. Mr. Johnson was doing the reconcilement 14 of the real estate owned, and Steve Harper 15 reviewed investments. 16 Q. Do you know where Mr. Nunn currently is 17 employed? 18 A. Not currently. 19 Q. When was -- 20 A. I know -- 21 Q. I'm sorry. Go ahead. 22 A. I knew that he left the State of Texas, 9983 1 went to work for what is now called OTS. And 2 after that, I lost track of him. 3 Q. Was Mister -- did Mr. Nunn hold any 4 certifications from any professional association 5 in appraising? 6 A. Not to my knowledge. 7 Q. Do you know how many years of 8 experience Mr. Nunn had prior to the 1986 9 examination of United? 10 A. Exactly, no. But I would approximate 11 four or five years' experience in examining. 12 Q. Now, I think you told us at various 13 times that you met with Mr. Pledger and Mr. Gross. 14 Right? 15 A. Yes, sir. 16 Q. I represent Art Berner, who was a 17 lawyer for United Financial Group during most of 18 this time period, and ultimately took the position 19 with United Savings Association of Texas. 20 My question to you, sir, is: Do you 21 recall ever having a meeting with Mr. Berner? 22 A. Not to my knowledge, no, sir. 9984 1 Q. Do you recall ever receiving any 2 letters from Mr. Berner or sending him any 3 letters? 4 A. Not to my knowledge. 5 Q. Do you recall ever discussing anything 6 with Mr. Berner on the telephone? 7 A. No, sir. 8 Q. And you wouldn't know who Mr. Berner 9 was if he were sitting in the courtroom? 10 A. I do not recall meeting the gentleman. 11 Q. Another one of my clients is Michael 12 Crow. Do you recall, sir, ever having a meeting 13 with Michael Crow? 14 A. Not offhand, no. 15 Q. Do you ever recall having any 16 discussions with him on the telephone or 17 otherwise? 18 A. No, I do not. 19 Q. Do you recall ever receiving any 20 letters from Mr. Crow or sending him anything? 21 A. No, sir. 22 Q. Do you know what position Mr. Crow held 9985 1 at United Savings Association of Texas at the time 2 period of your examination? 3 A. Not specifically, no. 4 Q. Generally, do you know what position he 5 held, sir? 6 A. He was in the upper management level, 7 as I recall. 8 Q. Did you ever meet him, sir? 9 A. Our exit meeting included the examiners 10 and some of the management team, and I'm not sure 11 exactly which ones were in attendance. 12 Q. But he never said or communicated 13 anything to you that's memorable; is that right? 14 A. That's correct. 15 Q. My third client is Mr. Ronald Huebsch. 16 Do you ever recall meeting Mr. Huebsch, sir? 17 A. Not to my knowledge. 18 Q. Do you ever recall communicating with 19 him either by letter, on the telephone? 20 A. No, sir. 21 Q. Do you know what position Mr. Huebsch 22 held at United Savings Association of Texas? 9986 1 A. No, I do not. 2 Q. So, as far as you know, you've never 3 had any contact with Mr. Huebsch; is that right? 4 A. That's correct. 5 Q. And my fourth client is Dr. Barry 6 Munitz. Have you ever met Dr. Munitz, sir? 7 A. Not to my knowledge. 8 Q. Do you know what position he held at 9 United Savings Association of Texas? 10 A. I don't believe I remember. 11 Q. Do you recall ever having a 12 communication with Mr. Munitz of any sort? 13 A. Not to my knowledge. 14 Q. Apart from -- let me ask about Charles 15 Hurwitz. 16 Do you ever recall meeting Charles 17 Hurwitz in connection with United Savings 18 Association of Texas? 19 A. I don't believe I did. I can't say for 20 sure, but I don't believe I did. 21 Q. If you met Mr. Hurwitz, you'd probably 22 remember it, don't you think, sir? 9987 1 A. I would believe so, yes. 2 Q. Apart from Mr. Crow and Mister -- I'm 3 sorry. Strike that. 4 Apart from Mr. Pledger and Mr. Gross, 5 do you recall meeting personally with any other 6 person at United Savings Association of Texas? 7 A. No, I do not. 8 Q. Did you meet personally with Mr. David 9 Graham? 10 A. Not myself, no. 11 Q. I see. So, these meetings between 12 Mr. Graham and Mr. Nunn that you've described were 13 all secondhand? 14 A. Yes. 15 Q. Your knowledge of them is secondhand; 16 is that right, sir? 17 A. That's correct. 18 Q. When the examination of United was 19 proceeding, were you on site every day? 20 A. Yes, I was. 21 Q. Was there any one of these different 22 areas you've told us about -- financial, REO, 9988 1 major loans, et cetera -- that you focused your 2 personal attention on, sir? 3 A. Yes, sir. I did the financial 4 analysis. 5 Q. Was there a reason -- particular reason 6 you selected Mr. Nunn to do the major loans? 7 A. I don't remember at this time. I seem 8 to recall that he asked for the loan review. 9 Q. I see. Had you ever reviewed any 10 thrift in Texas with assets of $5 billion or more, 11 apart from United Savings Association? 12 A. I believe that was the largest one that 13 I examined. 14 Q. Did you have any person on your 15 examination team that was -- I know that you and 16 Mr. Nunn weren't. 17 Did you have anybody on your 18 examination team that was a licensed appraiser? 19 A. No, sir. 20 Q. Was there some kind of appraisal review 21 function that was available to Texas examiners if 22 they needed to check on an appraisal issue? 9989 1 A. Yes. 2 Q. How did that work? 3 A. Generally, if we determined that we 4 felt uncomfortable with the value that was 5 assigned, we would copy the documents in the loan, 6 including the appraisal report, submit it to our 7 office in Austin, and they, in turn, would submit 8 it to the Bank Board. 9 Q. To the Federal Home Loan Bank Board? 10 A. Yes, sir. 11 Q. In Dallas? 12 A. Yes. 13 Q. And the results of that would come back 14 to you somehow; is that right? 15 A. It never did to me personally, no. 16 Q. Would that be -- that would be 17 reflected in the final examination report, but it 18 wouldn't come to you? 19 A. No. If the property was reappraised, 20 it would have been subsequent to the examination 21 completion. So, any values that were changed, 22 reassigned, or whatever, normally I would not be 9990 1 aware of. 2 Q. And by "subsequent to the examination 3 completion," you mean when you -- when you 4 actually stopped working on the exam, at the time 5 of your exit interview; is that right? 6 A. Yes. Following the exit review, I 7 turned in my examination report and went to 8 another examination. 9 Q. Now, was the examination report 10 reviewed by other people in the Department of -- 11 is it Department of Supervision? Is that what 12 they called it at the Texas Savings and Loan 13 Commission during that time period? 14 A. I believe that's what it was referred 15 to as. 16 Q. Was your report reviewed by others 17 before it became final? 18 A. Yes, sir. 19 Q. And was -- can you tell me what the 20 hierarchy was in the Department of Supervision 21 above you? 22 A. The -- 9991 1 Q. And, of course, this is the time period 2 in the second quarter of 1986, second and third 3 quarters of 1986. 4 A. As I recall, there was one of two 5 people who were responsible for reviewing and 6 finalizing the examination report. One was 7 Richard Von Minden. The other would have been -- 8 I can't recall the name. And then above them 9 would, of course, have been Art Lieser, who was 10 the director of examinations. 11 Q. Now, I think you told us that you did 12 no preparation prior to an examination. That is 13 to say, you didn't sit down and review some packet 14 of documents during the -- or prior to the 15 examination; is that right, sir? 16 A. No, sir. I had no prior knowledge of 17 anything in the institution, even including 18 reports that were required, you know, by the 19 supervisory agencies. 20 Q. Would you get the thrift financial 21 reports, the TFRs? So, you're saying you wouldn't 22 get that; is that right? 9992 1 A. Back then, no. 2 Q. Once you began the examination, would 3 the Texas Savings and Loan Commission provide you 4 documents that were relevant to United? 5 A. No. To my recollection, all of those 6 documents were provided by the institution. 7 Q. So, if the Texas Savings and Loan 8 Commission received documents other than through 9 United Savings Association, they wouldn't send it 10 to you? 11 A. I don't recall anything being sent to 12 me, no. 13 Q. You told us at the beginning of this -- 14 at the beginning of the examination, you met with 15 Mr. James Pledger. 16 Do you remember that? 17 A. Yes, sir. 18 Q. And Mr. Pledger was a vice president 19 and, I believe, general counsel at that time of 20 United Savings Association of Texas. 21 Does that sound right? 22 A. As I recall, that is correct. 9993 1 Q. Now, you were asked whether you ever 2 met with a lawyer before as a liaison for a 3 financial -- or for an association that you were 4 examining, and your answer was "no." 5 Am I correct about that? 6 A. That's correct. 7 Q. You don't see anything wrong with 8 meeting with Mr. Pledger as the liaison with the 9 examiners, do you, sir? 10 A. Not at all. 11 Q. Mr. Pledger ultimately took a 12 position -- quite distinguished position in the 13 Texas Savings and Loan Commission, didn't he, sir? 14 A. That is correct. 15 Q. He became the commissioner, didn't he? 16 A. That is correct. 17 Q. And he was your ultimate boss; is that 18 right? 19 A. That is also correct. 20 Q. You told us, I believe, that Mr. Nunn 21 was in charge of major loans. And then you also 22 talked about investments, REO, and financial. 9994 1 My question is: Is investments in that 2 connection, does that include real estate 3 investments such as direct investments, or are we 4 talking about securities type investments or some 5 other type? 6 A. Securities. 7 Q. So, Mr. Nunn's responsibilities would 8 extend not only to the major loans but also to 9 real estate investments and joint ventures; is 10 that right? 11 A. As I recall, that's correct. 12 Q. And who -- I don't know if I asked you 13 this. Who was doing the investments? Was that 14 Mr. Harper? 15 A. Yes, that's correct. 16 Q. Do you know what Mr. Harper's 17 qualifications were, sir? Was he a CPA, for 18 example? 19 A. No. He was degreed as -- and had been 20 with the department for several years. But other 21 than that, I don't know. 22 Q. Now, sir, you said that you believed 9995 1 that in the course of the major loan review, 2 Mr. Nunn would have looked at the loan ledger and 3 selected all loans over a million dollars for 4 review; is that right? 5 A. Yes, sir. 6 Q. Do you have -- and as I recall, your 7 examination began on April 30, 1986; is that 8 right? 9 A. That was the "as of" date of the 10 report. I think it started shortly thereafter. 11 Perhaps the first week in May. 12 Q. And it terminated on or about 13 September 12, 1986? 14 A. Yes, sir. 15 Q. And Mr. Nunn reviewed every loan over a 16 million dollars in United during that time period. 17 Is that your testimony? 18 A. I can't specifically state that it was 19 every loan over a million. We, at that point in 20 time, set an amount for loans which we wanted to 21 review. At this point in time, I don't remember. 22 It may have been 5 million. But nevertheless, it 9996 1 was major loans. 2 Q. Now, I believe it was your recollection 3 that the federal examiners showed up two to three 4 months after you began your exam; is that right? 5 A. Yes, sir. 6 Q. And do you recall how many examiners 7 they brought in? 8 A. To my recollection, there were about 9 four or five federal examiners. 10 Q. You recall Ms. Carlton, Vivian Carlton. 11 Right? 12 A. Yes, that's correct. 13 Q. In preparation for your testimony, did 14 anybody discuss with you Ms. Carlton's testimony 15 in her deposition? 16 A. No. 17 Q. Did anybody discuss with you what 18 Ms. Carlton said about the Park 410 loan? 19 A. No, sir. 20 Q. Who else do you recall was the -- by 21 the way, how many -- how long did you spend 22 preparing for your testimony today? 9997 1 A. I've gone through the various items 2 several times. Perhaps a day at most. 3 Q. And when was that, sir? 4 A. Within the last month or so. 5 Q. You were deposed about five weeks ago; 6 so, it would have been -- is this before or after 7 you were deposed? 8 A. Sometime -- it was before I was 9 deposed. I was in Washington to review some of 10 these documents, and then I gave my deposition. 11 And then again, I had a chance to review some of 12 these materials before today. 13 Q. Have you spent any time talking to 14 Mr. Schwartz or his colleagues about your 15 testimony? 16 A. Only generally. 17 Q. How long have you spent generally 18 talking to them? 19 A. Perhaps a total of 30 minutes. 20 Q. And when was that, sir? 21 A. I would say within the last week. 22 Q. Do you remember any subjects that you 9998 1 talked to them about? 2 A. Not specifically. The only items that 3 were directed to my attention were the examination 4 report, several memoranda, the written report on 5 the joint venture, copies of a couple of 6 regulations. And that's essentially it. 7 Q. Now, sir, you talked to us a little bit 8 about the role of the federal examiners and the 9 division of labor between you and the federal 10 examiners. 11 Do you recall that? 12 A. Yes, sir. 13 Q. Do you know, sir, whether the federal 14 examiners did their own analysis -- strike that. 15 Were you -- when there was the exit 16 interview on September 12, 1986, did you 17 personally leave the association, as well? At the 18 time of the exit interview, you left; is that 19 right? 20 A. As best I remember, yes, that was the 21 conclusion point. 22 Q. So, you had -- and at that point, would 9999 1 you have had any further contact with the federal 2 examiners? 3 A. No, sir. 4 Q. Do you know how much longer after that 5 they stayed on site? 6 A. I have no idea. 7 Q. And do you know what tasks they were 8 doing when they were on site, sir? 9 A. Other than the review of the loans 10 purchased, updating financial information and 11 that, I have no idea. 12 Q. So, you don't know, sir, whether they 13 did their own independent analysis of the major 14 loans, do you, sir? 15 A. No, I do not. 16 Q. Now, let's talk a little bit about the 17 Couch loans. You talked about Couch Mortgage. 18 Couch Mortgage was a big issue here in Houston, 19 wasn't it, sir? 20 A. Yes, sir, it was. 21 Q. It was a fraud that had been -- that 22 had affected a number of thrifts in Houston; isn't 10000 1 that right? 2 A. That is correct. 3 Q. And Mr. Couch, who had run a major 4 mortgage company, was ultimately charged 5 criminally in connection with that; isn't that 6 right? 7 A. I believe so. 8 Q. So, United wasn't alone in being 9 victimized by these fraudulent liens, was it, sir? 10 A. No, they were not. 11 Q. Now, do you know, sir, when United 12 first became involved with Couch Mortgage? 13 A. Not initially, no. I would say several 14 years prior to my examination. 15 Q. So, you don't know whether any of the 16 respondents in this case were responsible for 17 the -- establishing the relationship with Couch 18 Mortgage that ultimately led to these losses that 19 you've described in your examination report; is 20 that right? 21 A. I have no idea. 22 Q. And your criticism of United for not 10001 1 catching these whiteouts is a criticism you could 2 have directed at any one of a number of other 3 major thrifts in Houston; isn't that right, sir? 4 A. If it was involved in those 5 institutions, yes, that's correct. 6 Q. If it was involved with Couch Mortgage? 7 A. That is also correct, yes. 8 Q. Now, sir, you have before you what's 9 been marked as T7500, which is a major loan review 10 document that you, I guess, drafted and was filled 11 in by Mr. Nunn; is that right? 12 A. Yes, sir. 13 Q. And all of this handwriting on here is 14 Mr. Nunn's; is that right, sir? 15 A. To knowledge, it's all his, yes. 16 Q. Can you identify Mr. Nunn's 17 handwriting? If I were to point to a particular 18 line, could you tell me whether that was 19 Mr. Nunn's, or are you just assuming that this is 20 Mr. Nunn's handwriting because his name appears in 21 the upper left-hand corner? 22 A. I'm assuming that this is his write-up. 10002 1 However, he was the only one that was responsible 2 for reviewing major loans. 3 Q. So, when you testified that all the 4 writing on here was Mr. Nunn's, it was on the 5 basis of your assumption that he'd be the only 6 person to be doing this. Right? 7 A. Yes, sir. 8 Q. Now, in your description of T7500, you 9 leveled certain criticisms about -- strike that. 10 In discussing T7500 with Mr. Schwartz, 11 you noted that the check for financial statement 12 or credit report or the line for financial 13 statement or credit report isn't checked; is that 14 right? 15 A. Yes, sir. 16 Q. And you were critical of a loan that 17 would be made without a financial statement or 18 credit report; isn't that right? 19 A. Yes. 20 Q. Now, I looked at your final examination 21 report on the Park 410 loan, and I didn't see any 22 criticism of the absence of a final statement or 10003 1 credit report. 2 Did you see any such criticism, sir? 3 A. I don't recall any. 4 Q. Let's turn to the other line, the next 5 line. It says "no attorney's opinion or title 6 policy in the file." 7 There is a line to that effect; isn't 8 that right? 9 A. Yes. 10 Q. It's about 4 inches down or, no, about 11 2 inches down. And that's not checked either; is 12 that right? 13 A. Yes, sir. 14 Q. Now, sir, Mr. Schwartz asked you 15 whether you'd be critical of somebody making an 16 80-million-dollar loan without an attorney's 17 opinion or title policy in the file. And you said 18 you would; is that right? 19 A. Yes. 20 Q. That makes sense, doesn't it, sir? 21 A. Certainly. 22 Q. I looked in the final examination 10004 1 write-up, and I didn't see any criticism of the 2 absence of a title policy or attorney's opinion. 3 Did you see any such criticism, sir? 4 A. I don't recall any. 5 Q. Now, sir, under the policies and 6 procedures you were adopting at the time, if you 7 had not ultimately found in the loan file such 8 things as credit reports, attorney's opinions, and 9 title policies, you would have put it in your file 10 write-up on this association, wouldn't you, sir? 11 A. Yes, sir. This appears to be an 12 omission from filling out the sheet. But at this 13 point in time, I wouldn't have any idea other the 14 fact that if, in fact, you know, it was not in the 15 file, then it should have been written up in the 16 comment regarding the loan. 17 Q. Well, sir, given the care that would be 18 taken with an 80-million-dollar loan, you believe 19 that Mr. Nunn would have written it up in the 20 examination report if he had found no credit 21 reports, financial statements, attorney's 22 opinions, or title policy, don't you? 10005 1 MR. SCHWARTZ: Objection, Your Honor. 2 Assumes -- improper foundation and also is -- 3 assumes facts not in evidence. 4 THE COURT: Denied. You may answer. 5 THE WITNESS: Answer? 6 THE COURT: Yes. 7 A. Would you restate that, please? 8 Q. (BY MR. VILLA) Well, let me try it a 9 little differently because I can't remember. 10 Under the procedures that you were then 11 following, you would expect that Mr. Nunn would 12 put into the examination report write-up the fact 13 that this loan closed without a credit report, 14 audited financial statement, attorney's opinion, 15 or title policy, wouldn't you, sir? 16 A. Yes, sir. I would expect it to be in 17 there. 18 Q. So, your belief is, after looking at 19 this and the final examination report, that what 20 we're looking at in T7500 is an incomplete major 21 loan review on Park 410 West; isn't that right? 22 A. I can't verify that. All I can say is 10006 1 that the lines weren't filled out. 2 Q. The lines weren't filled out. Now, 3 sir, do you recall discussing this T7500 with 4 Mr. Nunn? 5 A. That would have been part of the 6 preliminary review. I would have looked at this 7 plus his write-up, yes. 8 Q. Was there supposed to be something 9 under the number 2 right there in the middle? 10 A. Where -- 11 Q. It's about 3 inches from the bottom. 12 It's the lowest handwritten number on there. 13 Do you see 1 and 2 both are circled? 14 A. Oh, okay. Yes. I see it. It would 15 appear that either he meant part of the above to 16 be No. 2 or that he did not complete that 17 particular area. 18 Q. Now, sir, I believe you said that you 19 would have expected to see an appraisal in this 20 file when Mr. Schwartz asked you some questions. 21 Right? 22 A. That's correct. 10007 1 Q. Now, sir, given the nature of this 2 loan, isn't it true that you would expect to see 3 an as-developed appraisal in this file? Do you 4 understand the difference between as-developed and 5 as-is in appraisals? 6 A. Yes, sir. There is a difference. 7 Q. Wouldn't you expect to see an 8 as-developed appraisal in this file for this type 9 of loan? 10 A. I would assume so, but I have not done 11 any kind of safety and soundness examinations for 12 better than 10 years. 13 Q. What is the difference between an as-is 14 and as-developed appraisal? 15 A. As I recall, an as-is is the value of 16 the property or the land as it is in its natural 17 state. 18 Q. And an as-developed appraisal, as you 19 understand it? 20 A. Would be as developed with whatever was 21 involved in the development of the loan, be it 22 utilities, streets, whatever. 10008 1 Q. Now, in the -- Mr. Nunn's write-up and 2 in your final examination write-up, there is 3 discussion of the comparables. 4 Do you remember that, sir? 5 A. Yes, I do. 6 Q. Do you recall going out and checking on 7 the comparables? Did you collect information on 8 the comparables, sir? 9 A. No, I did not. 10 Q. Have you -- do you recall Mr. Nunn 11 going out and doing any work on the comparables? 12 A. Not to my knowledge. 13 Q. So, you made no independent analysis of 14 the comparables as to whether or not they were 15 useful in analyzing the value of this collateral 16 or not; is that right? 17 A. No. We did not go and look at any of 18 the comparables. It was not part of our 19 procedures. 20 Q. You told us, I think, in response to 21 Mr. Schwartz' question that the fact that some of 22 the comparables were one to three years old could 10009 1 indicate that the sales are not going well. 2 Do you remember that? 3 A. Yes, I remember. 4 Q. Where were you living in 1986? 5 A. San Antonio, Texas. 6 Q. Do you recall that not long after that 7 Sea World came into a suburb of San Antonio? 8 A. I do. 9 Q. Now, would you admit to the 10 possibility, sir, that people weren't selling land 11 in that area because they were hoping to benefit 12 by the increase in value from Sea World coming in? 13 MR. SCHWARTZ: Objection. Calls for 14 speculation, Your Honor. 15 THE COURT: Well, if he knows. Denied. 16 Do you know whether that's the case? 17 THE WITNESS: I have no idea. 18 Q. (BY MR. VILLA) Now, you described to 19 us your meetings with Mr. Gross on Thursday 20 afternoons right after lunch; is that right? 21 A. Normally, it was held on a Thursday 22 simply because Friday was a day that we traveled 10010 1 back to our homes. 2 Q. Do you actually remember setting up 3 meetings with Mr. Gross Thursday after lunch, or 4 was it simply your general practice as an examiner 5 to meet with management every Thursday before you 6 traveled back to your home? 7 A. This was set up at the early part of 8 the examination between Mr. Gross and myself. He 9 wanted to be kept up with how things were going 10 with the examination. Originally, he wanted to do 11 it on Friday; and I asked him if we could change 12 it to a Thursday. And that's how these meetings 13 were established. 14 Q. And these were at the request of 15 Mr. Gross so he could find out how the examination 16 was going; is that right? 17 A. Yes, that's correct. 18 Q. Is it unusual for a chief executive 19 officer or chairman of the board to show that 20 degree of interest in meeting with the examiners 21 every week to find out how the examination is 22 going? 10011 1 A. I don't believe you could consider that 2 unusual. 3 Q. Now, you testified that the comments in 4 Mr. Nunn's write-up near the end -- and his 5 write-up is 7501 -- near the end to the effect 6 that management indicated that the borrowers have 7 brought strength to the transaction, both 8 financially and by reputation indicates that the 9 borrowers -- I'm sorry -- that management were 10 satisfied with the loan. 11 Do you remember that, sir? 12 A. Yes, sir. 13 Q. Isn't that what you'd expect? I mean, 14 you'd expect management to be satisfied with 15 having just -- with the borrowers if it just 16 approved an 80-million-dollar loan, wouldn't you, 17 sir? 18 A. I would hope so. 19 Q. If it said anything to the contrary, 20 you'd be shocked, wouldn't you? 21 A. Yes, I surely would. 22 Q. Now, do you know who was in charge of 10012 1 real estate lending at United? Who's the most 2 senior lending officer at United? 3 A. I don't recall offhand. I know David 4 Graham was involved in the process, but I don't 5 know exactly what his position was in the lending 6 function. 7 Q. Did you ever deal with a man named Gem 8 Childress? 9 A. Not to my knowledge. 10 Q. Do you know who Gem Childress is? 11 A. Only by name. 12 Q. Have you ever dealt with him in his 13 role as supervisory agent for the Texas Savings 14 and Loan Commission? No? 15 A. Not to my knowledge. I wasn't aware 16 that he was even with the Commission. 17 Q. Let's take a look at Mr. Graham's memo 18 to you, which is T7089. I'm sorry. It's 19 Mr. Graham's memo to David -- to -- strike that. 20 If you look at T7089, which is 21 Mr. Graham's memo to Jeff Nunn -- do you have that 22 before you, sir? 10013 1 A. I have it before me. 2 Q. I gather that you read this memo, as 3 well as Mr. Nunn at the time? 4 A. Yes, I did. 5 Q. And your recollection is that 6 Mr. Graham's memo didn't affect your analysis of 7 the appraisals; is that right? 8 A. Yes, sir. 9 Q. But you did take into consideration 10 certain of the other things he said in his 11 memorandum, particularly about the land flip. 12 Right? 13 A. That's correct. 14 Q. You talked to us a little about a 15 criticism you had of United because its books were 16 kept on a GAAP basis -- United Savings Association 17 of Texas -- is that right? 18 A. That's correct. 19 Q. GAAP is generally-accepted accounting 20 principles? 21 A. That is also correct. 22 Q. Now, sir, it's true, isn't it, that 10014 1 apart from certain federally-insured financial 2 institutions, virtually all of the other 3 corporations and businesses in America keep their 4 books under generally-accepted accounting 5 principles; isn't that right? 6 A. Probably so. I have no idea. 7 Q. Do you know what generally-accepted 8 accounting principles is as a general rule? 9 Strike that. 10 Have you ever had -- have you ever been 11 trained in the difference between 12 generally-accepted accounting principles and 13 regulatory accounting principles? 14 A. No. No training. 15 Q. And do you know whether, for example, 16 national banks keep their books and records on 17 generally-accepted accounting principles? 18 MR. SCHWARTZ: At what point in time 19 are you referring to? Any particular -- 20 MR. VILLA: 1986. 21 A. At that point in time, I don't believe 22 so. 10015 1 THE COURT: You don't believe what? 2 THE WITNESS: That they were kept on a 3 GAAP basis, sir. 4 Q. (BY MR. VILLA) Now, sir, in 5 nineteen -- in the mid-1980s, the Texas economy 6 was adversely affected by oil price problems; 7 isn't that right? 8 A. That is correct. 9 Q. And certain areas were hit harder than 10 others; isn't that true? 11 A. That's correct. 12 Q. One of the areas that was hit hardest 13 was Houston, Texas; isn't that right? 14 A. One of the hardest. 15 Q. And one of the results of that was a 16 flood of defaults by homeowners on their homes. 17 Isn't that also right? 18 A. That's correct. 19 Q. And when you examined United Savings 20 Association of Texas in 1986, you saw, sir, that 21 there were thousands of people who were defaulting 22 on their homes in Houston; isn't that right? 10016 1 A. That's also correct. 2 Q. And that's one of the reasons that 3 United was overwhelmed with this REO and with the 4 documentary problems that you discuss in your 5 examination report; isn't that right, sir? 6 A. I'm not sure I agree with that. 7 Q. In your experience as a federal or 8 state examiner, have you ever seen a time period 9 when so many people defaulted on their home loans 10 in such a short period of time as in the mid-1980s 11 in Houston? 12 A. I don't believe so. 13 Q. Now, you were talking to us about the 14 management questionnaire that was in your 15 examination report, which is T7502. 16 And I'd like you to turn to that 17 management questionnaire. I believe it's Page 169 18 in there. 19 A. All right. I have it. 20 Q. And you told us, I believe, that you 21 were critical of -- and we'll figure out who it is 22 later -- but you were critical of whoever filled 10017 1 out this report because Paragraph 15 on Page 170 2 did not reflect Mr. Krasovec's name; isn't that 3 right? 4 A. That is correct. 5 Q. Now, if Mr. Krasovec was a guarantor of 6 this loan as opposed to a borrower, would it be 7 picked up by the literal language of that 8 Paragraph 15? 9 A. I don't believe it would have, no. 10 Q. Now, this document appears to have been 11 signed by Mr. Gerald Williams. 12 Do you see that, sir? 13 A. Yes, I do. 14 Q. Do you ever recall meeting with Gerald 15 Williams? Jerry Williams, he goes by. 16 A. I believe that he was at the exit 17 conference; but any other meetings, I don't 18 recall. 19 Q. Do you have any reason to believe that 20 Mr. Williams was trying to mislead anyone when he 21 prepared this management questionnaire -- when he 22 signed this management questionnaire? 10018 1 A. I have no knowledge to that effect. 2 Q. In fact, the answer on the management 3 questionnaire is not -- under Paragraph 15, it 4 isn't "no." It's, quote, "none known," isn't it, 5 sir? 6 A. That's correct. 7 Q. You talked to us a little bit about the 8 concept of operating income. 9 Do you remember that? 10 A. Yes. 11 Q. And you were distinguishing with 12 Mr. Schwartz between non-operating income and 13 operating income. Right? 14 A. I recall. 15 Q. And I believe that you said that 16 operating income were those moneys that would be 17 received on a consistent basis. Right? 18 A. That's correct. 19 Q. And non-operating income would be, 20 quote, generally a one-time amount, not 21 reoccurring. Isn't that right, sir? 22 A. That's correct. 10019 1 Q. Now, we have admitted in evidence in 2 this case a memorandum from Mister -- from 3 Ginger Baugh, who is a state supervisory person, 4 dated June 2nd, 1986, in which Michael Crow argued 5 to the federal examiners -- 6 MR. SCHWARTZ: Counsel, do you want to 7 identify the exhibit number and may I -- do you 8 have a copy of it? 9 MR. VILLA: It's your Tab 887. 10 MR. SCHWARTZ: Give me a moment, 11 please. 12 MR. VILLA: I'll read the line, if 13 you'd like. 14 MR. SCHWARTZ: A, I would like -- 15 please. 16 MR. VILLA: Okay. 17 MR. SCHWARTZ: I would like to give the 18 witness an opportunity to review the context of 19 the phrase or sentence that you're going to show 20 him. I think that's fair. 21 MR. VILLA: That's fine. 22 THE COURT: Is that an exhibit that's 10020 1 in the record? 2 MR. VILLA: Yes, Your Honor. 3 THE COURT: And what's the exhibit 4 number? 5 MR. VILLA: It's Tab 887. It's Exhibit 6 B4001. 7 8 (Discussion off the record.) 9 10 Q. (BY MR. VILLA) I'm going to ask you 11 about the third-to-last paragraph on the second 12 page, but I don't want to foreclose you from 13 looking at anything else, sir. 14 MR. EISENHART: Your Honor, while the 15 witness is looking at that, I think Mr. Villa may 16 have misspoken a moment ago and described 17 Ms. Baugh as a state regulatory person. I think 18 he meant to say federal. 19 MR. VILLA: I meant to say federal, 20 Your Honor. 21 MR. SCHWARTZ: Which paragraph are you 22 referring to, Mr. Villa? 10021 1 MR. VILLA: "According to." It's the 2 fourth paragraph down on the second page. 3 A. (Witness reviews the document.) I've 4 read it. 5 Q. You've read it, sir? Now, the time 6 period June 2, 1986, would have been while your 7 team was there examining United. Right? 8 A. That is correct. 9 Q. Now, sir, in this paragraph, it 10 reflects that Mr. Crow was making the argument to 11 the federal examiners and supervisory people that 12 income from securities transactions should not be 13 considered extraordinary as United has made them 14 part of its ordinary operations. 15 Do you see that, sir? 16 A. I see that. 17 Q. Did they make that same argument to you 18 when you were trying -- when you were 19 characterizing the different sources of income for 20 United Savings Association? 21 A. Not to my knowledge. 22 Q. Do you recall, sir, that United's 10022 1 operations had developed a very substantial 2 securities -- strike that. 3 Do you recall, sir, that United had 4 developed very substantial securities portfolios 5 in 1986? 6 A. Vaguely, I remember, yes. 7 Q. Do you know whether or not they had any 8 mortgage-backed securities? 9 A. They had some. I don't recall the 10 amount. 11 Q. Did they have any derivatives? Do you 12 know what a derivative is, sir? 13 A. I know what it is, but I don't recall 14 if they had any at that time or not. 15 Q. How about junk bonds? Do you know if 16 they had junk bonds, sir? 17 A. Yes. I do recall that. 18 THE COURT: Mr. Villa, how much are you 19 going to have on cross? 20 MR. VILLA: I would say about another 21 hour and 40 minutes, Your Honor. 22 THE COURT: All right. We'll adjourn 10023 1 until 9:00 o'clock tomorrow. 2 3 (Whereupon at 5:03 p.m. 4 the proceedings were recessed.) 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 10024 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 10th day of 17 December, 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 10025 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Shauna Foreman, the undersigned 5 Certified Shorthand Reporter in and for the 6 State of Texas, certify that the facts stated 7 in the foregoing pages are true and correct 8 to the best of my ability. 9 I further certify that I am neither 10 attorney nor counsel for, related to nor employed 11 by, any of the parties to the action in which this 12 testimony was taken and, further, I am not a 13 relative or employee of any counsel employed by 14 the parties hereto, or financially interested in 15 the action. 16 SUBSCRIBED AND SWORN TO under my hand 17 and seal of office on this the 10th day of 18 December, 1997. 19 _____________________________ SHAUNA FOREMAN, CSR 20 Certified Shorthand Reporter In and for the State of Texas 21 Certification No. 3786 Expiration Date: 12-31-98 22