1418 1 UNITED STATES OF AMERICA Before the 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 In the Matter of: ) 4 ) UNITED SAVING ASSOCIATION OF ) 5 TEXAS, Houston, Texas, and ) ) 6 UNITED FINANCIAL GROUP, INC., ) Houston, Texas, a Savings ) 7 and Loan Holding Company ) ) OTS Order 8 MAXXAM, INC., Houston, Texas, ) No. AP 95-40 a Diversified Savings and ) Date: 9 Loan Holding Company ) Dec. 26, 1995 ) 10 FEDERATED DEVELOPMENT CO., ) a New York Business Trust, ) 11 ) CHARLES E. HURWITZ, ) 12 Institution-Affiliated Party ) and Present and Former Director ) 13 of United Savings Association ) of Texas, United Financial Group,) 14 and/or MAXXAM, Inc.; and ) ) 15 BARRY A. MUNITZ, JENARD M. GROSS,) ARTHUR S. BERNER, RONALD HUEBSCH,) 16 and MICHAEL CROW, Present and ) Former Directors and/or Officers ) 17 of United Savings Association of ) Texas, United Financial Group, ) 18 and/or MAXXAM, Inc., ) ) 19 Respondents. ) 20 TRIAL PROCEEDINGS FOR 9-30-97 21 22 1419 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire Special Enforcement Counsel 4 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire 5 and BRYAN VEIS, Esquire of: Office of Thrift Supervision 6 Department of the Treasury 1700 G Street, N.W. 7 Washington, D.C. 20552 (202) 906-7395 8 ON BEHALF OF RESPONDENT MAXXAM, INC.: 9 FRANK J. EISENHART, Esquire 10 and BETTINA LAWTON, Esquire of: Dechert, Price & Rhoads 11 1500 K Street, N.W. Washington, D.C. 20005-1208 12 (202) 626-3306 16 13 DALE A. HEAD (in-house) Managing Counsel 14 MAXXAM, Inc. 5847 San Felipe, Suite 2600 15 Houston, Texas 77057 (713) 267-3668 16 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND 17 CHARLES HURWITZ: 18 RICHARD P. KEETON, Esquire of: Mayor, Day, Caldwell & Keeton 19 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 20 (713) 225-7013 3 21 22 1420 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 of: Gibson, Dunn & Crutcher 1050 Connecticut Avenue, N.W. 8 Washington, D.C. 20036-5303 (202) 955-8500 9 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 10 JOHN K. VILLA, Esquire 11 MARY CLARK, Esquire PAUL DUEFFERT, Esquire 12 of: Williams & Connolly 725 Twelfth Street, N.W. 13 Washington, D.C. 20005 (202) 434-5000 14 OTS COURT: 15 HONORABLE ARTHUR L. SHIPE 16 Administrative Law Judge Office of Financial Institutions Adjudication 17 1700 G Street, N.W., 6th Floor Washington, D.C. 20552 18 Jerry Langdon, Judge Shipe's Clerk 19 REPORTED BY: 20 Ms. Marcy Clark, CSR Ms. Erica Davis, CSR 21 22 1421 1 P-R-O-C-E-E-D-I-N-G-S 2 3 4 THE COURT: The hearing will come to 5 order unless there are preliminary matters, we 6 will continue with the cross-examination of the 7 witness. Mr. Eisenhart. 8 MR. EISENHART: Yes, Your Honor. The 9 only preliminary matter I'm aware of would be that 10 we would hope we could get before the end of the 11 day today from OTS a list of the witness that is 12 they propose to call next week. I suggest it 13 today only because we will be break can at noon 14 tomorrow and people will be scurrying for the 15 airport and there may not be time to deal with it 16 tomorrow. But we can take that up with our 17 colleagues at a break. 18 MR. RINALDI: Your Honor, we have been 19 in constant communication with Mr. Keeton on the 20 subject. Mr. Guido has. I think they know fairly 21 well who we are calling next week but just so it's 22 on the record, I believe Gerald Williams, 1422 1 Mr. Kozmetsky, Mr. Goldberg, and I believe 2 Mr. Hansen. But we will get back to you with a 3 definitive list. 4 THE COURT: All right. Proceed. 5 MR. EISENHART: Thank you, Your Honor. 6 7 FURTHER CROSS-EXAMINATION 8 9 10 Q. (BY MR. EISENHART) Good morning, 11 Mr. Schwartz. 12 A. Good morning. 13 Q. We'll start by taking a look at OTS 14 Exhibits T1144 and 1146. These are the two 1988 15 option extension agreements. 16 A. Yes, sir. 17 Q. Now, these extension agreements were 18 entered into in the spring of 1988; is that 19 correct? Spring and summer of 1988? 20 A. Yes, sir. 21 Q. And as I recall, the resolution that 22 had given Federated and MCO permission to acquire 1423 1 up to 35 percent and become a holding company had 2 expired in December 1987. Is that consistent with 3 your recollection? 4 A. Yes, sir. 5 Q. With the expiration of that bank board 6 resolution, would MCO have been in a position to 7 actually acquire the shares pursuant to these 8 extensions of the option agreement? 9 MR. RINALDI: I'm going to object to 10 the form of the question. It calls for a legal 11 conclusion. The question of whether they could 12 legally acquire the shares or not is one for the 13 Court to decide and not for a lay witness. 14 MR. EISENHART: I'm asking his legal -- 15 I'm not asking him legal conclusion. I'm simply 16 asking him his interpretation of the legal 17 agreement he signed. 18 Q. As you interpret the agreement, 19 Mr. Schwartz, with the expiration of that 20 resolution in December 87, would MCO have been in 21 a position to exercise its call option pursuant to 22 either of these extension agreements without some 1424 1 further action? 2 A. No, sir. It was my understanding that 3 it was not permitted to acquire additional shares. 4 Q. And was it your understanding that in 5 order to exercise the call under either of these 6 extension agreements, you would have gone -- had 7 to go back to the bank board and reply for 8 permission to go over the 25 percent? 9 A. Permission by whatever means would need 10 to have been sought. I don't know if that was the 11 bank board per se, but we didn't then have 12 permission to go to the 25 percent mark or beyond. 13 Q. So, it was your understanding that 14 something more would have had to have been done 15 before you could exercise this option? 16 A. Yes, sir. 17 Q. Why exactly did you want to extend this 18 option in the spring of 1988? 19 A. Well, at this point in time, the 20 United Financial Group, Inc., board -- I think I 21 testified yesterday -- was actively engaged still 22 in discussions that ultimately led to, I believe 1425 1 what is termed a Southwest Plan transaction. But 2 basically, we were then involved in trying still 3 to identify someone who would recapitalize 4 United Financial Group and United Savings 5 Association of Texas. And we were still highly 6 optimistic that, indeed, UFGI would, quote, be a 7 survivor, unquote. That's the term I think that 8 we had heard back from the regulators and that we 9 still felt that holding shares of UFGI and having 10 the ability to acquire at a future date additional 11 shares of UFGI would still even at that point in 12 time prove to be a good investment. 13 Q. Now, you say you were getting a message 14 back from the regulators that USAT would be a 15 survivor. How were you getting that message? 16 A. Well, most of that as I recall was 17 coming back from the reports that were made by the 18 management of USAT and those who were also on the 19 UFGI board regarding their discussions with the 20 regulators which were as I recall ongoing during 21 this period; and also, I recall the regulators 22 were actually sitting in on board meetings, 1426 1 perhaps not every board meeting but most of them 2 if I recall correctly during this period. And 3 they had spoken to us about how we had good 4 management. We were efficient in operations. We 5 had low costs. They seemed to feel that people 6 knew what they were doing and that among all the 7 Texas savings and loans, they had high regard for 8 the people there and that, therefore, they were 9 optimistic that at the end of the day, a 10 recapitalization under the Southwest Plan or one 11 of the earlier types of transactions I spoke about 12 might well be accomplished. 13 Q. There have been several references in 14 this proceeding to the Southwest Plan. I'm not 15 sure anybody has ever really described what it is. 16 What was your understanding of the Southwest Plan, 17 what it was? 18 A. I'm not sure I have a precise 19 understanding of exactly what it was but I think 20 the best example that I can think of is the 21 transaction that ultimately the Ranieri Group did 22 with United Savings Association of Texas where 1427 1 they agreed to do certain things and the 2 government agreed to provide certain types of 3 assistance by infusing notes, capital notes I 4 think it was, and providing for interest rate 5 support agreements and other types of regulatory 6 relief that were sought by people who at that 7 point were interested in infusing capital. And I 8 believe it related primarily to institutions in 9 the southwest. 10 Q. And was this generally a plan by the -- 11 under which the government by offering certain 12 forms of assistance sought to attract new capital 13 and new investment into southwest savings 14 institutions? 15 A. Yes, sir. That was my general 16 understanding. 17 Q. And I think you testified yesterday 18 that MAXXAM was actively pursuing and I believe 19 actually made a bid to acquire USAT as part of the 20 Southwest Plan; is that correct? 21 A. Yes, sir, that's my recollection. 22 Q. And that was all going on in the same 1428 1 time period of spring and summer of 1988? 2 A. Yes. The process was underway. I 3 don't remember precisely where it was. 4 Q. And you were aware at the time these 5 extension agreements were entered into that that 6 process was underway? 7 A. Yes, sir. 8 Q. I'm going to ask you to take a look for 9 a moment at two exhibits which were shown to you 10 yesterday. First is A2071. It's Amendment No. 10 11 to the UFG13D statement and the second is -- I 12 guess it was Lazard Exhibit No. 1 which is the 13 zero coupon note. That one ought to be pretty 14 fat. You should be able to find that pretty 15 easily. 16 A. I'm sorry. The 2071 did you say, sir? 17 Q. Right. A2071. 18 A. And also, did you say Exhibit 1 the 19 zero coupon note? 20 Q. That's. It's Exhibit 19 from 21 Mr. Lazard's deposition? 22 A. Yes, sir. I have those. 1429 1 Q. Now, on the zero coupon note, 2 Exhibit 1, Mr. Rinaldi referred you specifically 3 to page 17. 4 A. Yes, sir. 5 Q. And he referred you specifically to the 6 statement on that page that the net proceeds from 7 the sale of the notes will be added to the 8 companies working capital and will be utilized for 9 general corporate purposes. Do you see what I 10 referred to? 11 A. Yes, sir. 12 Q. And I think we established that the 13 proceeds from that note, the net proceeds, were 14 going to be on the order of something like 3.4 or 15 $3.5 million; is that correct? 16 A. Yes, sir. 17 Q. He then showed you Exhibit A 2071 which 18 is Amendment No. 10 to UFG's 13D and he referred 19 you to page five of that exhibit. And the 20 document is there describing the sources of funds 21 used to acquire the UFG stock owned by MCO and 22 Federated and it says there under, I guess, small 1430 1 III, small three, that $3,518,086 was obtained 2 from the corporate general -- or the general 3 corporate funds of MCO. Do you see that 4 reference? 5 A. Yes, sir. 6 Q. And I think he asked you whether there 7 was a certain similarity between those two numbers 8 and you said you didn't think they bore any 9 relationship? 10 A. Yes, sir. 11 Q. Okay. I don't think he really pointed 12 out the dates of these respective documents. 13 Turning to the end of the 13D, can you see the 14 date on which that was filed? I think it might 15 appear on Page 9. 16 A. I believe it's signed by several people 17 as of July 12th, 1983. 18 Q. Okay. So, this is a report filed on or 19 about July 12th, 1983; is that correct? 20 A. Yes, sir. 21 Q. And when was the zero coupon note 22 issued? 1431 1 A. That was issued more than a year 2 earlier on July 26th, 1982. Excuse me. 3 Approximately a year earlier, July 26th, 1982. 4 Q. I'm sorry. You're right. I want to 5 show you two different documents. I'll give them 6 to you together the first of which is Exhibit A 7 2085. I'll state for the record that that is a 8 form 10Q for MCO Holdings received at the 9 Securities and Exchange Commission on May 17th, 10 1982, and the second is Exhibit A 2086 and that's 11 a 10Q received on August 16, 1982. You don't have 12 these yet so don't look for them. And these are 13 respectively MCO's 10Qs for the first two quarters 14 of 1982. 15 A. I'm sorry. Did I keep only one, or did 16 I keep two? 17 Q. You want to keep the top one and pass 18 the other two to the Judge and his clerk. 19 A. Oh, I see. Thank you. Staples appear 20 to be sticking out, Your Honor. 21 MR. RINALDI: Do we have a copy? 22 MR. EISENHART: Oh, I'm sorry. 1432 1 Q. (BY MR. EISENHART) Now, let's turn 2 first to 2085 which is the 10Q for the first 3 quarter of 1982. Would you turn to the third page 4 of that exhibit, Mr. Schwartz? It's the page that 5 has the Post-it note on it. On the third page, 6 there is a consolidated balance sheet of MCO 7 Holdings. 8 A. That's the page that is actually Page 2 9 of the document itself, sir? 10 Q. Correct. Page 3 of the exhibit, Page 2 11 of the document. The first line on that balance 12 sheet under current assets is cash and cash 13 equivalents. Can you read the cash number, the 14 amount of cash that MCO was reporting that it held 15 as of March 31, 1982? 16 A. That would appear to be $25,125,000. 17 Q. Would you take a look then at Exhibit A 18 2086 and again, looking at the third page of the 19 exhibit, the second page of the filing, would you 20 give me the cash number as of June 30, 1982? 21 A. Yes. That would appear to be 22 $23,585,000. 1433 1 Q. So, in the first half of 1982 then, MCO 2 had cash reserves in the 23- to 25-million-dollar 3 range; is that correct? 4 A. Yes, sir. 5 Q. And would that have been cash that 6 would be available for use for general corporate 7 purposes? 8 A. Yes, sir. 9 Q. Such as buying UFG stock? 10 A. Yes, sir. 11 Q. And I repeat again, do you have any 12 reason to believe that the proceeds from the zero 13 coupon note, that three and a half million dollars 14 from the zero coupon note was specifically 15 earmarked in any fashion or earmarked in any 16 fashion for the purchase of UFG stock? 17 A. No, sir, I don't. 18 Q. It was used for general corporate 19 purposes, was it not? 20 A. Yes, sir, it was. 21 Q. Just like the $25 million in cash 22 already on-hand? 1434 1 A. Yes, sir. 2 Q. Would you take a look at Exhibit T1113? 3 THE COURT: Are you going to move the 4 receipt of these? 5 MR. EISENHART: I'm sorry, Your Honor. 6 Thank you for reminding me. Yes. I would move 7 2085 and 2086. 8 THE COURT: No objection having been 9 received, the documents are received. 10 Q. (BY MR. EISENHART) Would you take a 11 look, Mr. Schwartz, at Exhibit T1113? And the 12 cover page of that exhibit is a letter on the 13 letterhead of the law firm of McKenna Conner & 14 Cuneo. 15 MR. RINALDI: What's the date of that, 16 Frank? 17 MR. EISENHART: January 31, 1986. 18 There are actually several documents, but that's 19 the date of the first document. 20 A. I'm sorry. The number again of that 21 exhibit? 22 Q. (By Mr. Eisenhart) 1113. 1435 1 A. 1113? 2 Q. Yes. Now, turning toward the end of 3 that exhibit, I want to refer you specifically to 4 the letter dated December 5th, 1985, from 5 Mr. Dan Kearney of Solomon Brothers. I think it's 6 about four pages from the end of the exhibit. 7 A. Yes, sir. 8 Q. Now, in this letter, Mr. Kearney lays. 9 Out the reasons why he thinks that an 10 open-ended net-worth maintenance agreement would 11 restrict MCO's access to the capital markets; is 12 that correct? 13 A. Yes, sir. 14 Q. I'll refer you specifically to the next 15 to last paragraph of that letter where he notes -- 16 where he says finally: Issued note -- issued also 17 note that you are not alone in your concern over 18 the negative effect of an undertaking in as much 19 as I am aware of several other companies that view 20 the unlimited net worth commitment as a serious 21 impediment to their entry to into the savings and 22 loan industry. 1436 1 Were you aware that this was an issue 2 with companies other than MCO at the time MCO was 3 negotiating this with the bank board? 4 A. Yes, indirectly in the sense that I 5 became aware I think I indicated earlier of the 6 Ford First Nationwide transaction where a number 7 had been fixed as opposed to remaining open-ended. 8 Q. And you did refer to that earlier 9 although I don't think there was any elaboration 10 as to what that was. Was that a transaction in 11 which Ford Motor Company actually acquired a 12 thrift institution? 13 A. That was my understanding, sir, yes. 14 Q. And was it your understanding that they 15 also bought -- that the notion of an open-ended 16 net-worth maintenance agreement? 17 A. Generally, sir, yes. 18 Q. And was it your understanding that they 19 were able to negotiate some sort of satisfactory 20 conclusion? 21 A. Yes, that was my general understanding. 22 Q. Would you take a look, Mr. Schwartz, 1437 1 now at the document? I think it was identified as 2 Schwartz Deposition Exhibit 2. It's the outline 3 for the Drexel road show. Now, this was an 4 outline for a presentation in July of 1985; is 5 that correct? 6 A. Yes, sir. 7 Q. In July of 1985, was MCO a very 8 different company in terms of its size and makeup 9 than what is now known as MAXXAM, Inc., today? 10 A. Yes, sir, very different. 11 Q. Much smaller company in July of 1985? 12 A. Yes, sir. Much smaller. We didn't own 13 or have an interest in Kaiser Aluminum, a 14 multi-billion-dollar corporation, nor did we have 15 any interest at that point in the Pacific Lumber 16 Company. And I don't remember what our interest 17 was at that point precisely in MAXXAM group, Inc., 18 but if I remember correctly, we didn't own but 19 about 38 percent of that company at the time 20 whereas now, we own all of it. 21 Q. So, an issue such as a potential 22 open-ended net-worth maintenance obligation would 1438 1 have been a much more significant issue to you in 2 view of your size in those days? 3 A. I think it would have been an issue to 4 us no matter what size we were; but certainly it 5 was more acute at that point in time, yes. 6 Q. Now, Mr. Rinaldi asked you specifically 7 if you thought that becoming a savings and loan 8 holding company could impair your access to the 9 capital markets, and I think you said you thought 10 it could. Do you remember that testimony? 11 A. Yes. 12 Q. Would you believe that becoming an S&L 13 holding company would have impaired your ability 14 to access the capital markets if, in fact, you had 15 been able to work out a satisfactory arrangement 16 with the Federal Home Loan Bank Board that would 17 have taken care of the net-worth maintenance 18 obligation; that is some sort of substitute 19 arrangement? 20 A. No. I think we were also aware of 21 other issues at the time, sir, that I think I 22 testified to earlier regarding debt budgets, 1439 1 regarding appropriate lines of business for 2 savings and loan holding companies and certain 3 percentage limitations; that is, I don't recall 4 specifically all of which I think would have 5 impacted it in one way or another. 6 Q. So, this would have been an issue that 7 in any event you would have felt you ought to 8 raise with potential investors in your company? 9 A. Yes, sir. 10 Q. Mr. Schwartz, I want to go through with 11 you hopefully rather quickly a series of documents 12 and I don't think you were in the courtroom at the 13 time, but during the opening remarks, there was an 14 issue raised as to whether -- whether there was 15 any public notice by MCO concerning the Drexel 16 option. 17 Let me just ask you as a predicate: 18 Was there any effort that you are aware of at MCO 19 to keep the existence of the Drexel option a 20 secret? 21 A. No, sir, not at all. 22 Q. Was there any reason that you can think 1440 1 of why you would not have wanted USAT's federal 2 regulators to know about the existence of the 3 Drexel option? 4 A. No, sir. 5 MR. EISENHART: We'll start with an 6 exhibit that's A2085. I had marked A2085 in my 7 binder; and for some reason when I pull it out, 8 it's A2084. So, I will offer it as A2084 because 9 that's the number that appears on the copy that 10 I'm going to hand out. 11 Q. (BY MR. EISENHART) Exhibit A 2084 is 12 an SEC Form 10K for MCO Holdings, Inc., for the 13 fiscal year ended December 31, 1985. Do you 14 recognize this document, Mr. Schwartz? 15 A. Yes. It is a 10K. 16 Q. You're familiar generally with these 17 SEC filings? 18 A. Yes, generally. Again, I don't have 19 the specific recollection on this particular 20 document any more than any of the other documents 21 I don't specifically recall; but I'm sure this is 22 a 10K, yes. 1441 1 Q. And you see these as a matter of 2 routine? 3 A. Yes, sir. 4 MR. EISENHART: Your Honor, I would 5 offer Exhibit A 2084. 6 THE COURT: Received. 7 Q. (BY MR. EISENHART) Would you turn to 8 page 14 of that exhibit, Mr. Schwartz? And on 9 page 14, you will see under the heading 10 United Financial Group, Inc., about -- I guess 11 it's in the sixth line down, the sentence that 12 begins "in December 1985." Do you see what I 13 refer to? 14 A. Yes. 15 Q. Would you read that sentence into the 16 record, please? 17 A. Yes. "In December 1985, the company 18 entered into an option agreement with an 19 unaffiliated third party to acquire 300,000 shares 20 of the common stock of UFG during the 30-day 21 period commencing on July 1st, 1988, at a purchase 22 price of $8.59 per share." 1442 1 Q. Does that refer to what we've been 2 calling here the Drexel option? 3 A. Yes, sir. 4 Q. Would you turn to page 76 of that 5 document? And 76 -- page 76 includes a list of 6 exhibits actually attached to the filing with the 7 SEC, does it not? 8 A. Yes, sir. 9 Q. Would you look at Exhibit 10.9 and read 10 into the record what exhibit 10.9 is? 11 A. Yes. "10.9, stock option agreement 12 dated as of December 23rd, 1985, between 13 registrant and Drexel Burnham Lambert 14 incorporated, (quote 'DBL' close quote) regarding 15 the option granted to registrant to acquire 16 300,000 shares of common stock of United Financial 17 Group, Inc. from DBL (excluding exhibits.) 18 Q. And does that refer to the Drexel 19 option? 20 A. Yes, sir, it does. 21 Q. And a copy of the option agreement was 22 physically attached to the Form 10K filed with the 1443 1 SEC. Is that what that indicates? 2 A. Yes, sir. 3 Q. Ask that's a public document that 4 anybody can go look at? 5 A. Yes, sir. 6 Q. I'll next hand you copies of 7 Exhibits B804 and B805. I'm sorry. The second 8 exhibit is not B805. It's B832. 9 Now, B804, Mr. Schwartz, is a letter 10 from Dr. Munitz to Mr. L.L. Bowman, the 11 commissioner of the Texas Savings and Loan 12 Department, and B832 is a letter from Mr. Bowman 13 back to Dr. Munitz. I think we've seen these 14 documents earlier in your testimony, have we not? 15 THE WITNESS: Excuse me, Your Honor. I 16 was just wanting to give you these. 17 A. I don't recall specifically if we saw 18 both of these. I think we alluded at least to 19 Exhibit B804 when I suggested that it was my 20 understanding that Dr. Munitz had alerted people 21 regarding the option. 22 Q. (BY MR. EISENHART) And in fact, 1444 1 B804 -- in B804, Dr. Munitz specifically tells the 2 Texas S&L department that the option has been 3 entered into; is that correct? 4 A. Yes. 5 Q. And in B832, Mr. Bowman acknowledges 6 that, does he not? 7 A. Yes. 8 Q. Okay. And would these letters be, in 9 your view, consistent with a desire to keep the 10 option a secret? 11 A. No, sir. 12 MR. EISENHART: Your Honor, I move the 13 admission of B804 and B832. 14 MR. RINALDI: No objection, Your Honor, 15 although I thought they had previously been 16 entered. 17 MR. EISENHART: Well, they may be, Your 18 Honor. We haven't worked out a very good system 19 yet, quite frankly, for keeping track of what's 20 been admitted and what's not been because of the 21 different numbering systems the parties are using. 22 MR. RINALDI: You know, in that regard, 1445 1 perhaps when we get to some breaking point or 2 juncture, we can go through and clean up the 3 record and agree upon exhibits. 4 MR. EISENHART: That would certainly be 5 fine with us, Your Honor. I don't want to burden 6 the record with duplicate materials but it's -- 7 THE COURT: I'm not sure either whether 8 it's been received. If not, they are received at 9 this point. 10 MR. EISENHART: Thank you, Your Honor. 11 THE COURT: I think they were received 12 under those numbers if they were. 13 MR. EISENHART: I think they may have 14 been received -- well, I don't know if it was 15 under those numbers or different numbers. 16 MR. RINALDI: I was just thinking maybe 17 we can use -- to the extent there are two 18 documents, we'll give them dual numbers; and then 19 they will just be one and that may make it easy. 20 MR. EISENHART: We don't think on our 21 list that they have yet been admitted, but we 22 could be wrong. 1446 1 Q. (BY MR. EISENHART) Next document I 2 want to show you, Mr. Schwartz, is Exhibit A 3013. 3 This is a proxy statement of the of 4 United Financial Group dated March 31, 1986. Do 5 you recognize this document or this type of 6 document? 7 A. Yes, sir. 8 Q. And you would see these periodically? 9 A. Yes, sir. 10 MR. EISENHART: Your Honor, I'd move 11 the admission of A3013. 12 MR. RINALDI: No objection, Your Honor. 13 THE COURT: Received. 14 Q. (BY MR. EISENHART) If you would turn 15 to Page 3 of the proxy statement under the 16 numbered paragraph 5, there is a sentence that 17 begins in December 1985; and I would ask you if 18 you would read that into the record? 19 A. This is under footnote 5, sir? 20 Q. Yes. Under note 5 there. And it's a 21 sentence that begins "in December 1985." 22 A. "In December 1985, DBL granted to MCO 1447 1 the call option on 300,000 shares of the company's 2 common stock which DBL holds. The call is 3 exercisable during a one-month period commencing 4 July 1, 1988. In the event that MCO does not 5 exercise the call, it is required to grant to DBL 6 a put option in respect to such shares exercisable 7 during a one-month period commencing August 1, 8 1988." 9 Q. And does that refer to what we've been 10 calling here the Drexel option? 11 A. Yes, sir. 12 Q. And this is a document that is filed 13 with the Securities and Exchange Commission and 14 sent out to all the stockholders of 15 United Financial Group, is it not? 16 A. Yes, sir. 17 Q. Now, Exhibit 954, do you recognize what 18 Exhibit 954 is, Mr. Schwartz? 19 A. I believe that this is all or part of a 20 document that was submitted to the Federal Savings 21 and Loan Insurance Corporation which document was 22 an application for the approval to issue a maximum 1448 1 principal amount of $50 million of subordinated 2 debt securities of United Savings Association of 3 Texas, and I believe the date of its submission 4 was on or about May of -- my date is very -- I 5 can't read the date here, sir. 6 Q. Let me give you another document that 7 may help you with the date of submission. I'll 8 hand you a copy of Exhibit B953 which is a letter 9 from Arthur S. Berner of United Financial Group, 10 Inc., to Mr. Neil Twomey, supervisory agent of the 11 Federal Home Loan Bank of Dallas, dated 12 April 29th, 1986. Does that appear to be the 13 transmittal letter for the subordinated debt 14 application? 15 A. It seems to be in connection with it, 16 sir; but this letter speaks to an application to 17 the Federal Home Loan Bank Board office of 18 district banks whereas the cover page on what you 19 gave me would appear to be to the federal savings 20 and loan insurance corporation. 21 Q. But they do appear to refer to the same 22 document, though, do they not? The subordinated 1449 1 debt application? 2 A. I couldn't say for certain. 3 Q. Okay. Would you turn to page 86 of 4 Exhibit B954? I'll refer you specifically to 5 numbered paragraph 6 on that page and to a 6 sentence beginning right at the bottom of the page 7 beginning in December 1985; and would you read 8 that into the record? 9 A. "In December 1985, DBL granted to MCO a 10 call option on 300,000 of the shares of UFG's 11 common stock which DBL holds (the call). The call 12 is exercisable during a one-month period 13 commencing July 1, 1988. In the event that MCO 14 does not exercise the call, it is required to 15 grant to DBL a put option in respect of such 16 shares. Exercisable during a one-month period 17 commencing August 1, 1988." 18 Q. And does that refer to what we have 19 been calling in this case the Drexel option? 20 A. Yes, sir. 21 MR. RINALDI: What page are you reading 22 from? 1450 1 MR. EISENHART: Page 86 and 87 of the 2 subordinated debt application. Your Honor, I 3 would move the admission of B953 and B954. 4 THE COURT: Received. 5 MR. RINALDI: No objection, Your Honor. 6 Q. (BY MR. EISENHART) Your Honor, I've 7 handed the witness a document which has been 8 marked Exhibit A 2074 and which is a Schedule 13D 9 Amendment No. 13 filed by United Financial Group, 10 Inc., with the Securities and Exchange Commission. 11 And I believe the signature date on this document 12 is April 30, 1986. Mr. Schwartz, do you see 13 documents such as this Schedule 13D in the normal 14 course of events? 15 A. Sometimes. 16 Q. You're familiar with documents of this 17 sort? 18 A. Yes. I see them from time to time. 19 Q. Would you turn to page 16 of this 20 Schedule 13D? Would you just read the material 21 you can -- I won't make you read it into the 22 record because it is rather lengthy, but would you 1451 1 just read the material on page 16 and tell me if, 2 in your opinion, that refers to what we've been 3 calling the Drexel option? 4 A. Yes, sir. The words appear to be 5 similar if not identical to the words that you 6 caused me to read into the record previously. 7 Q. And it refers to the put and the call, 8 does it not? 9 A. Yes, sir, it does. 10 Q. Refers to the letter of credit, does it 11 not? 12 A. Yes, sir, it does. 13 Q. Refers to the amount of the premium 14 paid for the option, does it not? 15 A. Yes, sir, it does. 16 Q. Refers to the purchase price of the 17 shares and the price per share, does it not? 18 A. Yes, sir, it does. 19 Q. It also refers to the escrow 20 arrangement does it not? 21 A. Yes, sir. 22 Q. And it says Drexel will retain sole 1452 1 rights to both the shares and to receive dividends 2 declared by UFG on the shares. It says that, too, 3 does it not? 4 A. Yes, sir, it does. 5 Q. And it also states, does it not, that a 6 copy of the agreement is filed herewith as 7 Exhibit 4? Does it state that? 8 A. Yes, sir, it does. 9 Q. And if you turn to -- look at the Bates 10 numbers at the bottom, it will be page OFD2 of 33. 11 The heading at the top of that reads Exhibit 4, 12 does it not? 13 A. Yes, sir, it does. 14 Q. And do that and the following pages 15 appear to you to be copies of the stock option 16 agreement that we've been referring to as the 17 Drexel option? 18 A. Yes, sir, it does. 19 Q. This is a document that's filed with 20 the Securities and Exchange Commission and is 21 available to anyone who wants to look at it, is it 22 not? 1453 1 A. Yes, sir. 2 MR. EISENHART: Your Honor, I would 3 move the admission of Exhibit A2074. 4 THE COURT: Received. 5 Q. (BY MR. EISENHART) Mr. Schwartz, I've 6 handed you a copy of a document which was marked 7 at the deposition of Mr. Neil Twomey of the 8 Federal Home Loan Bank of Dallas as Twomey 9 Deposition Exhibit 21 and which is a letter dated 10 August 29th, 1986, to Mister -- from Mr. Berner of 11 United Financial Group, Inc., to Mr. Twomey 12 transmitting the attached business plan of USAT to 13 the Federal Home Loan Bank of Dallas. Do you 14 recognize this document? 15 A. Yes, sir. I think I had previously 16 alluded to this document in my deposition. 17 Q. Now, will you turn to page 18 of the 18 business plan that Mr. Berner submitted to the 19 Federal Home Loan Bank of Dallas? 20 A. Yes, sir. 21 Q. On page 18, under the numbered 22 paragraph 6, there appears a sentence that begins 1454 1 "in December 1985." And just reading that 2 sentence to yourself, we won't burden the record 3 with it again, does that appear to refer to the 4 Drexel option in the same manner as the previous 5 statements we've read? 6 A. Yes. The language seems to be very 7 similar to those that we read into the record 8 earlier. 9 MR. EISENHART: Your Honor, I would 10 move the admission of Twomey Deposition 11 Exhibit 21. 12 MR. RINALDI: No objection, Your Honor. 13 THE COURT: Received. 14 Q. (BY MR. EISENHART) Your Honor I've 15 handed the witness Exhibit A2085 which is a 16 Form 10K filed with the SEC by MCO Holdings 17 Company for the fiscal year ended December 31, 18 1986. Do you recognize this document, 19 Mr. Schwartz? 20 A. Yes. It would appear to be the 10K as 21 you described it. 22 Q. And would you turn to page 14? 1455 1 A. Yes, sir. 2 Q. And under the heading "United Financial 3 Group," does it appear -- does there appear on 4 page 14 a description of the Drexel option 5 substantially similar to the ones we've seen in 6 earlier documents? 7 A. Yes. It does describe that, beginning 8 in the fifth line on page 14, in language similar 9 to the language we read into the record earlier. 10 Q. Beginning with the words "in 11 December 1985." Right? 12 A. Yes, sir. 13 Q. Okay. Would you turn to page 77 of 14 that document? It's a list of exhibits to the 15 10K, is it not? 16 A. Yes, sir. 17 Q. Look at item -- Exhibit No. 10.12. 18 Does that appear to be the Drexel option? 19 A. Yes, sir. 20 Q. And that's filed with the SEC and 21 available to anyone who wants to look at it, isn't 22 it? 1456 1 A. Yes. Actually, I think it had been 2 filed earlier; and this is a reference to a 3 previously filed option agreement. 4 Q. All right. 5 THE COURT: Mr. Eisenhart, I have, 6 according to my recording, another 2085 that was 7 received. 8 MR. EISENHART: That is entirely 9 possible, Your Honor. It's very hard to keep 10 track of which of these have come in. May I move 11 it provisionally in the event it has not been 12 received before? 13 MR. RINALDI: What is the document? 14 THE COURT: I'm not sure it's the same 15 document. 16 MR. EISENHART: Well, let me see. 17 Thank you, Your Honor. I am told that, in fact, 18 we appear to have duplicate 2085s. Why don't we 19 call this 12085A? 20 THE COURT: Okay. 21 MR. RINALDI: Which document is the 22 10K? 1457 1 MR. EISENHART: That's the 10K for the 2 year ended December 31, 1986. Your Honor, I'm not 3 sure. Did I move Twomey Deposition Exhibit 21? 4 That was the previous document. 5 THE COURT: Yes, I think you did. 6 Q. (BY MR. EISENHART) Now, I've handed 7 Mr. Schwartz a document which is marked A3014 8 which is a proxy statement of United Financial 9 Group, Inc., dated March 31, 1987. Are you 10 familiar with this type of document, Mr. Schwartz? 11 A. Yes. 12 MR. RINALDI: Your Honor, if it would 13 speed matters up, I'm pretty much familiar with 14 these proxy statements; and every year, the proxy 15 statement was the same and every year, I believe, 16 contained similar language. If I'm wrong, I'd be 17 corrected; but if it's his intention to do this 18 with respect to all of the proxies, I suggest we 19 just put them all on together. 20 MR. EISENHART: Well, that's fine, Your 21 Honor, because there obviously is a great deal of 22 repetition. It was disclosed every year in the 1458 1 proxy statements and the 10K, and I'd be glad to 2 accept Mr. Rinaldi's invitation to simply move 3 them on mass if he wishes. It is disclosed. 4 MR. RINALDI: Well, if you will 5 represent to me that, the one where it is 6 disclosed, I have no reason to doubt that. 7 Every -- I mean, I have read most of the 10Ks and 8 certainly most of the proxy statements; and there 9 is a paragraph in most of them that I'm aware of. 10 MR. EISENHART: Well, if Your Honor 11 wishes then, I will simply offer copies of the 12 exhibits and move them; and I will represent that 13 in each of these exhibits, there is a disclosure 14 of the Drexel option in substantially similar form 15 to the ones we've already seen. 16 THE COURT: Well, we'll have to 17 identify the exhibits. 18 MR. EISENHART: I will do that. A3014 19 is the United Financial Group, Inc., proxy 20 statement for March 31, 1987. A3016 is the 21 United Financial Group, Inc., proxy statement 22 dated March 31, 1989. 1459 1 THE COURT: I have before me A3014, and 2 that's a notice to stockholders. 3 MR. EISENHART: Yes, Your Honor. And 4 attached to that is the proxy statement. And 3016 5 is the same thing for March 31st, 1989. And 3015 6 is the same thing for March 30th, 1988. These are 7 all UFG proxy statements. A2076 is a UFG schedule 8 13D, Amendment No. 15 filed May 25th, 1988. 9 MR. RINALDI: This was previously moved 10 into evidence by the OTS, was it not? 11 MR. EISENHART: I'm told that is 12 already in evidence. A2077 is a UFG Schedule 13D 13 Amendment No. 16. 14 MR. RINALDI: Again, that's already in 15 evidence, Frank. I think we moved the entire 16 group in at the beginning of -- at the end of last 17 week; so, all of the 13Ds -- if you want to 18 identify for the record those that -- where they 19 disclose to the SEC the option arrangement. 20 MR. EISENHART: Fine. A2077 refers not 21 only to the option agreement but to the extensions 22 in 1988. A3025 is a Form 10K for United Financial 1460 1 Group, Inc. This is for the year ended 2 December 31, 1989. I don't think this one has 3 been admitted. 4 MR. RINALDI: And that was for MCO. 5 MR. EISENHART: No. For 6 United Financial Group, Inc., 12/31/89. And that 7 completes the offer of the proxy statements and 8 the SEC filings. There are one or two additional 9 documents that I want to put in. 10 THE COURT: All right. Let's just go 11 through them. Would you read the ones that you've 12 just now. 13 MR. RINALDI: I have 3014, 3016, that's 14 A3016, A3014, A3015. 15 THE COURT: All right. Received 3014, 16 15, 16 are received. Okay? What's next. 17 MR. RINALDI: Then I've got A2076 and 18 A2077 which have been previously admitted by the 19 OTS; and then I've got A2035 which is a 10K for 20 United Financial Group dated 12/31/89, which I 21 don't believe is in evidence. I'm sorry. 3025. 22 THE COURT: 3025 is received. 1461 1 MR. RINALDI: And that, we have no 2 objection to. 3 THE COURT: You know, the order in 4 which these exhibits are being put in makes it 5 almost impossible to track them. 6 MR. EISENHART: I agree, Your Honor. I 7 apologize for that. It is very difficult. 8 Q. (BY MR. EISENHART) Mr. Schwartz, I've 9 handed you a copy of a document which is marked as 10 Exhibit B1739 and which is a memorandum by 11 Ginger Baugh who I would represent to you is an 12 analyst at the Federal Home Loan Bank of Dallas to 13 Neil Twomey and Danny Thomas at the Federal Home 14 Loan Bank of Dallas dated September 3, 1987. Now, 15 I would not expect that you would be familiar with 16 this document. Am I right? 17 MR. RINALDI: If he's not familiar with 18 the document, then Your Honor, I don't think it's 19 something that Mr. Eisenhart can offer through 20 him. 21 MR. EISENHART: Your Honor, I propose 22 at this point simply to have the witness 1462 1 identify -- have the witness identify it, read a 2 certain portion of it into the record and we will 3 offer it at a later date with a witness who can 4 more accurately sponsor it, but it relates to this 5 portion of the testimony and I think I will -- it 6 leads like a reference here. 7 MR. RINALDI: If he's not familiar with 8 the content of it, I suggest you just wait until 9 the witness that can identify it can testify as to 10 its contents. 11 THE COURT: Well, ask him whether he 12 has any knowledge of it. 13 Q. (BY MR. EISENHART) Are you familiar 14 with this document, Mr. Schwartz? 15 A. No. 16 Q. Well, I would simply note now, and I 17 will move the document at some later date, that 18 this is an internal memorandum at the Federal Home 19 Loan Bank of Dallas and that at the fourth 20 paragraph from the bottom, on the first page of 21 the document -- 22 MR. RINALDI: Your Honor, if he's not 1463 1 going to move it into evidence at this point -- 2 THE COURT: All right. I'll sustain 3 the objection. Let's wait until the next witness, 4 to the witness that knows something about the 5 exhibit. 6 MR. EISENHART: Perfectly all right, 7 Your Honor. 8 Q. (BY MR. EISENHART) Mr. Schwartz, I 9 hand you a document which has been marked B2358 10 which is a letter from Dr. Munitz to 11 Mr. James Pleasure -- Pledger, excuse me, 12 commissioner of the Texas Savings and Loan 13 Department. The document is dated August 3, 1988. 14 Are you familiar with this document? 15 A. Yes, I believe I've seen it before. 16 Q. And this document also refers, does it 17 not, to the stock option arrangement? 18 A. Yes, sir, it does. 19 Q. And this informs Commissioner Pledger 20 that the option arrangement has been extended, 21 does it not? 22 A. Yes, sir, it does. 1464 1 Q. And it also refers, does it not, to the 2 fact that MCO currently has no approval from the 3 bank board to acquire these shares? 4 A. Yes, sir. It says we have no current 5 issue on application filed with the Home Loan Bank 6 Board and, therefore, we were in no position to 7 exercise the call. 8 Q. Finally -- I know you will be glad to 9 hear the word "finally." I want to hand you a 10 document which is Exhibit B1613. B1613 is a 11 letter from Julie L. Williams, deputy general 12 counsel for securities and corporate policy of the 13 Federal Home Loan Bank Board in Washington to 14 Mr. Arthur S. Berner, senior vice president and 15 general counsel of UFGI dated May 6th, 1987. Have 16 you seen this document before, Mr. Schwartz? 17 A. I believe I have, yes. 18 Q. And I believe this is a reply, is it 19 not, to the inquiry that was submitted to the bank 20 board concerning the exchange of the Series C 21 preferred for Series D preferred; is that correct? 22 A. Yes, sir. 1465 1 Q. I want to direct your attention to 2 footnote 1 of Ms. Williams' letter. Would you 3 just read footnote 1 into the record? 4 A. Yes, sir. "In addition, Federated and 5 MCO have indicated in a Schedule 13D filing with 6 the Securities and Exchange Commission that they 7 are acting as members of a group in acquiring the 8 common stock." 9 Q. You don't have to read the second 10 sentence. Would this indicate to you that senior 11 officials at the Federal Home Loan Bank Board such 12 as Ms. Williams had available to them for review 13 the Schedules 13D that were filed by UFGI? 14 A. Yes, sir. 15 Q. And those would include the 13Ds, I 16 would assume, that would have reference to the 17 Drexel option? 18 MR. RINALDI: Your Honor, I just have 19 to object here. We've been leading this witness 20 for a long time. There are going to be plenty of 21 people from the bank board that can testify as to 22 these matters. He's asking him is it his belief 1466 1 that people at the bank board could read the 13Ds 2 or that they may have had them available to them. 3 I don't think this is the right witness. 4 THE COURT: He's testifying from a 5 document. We can all draw conclusions. Denied. 6 MR. EISENHART: Your Honor, I'll simply 7 point out that we did try to take a deposition 8 from Ms. Williams to talk to her about this and 9 other subjects and that subpoena was quashed. 10 Q. (BY MR. EISENHART) That would 11 indicate, would it not, sir, that these 13Ds were 12 available to senior people at the bank board? 13 A. Yes, based on the statement of the 14 document, it would indicate that to me, sir. 15 Q. Now, Mr. Schwartz, we've looked at a 16 great number of documents that have disclosed this 17 Drexel option in one form or another to various -- 18 the federal regulators we've seen, the SEC, the 19 firm Home Loan Bank Board and the Texas Savings 20 and Loan Department. Would these disclosures, in 21 your view, be consistent with a policy or plan to 22 conceal the existence of the Drexel option? 1467 1 MR. RINALDI: Your Honor, again, this 2 is such a leading question. I think it's 3 appropriate for him to put this evidence into the 4 record, but I'm not sure that Mr. Schwartz' 5 opinion in that regard, especially in the context 6 of the question, is appropriate. 7 THE COURT: Denied. You may answer. 8 A. I'm sorry. Could you please repeat the 9 question? 10 Q. (BY MR. EISENHART) Sure. We've seen 11 disclosures here to the Securities and Exchange 12 Commission, to the Federal Home Loan Bank Board, 13 and to the Texas Savings and Loan Department on 14 multiple occasions over a number of years. Would 15 those disclosures be consistent in your view with 16 a plan to conceal the existence of the Drexel 17 option? 18 A. No, sir, they would not. 19 Q. And would they, in fact, be totally 20 inconsistent with such a plan? 21 A. Yes. In my way of thinking, they would 22 be, sir. 1468 1 MR. EISENHART: Your Honor, I would 2 move Exhibits B2358 and 2316 -- I'm sorry -- and 3 B1613. 4 THE COURT: Received. 5 MR. RINALDI: No objection. 6 MR. EISENHART: I have no further 7 questions for Mr. Schwartz. 8 MR. BLANKENSTEIN: Your Honor, I have a 9 very few questions for Mr. Schwartz. 10 THE COURT: All right. 11 Q. (BY MR. BLANKENSTEIN) Mr. Schwartz, I 12 know you're eager to face questioning from yet 13 another lawyer; but I'll probably be very, very 14 brief. 15 MR. BLANKENSTEIN: Your Honor, I'm 16 going to ask Mr. Schwartz questions about two 17 documents that are already in evidence. The first 18 is the May 13th, 1988, letter from Neil Twomey to 19 the board of directors of UFG which is 2013 and 20 the other one is the December 8th letter from 21 Mr. Twomey to the board of directors which is 22 2021. Rather than having Mr. Schwartz try and 1469 1 fish through that pile, with your permission, I'll 2 just give him copies of the two letters. 3 THE COURT: All right. 4 Q. (BY MR. BLANKENSTEIN) With regard to 5 the May 13th letter, Mr. Schwartz, I believe you 6 testified in response to a question by Mr. Villa 7 that you didn't consider this to be a demand from 8 the regulators that UFG infuse capital into USAT; 9 is that correct? 10 A. Yes, sir, that's correct. 11 Q. And the reason for that is because the 12 letter only asks that you advise what steps UFG 13 was going to take to try and raise capital for 14 USAT; is that right? 15 A. Yes, sir. 16 Q. And you contrasted that with the letter 17 that Mr. Twomey sent on December 8th, 1988; is 18 that right? 19 A. Yes, sir. 20 Q. And the reason for that is because in 21 that letter, Mr. Twomey made the direct request to 22 the board of directors that they infuse capital 1470 1 into USAT; is that right? 2 A. Yes, sir. 3 Q. Do you remember whether Jenard Gross 4 was a member of the UFG board of directors on or 5 about December 8th, 1988? 6 A. To the best of my recollection, 7 Jenard Gross was not then a member of the board of 8 directors. 9 MR. BLANKENSTEIN: Thank you, 10 Mr. Schwartz. No further questions. 11 THE COURT: Okay. Is there any more 12 cross? 13 MR. EISENHART: I don't believe so, 14 Your Honor. 15 THE COURT: Redirect? 16 MR. RINALDI: Yes, Your Honor. 17 18 REDIRECT-EXAMINATION 19 20 21 Q. (BY MR. RINALDI) Mr. Schwartz, the 22 first question I have relates to document A2023. 1471 1 I believe that's the first document that you were 2 shown. If you could pull that out. 3 A. I'm sorry. The first document today, 4 you mean? 5 Q. Yes. Or, well, when Mr. Eisenhart 6 began to examine you, he gave you a copy of A2023. 7 What is it? I'm sorry. A3023. 8 MR. VILLA: Can you tell us what it is? 9 MR. RINALDI: Yes. It's the Form 10K 10 for United Financial Group dated for 11 December 31st, 1987. 12 Q. (BY MR. RINALDI) Have you found that, 13 sir? 14 A. No, sir, I haven't. 15 Q. I'm sorry. Maybe I can help you. It 16 probably ought to be at the bottom of the stack. 17 A. Well, this was yesterday beginning 18 here. 19 Q. Okay. Here. This looks like it. 20 There it is. Okay. 21 Sir, yesterday, there was some 22 testimony regarding UFG's obligation to maintain 1472 1 the net worth of USAT. Do you recall the 2 testimony in that regard? 3 A. I remember people asking me questions, 4 sir, yes. 5 Q. And when you went on the board of UFG, 6 you learned that UFG had agreed to maintain the 7 net worth of USAT; isn't that correct? 8 A. No, I don't think that's what I said, 9 sir. 10 Q. Well, what did you say? 11 A. I thought I said that I came to learn 12 at a much later date that there had been a 13 document signed by Mr. Bentley back in, I believe 14 it was 1983, that spoke to that undertaking but 15 that at the time of my coming on the board, I did 16 understand that there had been a writing to the 17 effect that, to approve a merger back in 1983, 18 that would be required but I didn't know that such 19 an undertaking had been made. 20 Q. So, in your mind, did you understand 21 that UFG had agreed to maintain the net worth of 22 USAT? 1473 1 A. It's very hard for me today to sort out 2 what I've learned since, from what I understood 3 then. I can't say with certainty what my 4 understanding was at that particular point in 5 time. 6 Q. Now, Mr. Blankenstein just showed you a 7 document dated May 13th, 1985, at which time 8 Mr. Twomey -- 9 MR. VILLA: '88. 10 Q. (BY MR. RINALDI) -- '88 at which time 11 Mr. Twomey indicated that there was a net-worth 12 deficiency at the USAT level, and he wanted to 13 know what UFG was going to do to correct that. Do 14 you recall that? 15 A. Yes, sir. 16 Q. Okay. And in connection with that 17 inquiry by Mr. Twomey, why was it that the board 18 of directors of UFG didn't infuse capital into 19 USAT at that time? Was it because they didn't 20 think they had an obligation to do so? 21 A. I think it was for the reasons that we 22 went through yesterday, that the concern of the 1474 1 board was if putting aside whether or not there 2 was or was not an obligation at that point in 3 time, that had they done so, the prospect would 4 arise whereby they would default on their debt 5 obligations and in so defaulting, cause a change 6 of ownership for tax purposes which would 7 eliminate about a hundred $40 million of tax 8 benefits which were viewed as important to the 9 recapitalization effort and, also, there was a 10 fear that any such a default could trigger 11 substantially adverse reaction in his the 12 marketplace to USAT's continuing financing in the 13 market daily of its -- I believe it was called 14 repo lines. 15 Q. Okay. And they wrote to the bank board 16 and asked the bank board's permission to pay off 17 some debt to PennCorp, didn't they? 18 A. UFGI did go ahead and write, yes, they 19 did. 20 Q. Okay. And the bank board wrote back 21 and said yes, you may go ahead and pay off with a 22 portion of the assets of UFG that debt owed to 1475 1 PennCorp, didn't they? 2 A. Yes, sir, they did. 3 Q. Now, after they had paid off the 4 PennCorp debt, did UFGI infuse any remaining 5 assets into USAT? 6 A. No, sir, they did not. 7 Q. And was the reason they didn't infuse 8 them into USAT that you as a director believed 9 they had no obligation to do so? 10 A. I don't know if there was a belief at 11 the time in my head about a legal obligation or 12 otherwise. I think there was a belief that we 13 were doing everything in our power to try to fill 14 what was becoming a very, very big hole in the 15 form of the net worth and that we were directing 16 our efforts at every opportunity to come up with 17 interested parties, to come up with structures 18 that would lead to interested parties being 19 interested in putting in sufficient capital to put 20 the institution on a sound footing and to be able 21 to move forward. 22 Q. To your knowledge, has anyone at the 1476 1 Federal Home Loan Bank Board or the Office of 2 Thrift Supervision criticized the directors for 3 paying off the PennCorp debt? 4 A. No, sir, not to my knowledge. 5 Q. Thank you. Now, what was the condition 6 of United Financial Group at the beginning of 1988 7 when it filed this 10K? 8 Well, before we get to that, just one 9 question. Did you -- as a director, did you 10 review this 10K; and it indicates there is a 11 signature box. I think that was pointed out to us 12 by Mr. Eisenhart. 13 MR. VILLA: Villa. 14 MR. RINALDI: Villa. I see so many of 15 these, I forget who offered them. I think it's at 16 the back of the document. 17 MR. VILLA: Page 68. 18 Q. (BY MR. RINALDI) 68. And it would 19 appear to have a place for the signatures of the 20 directors; and yours is third from the bottom; is 21 that correct? 22 A. Yes, sir. 1477 1 Q. What was your customary practice as a 2 director of UFG? Did you actually review these 3 things? 4 A. Yes, sir, I did. 5 Q. Okay. 6 A. I read them. 7 Q. And directing your attention to page 2 8 of the document, the last full paragraph, it says: 9 UFGI in connection with its becoming a holding 10 company agreed to maintain USAT's capital above 11 the minimum requirement level established by the 12 FSLIC. UFGI has not been requested to provide 13 additional capital to USAT; but if requested, UFGI 14 currently does not have sufficient assets to 15 contribute to maintain USAT. Do you see that? 16 A. Yes, sir. 17 Q. So, you knew at the time you came on or 18 shortly thereafter the board of UFG that UFG had 19 agreed to maintain USAT's capital; isn't that 20 correct? 21 A. I can't quarrel with the words as 22 written here, sir. I only understand that upon 1478 1 looking at the details of whatever that agreement 2 was, that there subsequently arose for sure -- and 3 I don't know if there were doubts even earlier -- 4 but there subsequently arose doubts as to that 5 agreement. 6 Q. Okay. And turning to page 20, you were 7 also familiar with the fact that as of this same 8 date, USAT was not in compliance with its minimum 9 capital requirements and had not been so since at 10 least as early as December 31st, 1987; isn't that 11 correct? 12 A. Yes, that's correct. 13 Q. And notwithstanding that knowledge -- 14 strike that. Now, at the end of 1987 and the 15 beginning of '88, can you tell from the 10K the 16 financial condition of -- or what the 17 stockholders' equity was in UFG at this point in 18 time? 19 A. Yes. Reading from page 40, I think I 20 could repeat the numbers on that page. 21 Q. And what does it indicate? 22 A. It would indicate that total common 1479 1 stockholders' equity was in a deficit position of 2 approximately $41.9 million at December 31st, 3 1987. 4 Q. So, this was a company who was in bad 5 financial condition. Is that a fair statement? 6 A. Yes, sir. 7 Q. Now, as a director of a company in this 8 kind of condition with negative shareholder 9 equity, did the directors, as you understand it, 10 owe a duty of care to protect the interest of 11 United Financial Group's creditors and to preserve 12 the assets of UFG for the benefit of the creditors 13 rather than the stockholders? 14 A. Well, there certainly came a time when 15 I understood that to be the case, sir. I don't 16 remember if it was at any particular juncture. 17 Q. So, you understood that as a director, 18 your primary duty was owed to the creditors of UFG 19 once UFG was in a financial condition as reflected 20 in the 10K? 21 A. No, sir. 22 Q. You came to understand that, did you 1480 1 not? 2 A. No, sir, not as reflected in this 10K. 3 Q. Who was the largest creditor of UFG, 4 sir? 5 A. Of UFG holding company stand alone, 6 sir? 7 Q. United Financial Group, Inc., yeah. 8 A. To the best of my recollection of the 9 parent company only, the largest creditor was the 10 PennCorp group or related entities that we spoke 11 about yesterday, I believe. 12 Q. Okay. Did you consider USAT to whom 13 UFG had an obligation to maintain the net worth to 14 be a creditor of UFGI? 15 A. At what point in time would that be, 16 sir? 17 Q. At the point in time you paid off the 18 PennCorp debt. How is that? 19 A. Well, I don't know if it's correct or 20 not; but no, from my own personal perspective, I 21 don't think I did. 22 Q. So, you didn't feel you owed any duty 1481 1 to USAT to preserve the assets of UFG to make good 2 on the net-worth obligation? 3 A. I think there is a very big difference 4 between the duties we felt and what we knew to be 5 legal facts. And I think that everybody on the 6 board felt that their first and foremost duty was 7 to do what they could to find a means to 8 recapitalize what was at that point a 9 deteriorating situation, one which grew from -- at 10 the end of December 1987 on the cusp of being in a 11 deficiency position to one which had a very, very 12 large deficiency in capital by the end of the 13 year; and our duty, as we understood it, was to do 14 what we could to try to raise the money to 15 recapitalize the institution. But if you're 16 asking me if putting in the last $10 million of 17 cash was something that we felt at that point in 18 time to be in the best interests of all concerned, 19 I think no, it was not. 20 Q. Now, moving forward still further to 21 December the 8th, now you receive a letter from 22 Mr. Twomey -- December the 8th, 1988. Do you 1482 1 recall as a member of the board receiving that 2 letter? 3 A. Yes, sir. 4 Q. And you are directed at this point to 5 infuse capital into USAT; is that correct? 6 A. Yes, sir. 7 Q. At that point, did you infuse capital 8 into USAT? 9 A. No, sir. 10 Q. At that point, did UFGI have assets 11 that could have been infused into that entity, 12 into USAT? 13 A. Yes, it did have assets. 14 Q. As a director, did you feel you had any 15 fiduciary obligation to USAT as a creditor of UFGI 16 to infuse capital under the net-worth obligation? 17 A. Again, I can't speak to, at that point 18 in time, what legal obligation, if any, did or I 19 thought existed but even at that point in time, we 20 were not done with doing what we could to try to 21 go ahead and bring new capital to UFG and to USAT. 22 But I can't answer the question from a legal 1483 1 perspective. I'm not sure I know the answer. 2 Q. Isn't it true, sir, that in about 3 June 30th, 1988, that UFGI entered into new 4 employment contracts with a number of their 5 officers and directors? 6 MR. VILLA: I'll object, Your Honor. 7 We're going beyond the scope of cross. If we're 8 going to get into compensation, we're going to 9 open up this witness all over again. Nothing was 10 talked about in compensation. 11 MR. RINALDI: We're talking about all 12 of the things he was doing, Your Honor, to try to 13 rescue this corporation, paying down the PennCorp 14 debt, and the final question always becomes did 15 you think that was in the interest of UFG? Well, 16 there were other things these people were doing. 17 They were taking money out of UFG and USAT and 18 paying it to themselves and I guess the question I 19 have, if they were so interested in preserving 20 that institution: Did they think that paying 21 themselves substantial severance benefits at this 22 point in time when the place was in extremis was 1484 1 in the best interest of UFG or its creditors? 2 MR. VILLA: Your Honor, closing 3 arguments probably is not appropriate. All I was 4 pointing out is it's beyond the scope of the 5 cross-examination. 6 THE COURT: Yeah, it is. But I think 7 we might as well get to it. I know this is an 8 issue in the case and we might as well get this 9 witness's views on the matter at this time while 10 he's on redirect. I'll deny the objection. 11 MR. RINALDI: I will make it very 12 brief, Your Honor. 13 A. I'm sorry. Was there a question asked 14 of me? 15 MR. RINALDI: That was what I was 16 trying to remember. 17 THE COURT: Why don't you ask the 18 question again? 19 MR. RINALDI: I will rephrase the 20 question. 21 Q. (BY MR. RINALDI) After retiring the 22 PennCorp debt with the approval of the regulators, 1485 1 did the directors of United Financial Group in 2 about June 30th of 1988 approve new employment 3 agreements for UFG management? 4 A. Yes, that's my recollection. 5 Q. And did those new contracts include 6 base salaries over 60 percent higher than what 7 those officers or management had received in 1987? 8 A. Yes, from, my recollection, those 9 contracts included base salaries that included an 10 amount equal to what I think was determined to be 11 their minimum bonus due for 1987. 12 Q. So that their base salary was increased 13 by over 60 percent in 1988? 14 A. Yes, that's my recollection in respect 15 of those who are employed but I seem to recall 16 that there were also new employees, Mr. Connell, I 17 believe, who came on board back the previous March 18 or so whose contract also had the same concept 19 embodied in it and if I recall correctly whose 20 contract was also approved by the federal 21 regulators in the sense that it was sent to them 22 for their comments and review. And if I recall 1486 1 correctly, that was the same contract that was 2 also executed on behalf of other of USAT's 3 management. 4 Q. All right. And we'll get to 5 Mr. Connell in a while. 6 THE COURT: How much longer do you 7 have? 8 MR. RINALDI: On the redirect, probably 9 half an hour. 10 THE COURT: We'll take a short recess. 11 . 12 (A break was taken.) 13 . 14 THE COURT: We'll be back on the 15 record. Mr. Rinaldi, you may continue with your 16 redirect. 17 MR. RINALDI: Thank you, Your Honor. 18 Q. (BY MR. RINALDI) Mr. Schwartz, in 19 response to a question I think by Mr. Eisenhart, 20 you made reference to the fact that the regulators 21 had advised you that they felt UFG and USAT had 22 good management. Do you recall the reference to 1487 1 that? 2 A. Yes, sir. 3 Q. Okay. In fact, didn't the regulators 4 require that as a condition of UFG and USAT 5 participating in the Southwest Plan or potentially 6 participating in the Southwest Plan, didn't they 7 require that USAT and UFG hire a new chief 8 operating officer, Larry Connell? 9 A. Yes, it's my recollection they did ask 10 for Mr. Connell or a similar person to be hired. 11 I don't know if that was specifically in 12 connection with Southwest Plan participation or 13 not, but that's correct. 14 Q. And the reason -- I'm sorry? 15 MR. VILLA: Objection. Let him finish 16 his testimony. 17 Q. (BY MR. RINALDI) Are you finished, 18 sir? 19 A. Yes, sir. 20 Q. And the reason the regulators gave for 21 wanting Mr. Connell hired was they perceived that 22 the upper level management of UFG lacked adequate 1488 1 experience operating a traditional savings and 2 loan; isn't that correct? 3 A. I don't remember it being placed in the 4 negative. I remember it being placed in the 5 affirmative in the sense that I do recall them 6 saying they wanted someone with traditional 7 savings and loan experience. 8 Q. And at the point in time when 9 Mr. Connell was brought on, who was the president 10 and CEO of USAT and UFG? 11 A. I believe that was Mr. Gross but 12 without reference to the documents in specific, I 13 couldn't tell you. 14 Q. And the regulators requested that 15 Mr. Connell be hired to replace Mr. Gross in the 16 position attention of president and chief 17 operating officer; is that correct? 18 A. Well, that wasn't my understanding, 19 sir, no. That may be what they were thinking. It 20 wasn't something that I understood at the time. 21 Q. But he did replace Mr. Gross, 22 Mr. Connell, as president of USAT and UFG? 1489 1 A. If you have something to show me that, 2 I have no reason not to believe that. Eventually 3 Mr. Gross did resign. 4 Q. And as a condition of Mr. Connell 5 coming onto the boards and coming onto USAT and 6 UFG, Mr. Connell demanded that he receive a 7 severance or an employment contract, didn't he? 8 A. Yes, that's my understanding. 9 Q. And because of the uncertainty of the 10 future of UFG and USAT, Mr. Connell required 11 severance provisions in that employment contract 12 in the event that USAT or UFG went out of 13 business; isn't that correct? 14 A. Essentially, that was my understanding, 15 yes. 16 Q. And it was the contract for Mr. Connell 17 that was given to the regulators for their review, 18 isn't it? 19 A. Yes, that was my understanding. 20 Q. And none of the -- and at the same time 21 Mr. Connell received severance contracts, similar 22 contracts were entered into between UFG and USAT 1490 1 and the following individuals: Jenard Gross, 2 Mr. Crow, Mr. Burner, and Mr. Munitz. 3 A. Yes. It's my understanding that 4 contracts were entered into using the Connell form 5 of contract for those individuals based on 6 negotiations that, if I recall correctly, had 7 actually taken place back in March of the previous 8 year or I'm sorry, March of that year if I 9 remember correctly. 10 Q. And those employment contracts included 11 over two years' severance pay in the event that 12 any of those executives were to be terminated from 13 their employment at USAT or UFG; isn't that 14 correct? 15 A. I don't believe so. I believe they had 16 something just short of two years if I remember 17 correctly. 18 Q. Well, they had two years' severance pay 19 plus two times their bonuses, as well? 20 A. My recollection is that their bonuses 21 had already been included in their salaries. So, 22 that two times their pay, if I remember correctly, 1491 1 was essentially what they were entitled to. 2 Q. And the directors of UFG attempted to 3 place the severance benefit payments that these 4 individuals might become entitled to if they were 5 severed into an escrow account, didn't they? 6 A. I don't remember which UFG or USAT did 7 at some point attempt to do that in respect of the 8 severance benefits. I don't know if it was UFG 9 sitting here this ten seconds. 10 Q. But it was the same directors that 11 approved the putting the money into the escrow 12 that were on the board of directors of UFG as were 13 on the board of directors of USAT; isn't that 14 correct? 15 A. If you're asking me did we have the 16 same directors at both levels, my recollection is 17 yes, we did. 18 Q. Okay. And with respect to that escrow 19 agreement, do you recall that they put $6.6 20 million into the escrow agreement in order to fund 21 the severance benefits? 22 A. I don't remember an exact number. That 1492 1 may be correct, sir. I have no reason to dispute 2 it. 3 Q. And in fact, it was only because of the 4 intervention of the regulators that that money was 5 transferred back out of the escrow account into 6 USAT; isn't that correct? 7 A. My recollection is that someone 8 questioned the arrangement, and then the money was 9 returned with all due speed. 10 Q. And even though USAT -- strike that. 11 Even though UFG and USAT sent a copy of 12 Mr. Connell's contract to the regulators, isn't it 13 a fact, sir, that they never told the 14 regulators -- strike that. Isn't it a fact that 15 they never sent the regulators a copy of 16 Mr. Berner's contract, Mr. Munitz's contract, 17 Mr. Gross' contract or Mr. Crow's contract with 18 the new severance provisions? 19 A. I'm not sure. I couldn't say for 20 certain. I don't know. 21 Q. Well, isn't it a fact that prior to 22 entering into them or at or about the time they 1493 1 executed them, they never provided the regulators 2 with copies of those contracts and put -- and the 3 severance provisions? 4 A. I couldn't sit here and tell you one 5 way or the other, sir. I don't know for certain. 6 Q. And as a director of UFG, did you think 7 it was in the better interest of the creditors of 8 UFG to enter into contractual arrangements which 9 required UFG and/or USAT to escrow $6.6 million 10 for severance benefits? 11 A. I thought it was crucial to the entire 12 plan that we were then pursuing, the plan being 13 either participation in the Southwest Plan or 14 participation in one of the other forms of 15 assistance that the Federal Government was then 16 suggesting it was going to offer. I thought it 17 was necessary to retain the people we had on 18 board, to put them in a position to feel 19 comfortable with their then current employment 20 arrangement, and to focus on the efforts underway 21 to find the capital to rescue the institution. 22 Q. As a director of UFG, sir, did 1494 1 Mr. Berner ever tell you that if he didn't get a 2 severance benefit of two years' annual salary 3 placed in an escrow arrangement, that he would 4 leave the company? 5 A. No. I don't recall Mr. Berner 6 threatening people to do any such thing. 7 Q. How about Mr. Crow? Did he ever tell 8 you or any members of the board that if he didn't 9 get a 60 percent salary increase in 1988 over what 10 he had earned in '87 and if he didn't get a 11 severance package of two years placed in an escrow 12 arrangement, that he would leave UFG and USAT? 13 A. No. I have no specific recollection of 14 Mr. Crow saying anything in that regard. 15 Q. And how about with respect to Mister -- 16 I think I said Crow but -- 17 A. I'm sorry. Did you say Crow? I don't 18 remember Mr. Crow saying anything in that regard. 19 Q. And would your answer be the same with 20 respect to Mr. Gross? 21 A. Yes. 22 Q. And how about with respect to 1495 1 Mr. Munitz? Same answer? 2 A. Yes. 3 Q. Now, on your cross-examination, you 4 talked about the fact that MCO had employed other 5 investment bankers. Do you recall that? 6 A. Yes, sir. 7 Q. Wasn't DBL the principal investment 8 banker underwriting high-yield bond financing for 9 MCO and its affiliates between 1985 and 1989 when 10 DBL went out of business? 11 A. Yes, I think so. 12 Q. Did Bear Sterns underwrite any of the 13 high-yield bonds issued by MCO or any of its 14 affiliates between 1984 and 1989? 15 A. I couldn't tell you sitting here 16 without looking at the specifics of the various 17 prospectuses wherein it would speak to who was or 18 who was not on the underwriting of the various 19 issues. 20 Q. So, as you sit here today, you don't 21 recall any particular bond issue or high-yield 22 bond issued by MCO or any of its affiliates 1496 1 between 1984 and 1989 that was underwritten by 2 Bear Sterns? 3 A. Well, I seem to recall but I may be 4 incorrect here that oftentimes, there were 5 co-underwriters on issues and I'm not very good at 6 remembering back who might have been a 7 co-underwriter on any particular issue. So, no, I 8 couldn't say to you here today that I remember 9 Bear Sterns underwriting any particular issue or 10 co-underwriting. 11 Q. And if I ask you the same question or 12 series of questions with respect to ( PaineWebber, 13 would your answer be the same, sir? 14 A. No, I don't think it would be. I think 15 I recall them participating in one or another 16 financings in 1989 if I recall correctly in 17 connection with the Kaiser transactions. 18 Q. Okay. And you recall one, you say or 19 more than one? 20 A. One. Perhaps others. But one in 21 particular. 22 Q. And did Goldman Sachs underwrite any of 1497 1 the high-yield bonds issued by MCO or any of its 2 affiliates between 1984 and 1989? 3 A. No, I don't believe so. 4 Q. And did DLJ -- I believe that's the 5 term you used, did you not? 6 A. Yes, sir. 7 Q. Did they underwrite write any of the 8 high-yield bonds issued by MCO or any of its 9 affiliates between 1984 and 1989? 10 A. Here again, I'm not certain with 11 respect to the Kaiser transactions, but aside from 12 that, no, I don't believe so. 13 Q. So, in other words, with the exception 14 of perhaps PaineWebber and one or perhaps two of 15 the Kaiser transactions, all the remaining 16 high-yield bonds that were underwritten on behalf 17 of MCO between 1985 and 1989, as you recall, were 18 underwritten by Drexel? 19 A. With the possible exception of one 20 other investment banker again in connection I 21 think with Kaiser. 22 Q. And which investment banker would that 1498 1 have been? 2 A. I don't remember if it wasn't one of 3 the ones that you already mentioned to me or 4 perhaps Kidder Peabody. I don't remember 5 specifically. 6 Q. Okay. And you indicated that you do 7 recall instances when there may have been a 8 co-underwriter. In those instances when there was 9 a co-underwriter, wasn't Drexel the lead 10 underwriter for those issues? 11 A. To the best of my recollection, yes. 12 Q. What's the difference between a lead 13 underwriter and a co-underwriter, sir? 14 A. Typically, the lead underwriter in 15 their parlance runs the book. 16 Q. And what do you mean by the term "runs 17 the book"? 18 A. I'm not really sure precisely what it 19 means but as a practical matter, they end up 20 getting the lion's share of the commissions that 21 result from the participation of the various 22 underwriters because they are in a position to 1499 1 determine those allocations of commissions. 2 Q. Now, we've heard testimony previously 3 in this proceeding that MCO was highly leveraged. 4 Is that a fair characterization of MCO in your 5 mind? 6 A. At what point in time are we speaking 7 of, sir? '85 to '89? 8 Q. Yes. 9 A. It was leveraged. I don't know if it 10 was highly leveraged. 11 Q. And what do you mean by "leveraged," 12 just so we all understand? 13 A. It had, as its capital structure, a 14 sizable portion of debt. 15 Q. And that sizable portion of debt came 16 from the issuance of high-yield bonds; is that 17 correct? 18 A. Principally, yes. 19 Q. And in view of that leverage, weren't 20 MCO's high-yield bonds more difficult to sell? 21 A. I'm sorry. More difficult than what? 22 Q. Than other corporate high-yield bonds 1500 1 or other -- of other entities that weren't so 2 highly leveraged. 3 A. No, I don't think so. I think the name 4 of MCO was actually fairly well-accepted. We had 5 been out there and we had borrowed and we had paid 6 our debts as they came due and compared to others, 7 no, I don't think it was more difficult for it to 8 do what it was doing at that time than other 9 companies who were similarly categorized. 10 Q. When a company's highly leveraged like 11 MCO, doesn't it create a greater risk to the 12 investor when they invest in their debt 13 securities? 14 A. Well, that would depend upon the 15 investor's portfolio; but if you're asking me are 16 they riskier securities generally than more highly 17 rated securities, I think my answer would be yes. 18 Q. Given the leverage of MCO, didn't it 19 justify DBL insisting upon a higher coupon rate 20 for MCO's high-yield bonds? 21 A. I don't know that DBL insisted on what 22 the coupon rate was. I think the market ended up 1501 1 insisting what that would be since, generally 2 speaking, those bonds were purchased by DBL and 3 then sold to people in the market. 4 Q. And given the fact that MCO was a 5 highly leveraged or a leveraged company, wasn't 6 DBL justified in trying to negotiate higher coupon 7 rates for the MCO high-yield bonds? 8 A. I don't understand the word 9 "justified." I'm sorry. I don't understand in 10 the context of what we were doing. Our 11 understanding was that we were selling with 12 Drexel Burnham as the underwriter but that the end 13 of the day, it was the market generally of many 14 buyers and many sellers that determined where the 15 perceptions of any given issuer would be and the 16 resultant rate that investors would accept 17 compared to all the other people out there that 18 had choices to make from as to where we could 19 issue the bonds. 20 Q. And as the underwriter, DBL insisted on 21 higher coupon rates is what you testified earlier, 22 didn't you or was arguing with you on the rate at 1502 1 which the bonds should be issued; isn't that 2 correct? 3 A. No, I don't remember saying that. 4 Q. Didn't you indicate to us that you had 5 these arguments with DBL as to what rates the 6 bonds should be issued at? 7 A. Yes, in respect of premiums I argued 8 that, yes. In respect of other issues regarding 9 how they were to be paid, yes. But with respect 10 to the coupon, per se, no, I don't remember saying 11 that. 12 Q. Okay. Now, you indicated that you 13 didn't know how DBL -- or that DBL was continuing 14 to acquire UFG shares throughout 19 -- 15 A. I'm sorry. Can I come back and finish 16 the answer to that question? 17 Q. Sure. I thought -- 18 A. I'm not sure I left you with a complete 19 answer because there were times when we did argue 20 with DBL about the price we should pay to borrow 21 money. 22 Q. And because of the leverage of MCO, you 1503 1 would anticipate that MCO would pay a higher price 2 for borrowing money than a less leveraged company? 3 A. Well, but that wasn't the reason we 4 argued. 5 Q. Okay. Now, you mentioned that DBL, the 6 evidence has shown, during 1985 continued to 7 acquire additional shares of UFG over and above 8 the 585,000 shares that were available in about 9 February 1985. It was the subject of your initial 10 negotiations. Do you recall that? 11 A. Well, I recall at some point during my 12 preparation for this testimony and/or the 13 depositions that I was shown documents that 14 indicated what Drexel may have owned at a given 15 point in time; but other than in connection with 16 my other testimony where I said that I came to 17 understand at some point that rather than 585,000 18 shares, there was a larger number, I don't know 19 anything about what they acquired or when. 20 Q. Well, did MCO tell DBL during the 21 course of that negotiation that they would agree 22 to enter into an option for as many shares of UFG 1504 1 as DBL could acquire? 2 A. No. I remember being told that DBL had 3 a different number of shares and us thinking about 4 whether or not we would be willing to enter into 5 an option for that different amount of shares and 6 I remember that happening on only a single 7 occasion and that the number then went from 8 roughly the 585,000 to roughly the 780 odd 9 thousand shares that we have spoken about earlier. 10 Q. So, as far as you know, in the midst of 11 your negotiation with Drexel Burnham Lambert in 12 1985, at some point in time while you were 13 exchanging drafts back and forth, Drexel went out 14 and decided to acquire some additional 200,000 15 shares of UFG in the hopes that they could option 16 those to MCO? 17 A. I have no idea why Drexel acquired what 18 they did. Not those shares, not any of the shares 19 they acquired. 20 Q. But they did acquire the additional 21 200,000 shares and then just offered them to MCO? 22 A. That's my understanding sitting here 1505 1 today. 2 Q. Now, you talked about the pro rata 3 provision. Do you remember that that was 4 contained in the net-worth condition that was 5 imposed by the bank board on MCO as a condition of 6 its acquiring more than 24.9 percent of the 7 outstanding shares of UFG? 8 A. Yes, sir. 9 Q. Okay. Now, even though you didn't 10 understand how the pro rata requirement would 11 work, MCO incorporated that pro rata language 12 word-for-word into its own proposal to the federal 13 bank board that's attached to Exhibit T113; isn't 14 that correct? 15 A. Can you show me T113, sir? 16 Q. Sure. 17 THE COURT: I'm not sure we've had a 18 T113. 19 MR. RINALDI: This is a letter dated -- 20 here it is. T1113. 21 THE COURT: Okay. 22 Q. (BY MR. RINALDI) Would you take a 1506 1 look at Exhibit D? This is a letter dated 2 January 31st, 1986, to Julie Williams from McKenna 3 Conner Cuneo that's written on behalf of Federated 4 and MCO and attached to that is a 5 December 3rd, 1985, letter and enclosed within the 6 December 3rd, 1985, letter is an Exhibit D. 7 A. You're directing me to Exhibit D of the 8 December 3rd letter? 9 Q. I think it's the next to the last page. 10 Do you see that? 11 A. Yes, sir. 12 Q. And isn't it true, sir, that even 13 though you didn't understand how the pro rata 14 requirement would work, MCO incorporated it 15 word-for-word into MCO's proposal to the Federal 16 Home Loan Bank Board that's attached to 17 Exhibit T113? 18 A. Yes, sir, I see the language. And 19 there are words that are identical, I believe, to 20 the ones that are not underlined which incorporate 21 the pro rata language; but they are modified, if I 22 understand this correctly, so that they relate to 1507 1 a capped obligation regardless of how one might 2 interpret the pro rata form of -- 3 Q. But notwithstanding your inability to 4 understand what the pro rata language meant, you 5 went ahead and incorporated it into your 6 modification, didn't you, and it's word-for-word? 7 A. Well, I don't know that I did; but 8 clearly, those who wrote the letter did, yes. 9 Q. Fine. Now, do you have a copy of the 10 option agreement handy there? That is -- I think 11 it's attached to the minutes of the December 17th, 12 1985, meeting. 13 A. I think we have a few copies here. 14 Q. I think it's the next document. And 15 Mr. Eisenhart, I believe, directed you to some 16 language on page 11. I believe it's paragraph 6E, 17 top of the page. And it indicates -- and I 18 believe you so testified -- that MCO on the date 19 of the exercise of the MCO option, MCO shall 20 obtain the approval of the Federal Home Loan Bank 21 Board -- of its application on form H(e)-1 and to 22 the Texas savings and loan commissioner of its 1508 1 application submitted thereto and be duly 2 registered with the Federal Home Loan Bank Board 3 as a savings and loan holding company. Do you see 4 that? 5 A. Yes, sir. 6 Q. So, in other words, under this 7 provision, MCO could not have called the shares 8 that were held by Drexel unless they had been 9 registered as a savings and loan holding company, 10 correct? 11 A. Yes, that's my understanding. 12 Q. But there is nothing in here that says 13 Drexel Burnham Lambert couldn't have put the 14 shares back to MCO if MCO hadn't registered, is 15 there? 16 A. They could have moved forward with 17 their put. I don't know if MCO would have been 18 able to accept the shares. 19 Q. So that if MCO failed to exercise its 20 call, DBL could have exercised its put and put the 21 shares back to MCO; isn't that correct? 22 A. I believe that's correct in the sense 1509 1 that they could put the shares; but in that case, 2 it would be, if we were not then a savings and 3 loan holding company, to the escrow agent who 4 would release to them the letter of credit. But 5 as I understood it, MCO couldn't own the shares so 6 they couldn't take them. 7 Q. So, they would pay Drexel $2,577,000 8 for the exercise of the call. Isn't that the 9 amount? 10 A. That sounds like the correct number for 11 the call and also for the put, yes. 12 Q. And after they had paid for those -- 13 the option price, $2,577,000, MCO wouldn't own the 14 shares. Is that your understanding? 15 A. Yes. 16 Q. They would be out in the netherworld 17 somewhere? 18 A. Yep. 19 Q. Now, you indicated in response to some 20 questions relating to Exhibit 2085 and 2086 21 that -- 2085 is the MCO Holdings, Inc. -- I'm 22 sorry. It's -- oh, 2085 is the one I'm talking 1510 1 about. It's MCO Holdings, Inc., 10Q. And I 2 believe you indicated at -- I hope I can find the 3 page. You indicated what the cash position of MCO 4 was at that date. Do you recall? 5 A. Yes, I believe I read off the balance 6 sheet. 7 Q. And what page would that appear at, 8 sir? I'm sorry. 9 A. I think that was on page 2 of the 10Q 10 itself, sir. 11 Q. And how much was that, sir? 12 A. I believe I said it was $25,125,000. 13 Q. I see. It's right there at the top 14 under "current assets." 15 Okay. And then you pointed us to the 16 same or comparable number at A2086 and that 17 indicated cash and cash equivalents on page 2 on 18 June 30th, 1982, of $23,585,000; isn't that 19 correct? 20 A. Yes, sir. 21 Q. Now, were these 10Qs prepared on a 22 consolidated balance sheet basis? 1511 1 A. That's my understanding, sir. That's 2 what they say. 3 Q. And can you explain to the Court what 4 it means to prepare something on a consolidated 5 balance sheet basis? 6 A. It means that it consolidates all of 7 the subsidiaries that for accounting purposes are 8 required to be combined into a single number for 9 presentation purposes. 10 Q. And in the case of MCO, which 11 subsidiaries would have been combined in that 12 consolidated statement? 13 A. I don't know that I have a good 14 recollection of all of them, but among them would 15 have been the MCO properties subsidiaries. That 16 is to say those engaged in real estate. I believe 17 there would have also have been subsidiaries 18 engaged in oil and gas activities. 19 Q. Do you recall what the condition of MCO 20 holding company's was on an unconsolidated basis? 21 A. No, sir, I do not. 22 Q. Would it surprise you if MCO Holdings' 1512 1 cash position on an unconsolidated basis was 2 significantly smaller or a number significantly 3 smaller than that on a consolidated basis? 4 A. No, sir. 5 Q. And that's because on an unconsolidated 6 basis, you don't include all of the assets of the 7 subsidiaries. Right? 8 A. Essentially, sir, yes. 9 Q. And do you know what MCO's position on 10 an unconsolidated basis was at the beginning of 11 1982? 12 A. No, sir, I do not. 13 Q. How about the end of 1982? 14 A. No, sir. Sitting here now, I do not. 15 Q. How about at the point in time when MCO 16 entered into the 260-million-dollar zero coupon 17 bond for the purpose of raising approximately 18 three and a half million dollars? 19 A. I do not know, sir. 20 Q. Thank you. Now, you indicated that MCO 21 had grown between the periods 1985 and 1989. Do 22 you recall that? 1513 1 A. Yes, sir. 2 Q. And how was it that MCO came to grow 3 between those periods? 4 A. As I recall, there were a series of 5 acquisitions and mergers that took place between 6 those two dates. 7 Q. And what were the principal 8 acquisitions and mergers that took place? 9 A. There are three that come to mind. 10 Q. And what were they? 11 A. The first, if I recall correctly, was 12 the acquisition by MAXXAM Group, Inc., of the 13 Pacific Lumber Company. 14 The second was the merger of MAXXAM 15 Group, Inc., with MCO Holdings. 16 And the third was the acquisition of 17 the Kaiser Aluminum Corporation and/or related 18 companies. 19 Q. And the -- 20 A. And there are also, if I remember 21 correctly, acquisitions of certain real estate at 22 approximately this time as well, real estate 1514 1 companies. 2 Q. Was most of that growth attributable to 3 the acquisition of Pacific Lumber and Kaiser Tech? 4 A. I find it difficult to separate those 5 two out from the merger of MAXXAM Group, Inc., 6 with MCO; but I think all three were important. 7 Q. And both of those acquisitions were 8 facilitated by the issuance of high-yield bonds 9 underwritten by Drexel, weren't they? 10 A. Yes, they were. Both of the Kaiser and 11 the Pacific Lumber Company transactions were. 12 Q. And both of those acquisitions would 13 have been impossible without the assistance of 14 Drexel's underwriting of high-yield bonds; is that 15 correct? 16 A. No, I don't know that that is correct. 17 I think they would have been more difficult. I 18 don't know that it would have been impossible. 19 Q. No one has a crystal ball and can 20 predict the future, can they, or what might have 21 been? 22 A. Don't know, sir. 1515 1 Q. Now, Mr. Eisenhart showed you a number 2 of documents in which the put call option is 3 referred to. And in order to move this thing 4 along -- and I know you want to get off the 5 stand -- it strikes me that there were probably 6 three or four major categories of documents. I 7 believe he showed you 10Ks; is that correct? 8 A. Yes, sir. 9 Q. And the 10Ks are ones that were filed 10 by MCO? I stand corrected. There is also 11 UFG 10Ks? 12 A. That's what I was looking to see, if 13 they weren't both MCO and UFG. 14 Q. And what is a 10K, sir? 15 A. That's an annual report that's required 16 to be filed by companies who are subject to the 17 reporting requirements of the Securities and 18 Exchange Commission. 19 Q. And the requirement to file those is 20 made by the Securities and Exchange Commission and 21 not the Federal Home Loan Bank Board; isn't that 22 correct? 1516 1 A. In respect of MCO, yes. I don't know 2 whether the federal regulators do or do not 3 require companies like UFGI to so file 10Ks or 4 not. 5 Q. Do you have any knowledge as to whether 6 MCO or U -- whether MCO sent any of its 10K 7 filings to the Federal Home Loan Bank Board for 8 them ... 9 A. Other than file the document, I don't 10 know that it sends it to anybody, sir. 11 Q. And the information that was included 12 in that document relating to the put call option 13 because it's a material fact that investors should 14 be aware of is required to be disclosed, isn't it, 15 under law? 16 A. I'm not so intimately familiar with the 17 requirements of the Securities and Exchange 18 Commissions on 10K to know whether it was required 19 to be disclosed or not. But somewhere along the 20 line, it was determined to be material to the 21 financial statements, and I have to believe then 22 it was filed. 1517 1 Q. Is it your understanding that it's 2 against the law to fail to disclose material facts 3 regarding a publicly held company in public -- in 4 the 10K? 5 MR. EISENHART: Your Honor, I believe 6 he's now getting into areas of legal opinion. He 7 can certainly ask Mr. Schwartz his understanding 8 as the chief financial officer, but he's asking 9 him now whether it is or is not a violation of the 10 law. It goes a little beyond -- 11 MR. RINALDI: I think if you read back 12 the question, it says, "was it your 13 understanding." 14 THE COURT: All right. Denied. 15 A. It was my understanding that we always 16 tried to report all the things that were material 17 to our financial condition. I don't know if 18 that's a requirement or not of the Securities and 19 Exchange Commission in the context of filing a 20 Form 10K then or now. 21 Q. (BY MR. RINALDI) Do you have document 22 B832 and B804 in front of you? 1518 1 A. Which would those be, sir? 2 Q. They would be the correspondence with 3 the Texas Savings and Loan Department. And there 4 is also a B2358? 5 A. Sir, you wanted me to have B2358? 6 Q. That's correct. 7 A. B832 was it? 8 Q. Yes. And B804. 9 A. Sorry. I'm having some trouble 10 locating B804. 11 Q. That's the document dated 12 January 25th, 1986, to Mr. Bowman of the 13 Federal -- I mean. Sorry. The Texas Savings and 14 Loan Department on Federated Development Company 15 letterhead and it's signed by Barry Munitz? 16 A. I'm sorry. If you have one to hand me, 17 I may well have passed it here in the stack. 18 Q. Sure. I'll give you my copy, and I'll 19 also give you have the copy of what's been marked 20 as B2358. 21 A. I have 2358. 22 Q. The only question I wanted to ask you 1519 1 with respect to both of these documents: Do they 2 reflect whether copies of either of these 3 documents were sent to the Federal Home Loan Bank 4 Board by Federated or MCO Holdings, Inc.? 5 A. No, sir. I don't see anything 6 reflecting that. 7 Q. To your knowledge, were copies of these 8 letters sent to the Federal Home Loan Bank Board? 9 A. I don't know, sir. 10 Q. Did MCO or Federated ever send a letter 11 to the Federal Home Loan Bank Board advising them 12 of the put call arrangement at or about the time 13 the put call arrangement was entered into? 14 A. I have no knowledge of Federated's 15 dealings other than what we've talked about here 16 in the context of these documents and I'm not 17 aware of copies other than as we've seen them here 18 today. 19 Q. Now, the second category of documents 20 that you made -- you were shown by Mr. Eisenhart 21 related to United Financial Group proxies. Do you 22 recall that? 1520 1 A. Yes, sir. 2 Q. And in those proxies, there is a 3 paragraph that makes reference to the put call 4 option. Do you recall that? 5 A. Yes, sir. 6 Q. Do you happen to have one of those 7 proxies there? 8 A. Yes, sir. 9 Q. Would you take a look at that 10 paragraph? 11 A. Yes. I'm looking at 3014. 12 Q. Okay. I've got that one here. And I 13 believe the language that we were discussing would 14 appear at footnote 6 on page 3. Do you see that? 15 Now, do you know who UFG or which regulator UFG 16 files these proxy statements with? 17 A. I believe they file them with the SEC. 18 Q. Do you have any knowledge that these 19 proxy statements, either A3014, A3016, or A3013 20 were filed with the Federal Home Loan Bank Board? 21 A. I don't know who they were filed with, 22 sir. These were documents prepared by UFG for 1521 1 proxy purposes. I couldn't say if copies were 2 delivered to anyone other than shareholders and 3 the SEC. 4 Q. Okay. 5 A. But they may have been. 6 Q. And directing your attention to 7 paragraph 6, does it disclose the existence of the 8 letter of credit to ensure that Drexel could put 9 the shares back to MCO and receive their strike 10 price? 11 A. I don't see reference to it there, sir. 12 Q. Okay. Does it disclose the fact that 13 MCO had agreed to indemnify Drexel Burnham Lambert 14 for all losses associated with this transaction? 15 A. No, sir. 16 Q. To your knowledge, did either 17 Federated -- strike that. You were also handed a 18 copy of Exhibit B953 and B954. This is an 19 application for approval to issue subordinated 20 debt securities. Do you remember that? It's a 21 big wad of paper. 22 A. Yes, sir. 1522 1 Q. Okay. And in fact, that application is 2 over 300 pages long, isn't it? I'm referring to 3 the application and the attachments that form this 4 document, a -- 5 A. I couldn't say how many pages there 6 are. They are not numbered sequentially. 7 Q. Well, they are numbered sequentially, 8 and it appears they start at a 103,702 and end at 9 a 104,009. Do you see that? 10 A. TX S&L? Is that what you're referring 11 to, sir? 12 Q. Yes. 13 A. Okay. I see those numbers. I don't 14 know if all the numbers there are, but I have no 15 reason to doubt they are. 16 Q. Well, if they are all there, that would 17 mean that this document contains over 300 pages, 18 wouldn't it? 19 A. Yes. 20 Q. And then tucked away on page 86 of the 21 document is a reference to the option arrangement, 22 isn't there? Bottom of page 86 and the top of 87. 1523 1 A. I see a reference on the bottom of 2 page 86 and the top of page 87 to that. I don't 3 know that I share the feeling it's tucked away 4 however. 5 Q. Oh, okay. And does that reference talk 6 about a letter of credit or an indemnification? 7 A. No, sir. 8 Q. And who filed this document? Can you 9 tell from the cover letter which is B953? 10 A. 954 is the one I have that says it was 11 United Savings Association of Texas if I 12 understand it correctly. 13 Q. So, that wasn't filed by Federated or 14 MCO, was it? 15 A. No. 16 Q. And finally, would you take a look at 17 Twomey 21, page 18? And this is the business plan 18 that was filed by United Financial Group with the 19 Federal Home Loan Bank Board. And I believe this 20 one is slightly over a hundred pages long; is that 21 correct if the Bate stamps at the bottom or the 22 sequential numbering at the bottom is accurate? 1524 1 A. Yes, sir. 2 Q. And included in here is also a 3 reference to the stock option -- the Drexel 4 option, correct? 5 A. Yes, that's my recollection. If you 6 could help me to see where that was, it would be 7 helpful. 8 Q. Well, you know, I'm trying to locate it 9 myself. Here it is. It's on page 18. You see 10 that? 11 MR. EISENHART: Your Honor, I'm going 12 to object to this line of questioning and move to 13 strike it. It seems to me it's very misleading 14 for Mr. Rinaldi to pursue a line of questioning 15 that I suppose is calculated to show that the bank 16 board was not aware of the Drexel option when it 17 is by his objection that I had been prevented from 18 putting into evidence documents that show the bank 19 board was aware of it. 20 THE COURT: What document is that? 21 MR. EISENHART: Your Honor, I offered 22 Exhibit -- 1525 1 MR. RINALDI: Your Honor, there is a -- 2 MR. EISENHART: I offered Exhibit 1739 3 which is. 4 THE COURT: Well, we didn't have a 5 sponsoring witness for that. 6 MR. EISENHART: Yes, sir. But he's, 7 here now, suggesting that -- he's here on a whole 8 line of questioning that's calculated to suggest 9 that this thing was carefully concealed from the 10 bank board and that these documents went to the 11 SEC and these went to -- went somewhere else; but 12 nobody ever sent it to the bank board when, as he 13 well knows, there are internal bank board 14 documents that he's objected to me putting in. 15 MR. RINALDI: Frank, you may -- 16 THE COURT: Well, let's make a record 17 of where these documents were sent. 18 MR. RINALDI: The 13Ds are documents 19 that are filed with the Securities and Exchange 20 Commission. That's -- like A2074. Those are not 21 documents that to my knowledge are required to be 22 filed with the Federal Home Loan Bank Board. The 1526 1 10Ks are also, as I understand, annual reports 2 that have to be filed by public companies with the 3 Securities and Exchange Commission, and those are 4 not documents that have to be filed with the 5 Federal Home Loan Bank Board each in the cases I 6 understand it of a Federal savings and loan 7 holding company such as UFG. 8 Finally, the third group of documents 9 are the proxy statements. These are documents 10 that are sent out once a year to the shareholders 11 to advise them of matters relating to the 12 operation of the corporation and in particular, in 13 connection with shareholder -- I mean election of 14 directors. These also are required to be filed 15 with the Securities and Exchange Commission. 16 The whole point is that Mr. Eisenhart 17 has put on all these documents which do contain 18 information and we don't dispute that, that relate 19 to the put call option. And all I'm simply 20 pointing out with this individual is that none of 21 those documents are filed with the Federal Home 22 Loan Bank Board. None of them were -- there is no 1527 1 evidence that these were -- that the put call 2 option was sent to the bank board and disclosing 3 the content of the option. There will be evidence 4 later from the examination staff that sometime 5 near the end of 1987, examination staff did review 6 and learn of the existence of the option and 7 looked into the question of what the option was 8 all about. 9 I only say that it shouldn't come on 10 through this witness because I believe that; one, 11 he's unaware of what actually occurred and; two, 12 to the extent that there is information in these 13 exam papers, I think that the examiners who were 14 looking at the documents and made the notations on 15 the paper are the people that can tell the Court 16 what was going through their minds. And so, it 17 was for that reason that I objected. I don't deny 18 that there is information in the exam papers that 19 relates to the put call option at about the time 20 that -- in late '87 when USAT was failing or about 21 to fail its minimum capital requirements. 22 MR. EISENHART: Your Honor, I've got 1528 1 five separate documents beginning in July of 1986 2 that I can put in from internal bank board memos 3 that reflect knowledge of the option derived from 4 the very filings that we're talking about here, 5 13Ds, proxy statements, and things like that. 6 MR. RINALDI: And does Mr. Schwartz 7 have any direct knowledge of any of those, Frank? 8 MR. EISENHART: He objected to the 9 first one I tried to put in, and Your Honor ruled 10 that it couldn't come in because Mr. Schwartz 11 couldn't sponsor the document. That's fine. I 12 didn't try to put the others in. But for him to 13 stand up here now and pursue a line of 14 cross-examination that's designed to show that 15 maybe everybody else in the world knew but the 16 bank board didn't know, I just think is flat out 17 misleading. That's why I objected to it. 18 MR. RINALDI: I think it's flat out 19 misleading, Frank, to put on a witness and ask the 20 witness to imply that the Federal Home Loan Bank 21 Board knew about something that was given to the 22 SEC when, in fact, it's not filed with the SEC. 1529 1 But the fact of the matter is there are. 2 THE COURT: All right. Let's hear from 3 Mr. Villa. 4 MR. VILLA: Your Honor, it's not my 5 custom to exchange comments with counsel in the 6 courtroom but to direct them to the Court. I 7 would say looking at it most charitably I would 8 think Mr. Rinaldi is unaware of the record in this 9 case and the record in this case will be contrary 10 to what he said which was the custom of 11 United Financial Group to send -- Mr. Berner would 12 send all of the securities filings to the Federal 13 Home Loan Bank Board. There will be ample 14 testimony on that point; and if Mr. Rinaldi said 15 something to the contrary, I'm sure it was an 16 inadvertent statement. There will be ample 17 testimony on that point. There were in the 18 depositions, and there will be at trial. 19 MR. RINALDI: Your Honor, I believe the 20 question was are they required to file 10Ks; and, 21 in fact, I should point out this is not a complete 22 10K. This is the 10K without its exhibits. They 1530 1 are rather voluminous documents. If a courtesy 2 copy was sent to the bank board, that may well be 3 the case. But the only point I made, and I stand 4 by that, is they were not required to file any of 5 these things with the bank board. And so, what 6 Mr. Villa is suggesting is that if you put it into 7 a 10K and send a complimentary copy to the 8 regulators, the regulators then are on notice of 9 everything in the 10K. And I would like -- 10 THE COURT: We're getting into an 11 argument on the evidence. I think this thing 12 started out with an objection to whether 13 Mr. Schwartz could be asked about where these 14 documents were filed. I think we've made a record 15 on that. Let's move on. 16 MR. RINALDI: All right. Your Honor, I 17 think at this point, we've probably pretty much 18 exhausted the issue of these. So, with that, I 19 have no further questions for the witness. 20 THE COURT: Is there going to be some 21 recross? 22 MR. VILLA: Your Honor, I think in 1531 1 deference to Mr. Schwartz, we would like to do the 2 recross before we break for lunch. I think I can 3 do about ten minutes and be done. I don't know. 4 MR. EISENHART: I think I have less 5 than that, Your Honor. Five minutes maybe. 6 THE COURT: All right. Let's do that. 7 MR. VILLA: We've had him for five 8 days, so... 9 THE COURT: All right, Mr. Villa. 10 MR. VILLA: Your Honor, with respect to 11 the fact that we didn't include the entire 10K and 12 the examinations, I had actually discussed that 13 with Mr. Rinaldi before we came into court and I 14 said the entire 10K is quite voluminous and; 15 therefore, I wouldn't use the 1987, 10K. I didn't 16 put it on the record, but I'll be happy to. 17 The entire 10K has a number of 18 exhibits, and we will introduce the entire 10K. 19 It didn't happen to be relevant to Mr. Schwartz' 20 testimony. And I thought I had an understanding 21 with Mr. Rinaldi which wouldn't subject me to 22 criticism on that. But I will now go on to point 1532 1 out a couple of the issues that Mr. Rinaldi raised 2 with Mr. Schwartz. 3 4 FURTHER RECROSS-EXAMINATION 5 6 7 8 Q. (BY MR. VILLA) Mr. Schwartz, 9 Mr. Rinaldi asked you -- first of all, can I ask 10 you to get the Form 10K for the year 1987 which is 11 Exhibit 3023 before you? 12 A. Yes, sir. 13 Q. To put us back in time, this is the 14 first 10K that you would have seen as a director 15 of UFG; is that right? 16 A. Yes, sir. 17 Q. Now, Mr. Rinaldi asked you a number of 18 questions about page 2 of the 10K. And why don't 19 you look down on page 2 of the 10K in the last 20 paragraph? The first sentence of the last 21 paragraph reads as follows: UFG in connection 22 with its becoming a holding company agree to 1533 1 maintain USAT's capital above the minimum 2 requirement level established by the FSLIC. 3 I'm sorry. The second sentence: UFG 4 has not been requested to provide additional 5 capital to USAT; but if requested, UFG currently 6 does not have sufficient assets to contribute to 7 maintain USAT above its minimum capital 8 requirements. Do you see that, sir? 9 A. Yes, sir. 10 Q. Now, does that indicate to you that UFG 11 was awaiting a request from the Federal Home Loan 12 Bank Board before it infused capital into USAT? 13 Was that your understanding when you became a 14 member of the board of UFG? 15 A. I'm sorry. I don't understand the 16 question. 17 Q. The agreement to maintain the capital 18 of USAT was not a self-executing agreement, was 19 it, sir? The regulators were supposed to request 20 that UFG infuse capital? 21 MR. RINALDI: Your Honor, I'm going to 22 object to this line of questioning. He's just 1534 1 leading the witness. He's asked him a question, 2 and now he's just trying to recite for him what 3 the arrangement was. I mean, I don't mind him 4 asking a direct question, but it's just beyond -- 5 Q. (BY MR. VILLA) Do you recall, sir, 6 whether you understood at the time you became a 7 director of UFG that the Federal Home Loan Bank 8 Board would be requesting UFG to infuse capital 9 before it had the obligation to do so? 10 A. Oh, I remember a discussion regarding 11 whether or not a request would be forthcoming; but 12 I don't know that had that request been 13 forthcoming, that I remember a discussion 14 regarding an obligation as well. 15 Q. Do you recall, sir, looking at the 16 letter of May 13, 1988, Exhibit T2013? Can you 17 take a look at that? That's Mr. Twomey's letter 18 of May 13, 1988. 19 A. I'm sorry but these have become a mess 20 and if there is any way you could provide me with 21 a copy, I'd be very grateful. 22 Q. Why don't I just hand you it? 1535 1 A. Thank you. 2 Q. Did you regard, sir, T2013, the May 13 3 letter from Mr. Twomey, as a request from the 4 Federal Home Loan Bank Board that UFG infuse 5 capital into USAT? 6 A. No, sir. 7 Q. In fact, you expected a request to 8 come, if at all, at some later point in time; 9 isn't that right? 10 A. Yes, sir. 11 Q. Now, in 1988, what was UFG's largest 12 asset when you became a director in 1988? 13 A. The savings and loan that UFG owned, 14 United Savings Association of Texas, the stock 15 that it owned in that institution. 16 Q. Was UFG's -- was it in UFG's interest 17 to try to allow USAT to survive? 18 A. Most assuredly. 19 Q. Were your actions with respect to the 20 infusion of capital into USAT driven by your 21 understanding of the legal obligation, if any, or 22 your consideration as a director as to what was in 1536 1 the best interest of the companies? 2 A. It was driven by what was in the best 3 interest of the companies, the best interest of 4 every constituency at that point in time that I 5 was aware of. 6 Q. Now, you were asked by Mr. Rinaldi 7 whether you took into consideration USAT's claims 8 when you paid off the PennCorp debt, something 9 along those lines. Do you recall that? 10 A. Yes, sir. 11 Q. Isn't the reason that the management of 12 UFG applied to the Federal Home Loan Bank of 13 Dallas for permission to pay off the PennCorp debt 14 to take into consideration what was in the best 15 interest of USAT? 16 A. Yes, sir. 17 Q. Did you expect the Federal Home Loan 18 Bank of Dallas to take into consideration the 19 interest of USAT in deciding whether or not UFG 20 could pay off the PennCorp debt? 21 A. Yes, sir. 22 Q. And isn't that the reason that UFG 1537 1 contacted the Federal Home Loan Bank of Dallas? 2 A. Yes, sir. 3 Q. Now, Mr. Rinaldi asked you the question 4 of after the payoff of the PennCorp debt, whether 5 UFG had assets. Do you remember that question? 6 A. Yes, sir. 7 Q. It did have assets, didn't it, sir? 8 A. Yes, it did. 9 Q. It also had liabilities, didn't it? 10 A. Yes, it did. 11 Q. Do you recall from our prior colloquy 12 whether its liabilities exceeded its assets in 13 December of 1988? 14 A. Yes, sir, they did, as I recall. 15 Q. So, it had assets but it didn't have 16 net assets; isn't that right? 17 A. Yes, sir. 18 Q. When the liabilities of a company 19 exceed its assets, in your experience, wouldn't 20 payment of UFG's assets to USAT likely precipitate 21 a bankruptcy filing by the other creditors? 22 A. Yes, sir, if they were to choose among 1538 1 them, yes, sir. 2 Q. Now, let's talk a little bit about the 3 management area that Mr. Rinaldi raised in his 4 redirect. As a director of United Financial 5 Group, did you think it was in the best interest 6 of United to lose its management team in mid-1988? 7 A. No. To the contrary. We were doing 8 what we could to get them to focus on the issue at 9 hand, that of raising money, raising capital, 10 rescuing the institution through Southwest Plan or 11 otherwise, trying to take their mind off of issues 12 regarding what happened if they didn't do that. 13 Q. Do you recall, sir, whether you had 14 received any comments or criticisms by the 15 regulators about turnover in management during the 16 year 1988? 17 A. Yes, I do, sir. 18 Q. And in fact, wasn't that raised in the 19 examination report that was sent to you in 20 mid-1988? 21 A. Yes. My recollection is that there was 22 an examiner later who had noted that there was a 1539 1 high rate of turnover and that she was very 2 concerned about that, especially among the upper 3 ranks and had noted that in her report. 4 Q. Mr. Rinaldi asked you a number of 5 questions about Larry Connell, the man who became 6 a senior executive of United in mid-1988. Do you 7 recall those questions? 8 A. I recall him asking me questions. I 9 don't know that I recall the questions 10 specifically, yes. 11 Q. Now, do you recall, sir, whether 12 Mr. Connell's contract was sent to the regulators 13 in mid-1988? 14 A. Yes. It is my recollection. 15 Q. And did you understand that the reason 16 it was sent to the regulators in mid-1988 was to 17 seek their views on its terms? 18 A. Yes, sir. 19 Q. Now, you used the word in a response to 20 a question from Mr. Rinaldi that, quote, "using 21 the Connell form of contract," close quote, United 22 entered into contracts with a number of other 1540 1 senior executives who -- many of whom turn out to 2 be respondents in this case being criticized for 3 entering into that contract. What did you mean by 4 "Connell form of contract"? 5 A. My understanding is that -- well, I 6 thought that earlier I was actually saying that I 7 thought they had approved the Connell form of 8 contract. 9 Q. Did there come a time when they changed 10 their view -- strike that. Did there come a time 11 when they expressed a view to United Financial 12 Group that the Connell form of contract was not 13 acceptable? 14 A. Yes. That is my recollection. 15 Q. And is Exhibit B2487 the letter you 16 were referring to in that regard? 17 A. Yes, sir. 18 Q. Now, directing your attention to the 19 first paragraph of B2487, Mr. Twomey's letter of 20 October 27, 1988, he criticizes a number of 21 contracts including the Connell form -- the 22 contract with Mr. Connell; isn't that right? 1541 1 A. Yes, sir. 2 Q. And this is the contract that had been 3 sent to the regulators, the Connell contract? 4 A. Yes, sir. 5 Q. Mr. Rinaldi asked you a number of 6 questions about two years' severance pay. Do you 7 remember him questioning whether it was 8 appropriate under the circumstances to enter into 9 contracts with two years' severance pay? 10 A. Yes, sir. 11 Q. Do you recall whether any contracts 12 that had previously been entered into between 13 senior executive officers of United and the 14 association had included a two-year severance pay? 15 A. Yes. There had been previous 16 contracts. If I recall correctly when I first 17 joined the board in February of '88 and soon 18 thereafter, certain employees who had been given 19 contracts back in September or October of 1987 20 began to complain that there had been triggered a 21 change of control under their contracts by virtue 22 of a change in board and that as a result, they 1542 1 were seeking payment of certain severance 2 agreements and I'm not sure I got it a hundred 3 percent straight; but I think that in those 4 instances, many of them were coming back and 5 asking for payment of amounts under a termination 6 clause. I don't know if it was identical to this 7 one or not. 8 Q. Do you recall, sir, whether the 9 prior -- whether a prior set of agreements was 10 adopted at an early board meeting where you were 11 present, perhaps even the first board meeting 12 where you were present? 13 A. Yes, there were prior agreements that 14 were adopted. 15 Q. And do you recall, sir, whether the 16 regulators were also present at that board meeting 17 when these contracts were adopted? 18 A. Yes, as best as I can remember, they 19 were present at that meeting and most every other 20 meeting that I attended during 1988. 21 MR. VILLA: Your Honor, I'm handing the 22 witness what has been marked as Exhibit A1141. 1543 1 It's the minutes of the meeting of the USAT board 2 of directors dated February 11, 1988. 3 Q. (BY MR. VILLA) Mr. Schwartz, was this 4 the first meeting -- strike that. Would you take 5 a moment and review this document? 6 A. Yes, sir. 7 Q. Is this the board meeting -- 8 MR. RINALDI: Your Honor, if I might 9 for just a moment, this is really going far 10 afield. I asked Mr. Schwartz about contracts that 11 UFG entered into in June of 1988. We're now 12 looking at some arrangements that were entered 13 into by United Savings Association of Texas that 14 predate that period. It seems to me that this -- 15 the question of the contracts with United Savings 16 Association of Texas is -- is not the same one 17 that I was talking about with Mr. Schwartz and, 18 indeed, I don't even think Mr. Schwartz was 19 present at the board meeting or on the board of 20 USAT at this point in time. 21 In any event, it seems to me that this 22 is -- the whole area of compensation we're going 1544 1 into and the only issues I touched upon were the 2 question of in June of 1988, was it appropriate 3 for UFG or did UFG enter into new contractual 4 arrangements and now we're backing this thing all 5 the way up to February of 1988 and into USAT. And 6 I think it far exceeds the scope of what I went 7 into with Mr. Schwartz. 8 MR. VILLA: Your Honor, let me make the 9 proffer. He said in his examination that it was 10 imprudent for the board of directors to enter into 11 employment contracts that had two years' 12 severance. He mentioned two years' severance on 13 several occasions in his questioning of 14 Mr. Schwartz. 15 I have evidence here in your hand that 16 an employment contract with multi-year severance 17 was approved three months before that in the 18 presence of two federal examiners. 19 Now, I can understand why he doesn't 20 want it in. But one can hardly say it's 21 irrelevant given the issues. And I caution -- I 22 was raising the issue as to whether we really want 1545 1 to get into compensation at this point; but it 2 doesn't seem to me he can suggest that two years' 3 severance is imprudent and exclude me from showing 4 record evidence that the examiners sat there while 5 employment contracts with two years' severance 6 were approved. 7 MR. RINALDI: And Your Honor, you will 8 further receive evidence that Mr. Berner told the 9 examiners in a subsequent letter that no such 10 contracts existed and there is no evidence from 11 that record that indicates that the contracts or 12 the contents of them were disclosed to the 13 regulators at that point in time, but this is an 14 issue that was going to be ventilated to the Court 15 at the end of this proceeding. Now, if Mr. Villa 16 wants to, in the middle of the proceeding, go into 17 the question of USAT -- 18 Q. (BY MR. VILLA) Page 27, I think. If I 19 direct your attention to the board minutes 20 February 11, 1988, page 27 is the reference to the 21 contracts. Do you see that? 22 A. Yes, sir. 1546 1 Q. First full paragraph -- second full 2 paragraph. And that's -- and that's consistent 3 with your recollection that at the first meeting 4 where you were present as a director, contracts 5 between the officers in UFG were entered into; is 6 that right? UFGI were entered into -- I'm sorry. 7 USAT. I misspoke. At USAT were entered into? 8 A. Yes, sir, that's correct. 9 Q. And if you look at the first page of 10 the exhibit, Exhibit A 1141, the end of the first 11 paragraph and is that also consistent with your 12 recollection that, quote, "representing the 13 Federal Home Loan Bank of Dallas was Ms.Vivian 14 Carlton and Mr. John Cottingham, two examiners? 15 A. I'm sorry. I didn't see that. 16 Q. On the very first page of the exhibit, 17 the first paragraph at the bottom. 18 A. Oh, yes. Yes. And Ms. Carlton was the 19 examiner that I had been trying to recall the name 20 of earlier as well. 21 Q. Vivian Carlton was the examiner in 22 charge of that examination. Do you recall that, 1547 1 sir? 2 A. Well, yes. I tried to remember that 3 name earlier when I said that I thought an 4 examiner had later noted in a report that she was 5 concerned about employee turnover. I believe that 6 was the lady whose name I was trying to recall. 7 Q. And your recollection is that those 8 contracts had multi-year severance as well; isn't 9 that right? 10 A. It's my recollection, sir, yes. 11 MR. VILLA: Your Honor, I move 12 Exhibit A1141 into evidence. 13 THE COURT: Received. 14 Q. (BY MR. VILLA) Now, Mr. Rinaldi 15 asked -- there did come a time subsequent to this 16 when the October 27, 1988, letter was received 17 from Neil Twomey, right? We just saw that letter, 18 right? 19 A. Yes, sir. 20 Q. And the board of UFG responded to that 21 letter by taking a number of steps that were 22 requested by Mr. Twomey; isn't that right? 1548 1 A. Yes, sir. 2 Q. Did the board of UFG ask the executives 3 to, for example, execute waivers of their rights 4 to the money in escrow? 5 A. Yes, sir. That's what my understanding 6 was. 7 Q. Did they do that? 8 A. Yes. I believe they all did. 9 Q. Every one of them, did; didn't they? 10 A. Yes, I believe so. 11 Q. At least all the then current 12 executives. Do you recall how long it took the 13 board of directors of UFG to respond to 14 Mr. Twomey's criticisms as set forth in the 15 October 1988 letter, Exhibit 2487? 16 A. Well, I think I had indicated earlier 17 that they responded as quickly as they knew how to 18 respond to all the concerns raised in here 19 immediately. 20 Q. Mr. Rinaldi asked you whether, from 21 the -- whether Mr. Berner had -- and I believe 22 Mr. Crow had made a number of -- strike that. 1549 1 Mr. Rinaldi asked you whether a number of senior 2 executives had made threats to leave the 3 association and I think he particularly mentioned 4 Berner and Crow. Do you recall that line of 5 questioning, sir? 6 A. Yes, sir. 7 Q. From the standpoint of a director of a 8 company, do you think that it is appropriate to 9 offer severance benefits in contracts only to the 10 key officers who are openly threatening to leave? 11 A. No, sir. 12 Q. Why not? 13 A. Well, you don't try to respond to 14 intimidation. You try to put in place a structure 15 that puts people's minds in the position that you 16 want them oriented which in this case was working 17 at full tilt without worrying about other things 18 towards what we hoped would ultimately be a 19 capital infusion to United Savings Association of 20 Texas, to focus the efforts on the rescue of the 21 institution. 22 Q. What effect do you believe it would 1550 1 have on morale to only offer severance benefits to 2 the key officers who are openly threatening to 3 leave? 4 A. Well, I don't think it's a very 5 favorable thing to respond only to people who are 6 sitting there and whining about their problems 7 yet, indeed, we did respond to those who whined 8 early on because we were concerned about everybody 9 getting the right mindset to focus on what we were 10 then trying to do. 11 And as I said earlier, this was 12 something that began quite early in the year. I 13 don't know if it was at absolutely the first 14 meeting but shortly thereafter that I first began 15 to hear that by virtue of myself coming on the 16 board and others, that some people were claiming, 17 well, they were going to jump ship. Not 18 Mr. Berner, not Mr. Crow, not Mr. Gross, not 19 Dr. Munitz, but other people. Mr. Gray, I 20 believe, was one and there may have been others; 21 and I've heard people were waiting in the wings 22 just to go ahead and trigger those arrangements 1551 1 contrary to the intent of what those arrangements 2 were set up to do. 3 Q. Finally, Mr. Rinaldi asked you a 4 question whether the board believed it was in the 5 best interest of United to give contracts as of 6 June 30, 1988, and July 1, 1988, with increased 7 salary levels. Do you remember those questions? 8 A. Yes, sir. 9 Q. When the board took action on those 10 contracts, was it relying in part upon the reports 11 of independent management consultants regarding 12 whether or not those compensation levels were 13 reasonable? 14 A. Yes, sir. At the end of the day as I 15 remember, there were two. Both Wyatt and also 16 Hewitt that had been brought in to give comfort 17 and guidance to the compensation committee that -- 18 and to the board that those were reasonable 19 arrangements in all respects. 20 Q. Thank you. 21 MR. VILLA: No further questions. 22 THE COURT: Mr. Eisenhart? 1552 1 MR. EISENHART: Thank you, Your Honor. 2 I will, in fact, be very brief. 3 4 FURTHER RECROSS-EXAMINATION 5 6 7 8 Q. (BY MR. EISENHART) Mr. Schwartz, I 9 want to show you a document; and rather than have 10 you go fishing in the piles in front of you, let 11 me just give you my copy. It's T1093 which is the 12 Security Pacific bank letter of credit that was 13 part of the Drexel option agreement. Do you 14 recognize that? 15 MR. RINALDI: Is this an exhibit? 16 MR. EISENHART: I believe it is. I am 17 told it is. I am told it is in. 18 MR. RINALDI: What's the number then, 19 Frank? 20 MR. EISENHART: 1093. T1093. 21 A. Yes, sir, I see it. 22 Q. (BY MR. EISENHART) Mr. Rinaldi asked 1553 1 you what you believed would happen if Drexel put 2 the shares to MCO and MCO was not in a position to 3 take the shares. And I think you indicated that 4 in that case, Drexel would have the right to draw 5 under the letter of credit; is that correct? Is 6 that what you told him? 7 A. Yes, sir. 8 Q. And he then asked you what would happen 9 to the shares in that circumstance? And I think 10 you indicated some uncertainty as to what would 11 happen to the shares. 12 I want to direct your attention to 13 the -- it's the third paragraph of T1093 and on 14 your -- on the copy I handed you, Mr. Schwartz, 15 it's highlighted -- and ask you if that refreshes 16 your recollection as to exactly what happens to 17 the shares under the circumstances where the 18 letter of credit is triggered. 19 A. Yes, I think I may have incorrectly 20 confused the escrow agent with the bank in the 21 sense that certificates for the shares were to be 22 delivered to the bank to be able to draw upon the 1554 1 letter of credit. 2 Q. So, if Drexel put the shares to MCO and 3 MCO was not in a position to take them, under the 4 arrangement, Drexel would then tender the shares 5 to the bank? Is that -- 6 A. Yes, sir, that's my understanding from 7 reviewing the letter of credit. 8 Q. And then the bank would pay Drexel 9 pursuant to the letter of credit agreement? 10 A. Yes, sir. 11 Q. And what would happen to the shares 12 after that then I suppose would be a matter 13 between MCO and the bank? 14 A. Yes, sir. 15 Q. But MCO was not required to take those 16 shares if it was not in a legal position to do so? 17 MR. RINALDI: I'm going to object to 18 the form of the question. 19 THE COURT: Sustained. 20 MR. RINALDI: If he's a lawyer and can 21 testify to that. 22 Q. (BY MR. EISENHART) Are you aware of 1555 1 anything in the agreement which would have 2 required MCO to take ownership or possession of 3 those shares if it was not legally entitled to do 4 so? 5 A. No, sir. 6 Q. Finally, Mr. Schwartz, I want to refer 7 you briefly to Exhibit T1113. This was the letter 8 from Mr. Eckland at McKenna Conner & Cuneo to 9 Julie Williams at the Federal Home Loan Bank 10 Board. 11 A. 1113, sir? 12 Q. Yes. And I want to refer to you 13 Exhibit D in that letter which is the next to last 14 page. This was the language that Mr. Rinaldi 15 referred to, I believe, as MCO's proposal for 16 modified language for the net-worth maintenance 17 agreement. Do you see what I'm referring to? 18 A. Yes. 19 Q. Now, Mr. Rinaldi asked you specifically 20 about the language pro rata share as used in that 21 proposal. And I think you said that in your view, 22 pro rata share was not as much an issue here 1556 1 because the liability in our proposal was capped. 2 Was that your testimony? 3 A. I remember saying it would be capped. 4 I don't know that I said it wasn't so much of an 5 issue but certainly, it would be capped. 6 Q. Well, my question to you, Mr. Schwartz, 7 is: Did you have any better understanding of the 8 concept of pro rata share infusion as it was used 9 in this paragraph as compared to the original 10 proposal by the bank board? 11 A. Never had one then. Don't have one 12 now. 13 Q. So, you still didn't know what pro rata 14 infusion meant even though -- even as it was set 15 forth here? 16 A. No, sir, I did not. 17 Q. But the difference between the two is 18 here, the liability is capped. Is that what 19 you're telling us? 20 A. Yes, sir. 21 MR. EISENHART: Thank you, Your Honor. 22 I have no further questions. 1557 1 MR. RINALDI: Your Honor, I have five 2 questions; and then we can let him go. 3 THE COURT: All right. You have one 4 question, or what did you say? 5 MR. RINALDI: I have about five 6 questions. 7 8 FURTHER REDIRECT-EXAMINATION 9 10 11 Q. (BY MR. RINALDI) You testified that 12 at the February 11, 1988, meeting of the board of 13 directors of USAT, that Vivian Carlton, a bank 14 examiner, was present and that at that meeting, 15 there was a discussion of employment contracts for 16 officers or directors of -- or senior management 17 of USAT. Do you recall that? 18 A. Yes, sir. 19 Q. Were copies of the employment contracts 20 given to Ms. Carlton in your presence? 21 A. I don't recall, sir. 22 Q. Now, do you recall where the contracts 1558 1 that were discussed here, they indicate that these 2 contracts were identical to contracts entered into 3 by UFGI and would only be affected if UFGI could 4 not perform under such contracts. Do you see 5 that? 6 A. Where would that be, sir? 7 Q. On page 27. It's in the second full 8 paragraph, second line. It states it was noted 9 that these contracts, the USAT contracts, were 10 identical to contracts entered into by UFGI and 11 that -- and would only be effective if UFGI could 12 not perform under such contracts. Do you see 13 that? 14 A. Yes, sir. 15 Q. Okay. So that -- do you recall whether 16 these contracts included the 60 percent pay 17 increases that were subsequently incorporated into 18 the June 30th, 1988, contracts between UFGI and 19 certain of its senior management? 20 A. To the best of my ability, if I recall 21 correctly, these contracts had certain minimum 22 bonuses. I don't know that they had other 1559 1 features or not. I believe they had minimum 2 bonuses reflective of what had been received in 3 the previous year. 4 Q. My question to you, sir, is do you 5 recall that you testified that the 19 -- 6 June 30th, 1988, UFG contracts included 60 percent 7 increases over the 1987 compensation, that the 8 same individuals had received? 9 A. No, I don't think I said that. What I 10 think I said was that their base salary had at 11 some point in time been adjusted to reflect the 12 bonuses that, if I recall correctly, had actually 13 been received in respect of 1987 service. 14 Q. Okay. And that meant that their base 15 salaries went up by 60 percent, didn't it? 16 MR. VILLA: Your Honor, at the risk of 17 raising a sore subject, I don't think I got into 18 base salaries here. He's cross-examining now 19 based upon his former redirect. All I said was he 20 brought up severance agreements in two different 21 contracts, and the severance agreements were there 22 with the employees. If he gets into base 1560 1 salaries, we're going to go through an entire 2 other part of the case. I said nothing about 3 them, Your Honor. 4 MR. RINALDI: Fine, Your Honor. I 5 would agree with Mr. Villa that it is ridiculous 6 to try to put on the compensation case at this 7 point. 8 THE WITNESS: Is there a question in 9 front of me? 10 Q. (BY MR. RINALDI) Yes. But I do have 11 a question regarding the severance. Under the 12 agreements that were referenced at February 11, 13 1988, did the severance provisions under those 14 agreements have provisions for an escrow 15 arrangement whereby moneys would be set aside to 16 fund the severance provisions? 17 A. Not to the best of my recollection. 18 Q. And were the -- I don't want to go 19 into -- anywhere beyond anything that Mr. Villa's 20 been into; so, I'll strike that question. And you 21 indicated that the directors of UFG had received a 22 report from Hewitt and Wyatt companies regarding 1561 1 the advisability of entering into the contracts. 2 Do you recall that? 3 A. I think I said that we received their 4 opinion as to the appropriateness of the levels 5 and the terms of the compensation, yes. 6 Q. And do you further recall that Hewitt 7 advised them that the funding provisions for these 8 severance benefits may constitute an unsafe and 9 unsound banking practice and that they should 10 check with regulatory counsel to see if they did 11 violate unsafe and unsound banking practices? 12 MR. VILLA: Objection, Your Honor. 13 We're getting beyond the scope of even the most 14 remote areas of my examination. I've got the 15 reports here. I didn't put them into evidence 16 just so we could all have a lunch break. 17 MR. RINALDI: Well, if that's a threat 18 to go beyond the scope, then I will withdraw the 19 question, John, and we can save that for later. 20 Q. (BY MR. RINALDI) Mr. Schwartz, when 21 Drexel put the -- when Drexel put the shares back 22 to MCO and -- if Drexel had put the shares back to 1562 1 MCO and drawn down on the letter of credit, you 2 stated that the shares would have been given back 3 to the bank. Do you recall that? That was your 4 understanding? 5 A. Yes, sir, my corrected understanding. 6 Q. And MCO would have had the economic 7 risk regarding the losses associated with those 8 shares, would they not? 9 A. Yes, sir, that was my understanding. 10 MR. RINALDI: No further questions. 11 THE COURT: Could I ask just one 12 question, Mr. Schwartz? We're talking about the 13 put option. What was the rationale for MCO 14 entering into the put option? 15 THE WITNESS: Well, as I recall, Your 16 Honor, it was something that Drexel demanded, 17 required for MCO to be able to enter into a call 18 option; that is to say that at the end of the day, 19 that was the only way they were prepared to enter 20 into the call option, notwithstanding the fact 21 that we had looked to others to see if we could do 22 other arrangements. 1563 1 THE COURT: So, they wouldn't have 2 entered into the call option if you hadn't agreed 3 to the put option; is that right? 4 THE WITNESS: Yes, sir. That's my 5 understanding, Your Honor. 6 THE COURT: All right. Thank you. 7 MR. EISENHART: Your Honor, I have one 8 housekeeping matter to take up before we break. 9 THE COURT: All right. Mr. Schwartz, 10 you may step down. 11 MR. KEETON: Your Honor, I have one 12 question to ask him. 13 THE COURT: All right. Mr. Schwartz, 14 will you resume the chair; and Mr. Keeton's going 15 to ask you one question. 16 MR. KEETON: It relates to Your Honor's 17 question. 18 Q. (BY MR. KEETON) If MAXXAM had had a 19 call option and the shares had gone to zero or 20 very, very low and there had been no put, would 21 MAXXAM have exercised the call? 22 A. No. 1564 1 Q. So, the put protected Drexel if the 2 shares went down and the call protected or gave 3 the benefit to MAXXAM if the shares went up; is 4 that correct? 5 A. Yes. 6 MR. KEETON: Thank you. 7 THE COURT: All right. Now you may 8 step down. 9 THE WITNESS: Thank you, Your Honor. 10 MR. EISENHART: I'll wait till 11 Mr. Schwartz actually physically leaves the stand. 12 I don't believe this is an issue, Your 13 Honor. I had a note delivered to me this morning 14 from Mr. Eckland who has been, I believe, 15 somebody -- the next witness who has been 16 patiently waiting since I think around noon 17 yesterday and I was asked to share this -- with 18 the Judge at my discretion. But he has got to 19 leave tonight he says. He has a 7:00 a.m. meeting 20 in New York on Wednesday that he cannot 21 reschedule. Now, I don't know that this is going 22 to be a problem. 1565 1 MR. RINALDI: In that regard, Your 2 Honor, I will commit to put on Mr. Eckland. I 3 will make the examination as short as possible. I 4 think maybe it's a half an hour. Did you say 5 something, Richard? 6 MR. KEETON: I said it's been an hour 7 and a half minimum every time you said a half 8 hour. 9 MR. RINALDI: Thank you. 10 MR. EISENHART: There is a subsidiary 11 question involving Mr. Lazard who has called me on 12 several occasions wanting to know whether he's 13 really going to get on tomorrow. I told him I 14 would advise him today. He is scheduled to be 15 their witness for tomorrow morning. 16 THE COURT: Well, counsel knows more 17 about these matters than I do. 18 Wait a minute. Wait a minute. I don't 19 know how the reporter is going to take this down 20 if we're all talking at the same time. All right. 21 Mr. Rinaldi. 22 MR. RINALDI: The schedule of witnesses 1566 1 is a matter that counsel and the OTS can work out. 2 There is a witness this afternoon, and then we're 3 supposed to move on to another witness. If it 4 appears that we can't take Mr. Lazard on 5 Wednesday, then we can make appropriate 6 arrangements I think. 7 MR. EISENHART: I wouldn't normally 8 burden the Court or the record with this, Your 9 Honor, except, frankly, these people are OTS 10 witnesses; but they are calling us because they 11 can't get an answer as to when they are going to 12 go on. Mr. Lazard lives in Phoenix, Arizona. 13 He's been out here once already and didn't get on. 14 He's due to get on a plane tonight and all he's 15 trying to do is get an answer as to whether he's 16 really going to get on tomorrow and I'm asking -- 17 THE COURT: Thank you. We'll adjourn 18 until 2:30: 19 . 20 (Luncheon recess) 21 . 22 THE COURT: The hearing will come to 1567 1 order. Mr. Rinaldi, do you have another witness. 2 MR. RINALDI: We do, Your Honor. If it 3 please the Court, I'd like to call to the witness 4 stand William Eckland. 5 6 EXAMINATION 7 8 9 WILLIAM ECKLAND, 10 11 called as a witness and having been first duly 12 sworn, testified as follows: 13 THE COURT: Be seated. 14 Q. (BY MR. RINALDI) Would you state your 15 full name fo the record, sir? 16 A. Yes. It's William S. Eckland. 17 Q. And how are you presently employed? 18 A. I am an attorney at the law firm of 19 Sydley & Austin in Washington, D.C. 20 Q. And prior to being employed by 21 Sydley & Austin, could you just relate to the 22 Court what your other professional affiliations 1568 1 were? 2 A. I was at the law firm of 3 Morrison & Forester. Prior to that, at the law 4 firm of McKenna Conner Cuneo and previously at the 5 law firm of Cleary, Gottlieb, Steen & Hamilton in 6 Washington, D.C. 7 Q. And do you have an area of the law in 8 which you principally are engaged and practice? 9 A. Yes. I practice in the area of 10 financial institution regulatory law. 11 Q. Now, did there come a time in about 12 1985 when you were retained by either Federated or 13 MCO Holding Company? 14 A. Yes. We were retained, I believe it 15 was somewhere in the fall of 1985. 16 Q. And can you just describe generally to 17 the Court the nature of the activities that you 18 were retained to participate in? 19 A. The initial representation in the fall 20 of 1985 was for a specific assignment to try and 21 get a limited net-worth maintenance agreement out 22 of the -- I guess then the Federal Home Loan Bank 1569 1 Board in connection with an order that MCO and 2 Federated had received the previous year from the 3 bank board. 4 Q. And what was the nature of the order 5 that MCO and Federated had received the previous 6 year? 7 A. It contained a condition in the order 8 that required the maintenance of the institution's 9 net worth under certain circumstances. 10 Q. Okay. Let me hand you a copy of what's 11 been previously marked as 1059, T1059; and pass a 12 copy onto the Court. And tell me if you recognize 13 that document as -- 14 THE COURT: I don't have a copy of 15 this. 16 MR. RINALDI: Yes. I just thought it 17 would be easier. 18 THE COURT: Okay. 19 A. This looks like the order. 20 MR. RINALDI: Oh, I'm sorry, sir. I 21 thought you said you already had a copy, and I was 22 just saying this is just for convenience. We were 1570 1 passing along a second one. 2 Q. (BY MR. RINALDI) And can you describe 3 for me the nature of the activities you were asked 4 to participate in? 5 A. Yes. We had been a few months earlier 6 successful in obtaining a limit for another 7 company in a similar situation and we were 8 attempting to get similar type of language and 9 have the order amended so that the obligation of 10 the holding company would be capped at some 11 definite amount. 12 Q. And you indicated that on another 13 occasion, you had been successful? 14 A. Right. 15 Q. What entity had that been in connection 16 with? 17 A. That was in connection with Ford Motor 18 Company's acquisition of First Nationwide. 19 Q. And to your knowledge, had the Federal 20 Home Loan Bank Board granted any other limitations 21 on net-worth maintenance commitments prior to the 22 Ford Motor Company matter? 1571 1 A. We were operating under the assumption 2 that was the first one. 3 Q. Okay. Now, as a result of your being 4 contacted, who in particular contacted you? 5 A. My principal contact was Barry Munitz. 6 Q. And is it your recollection that 7 Mr. Munitz was contacting you object behalf of 8 some corporate enterprise? 9 A. MCO and Federated. 10 Q. Okay. And as a result of your first 11 contact with Mr. Munitz, did you have occasion 12 then to come up with a strategy for approaching 13 the Federal Home Loan Bank Board? 14 A. We did. 15 Q. Okay. Can you describe that briefly? 16 A. Well, I think that we had laid out a 17 number of options to try and approach the agency 18 and see which one they would be receptive. The 19 result of any of those strategies would have been 20 to either eliminate the obligation entirely or to 21 place some limit but to modify it so it would not 22 read the way the original order. 1572 1 Q. Okay. And would you take a look at 2 what's been previously marked as Exhibit CT1067? 3 A. Uh-huh. 4 Q. And do you recognize that document? 5 A. It looks like a memo I prepared. 6 Q. And the memo is the attachment to the 7 letter to Mr. Munitz dated October 25th, 1985? 8 A. Correct. 9 Q. And if you look at the first full page 10 of the memo and the second full page, there is a 11 first option and a second option. Can you just 12 describe for the Court what that first option 13 entailed? 14 A. Just -- I'm going to need a minute to 15 read. 16 Q. Sure. Take your time. 17 A. Okay. The first option that we had 18 laid out were options that we would try and obtain 19 by negotiating directly with the bank board. It 20 would not require us to make any supervisory type 21 of acquisition which is Option No. 2, and I think 22 we laid out three approaches. 1573 1 The first would be to seek placing a 2 cap which was exactly the situation in the 3 Ford/First Nationwide transaction. 4 The second would be to -- in lieu of 5 having any obligation order, infuse some 6 additional money up front to provide a sort of 7 cushion and if we -- the thought being if money 8 was put up up front that it would relieve the 9 back-end obligation. 10 And the third one was to attempt to get 11 the net-worth maintenance obligation done at an 12 intermediate holding company level, not at the 13 parent or top tier levels. 14 Q. Okay. And after you prepared this 15 options memo, did you submit it then to 16 Mr. Munitz? 17 A. The cover letter seems to indicate that 18 I did so... 19 Q. And after you submitted it to 20 Mr. Munitz, what happened next as you recall? 21 A. Well, my recollection dating back 12 22 years is a little fuzzy; but I assume what we 1574 1 would do -- what we did is we had several 2 discussions and then I know we had a meeting with 3 the agency and then we submitted a series of 4 letters to the agency. 5 Q. Okay. And let me hand you a copy of 6 what's been previously marked as CT1069 and ask 7 you to take a look at that. 8 THE COURT: Are you saying these 9 exhibits have been previously identified and 10 marked? 11 MR. RINALDI: Well, that we had 12 previously marked them. They have not -- 13 actually, I should move for the admission of 14 CT1067 which is a new document and as soon as he 15 identifies CT1069, I will ask him -- I will move 16 for the admission of that. Is there any objection 17 to -- 18 MR. EISENHART: Your Honor, I have no 19 objection to CT1067 with the understanding that 20 this is one of the, as I have been calling them, 21 special documents now. 22 THE COURT: All right. Received. 1575 1 MR. RINALDI: Okay. And by that, this 2 is another document that was inadvertently turned 3 over. 4 MR. EISENHART: Yes. This is another 5 one of the documents that we say was inadvertently 6 produced, and we ask that it be treated in 7 accordance with our understanding. 8 MR. RINALDI: That's fine, Your Honor. 9 Q. (BY MR. RINALDI) Do you recognize 10 1069, sir? 11 MR. EISENHART: Mr. Rinaldi -- Your 12 Honor, may we have -- Mr. Rinaldi identified 13 CT1069. It was not on the list they gave us. 14 MR. RINALDI: It's a letter dated 15 November 22nd, 1985, to William Eckland from 16 Barry Munitz. 17 Q. (BY MR. RINALDI) Does this appear to 18 be a letter that was you were sent by Mr. Munitz? 19 A. Yes. 20 MR. VILLA: Your Honor, if we might 21 have a copy, get a copy of the letter. If he's 22 going to examine the witness about a document that 1576 1 my client wrote, I'd like to have the letter. 2 THE COURT: All right. We'll hold for 3 a moment, be off the record. 4 MR. RINALDI: In the interest of time, 5 I'll skip the document, Your Honor. I know that 6 Mr. Eckland needs to catch a flight, and I'm happy 7 to move on. 8 Q. (BY MR. RINALDI) Mr. Eckland, as a 9 result of your retention, you indicated that a 10 decision was made to send the letter to the 11 regulators? 12 A. Correct. 13 Q. Okay. And do you recall whom the 14 letter was going to be sent to? 15 A. Yes. To Julie Williams, the deputy 16 chief counsel or general counsel in those days. 17 Q. Okay. And who was going to draft that 18 letter? 19 A. I was the principal draftsperson. 20 Q. Okay. I'm handing you a copy of what's 21 been previously marked as CT10 -- I'm sorry. I 22 apologize. I'm handing you a copy of what's been 1577 1 previously marked as T1113. Pass those onto the 2 Court. 3 This has, I believe, previously been 4 admitted into evidence. And ask you first of all 5 T1113 is a document dated January 31st, 1986, that 6 has a letter then attached to it dated 7 December 3rd, 1985. And attached to that are a 8 number of attachments. Do you see that? 9 A. Correct, yes. 10 Q. Now, directing your attention to the 11 December 3rd, 1985, letter, do you recognize that 12 letter, sir? 13 A. Yes. It's the letter I sent to 14 Ms. Williams. 15 Q. Okay. And you arranged to have that 16 document hand delivered to her in Washington, 17 D.C., on the third of December 1985? 18 A. Yes, it looks that way. 19 Q. And if you'll take a look at the letter 20 for a moment, what were you proposing to 21 Ms. Williams at this point in time regarding the 22 net-worth maintenance obligation of 1578 1 United Financial Group? 2 A. It looks as if what we were proposing 3 was to place a cap on their obligation equal to 4 the minimum net worth as of the close of the 5 quarter prior to the acquisition of control. 6 Q. Now, at the bottom of the second page, 7 it talks about the specific language for holding 8 companies proposed modification of the order is 9 attached as Exhibit D? 10 A. Correct. 11 Q. Do you see that? 12 A. Yes. 13 Q. Did you draft Exhibit D? 14 A. It certainly has -- it certainly is the 15 language we provided, yes. 16 Q. Okay. And am I correct that -- what 17 does the underlining in that mean? 18 A. The underlining is the additional 19 language that we had proposed to modify the order. 20 Q. Okay. Now, I notice the words 21 "pro rata" are underlined above. Those were in 22 the original document, were they not? 1579 1 A. I believe so. I think we were just 2 underlining it for effect. We did not add that 3 language. 4 Q. Right. But I didn't want anyone 5 reading the transcript to be confused. 6 A. Do you want -- 7 Q. No. So, the underlining portion is the 8 modifications that were added by you? 9 A. Correct. 10 Q. Okay. Now? 11 MR. EISENHART: Your Honor, one of my 12 co-counsel tells me -- I didn't hear this myself, 13 but Mr. Rinaldi may have misspoke a moment ago and 14 referred to a proposal submitted on behalf of UFG. 15 I think we all agree that this was a proposal on 16 behalf of MAXXAM and Federated. 17 MR. RINALDI: Yes. 18 Q. (BY MR. RINALDI) If I said that, then 19 let the record be corrected. Thank you, 20 Mr. Eisenhart. 21 Q. (BY MR. RINALDI) Now, in the first 22 full sentence of the December 3rd, 1985, letter, 1580 1 it makes reference to a meeting on November 18th, 2 1985. 3 A. That's correct. 4 Q. And do you recall who attended that 5 meeting, sir? 6 A. The only participants I can be sure of 7 were myself, Dr. Munitz, and Julie Williams. 8 There may have been others but I have no 9 recollection. 10 Q. And can you just sort of describe 11 generally what the substance of that meeting was? 12 A. I'm going to have a very difficult time 13 remembering exactly, but I would assume that the 14 discussion revolved around this letter that we had 15 done a draft among ourselves in wanting to make 16 our presentation to Ms. Williams to see if she 17 would be receptive to this type of argument. 18 Q. Okay. And after following -- after 19 sending the initial -- strike that. 20 After sending the December 3rd, 1985, 21 letter or hand-delivering it to Ms. Williams, did 22 there come a time when you followed that up with a 1581 1 second letter to Ms. Williams? 2 A. Yes. There is a January 31st, letter 3 that's attached. 4 Q. Now, at or about this point in time, 5 was this the only matter that you were working on 6 with respect to Federated and MCO? 7 A. This was certainly the significant part 8 of the engagement of that. 9 Q. Okay. Was there any other part of the 10 engagement that you recall? 11 A. Well, based on the log that you gave my 12 partner yesterday, Joe Tompkins, there is a 13 reference to some handwritten notes about a 14 December 31st conversation about the stock option, 15 we talked about that and I think there were some 16 references in the log about some debt budget 17 approval types of things as well, but I don't have 18 a whole lot of recollection about phone 19 conversations back then. 20 Q. Okay. As a result of your submitting 21 this -- these letters regarding the modification 22 of the net-worth obligation, were there further 1582 1 discussions with the Federal Home Loan Bank Board 2 regarding the modification of the net-worth 3 obligation that had been imposed upon MCO and 4 Federated under the resolution that was entered on 5 December the 6th, 1984? 6 A. Well, these letters certainly represent 7 sort of what our positions were. Were there phone 8 calls? There were probably some calls that went 9 on because at a parallel track, Dr. Munitz was, 10 every 90 or a 120 days, attempting to extend the 11 approval order that had an expiration date. We 12 were trying to keep the approval order alive 13 subject to this modification. So, no, I know he 14 had some conversations with them. We probably 15 talked to folks at the region to keep them 16 up-to-date on what was going on as well with the 17 discussions in Washington. 18 Q. And as a result of your writing these 19 letters and your continued involvement, did you 20 participate in periodic extensions of the 120-day 21 limitation for MCO to act under the resolution? 22 A. Yes. I think most of those letters 1583 1 probably were sent by Dr. Munitz, but I'm sure he 2 discussed them with me. He would probably call me 3 up within a couple days of expiration and say, 4 "Have you heard anything from the agency?" 5 And if I told him no, things were going 6 slow, he'd probably say, "I'm extending it." 7 Q. Okay. And would you just -- so that 8 everyone understands, what was the purpose for 9 these extension letters? 10 A. Again, to keep the order in effect. We 11 did not want the order to lapse. What we needed 12 was a modification of this particular provision. 13 It's far easier to modify a particular provision 14 in an order than to have it entirely lapse and 15 have to reapply the whole process again. 16 Q. And if it had lapsed, then you'd have 17 to reapply? 18 A. Correct. 19 Q. And provide another H(e)-1 application 20 and start all over again? 21 A. Correct. 22 Q. And were you successful in obtaining 1584 1 extensions of the 120-day orders for a period of 2 time? 3 A. Yes. I don't know precisely how long 4 but the government was amenable to extending it 5 for some period of time. I think it was two, two 6 and a half years. 7 Q. Okay. And did there come a time when 8 ultimately, it was determined that MCO and 9 Federated would no longer seek to extend the 10 order? 11 A. Yes. In the packet you had provided me 12 last week, there was a letter that I wrote to 13 Neil Twomey with drawing the -- or at least 14 indicating that there would be no further request 15 for extensions. 16 Q. Okay. 17 A. But I don't recall the date of that 18 letter. 19 Q. I'm handing you a copy of what's been 20 previously, I believe, admitted into evidence. 21 This is a letter dated December 21st, 1987. It's 22 T1140 and ask you if you recognize that letter, 1585 1 sir. 2 A. Yes. That looks like the letter. 3 Q. Okay. In the event that it has not 4 been admitted into evidence, I would submit an 5 additional two copies for the Court. And did you 6 draft this letter? 7 A. Yes, it appears I did. 8 Q. And as a result of -- did the 9 resolution then lapse? 10 A. I believe so. I believe there were no 11 further extensions granted. 12 Q. And were there then any further efforts 13 on behalf of -- by you on behalf of Federated or 14 MCO to -- with respect to the net-worth 15 maintenance modification? 16 A. There were no -- well, I certainly 17 don't recall us having any further conversations 18 as of this point. 19 Q. Okay. Now, during the course of the -- 20 did there come a time when, after the 21 December 21st, 1987, letter had been sent to the 22 bank board, that you were again asked to provide 1586 1 additional legal services by Federated or MCO? 2 A. Yes. I think there were two other 3 occasions in 1988 when I did some work for them. 4 Q. And do you recall what those occasions 5 were? 6 A. Yeah. One involved -- I believe I had 7 some discussions with the company in connection 8 with the extension of a Drexel option in the 9 spring or summer of '88; and also in the fall of 10 '88, October/November time frame, we were involved 11 with the company in an attempt to by United 12 Savings that was shortly to be taken over by the 13 government. So, we were negotiating with the 14 government on an acquisition of 100 percent of the 15 company. 16 Q. Okay. Let me hand you a copy of what's 17 been marked as -- would you take a look at what's 18 been marked T1149? Now, in the upper left-hand 19 corner, this is a letter dated August 3rd, 1988; 20 and it has your name among the people that 21 received distribution on it and it's a letter to 22 Mr. Pledger at the Texas Savings and Loan 1587 1 Department and it's signed by Barry Munitz. Do 2 you recall having received this letter? 3 A. Yes. 4 Q. Okay. Now, it describes a transaction 5 relating to a put call option between 6 Drexel Burnham Lambert and MCO. Do you see that? 7 A. Yes. 8 Q. Were you asked to do anything with 9 respect to that transaction at or about the date 10 of this letter? 11 A. I believe I had conversations sometime 12 in the spring. I received a copy of the option, 13 and I believe I had discussions with them. The 14 precise extent and who was involved is a little 15 bit fuzzy given the time. 16 Q. Now, when you say you believe that you 17 had discussions in the spring, in the spring of 18 which year? 19 A. In 1988. 20 Q. So, this would have been over two years 21 after the option arrangement was originally 22 entered into? 1588 1 A. Correct. This was at the time that 2 they were extending it and rolling it over. 3 Q. Okay. And were you asked to perform 4 some services in connection with the extension of 5 the option? 6 A. I was probably given the draft to 7 review and comment on. 8 Q. Now, let me hand you a copy of the 9 minutes of the board of directors dated 10 December 17th, 1985; and you'll see attached to it 11 is a stock option agreement between Drexel Burnham 12 Lambert and MCO. 13 A. Correct. 14 Q. Do you recognize that document, sir? 15 A. It was in the package that you gave me 16 last week so -- and I assumed it was the copy that 17 was sent to me in '88 as well. 18 Q. Okay. And prior to your receiving a 19 copy of the document in 1988 for purposes of 20 renewing the option, had you had occasion to 21 receive a copy of the option agreement from MCO or 22 Federated? 1589 1 A. I don't have a recollection of 2 receiving it prior to that; and, quite frankly, my 3 recollection is based primarily on the privileged 4 log you showed me yesterday that had the date of 5 when. It looked like it was September to me. 6 Q. Okay. Perhaps we should give you a 7 copy of the privileged log and you can identify 8 that for us. I'm handing you a copy of what's 9 marked as Exhibit 1208. I will represent to the 10 Court that this is a privileged log which I 11 received from Dechert, Price & Rhodes in which 12 Dechert, Price & Rhodes on behalf of MAXXAM or the 13 successor, I guess, to MCO asserted various 14 privileges with respect to documents that were in 15 the possession of then Morris & Forrester. And 16 for clarification, at the time this privileged log 17 was submitted, you were then employed by Morris & 18 Forrester? 19 A. Correct. 20 Q. And that was after you had left 21 McKenna Conner Cuneo? 22 A. Correct. 1590 1 Q. And before you went to your present 2 position at Sydley Austin? 3 A. Correct. 4 Q. Okay. Now -- 5 A. The reference I was referring to is on 6 page 7. 7 Q. Okay. And that would be which one? 8 A. It is about the middle of the page on 9 page 7. It looks like the author is someone named 10 Shari Fischer; recipient, William Eckland. Letter 11 enclosing copy of stock option agreement between 12 Drexel Burnham and MCO Holdings and the date on 13 that appears to be January 11th of '88. 14 Q. Okay. And do you recall independent of 15 this privileged log that at or about that point in 16 time -- that is in the early part of 1988 -- you, 17 in fact, did receive a copy of the put call 18 option? 19 A. I remember receiving a copy of the 20 option at some point. I can't tell you absent 21 looking at this whether it was '85 or '88, but I 22 know at some point I got it. 1591 1 Q. Okay. Now, as you look at the 2 privileged log, is there any other reference to 3 the option arrangement that you were aware of? 4 A. Yes. And December 31st of 1985, on 5 page 4, the last entry indicates that I took some 6 notes regarding a stock option proposal. 7 Q. I'm sorry. December 31st where? 8 A. The bottom of page 4, last entry. It 9 says "notes attorney"; and it has my name and it 10 says "notes re: stock option proposal." 11 Q. And that would have been approximately 12 one week following the entry of the -- or the date 13 that appears on Exhibit 1085? 14 A. Correct. 15 Q. And 1085 of course is the stock option 16 agreement itself; is that correct? 17 A. Yes. 18 Q. And do you recall or can you tell from 19 the privileged log whether you had any involvement 20 with the option prior to December 24th, 1985? 21 A. There does not appear to be any 22 reference on the log itself; and if I had phone 1592 1 conversations, again, I have no recollection of 2 that at this point. 3 Q. Now, it talks here about notes 4 regarding stock option proposal. 5 A. Right. 6 Q. Do you see that? 7 A. Uh-huh. 8 Q. Do you recall what the substance of 9 that -- those notes were or that involvement? 10 A. No. 11 Q. Was it your understanding that this was 12 still a proposal or had it been a done deal then? 13 A. I have no idea who typed this, what 14 they were basing it on; so, I can't answer that. 15 Q. Do you have any recollection of doing 16 any work for Federated or MCO on the put call 17 option at or about this point in time? 18 A. In 1985? 19 Q. Yes. 20 A. No, other than this entry, this is the 21 only recollection I have of it. 22 Q. Do you have any recollection of having 1593 1 provided any legal advice to MCO or Federated on 2 the put call option at or about December 31st, 3 1985? 4 A. Again, other than this reference on 5 here, I have no recollection today of what 6 transpired 12 years ago. 7 Q. Did you provide any kind of written 8 opinion to the -- to Federated or MCO regarding 9 the put call option? 10 A. In December of '85? 11 Q. Yes. 12 A. No. 13 Q. Did you provide any kind of written 14 opinion -- strike that. 15 Let me hand you a copy of what's been 16 marked as CT1095 and ask that you give a copy to 17 the Court. 18 MR. RINALDI: And Your Honor, while 19 there -- I'm -- I'd like to move into evidence 20 T1208. That's the log. And I believe the rest of 21 the documents are already in evidence. 22 MR. EISENHART: I have no objection to 1594 1 1208, Your Honor, and I concur with Mr. Rinaldi. 2 THE COURT: I'm not sure 1140 and 1149 3 have been received. 4 MR. RINALDI: Okay. I will then move 5 their admissions as well. I had thought 1140 had 6 come in, but I may be mistaken and the same as to 7 1149. You're correct, Your Honor. We have not 8 received that yet. 9 MR. EISENHART: I have no objection to 10 either. 11 THE COURT: Received. 12 Q. (BY MR. RINALDI) Now, do you 13 recognize that document as one that you prepared? 14 A. Yes. 15 Q. Now, was this document submitted in 16 connection with the net-worth maintenance 17 modification work that you were doing on behalf of 18 Federated and MCO? 19 MR. EISENHART: Your Honor, excuse me. 20 May I just see Mr. Rinaldi's copy of the document? 21 This one wasn't on the list. I just wanted to 22 take a look at it. Thank you. 1595 1 A. I'm sorry. Could you repeat the 2 question? 3 Q. (BY MR. RINALDI) Do you recognize 4 this as a document which you prepared in 5 connection with the work that you did on the -- on 6 the application to modify the net worth? 7 A. On the face of the document, I can't 8 tell you what -- it simply says there is a 9 follow-up to a conversation that I had with this 10 individual. So, I don't know. 11 Q. Do you know who Charles Brewer was? 12 A. I don't recall who he is or was. 13 Q. All right. 14 A. Other than he's obviously a government 15 official. 16 Q. Let me hand you a copy of what's been 17 previously marked as T1117. And this is a letter 18 to Louis Roy dated March the 6th, 1986; and it's 19 from Barry Munitz with a CC to William Eckland. 20 A. Right. 21 Q. And it describes a meeting with a 22 Frank Passarelli, a Joe Orendez. I'm sorry. 1596 1 It's -- it says: I'm writing to follow-up a 2 letter at this specific request of Frank 3 Passarelli and Joe Orendez following our visit on 4 Tuesday, March 4th, in Washington, D.C. Who were 5 Frank Passarelli and Joe Orendez? 6 A. They were OTS officials or Federal Home 7 Loan Bank Board officials, I believe, on the 8 supervisory side. They were not lawyers. 9 Q. And it also says at that meeting which 10 was also attended by Charles Brewer and later 11 confirmed by Julie Williams, they were leaning 12 towards addressing the specific MCO Federated 13 Development proposal outlined in my earlier 14 letters of December 3rd, 1985, and January 31st, 15 1986. Do you see that? 16 A. Yes. 17 Q. Do you recall that there was a meeting 18 at or about March 4th with the -- with members of 19 the Federal Home Loan Bank Board regarding your 20 letters seeking to modify the net-worth 21 obligation? 22 A. It's certainly what this letter says. 1597 1 I can't tell you I recall the meeting but yes,, 2 the letter indicates there was a meeting. 3 Q. Okay. And does that refresh your 4 recollection that one of the individuals you met 5 with was Charles Brewer? 6 A. Correct, but I do not know what his 7 position was. 8 Q. Okay. But following that meeting on 9 March the 4th, did you then submit the letter 10 which is marked as Exhibit 1095 to Mr. Brewer? 11 A. Yes. 12 Q. Okay. 13 MR. RINALDI: Your Honor, I would move 14 the admission of T1117. That's the March 6th, 15 1986 letter. 16 MR. EISENHART: I have no objection. 17 THE COURT: Received. 18 MR. RINALDI: As well as CT1095. 19 That's the March 12th, 1986, letter. 20 MR. EISENHART: May I just look at that 21 again, Your Honor, before I -- it's a one-page 22 document? 1598 1 MR. RINALDI: Uh-huh. 2 MR. EISENHART: No objection, Your 3 Honor. 4 THE COURT: What is that? CT1095. 5 MR. RINALDI: 1095. 6 THE COURT: All right. Received. 7 Q. (BY MR. RINALDI) Now, CT1095 states: 8 As a follow-up to our conversation the other day, 9 I'm enclosing herewith a copy of a chart that sets 10 forth the ownership interest of the Federated MCO 11 group and United Financial Group, Inc. Do you see 12 that? 13 A. Yes. 14 Q. I trust the chart will be helpful. The 15 letter we received in disclosure had no chart 16 attached. So, the question I have for you: Do 17 you recall whether the chart disclosed the 18 existence of the put call option arrangement 19 between MCO and Drexel Burnham Lambert? 20 A. I have no recollection whatsoever what 21 the chart said. 22 Q. Pardon? 1599 1 A. I have no recollection whether the 2 chart did or did not have any information. 3 Q. Do you recall whether, at the time you 4 wrote this letter, you had ever actually seen a 5 copy of the put call option? 6 A. Again, I don't have any recollection 7 independent of -- the log here would seem to 8 indicate that I didn't get it until '88. 9 Q. All right. And just one final 10 question, sir: Were you ever asked to give an 11 opinion with respect to the put call option during 12 the period between 1985 when it was entered into 13 and 1990 when it was executed or was -- 14 A. When you say "an opinion," do you mean 15 a written formal opinion? 16 Q. Yes. 17 A. No. 18 Q. Were you ever asked to give any other 19 opinion? 20 A. I believe I had discussions with him in 21 1988 in connection with the rollover of the 22 option. 1600 1 Q. Do you recall the nature of the 2 discussions? 3 A. Not precisely but I have a pretty good 4 idea it probably would have revolved around the 5 issue of could we extend the option without it 6 become becoming underlying shares. 7 MR. RINALDI: I have no further 8 questions. 9 THE COURT: Cross-examination. 10 MR. EISENHART: Thank you, Your Honor. 11 12 CROSS-EXAMINATION 13 14 15 Q. (BY MR. EISENHART) Mr. Eckland, let 16 me have -- you have in front of you Exhibit T1059 17 which is a letter from Charles Danson, supervisory 18 agent, to Howard Bressler enclosing the Federal 19 Home Loan Bank Board resolution. 20 A. Correct. 21 Q. I believe in a number of Mr. Rinaldi's 22 questions; and I think in a number of your 1601 1 answers, this document was referred to as an 2 order. Technically it is not an order; is that 3 correct? 4 A. Well, it's a resolution. 5 Q. Okay. And that would be the proper 6 terminology for referring to it? 7 A. Yes, I believe so. 8 Q. Okay. You said that about two months 9 before you were retained in this matter, you had 10 been successful in the Ford/First Nationwide case 11 in obtaining a limited net-worth maintenance 12 agreement? 13 A. Correct. 14 Q. Was it your understanding that that was 15 one of the principal reasons why you were retained 16 in this matter? 17 A. Yes. 18 Q. Mr. Rinaldi showed you your January 31, 19 1986, letter to Julie Williams. That's T1113. 20 That has your proposed language attached to it? 21 A. Correct. 22 Q. That language you have proposed as to 1602 1 the original resolution that any infusion of 2 capital be done on a pro rata basis. Do you see 3 what I'm referring to? 4 A. Yes, I do. 5 Q. Was there some uncertainty on your 6 client's part that you are aware of as to what a 7 pro rata infusion really entailed? 8 A. Yes. It was very difficult to 9 understand what it really meant and I think in one 10 of the letters -- I think it may be the -- just 11 bear with me one minute. Yes. It's the 12 January 3rd letter. On page 3, we discussed the 13 problems. We saw that language and we viewed that 14 as being how pro rata played out in those 15 circumstances. 16 Q. Why did you decide to leave it in your 17 draft proposal to the bank board? 18 A. For two reasons. One is as a general 19 rule, the less language you change the better; and 20 the more receptive the agency would be. And more 21 importantly, the language that we added would 22 render that paragraph essentially meaningless. 1603 1 The purpose of the additional language was to 2 place a finite cap on the obligation. It would 3 not matter if the cap was $140 million. It 4 wouldn't matter in it was infused at one time or 5 infused in a 142 times at a million dollars a 6 piece. The purpose was to limit the obligation 7 and large parts of the financial community could 8 assess what the risk to a holding company would be 9 of owning the institution. 10 Q. And had that been the principal concern 11 of your client in this matter; that is, the 12 potential impact of an unlimited liability on 13 their balance sheet? 14 A. Yes. As I understood it, a critical 15 feature of their holding company operations -- 16 was; the ability to access the capital markets and 17 this type of unlimited obligation very difficult 18 for the rating agencies to assess and could cause 19 a higher or a downgrading of one's debt or ratings 20 which would increase the cost of borrowing. 21 MR. EISENHART: Thank you very much, 22 Mr. Eckland. I don't have anymore questions. 1604 1 THE COURT: Mr. Villa, do you have some 2 questions. 3 MR. VILLA: Oh, just a couple, Your 4 Honor. 5 Q. (BY MR. VILLA) Mr. Eckland, may I 6 direct your attention to the privileged log T1208. 7 A. Okay. 8 Q. And the entry on page 4 that we've 9 previously talked about which reflects your notes 10 on December 31st, 1985, regarding a stock option 11 proposal, do you have a recollection of working on 12 any stock option proposal in this period of time 13 other than the Drexel option that you have 14 subsequently discussed with Mr. Rinaldi? 15 A. I certainly have no recollection of any 16 other option. 17 Q. So, best of your recollection, looking 18 at this document and working from what you 19 remember you did for MCO and Federated, these 20 notes would have referred to work that you 21 performed on or about December 31st, 1985, with 22 respect to the stock option that we referred to as 1605 1 the Drexel option. Right? 2 A. That is probably a fair assumption. 3 Q. Thank you. 4 MR. VILLA: No further questions. 5 MR. RINALDI: I have no questions. 6 THE COURT: No further questions, 7 Mr. Eckland. You may be excused. Thank you. 8 MR. RINALDI: Your Honor, could we take 9 just a moment while I locate Mr. Guido? He has 10 the next witness and he -- 11 THE COURT: All right. We'll take a 12 short recess. 13 . 14 (A break was taken.) 15 . 16 THE COURT: The hearing will come to 17 order. Mr. Guido, do you have a witness. 18 MR. GUIDO: We do. Mr. C.E. Bentley, 19 Your Honor. 20 21 C.E. BENTLEY, 22 1606 1 called as a witness and having been first duly 2 sworn, testified as follows: 3 THE COURT: Be seated, please. 4 5 EXAMINATION 6 7 Q. (BY MR. GUIDO) Would you please state 8 your full name for the record, Mr. Bentley? 9 A. C.E. Bentley, B-E-N-T-L-E-Y. 10 Q. And where do you reside? 11 A. I reside in Abilene, Texas. 12 Q. And what is your age? 13 A. I'm 75. 14 Q. And where were you -- where did you 15 attend college? 16 A. I attended college at 17 McMurry University in Abilene. 18 Q. And where did you first become employed 19 after college? 20 A. A couple of temporary jobs while I was 21 on leave from the service, but I became employed 22 in December of 1944 with Abilene Savings 1607 1 Association in Abilene. 2 Q. In 1944, you went to work for Abilene 3 Savings and Loan? 4 A. That's correct. 5 Q. And what was your positions with 6 Abilene Savings and Loan? 7 A. For the first two years, I was sort of 8 a handyman. I became a vice president, I think, 9 in 1946, executive vice president in 1950, and 10 managing officer and then president in 1960. 11 Q. Is it fair to say you worked your way 12 up at Abilene Savings Association to that 13 position? 14 A. Other than the fact that the principal 15 owner of the institution was my father-in-law 16 which contributed some, I suppose. 17 Q. Now, in 1977, what did you -- where did 18 you go to work? 19 A. I remained in the employ of Abilene 20 Savings. All during that period of time. In 21 1974, I believe it was, we became a part of a 22 multiple holding company and what was called 1608 1 Southwestern Group Investors; and at that 2 particular time, the law did not provide for a 3 merger of the institutions into one. So, we were 4 a multiple. I became president of the holding 5 company a couple years later and remained such 6 until December of 1977 at which time all of the 7 institutions were merged and I became the 8 president and CEO of the successor institution 9 which was United Savings Association of Texas. 10 Q. And is that the institution that is the 11 focus? 12 A. That's correct. 13 Q. Now, in 1977, you became what at United 14 Savings Association of Texas? 15 A. The president and CEO. 16 Q. And you held that position for how 17 long? 18 A. I held it until January of 1981. 19 During that interim, we were acquired by a 20 diversified holding company called Kaneb Services; 21 but I remained as the CEO of the association until 22 that time, until January of 1981. 1609 1 Q. And then who became the president of 2 the -- of USAT or the savings association? 3 A. Jim Coles, a fellow by the name of 4 James A. Coles, C-O-L-E-S, became president and I 5 became chairman. He, however, became the CEO of 6 the association. 7 Q. Now, was the institution still owned by 8 Kaneb Services? 9 A. Yes, at that particular time. 10 Q. And Mr. Coles, he remained as the 11 president until approximately October, 12 November 1983? 13 A. Yes. However, a year or two after the 14 acquisition by Kaneb in 1979, then the holding 15 company, United Financial Group, was spun off to 16 the shareholders of Kaneb Services and Jim became 17 the president of the holding company and the 18 association and I became chairman of both of those 19 institutions. 20 Q. And what year was that? 21 A. That was in 1982, December, I think of 22 '82. 1610 1 Q. Now, did you subsequently resume the 2 positions of president of the savings and loan 3 association? 4 A. No. When Jim Coles resigned in October 5 or November of 1983, I assumed the role as 6 chairman and CEO of both the holding company and 7 the association. 8 Q. And who became president? 9 A. Gerald Williams became the president of 10 the holding company. I think I was also the 11 president of the holding company. Williams became 12 the president of the association. 13 Q. And then between October of '83 or 14 November of '83 and April of '85, you held the 15 position of chief executive officer of the holding 16 company? 17 A. I -- I'm not sure of that date. At 18 some point in time, Charles Hurwitz became 19 president of the holding company. I don't recall 20 that exact date. And there is some confusion as 21 to whether or not the CEO job -- I've forgotten 22 how the bylaws provided at that time. 1611 1 Q. But during that period of time, you 2 were in upper management? 3 A. Yes. 4 Q. Or on the board of -- 5 A. That's correct. 6 Q. -- both the association and the holding 7 company? 8 A. That's correct. That I was the 9 chairman of both. 10 Q. And then you left, I think, in November 11 of 1985, November/December, as a member of the 12 board and as the chairman of the association? 13 A. I effectively left in about April of 14 '85 when I became senior chairman of the board and 15 Jenard Gross became the president of the holding 16 company. And I remained on that board and active 17 until sometime later in the year at which time I 18 resigned all positions with the institution with 19 both institutions although the provisions for my 20 retiring provided that I would be a, quote, 21 "consultant" for the company primarily for the 22 purpose of seeing the conclusion of several branch 1612 1 sales that were pending which had been largely 2 handled by me until my full retirement at age 65 3 in October of 1986. 4 Q. Now, what was the nature of United 5 Savings Association of Texas' business in January 6 of 1982? 7 A. It was pretty much plain vanilla 8 savings and loan with the exception of invasions 9 that had accrued to the benefit of the institution 10 over the years that were somewhat different than 11 the usual S&L operations such as the mortgage 12 banking facet of the operation and the investment 13 in real estate which became a part of the 14 operation attendant to the normal taking of 15 savings and lending for residential purposes. 16 Q. Now, at that time, were there 17 regulations that the State of Texas had with 18 regard to direct investments by savings and loans? 19 A. Yes. There were two type of 20 investments that were permitted to -- by Texas 21 State Charter Association in Texas. One was the 22 provision for subsidiary investments. Then there 1613 1 was what was called a direct investment by the 2 institution in real estate without going through 3 the subsidiary. It used to be it was renumbered. 4 It was called 8.11. This was section 8.11 of the 5 rules and regulations for savings and loans in 6 Texas. 7 Q. Now, did USAT engage in any of these 8 direct investments? 9 A. Yes, it did. 10 Q. Did it -- did the board have a policy 11 about limits that it would impose on itself on 12 those investments? 13 A. I don't believe that the board itself 14 imposed. Management imposed limits. 15 Q. And what were those limits? 16 A. Initially, 1 percent was the total 17 so-called direct investment which would be 18 investments in subsidiaries and/or in 8.8 or 19 direct real estate investments. That later, 20 through my tenure, was increased, I believe, to 21 3 percent by the commissioner. We did not require 22 that but we did it as a matter of caution to ask 1614 1 that that -- that we had imposed the 1 percent. 2 Q. This is all in the time frame of 3 January 1982? 4 A. That's correct. Well, this would carry 5 it up to the point at which I no longer was 6 involved in management. We were at a 3-percent 7 level at that time. 8 Q. Now, what was the financial condition 9 of USAT in January of 1982? 10 A. Conditions were I suppose tenuous, at 11 best, in that we were facing in the State of 12 Texas, we had gone through or were still going 13 through I suspect at that time artificial 14 limitations on what we could charge for mortgage 15 loans, a usury ceiling which was artificially low 16 given the cost of dollars and the cost of savings 17 and the cost of capital, and this was persisting 18 actually from October of '79 when rates escalated 19 almost out of sight given the condition in the 20 institution to where your cost of money exceeded 21 the return on those dollars. 22 Q. Now, had -- you had been in the 1615 1 business since 1943. Had you experienced 2 situations where interest rates fluctuated and 3 affected the profit margin of USAT or its 4 predecessor institutions? 5 A. Absolutely. There were no such thing 6 as adjustable interest rate loans back in those 7 days. Consequently, when the cost of loans -- 8 when the cost of your capital, your deposits, your 9 savings went up, that immediately increased the 10 cost of all dollars in your portfolio whereas your 11 loans remained at a constant low. So, we were 12 accustomed to dips, escalation in rates, and then 13 declines in rates and the paying of the escalating 14 rates was abated somewhat when rates declined. 15 Q. Now, -- and you had experienced that in 16 the past? 17 A. Yes. We had experienced numerous times 18 where interest rates went like a roller coaster. 19 Q. And what did you do when rates would go 20 up and they would bump up against or go beyond the 21 fixed rate mortgage rates that you were earning? 22 A. Outside of praying for lower interest 1616 1 rates, we attempted to adjust the investments of 2 the institution with the tools that we were 3 permitted under regulatory -- under regulations at 4 that time. 5 Q. Now, in January of 1982, this change in 6 interest rates, the escalation in interest rates 7 was quite severe, wasn't it? 8 A. Yes, it was. 9 Q. And what did you attempt to do? Did 10 you attempt to just pray or did you attempt to 11 hunker down or how did you hunker down? What did 12 you attempt to do? 13 A. We hunkered down. We plotted a course 14 of putting less money into nonvariable lending. 15 We, by then, were able to make some rate 16 adjustable loans. We shifted into shorter term 17 investments hoping to see a turnaround in interest 18 rates. And then we stepped up our investments in 19 the more exotic areas such as real estate and some 20 subsidiary activities. We went in for a little 21 more construction loans than would be normal, and 22 then we sold a few things. We had investments 1617 1 that had been -- that we had made anticipating a 2 rainy day sometime. We sold a mortgage company at 3 a nice profit. It was a subsidiary of a 4 subsidiary, and that helped cushion. We sold some 5 real estate that we had profits in. That helped 6 cushion that period. 7 Q. So, during the 1982 time period, '80 to 8 '82 time period, you attempted to reposition the 9 portfolios to cushion it against any further 10 interest rate shocks. Is that a fair statement? 11 A. That's correct. 12 Q. And you attempted to shed assets that 13 had appreciated in value as to develop a capital 14 cushion; is that correct? 15 A. That's correct. 16 Q. And did you attempt to sell any 17 servicing rights, or did that come later? 18 A. I believe that came a little later. We 19 may have contemplated selling services because I 20 believe we did sell the mortgage company in '81 or 21 '82 and we subsiquently sold -- we had amassed a 22 great deal of servicing and we did sell those 1618 1 again to augment our capital. 2 Q. But those are later time periods? 3 A. That's a later period. 4 Q. I'm just focusing on this January 1982 5 time period to get a sense of what it is you faced 6 and what it is you attempted to do. 7 Now, a few preliminary questions before 8 I get into the documents and the detail of what 9 happened after January of 1982. Did you review 10 any documents before you testified today? 11 A. Yes. I reviewed some previous 12 testimony that I had given and depositions that I 13 had given recently in Dallas in the last year or 14 two and then some depositions given back in 1984 15 in connection with some hearings in Honolulu and 16 then some board minutes that were furnished to me 17 by you. 18 Q. Okay. Now, did that position in 1984, 19 was that an investigative deposition that Mr. Veis 20 took of you? 21 MR. NICKENS: 1984? 22 MR. GUIDO: I'm sorry. 1619 1 Q. (BY MR. GUIDO) In Dallas in, I think, 2 1995? 3 A. Ask the question again. 4 Q. Was the -- you said that there was a 5 deposition that was taken of you I think in 6 Dallas? 7 A. Yes. 8 Q. And that was by the Office of Thrift 9 Supervision? 10 A. That is correct. 11 Q. And Mr. Veis was the person who took 12 that deposition? 13 A. That's correct. 14 Q. And then you were deposed in a matter 15 where there was a dispute between USAT and other 16 entities and Castle & Cooke with regard to 17 acquisition of stock of Castle & Cooke? 18 A. That's correct. That was the 19 depositions in 1984. 20 Q. And I provided you with copies of those 21 depositions? 22 A. That's correct. 1620 1 Q. Now, did you meet with me? 2 A. Yes, I met with you on two occasions, I 3 believe. 4 Q. And did I also provide you with minutes 5 of various board meetings and executive committee 6 meetings? 7 A. Yes, you did. 8 Q. And did you review those minutes? 9 A. Yes, I did. 10 Q. And did I ask you questions about 11 those? 12 A. I'm not sure you asked questions about 13 them. You could have. 14 Q. Did I direct your attention to certain 15 portions of the documents? 16 A. Yes, that's correct; but I don't 17 believe you asked necessarily specific questions. 18 Q. Now, did I ask you to look at certain 19 portions of your depositions -- 20 A. Yes. 21 Q. -- to prepare for your testimony? 22 A. Yes. 1621 1 Q. When did you first meet 2 Charles Hurwitz? 3 A. I'm sorry. I can't give you a date but 4 it -- it was after Jim Coles came aboard which was 5 in January of '81 and certainly was after the 6 spinoff by Kaneb which was I believe in December 7 of '81. So, it could have been in the early part 8 of '82. 9 Q. Now, did you also know 10 Mr. Arthur Leibold? 11 A. Oh, yes. I have known Arthur Leibold 12 for a number of years. 13 Q. Have you talked to him prior to your 14 testimony today? 15 A. Yes. I visited with Art on the 16 telephone. I did not -- yes, I did visit with 17 him. He called my wife about a month ago and 18 stated that he doubted I would be called but would 19 she kindly alert me that I might be called to 20 testify in this particular case and then I did not 21 hear from Mr. Leibold again until last week when 22 he called and mostly, it was a visitation about 1622 1 old friends that we mutually knew and he told me 2 that he would probably see me here and that if I 3 saw fit, he would like to visit with me. 4 Q. And did you indicate to him whether or 5 not you were willing to meet with him to discuss 6 the matters pending in this proceeding? 7 A. I gave him a reservation that I had not 8 yet determined whether or not I would be willing 9 to talk to anyone prior to this trial; or if I 10 did, that I would probably choose to talk to both 11 sides which was my ultimate decision, to make 12 myself available on a limited basis to talk to 13 both parties. 14 Q. And last evening? 15 A. And I have done that. 16 Q. And last evening you met with both 17 parties? 18 A. Yes, for less than an hour in each 19 instance. 20 Q. Now, did you meet with 21 Charles Hurwitz -- 22 A. No. 1623 1 Q. -- prior to your testimony? 2 A. I did not. 3 Q. Now -- I don't remember whether I asked 4 you the question, but how did you first meet 5 Charles Hurwitz? What were the circumstances? 6 A. I knew of Charles Hurwitz but had never 7 met him and he called me in the early part, I 8 believe, of 1982 and said he would like to come 9 over and visit with me. And he did and told me 10 that, as I recall, he had acquired about a 11 5 percent interest in the company and that he 12 wanted to make me aware of that, that they were 13 filing whatever form was necessary at that entry 14 point and that he wanted to talk to me and I said 15 "Well, I'll be happy to visit with you. However, 16 you may not know but I am not the CEO of this 17 institution of the holding company." and I took 18 him in to visit with Jim Coles. And I stayed for 19 part of the visit and left. 20 Q. And what transpired in the portion of 21 that meeting that you were in with Mr. Coles and 22 Mr. Hurwitz? 1624 1 A. I can't specifically recall anything 2 happening. I don't believe that I stayed for the 3 entire visit. Now, I could be mistaken. That's 4 been 17 years ago. How many years ago? Maybe not 5 17. But I don't -- I don't have specific 6 recollection of -- at this point. 7 Q. I'd like to hand you a document that 8 we've had marked as Exhibit A10519. I'm going to 9 give you three copies -- and would you please pass 10 two onto the Court -- and ask you some questions. 11 This is a set of minutes, Mr. Bentley, of the 12 April 29th, 1982, board of directors' meeting of 13 United Financial Group. And I direct your 14 attention to page 2 of that document where the 15 third to the last paragraph says Mr. Coles 16 reported that the company received from the 17 Federal Home Loan Bank Board a change of control 18 application which if approved would permit 19 Federated Reinsurance Corporation to acquire 10- 20 to 25 percent of United Financial Group Inc.'s 21 stock; and then it says the grounds for denying 22 the application are limited by statute and that 1625 1 bank board is expected to approve it. The board 2 is unaware of any information which should be 3 brought to the attention of the bank board which 4 would serve as grounds for the denial of the 5 application. 6 And then it goes on and the next 7 paragraph says Mr. Coles said several companies 8 had expressed interest in United Financial Group, 9 Inc., all offering different alternatives for the 10 company. Mr. Whatley suggested that all options 11 should be explored and that the company should be 12 prepared for a variety of legal and corporate 13 actions that may arise or become necessary due to 14 the present value of UFG stock. Do you see that? 15 A. Yes, I do. 16 Q. Was this board meeting before or after 17 Mr. Hurwitz came to see you and you brought him in 18 to meet Mr. Coles? 19 A. This was after. 20 Q. This was after? 21 A. That's correct. 22 MR. NICKENS: Did you offer the 1626 1 document? 2 MR. GUIDO: I haven't offered the 3 document. I'm going to do that at the end of each 4 of the documents if that's okay with you, 5 Mr. Nickens. Would you like me to offer the 6 document at the beginning? 7 MR. NICKENS: I would prefer it, Your 8 Honor, to be offered at the beginning so that if I 9 have an objection, I can make my objection before 10 the parts that I object to come in. 11 MR. GUIDO: That's fine with me, Your 12 Honor. 13 MR. NICKENS: I have no objection to 14 this one. 15 THE COURT: Do you have an objection to 16 to this one? 17 MR. NICKENS: No, Your Honor. 18 THE COURT: Received. 19 MR. GUIDO: And I will attempt to 20 introduce them at the outset, Your Honor, at 21 Mr. Nickens convenience. 22 Q. (BY MR. GUIDO) Now, had the 1627 1 application that is being discussed in 2 Exhibit No. 10519 been discussed during your 3 participation in the meeting with Mr. Coles and 4 Mr. Hurwitz? 5 A. Not while I was present. This as 6 contained in the next to the last paragraph, I was 7 not familiar with that initial meeting. I don't 8 know when I might have become familiar with this 9 intent. 10 Q. I don't recall whether you testified 11 here or in the deposition, but I think your 12 testimony had previously been that you -- 13 MR. KEETON: Wait a minute, Your Honor. 14 I object to that. 15 MR. GUIDO: I'll rephrase it. 16 MR. KEETON: To impeach his own witness 17 or refresh him right there. 18 MR. GUIDO: I'll rephrase the question. 19 THE COURT: Restate it. 20 Q. (BY MR. GUIDO) When you were 21 approached by Mr. Hurwitz and you were in the 22 meeting with Mr. Coles, did Mr. Hurwitz mention 1628 1 anything about a change of control application? 2 A. No. 3 Q. Did he mention that he had purchased 4 5 percent of the stock of UFG? 5 A. That's correct. 6 Q. Did he say he had done so individually 7 or he had done so on behalf of an entity? 8 A. I don't recall. 9 Q. But he didn't mention a change of 10 control application? 11 A. No. As I recall, it was -- he stated 12 it was for investment purposes. 13 Q. Okay. Now, then Mr. Coles goes on and 14 says the grounds for denying the application are 15 limited by statute and the bank board is expected 16 to approve it and then the next sentence, the 17 board is unaware of any information which should 18 be brought to the attention of -- so, it was an 19 unsolicited acquisition as far as you know? 20 A. That's correct. 21 Q. And were there discussions about taking 22 action to oppose such acquisition? 1629 1 A. I don't believe so. 2 Q. Were there discussions about seeking 3 other potential acquirers? 4 A. Do you mean was there discussions about 5 our seeking other purchasers of the company? 6 Q. Or of the stock of the company. 7 A. There had been some informal 8 discussions prior to this. There had been 9 inquiries, none of which were -- I could cite with 10 specificity. But there were people who constantly 11 were touching base with us. Nothing serious. 12 Q. Now, I'd like to show you a document 13 that has been marked as A1056 and ask you to look 14 at that document as well. This is a set of 15 minutes of the board of directors of 16 United Financial Group dated May 27th, 1982. And 17 it's Exhibit No. A1056. 18 MR. GUIDO: I'd like to offer that into 19 evidence. 20 MR. NICKENS: No objection, Your Honor. 21 MR. GUIDO: Thank you, Mr. Nickens. 22 THE COURT: Received. 1630 1 Q. (BY MR. GUIDO) Now, in the full 2 paragraph at the bottom of the first page, the 3 minutes say Mr. Coles reported that recent 4 discussions had taken place with First American 5 Financial for a merger of United Financial Group, 6 Inc., and First American Financial and a merger of 7 their subsidiaries, United Savings and Houston 8 First American Savings. It says the board of 9 directors of First American or FAF is also meeting 10 on this same day to consider similar action and 11 authorize its management to enter into a letter of 12 intent regarding the merger. Do you see that 13 paragraph? 14 A. Yes. 15 Q. Okay. Now, did that merger of First 16 American Financial and United Financial Group have 17 any connection to the acquisition of stock by 18 Federated Reinsurance that Mr. Coles had talked 19 about in the previous board meeting? 20 A. Not that I'm aware. The contact with 21 the group, the First American Financial, came as a 22 result of a contact by the then CEO of that 1631 1 company to me. And then I put Wayne Winters, who 2 was the principal that I referred to, in touch 3 with Mr. Coles; and then they worked out largely 4 the details although I assisted in some of the 5 negotiations. 6 Q. Now, were those merger discussions 7 prior to the time that Mr. Hurwitz had approached 8 you and Mr. Coles? 9 A. I do not recall. 10 Q. But it's your recollection they didn't 11 appear to be connected? 12 A. No. I don't think there was any 13 connection. 14 Q. Now -- 15 A. I was aware of none. 16 Q. Now, the paragraph before says 17 Mr. Coles reviewed the status of Federated 18 Reinsurance's acquisition of UFG's stock. The 19 bank board approved Federated's application to 20 increase its ownership from 10- to 24.9 percent; 21 several members of the board reporting having 22 discussions with Mr. Charles Hurwitz from 1632 1 Federated; and each instance, Mr. Hurwitz stated 2 he was not interested in exercising control but 3 would like to have a director elected to the 4 board. The board generally agreed to support such 5 election but was uncertain how or what stage it 6 should be accomplished. It says the proxy 7 materials were already printed. 8 And then it says the board asked the 9 counsel to review the situation in the event an 10 effort to elect a director from 11 Federated Reinsurance is made. Do you see that? 12 A. Yes. 13 Q. And the -- did the board discuss at all 14 Mr. Hurwitz's comments about being not interested 15 in exercising control? 16 A. I don't recall any specific discussion. 17 Q. Did the board discuss his desire to 18 have a director elected to the board as you 19 recall? 20 A. Yes, as I recall, the board expressed 21 that it would be amenable to that proposal. 22 Q. Now, it had been the custom when people 1633 1 acquired stock or an institution, was it absorbed 2 into USAT that the individuals who were 3 shareholders of that entity would have 4 representation on the board of UFG? 5 A. That's correct. 6 Q. So, Mr. Hurwitz wasn't asking for 7 anything out of the ordinary when he asked that 8 Federated have a representative on the board? 9 A. We did not think so. 10 Q. Now, the second page of the minutes 11 discusses a PennCorp financial entity. Do you see 12 that reference? 13 A. Yes. 14 Q. What was PennCorp's financial 15 relationship to First American Financial? 16 A. PennCorp had been the owner of First 17 American Financial and not unlike the condition at 18 United where it was spun off, First American 19 Financial had also been spun off by PennCorp and 20 PennCorp retained or had in the process of 21 acquiring First Financial had a rather sizable 22 amount of preferred stock in First American 1634 1 Financial. That was their interest, to protect 2 the value of their preferred stock. 3 Q. Now, I'd like to show you a document 4 that's dated 8/26/1982. It is Exhibit 1061, 5 A1061. 6 MR. GUIDO: I move the admission of 7 Exhibit A1061. 8 MR. NICKENS: No objection, Your Honor. 9 THE COURT: Received. 10 Q. (BY MR. GUIDO) Now, Exhibit A1061 is 11 the minutes of the board of directors of 12 United Financial Group dated August 26th, 1982. 13 And do you see the third paragraph, there is a 14 resolution that's referred there and it says a 15 motion of Mr. Duckett and second by Mr. Putegnat, 16 the following resolution was unanimously approved: 17 That Dr. Barry Munitz shall and is hereby elected 18 a director of United Financial Group, Inc., until 19 the next annual meeting of shareholders pursuant 20 to Article 3, Section 2 of the bylaws of the 21 company. Do you see that? 22 A. Yes, I do. 1635 1 Q. And was that unanimously adopted to 2 your recollection? 3 A. Yes, to my recollection. There were no 4 descending votes. 5 Q. And who suggested that Dr. Barry Munitz 6 be the person that was elected a director by the 7 board? 8 A. Charles Hurwitz. 9 Q. And is that the person who requested 10 pursuant to his previous request that there be a 11 representative of Federated Reinsurance on the 12 board? 13 A. That's correct. 14 Q. When did you first meet 15 Dr. Barry Munitz? 16 A. On or about the time that he became a 17 board member. I believe he had been by the office 18 and had visited with Jim Coles, but I had not met 19 him until a little while later. 20 Q. Had he been introduced to you by 21 Charles Hurwitz? 22 A. I don't recall. 1636 1 Q. So, he may have come by himself? 2 A. I rather think that maybe Jim Coles 3 introduced me to him, but I'm not sure of that. 4 Q. And was it made clear to you that 5 Dr. Barry Munitz would be Federated's 6 representative on the board? 7 A. Yes. At some time after we committed 8 to permit a representative, I believe we received 9 some background information on Dr. Munitz and that 10 he came by to personally introduce himself at 11 least to Mr. Coles and maybe subsequently to me. 12 Q. Did that background information include 13 information that Dr. Barry Munitz held a position 14 with Federated, the parent company of 15 Federated Reinsurance? 16 A. I believe that's correct. 17 Q. Did that background information 18 indicate that he was also a director of a company 19 called MCO Holdings? 20 A. That I do not recall. 21 Q. But it's your understanding that he 22 served or he was elected at the request of 1637 1 Charles Hurwitz? 2 A. That's correct. Most of the background 3 information, I dealt with his previous occupations 4 at University of Houston and others. 5 Q. Now, did he also become a member of the 6 board of United Savings Association of Texas at 7 that time? 8 A. This does not reflect unless it was 9 done -- it could have been done simultaneously. I 10 believe he did subsiquently become, but I'm not 11 sure whether or not it was simultaneous. 12 Q. Now, going -- moving to the First 13 American Financial merger discussions or 14 acquisition discussions, the last portion of the 15 bottom portion of the minutes on the last page 16 discuss certain concerns that the PennCorp people 17 had with regard to that acquisition. 18 And the last one is that there be 19 purchase accounting, pushdown accounting for the 20 acquisition. Can you explain to the Court what 21 the consequences of the purchase accounting was 22 for the financial statements of the combined 1638 1 entity? 2 A. I'm not an accountant, but it's a 3 device whereby you can write down certain assets 4 to market and establish more or less goodwill 5 against that. It's intended to improve earnings. 6 Q. It creates a goodwill. It's called 7 supervisory goodwill; is that correct? 8 A. That's correct. 9 Q. And the next to the last paragraph 10 addresses the comfort that you-all received from 11 Peat Marwick with regard to what is referred to 12 here as "fresh start accounting"; is that correct? 13 A. Yes, that's correct. 14 Q. That fresh start account something what 15 I've just described as supervisory -- the creation 16 of supervisory goodwill? 17 A. That's correct. 18 Q. Now, did they also indicate that they 19 had some other concerns that they wanted met? 20 A. Yes. The conditions as spelled out in 21 the last resolve refer to inclusion of four 22 conditions precedent to the merger that dealt with 1639 1 no deterioration in earnings, net worth, scheduled 2 items, and then of course the purchase accounting 3 procedure. 4 Q. So that they said that there had to be 5 certain earnings tests that were met as a 6 precondition to the -- 7 A. That's correct. There was a provision 8 for an outing of the contract in the event of 9 certain things happening, certain triggers. 10 Q. Now, I'd like to show you 11 Exhibit No. A10523. 12 MR. GUIDO: I'd like to move the 13 admission of the minutes of the board of directors 14 of United Savings Association of Texas dated 15 September 23, 1982, marked as Exhibit A10523. 16 MR. NICKENS: No objection, Your Honor. 17 THE COURT: Received. 18 Q. (BY MR. GUIDO) Now, on the second 19 full paragraph, it talks about -- or third 20 paragraph, it talks about Mr. Munitz's coming on 21 the board. It says Mr. Bentley welcomed 22 Dr. Barry Munitz to his first meeting of the 1640 1 United Savings board of directors and said the 2 board was pleased to have him. 3 A. We were very polite. 4 Q. The -- is it your understanding that 5 Dr. Munitz assumed that position to represent 6 Charles Hurwitz's views on the board of United 7 Savings Association of Texas? 8 MR. KEETON: I object to the leading 9 type of question. Board members on there for the 10 company? 11 MR. NICKENS: Your Honor, I would 12 object for the record at this time to this 13 question and other similar questions. I believe 14 the issue's, first of all, repetitive but I 15 believe they go to solely the issue of controlling 16 influence as alleged -- as not alleged, as you 17 will recall that we argued before, Your Honor, in 18 our motion in limine for purposes of preserving 19 our record, I object to these questions. In order 20 to not be a pest and to further extend these 21 proceedings, I would ask if it is agreeable to the 22 other side that I have a continuing objection on 1641 1 that basis to these questions with regard to 2 control and controlling influence. 3 MR. GUIDO: Your Honor, may I address 4 that because I think it's important for the Court 5 to be aware of the reasons that I would be going 6 into this. 7 First of all, we are going to present 8 evidence as Mr. Nickens has just suggested that 9 will, we believe, demonstrate that MCO and 10 Federated and Mr. Hurwitz controlled United 11 Savings Association of Texas. We are doing that 12 to show that the condition in the resolution 13 approval application to acquire control has been 14 met. Not only directly by the exercise of the 15 control but also as to give meaning to the put 16 call arrangement which you have heard so much 17 about. The respondents have an expert report of a 18 person that they intend to call; and in that 19 expert report, that person says that evidence of 20 acts of control are relevant to interpreting 21 whether or not conditional agreements such as a 22 put call agreement impose control. So, we're 1642 1 doing it not only directly but indirectly to show 2 that. 3 Third is that we believe that this 4 evidence will go to show that MCO and Federated 5 were unjustly enriched by being able to assume 6 control of an institution, receive all the 7 benefits of that ownership, and that, therefor, 8 they are obligated to comply with the net-worth 9 condition. So, those are the reasons that we are 10 introducing this testimony, Your Honor. We 11 believe that it's relevant to all three reasons. 12 MR. NICKENS: Your Honor, up until the 13 time that just shortly before this proceeding 14 began, the OTS's notice of charges and the 15 development of the case had been entirely based 16 upon the so-called Drexel option. 17 It was the addition of this controlling 18 influence allegation through a deposition that 19 prompted our motion in limine. My purpose at this 20 point is to simply register my objection, to ask 21 the Court and opposing counsel to note that 22 objection and relieve us of the disruptive effect 1643 1 of my having to object at every point that this 2 issue is raised. 3 Up until now, it has been a factual 4 matter with regard to how it was that Mr. Munitz 5 came on the board, but this particular question is 6 clearly intended to elicit this controlling 7 influence issue. I am obliged. We are to 8 register our objection. We are not trying this 9 issue by consent. We are fully aware of Your 10 Honor's earlier ruling; and I'm not here to 11 reargue that. But I am here to make our objection 12 and to preserve our record as we are obliged to 13 do. 14 THE COURT: All right. I assume you've 15 indicated that beef, been over this before, and I 16 have stated that we will hear this issue. You may 17 have a continuing objection. Proceed. 18 MR. GUIDO: Your Honor, we have no 19 objection to a continuing objection to this line 20 of questioning. 21 MR. KEETON: I want to make sure that's 22 on behalf of my client, too, Your Honor. 1644 1 THE COURT: I'll consider it on behalf 2 of all of the respondents. 3 Q. (BY MR. GUIDO) Now, was it your 4 understanding on September 23, 1982, that 5 Dr. Barry Munitz was there to represent 6 Charles Hurwitz's views to the board -- on the 7 board of United Savings Association of Texas? 8 MR. KEETON: I still object to the form 9 of that question, Your Honor. It's totally 10 different from the other broader objection. He 11 ought to ask the question, not try to put words in 12 the mouth or lead the witness. 13 THE COURT: Denied. You may answer. 14 A. The election was consistent with the 15 agreement that we had with Charles Hurwitz and 16 Mr. Munitz was his designee. So, you can 17 answer -- anyone can answer for themselves as to 18 who he was representing. We were following the 19 agreement that we had to permit a board member at 20 that point. 21 Q. (BY MR. GUIDO) Well, you observed 22 Dr. Munitz's activities on the board, did you not? 1645 1 A. Yes. 2 Q. And was it your understanding that he 3 was representing the interests of MCO and 4 Federated on that board? 5 A. I would say yes. 6 MR. NICKENS: Your Honor, I object. 7 There is no evidence at this point that MCO had 8 any interest. Federated Reinsurance owned the 9 shares. There is no evidence to suggest that MCO, 10 at this point in time, had any interest to be 11 represented -- 12 MR. GUIDO: Your Honor, let me make a 13 modification to the question. I'm sorry I was 14 asking the question for the entire time period; 15 but at this point in time, it was your 16 understanding that Dr. Munitz was representing the 17 interests of Federated on the board of USAT? 18 A. Yes. 19 Q. Now, Dr. Munitz, on page 2, discussed 20 certain matters at the end that are reflected in 21 the last paragraph of page 2 of these minutes. 22 And the paragraph begins: The board discussed the 1646 1 agreement and plan of association reorganization 2 for the merger of United Savings and Houston First 3 American Savings. That's the merger that we 4 talked about of First American Financial and 5 United Financial Group; is that correct? 6 A. That's correct. 7 Q. And that these two entities are the 8 savings and loans that were owned by these two 9 holding companies; is that correct? 10 A. That's correct. 11 Q. And it says Dr. Munitz as a new board 12 member asked about the obligation and options 13 available to the parties under the merger 14 agreement with financial, that holding company; is 15 that correct? 16 A. That's, I believe, what this is in 17 reference to. 18 Q. And so, Dr. Munitz was concerned about 19 other people exercising options to -- and thereby 20 obtaining stock of United Financial Group? 21 A. Yes. 22 MR. VILLA: Objection, Your Honor. 1647 1 Leading the witness. It's his own witness. 2 THE COURT: Well, it is leading. 3 MR. GUIDO: You want me to rephrase the 4 question? 5 THE COURT: Yes. 6 MR. GUIDO: I'll be happy to rephrase 7 the question. 8 Q. (BY MR. GUIDO) Was Dr. Munitz 9 concerned about third parties exercising option 10 rights and acquiring stock in United Financial 11 Group when he raised questions about the 12 obligations and options available to the parties 13 under the merger agreement. 14 A. I'm not sure you -- when you referred 15 to acquiring shares under -- Your Honor the 16 holding company of United Financial Group, it 17 actually as I recall would have been acquiring 18 shares in Houston, the first financial group, the 19 institution we were acquiring. And it would have 20 been dilutionary possibly if those options were 21 outstanding, could have created dilution if they 22 had exercised those options -- 1648 1 Q. Is that because the merger agreement 2 between First American Financial and 3 United Financial Group provided for an exchange of 4 stock? 5 A. That's correct. 6 Q. So that the next sentence, it says the 7 board discussed the debt and debt conversion 8 rights under the agreement and the effect of such 9 rights on United Financial Group and United 10 savings. It was discussing the potential diluting 11 effect of those conversion rights? 12 A. Okay. I had not seen that and I still 13 don't see it. 14 Q. It's the next to the last sentence 15 object the second page. 16 A. Okay. 17 Q. Is your answer yes to my question? 18 A. Yes. 19 Q. Now, it then goes on and says that the 20 following motion was approved with Dr. Munitz 21 abstaining and that resolution says that the board 22 of directors of USAT does hereby approve the 1649 1 adoption of the agreement and plan of association 2 reorganization for the merger of USAT with HFA. 3 Do you see that? On page 3, the fourth paragraph, 4 it says resolved. I'm sorry. 5 A. Read the last sentence of what you read 6 me, please. 7 Q. It says that the board of directors of 8 USAT does hereby approve the adoption of the 9 agreement and plan of association reorganization 10 for the merger of USAT with HFA. 11 A. I must -- I see. I turned an extra 12 page. Yes, I see it. 13 Q. Okay. So, the board adopted the merger 14 agreement? 15 A. That's correct. 16 Q. And it did so with Dr. Munitz 17 abstaining. Do you see that in the last line of 18 the second page of the board minutes? 19 A. Yes. 20 Q. Okay. Did Dr. Munitz indicate why he 21 was abstaining at that board meeting? 22 A. If he did, I don't recall it. 1650 1 Q. But he had expressed or raised some 2 questions about the potential dilution of the 3 stock of the association? 4 A. That's correct. 5 Q. Now, on page 7 of the minutes, the last 6 set of minutes or the last page of the minutes, it 7 has a K2532 Bates stamp mark on the right hand 8 corner. 9 A. Yes. 10 Q. It says Dr. Munitz related the interest 11 of Federated Development in purchasing additional 12 United financial stock. It stated their present 13 holdings are approximately 14 percent of the 14 outstanding stock and they wish to purchase up to 15 24.9 percent. He asked if the board has 16 considered selling the remaining authorized but un 17 issued stock. Mr. Whatley stated that the board 18 that the board had addressed this issue in the 19 past and given current market prices which is 20 substantially below book value decided that such a 21 sale would be inappropriate. Dr. Munitz said that 22 he was interested in some strategy assistance and 1651 1 asked that the board consider under what 2 conditions it would favorably view such a sale. 3 Do you see that paragraph? 4 A. Yes. 5 Q. Now, how much stock was authorized had 6 but un issued at the date of the board meeting of 7 September 23rd, 1982? 8 A. I do not recall. 9 Q. Was it sizable? 10 A. I really don't recall. 11 Q. Now, it says Mr. Whatley said the board 12 had addressed this issue in the past and because 13 the market value was below book value, that it 14 decided it would not sell any authorized but un 15 issued shares. Do you see that? 16 A. That's correct. 17 Q. And then did Dr. Munitz then ask 18 whether or not the board would consider conditions 19 under which it would favorable Lee view such a 20 sale as reflected on those minutes? 21 A. The minutes reflect that and that's 22 really all I recall is what that sentence tells 1652 1 me. 2 Q. That Dr. Munitz did indicate an 3 interest in acquiring additional shares at that 4 meeting? 5 A. Presumably so. 6 Q. You don't have any reason to dispute 7 the accuracy of the minutes, do you? 8 A. Do not. 9 Q. Now, I'd like to show you a document 10 that I've marked as A or, excuse me, the parties 11 have mark as A1064. It's UFG board minutes dated 12 October 28, 1982. 13 MR. GUIDO: I move the admission of 14 Exhibit A 1064, Your Honor. 15 MR. NICKENS: No objection, Your Honor. 16 THE COURT: Received. 17 Q. (BY MR. GUIDO) Now, on the first 18 page, the fourth paragraph down, there is a 19 reference to Dr. Munitz making a motion with 20 regard to entering into a contract with the 21 Nu-West Group Limited. Do you see that? 22 A. Yes. 1653 1 MR. NICKENS: I'm sorry, Your Honor. 2 I'm lost. What was the reference again, 3 Mr. Guido? 4 MR. GUIDO: On the first page, 5 Dr. Munitz makes a motion seconded by 6 Dr. LeMaistre that the board of directors enter 7 into a contract with Nu-West Group Limited to 8 purchase three parcels of land. 9 Q. (BY MR. GUIDO) Do you see that, 10 Mr. Bentley? 11 A. Yes, I do. 12 Q. And then on the second page, that -- 13 there is a -- let's stick to the first page. Was 14 Dr. Munitz actively involved in the management of 15 United Financial Group as of October 28th, 1982? 16 A. I don't believe he was active in 17 management at that point, no. 18 Q. This seems to be an awfully specific 19 transaction. Do you recall how the board received 20 resolutions from the staff to make at its board 21 meetings? 22 A. At this point in time, I presume 1654 1 resolutions were prepared by counsel, by 2 association counsel. That may not have been the 3 case all the way through but at this point in 4 time, I rather think that is the case to the best 5 of my knowledge. 6 Q. And were those resolutions included in 7 board packets that were given to each board 8 member? 9 A. Yes, that's correct. At this point in 10 time, we mailed out proposed board meetings prior 11 to board meetings overnight to the board. 12 Q. Now, the last paragraph on the first 13 page talks about presentation by 14 Mr. David Barrett, the treasurer of UFG. And it 15 says Mr. Barrett discussed the nature of each of 16 the debt obligations involved and explained that 17 the data contemplates a dividend from United 18 savings equal to 2 million a conversion of 19 $3 million in PennCorp debt into UFG common stock. 20 Do you see that? 21 A. Yes. 22 Q. Okay. Now, does that discussion 1655 1 pertain to the last resolution that is part of the 2 resolutions that Dr. Munitz moved be adopted? If 3 you look on Page 1, it says further resolve that 4 the board of directors does hereby recommend to 5 the share holders of United Financial Group, Inc. 6 that the certificate of incorporation of 7 United Financial Group be amended to authorize the 8 issuance of future series of UFG preferred stock 9 by action of the board of directors. Are those 10 two paragraphs related to each other or am I 11 confused about what they relate to? 12 A. I actually can't say what all the last 13 resolved intended. It would appear that it might 14 have been open-ended but I would take this 15 resolution to mean that it would accommodate the 16 transaction as outlined in the first resolved, in 17 the first resolve which was the exchange of 18 preferred stock for certain property primarily 19 located in Florida. 20 Q. Okay. So, the first resolve really 21 talks about exchange of Series B UFG preferred 22 stock for property in Florida with the Nu-West 1656 1 group. Right? 2 A. Yes. I see it. I don't know what the 3 interpretation would be of the last resolve. When 4 it refers to future series, I don't know whether 5 that's inclusive of the preferred stock in that 6 that doesn't appear to be necessarily authorized 7 in the first resolve. But again, I'm not an 8 attorney. I won't attempt to answer that. 9 Q. I'm just trying to get what the 10 intention of the board was. The first one really 11 deals with the exchange of property in Florida for 12 Series B preferred stock, does it not? 13 A. Yes, it does. 14 Q. And then look at the third. It talks 15 about the exchange or the issuance of Series B UFG 16 preferred stock to be issued in ex- and exchanged 17 for series A preferred stock of First American 18 Financial. Do you see that? 19 A. Yes. 20 Q. So, those two resolutions deal with the 21 exchange of assets for preferred stock. And my 22 question is: Is the last resolution a resolution 1657 1 that is limited to those two particular 2 transactions or does that resolution address 3 potential issuances of all UFG preferred stock in 4 the future by action of the board of directors? 5 A. I'm afraid I can't answer that. It 6 would appear to me -- again, I'm not an 7 attorney -- that it was an amendment to authorize 8 issuance of a future series of preferred stock. 9 Q. So, it was not just limited to those 10 two specific transactions as your understanding of 11 the minutes at that time? 12 MR. NICKENS: I object, Your Honor. 13 That is both leading and I think not suggestive of 14 what he testified to. 15 THE COURT: Sustained. 16 A. It's conjecture. I can't really answer 17 it. 18 Q. (BY MR. GUIDO) Was there any 19 discussion as of October 28th, 1982 of the 20 issuance of other preferred stock by UFG to your 21 knowledge? 22 A. I do not recall such. 1658 1 Q. There were later discussions regarding 2 the issuance of preferred stock, were there not? 3 A. That's correct. 4 Q. And those were Series C and Series D 5 preferred stock? 6 A. Yes, that's correct. 7 Q. But you don't know whether this 8 resolution has anything to do with those 9 issuances? 10 A. I do not. 11 Q. Now, the discussion on the first full 12 paragraph of page 2 of these minutes says 13 Mr. Coles discussed the projections for short-term 14 rates and the announcement of the sale of PennCorp 15 to American can and suggested it might be 16 advisable to consider elimination of the PennCorp 17 option to convert its UUFG preferred stock into 18 common -- preferred stock into UFG common stock at 19 $6. He stated that several discussions had taken 20 place since the last UFG board meeting when this 21 idea was initially discussed. Mr. Coles stated 22 that the discussions have involved the following: 1659 1 PennCorp would give up their option to convert the 2 preferred stock to common stock in exchange for 3 UFG giving up its right to convert the PennCorp 4 debt and preferred stock into UFG common stock. 5 Do you see that? 6 A. Yes. 7 Q. Now, were the discussions that he's 8 referring to mentioned at the board meeting? 9 A. I do not recall. I presume it was but 10 I do not recall. 11 Q. Do you recall whether or not he was 12 making reference to discussions with PennCorp 13 representatives or representatives of other I went 14 its that held interest in UFG? 15 A. I do not recall. 16 Q. The sentence goes on. It says 17 Mr. Coles said he believed that with the Nu-West 18 purchase and the subsequent sale of the property, 19 UFG would hold adequate funds to meet its debt 20 service through 1985 and expects dividends to be 21 available from United savings. Do you see that 22 sentence? 1660 1 A. Yes. 2 Q. And it then goes on and says he 3 recommended that the option be adjusted to convert 4 the preferred stock into a debt instrument with an 5 accelerated repayment schedule and carrying a 6 floating rate of one and a half over the six-month 7 treasury bill rate? 8 MR. NICKENS: I believe, Your Honor, it 9 says I believe it says one-half percent, not one 10 and a half percent. 11 MR. GUIDO: I'm sorry. One-half 12 percent of the six-month treasury bill rate. Do 13 you see that sentence. 14 A. Yes . 15 Q. Now, -- then it says Mr. Munitz 16 strongly supports this concept. Do you see that? 17 A. Yes. 18 Q. Now, is the concept that's referred to 19 the agreement that PennCorp would give up their 20 option to convert the preferred stock to common 21 stock in exchange for UFG giving up its right to 22 convert the PennCorp debt and preferred stock into 1661 1 UFG common stock? 2 MR. KEETON: Your Honor, I object. Why 3 doesn't he ask the witness what concept? 4 Logically it's the one that immediately preceded 5 it which is not the PennCorp. 6 MR. GUIDO: There is no mention. 7 MR. KEETON: He just wants to get his 8 own testimony in instead of this witness, Your 9 Honor. 10 THE COURT: All right. Restate your 11 question. 12 Q. (BY MR. GUIDO) Can you -- when it 13 says Dr. Munitz strongly supported this concept, 14 do you recall what Dr. Munitz was referring to in 15 these minutes? 16 A. I certainly don't. 17 Q. The previous paragraph that I just read 18 to you which Mr. Coles said he believed that with 19 the Nu-West purchase and a subsequent sale of the 20 property, UFG would hold adequate funds to meet 21 its debt service through 1985 and expects 22 dividends to be available from United savings. Do 1662 1 you see that sentence? 2 A. Yes. 3 Q. Did you ever have discussions with 4 Mr. Coles about the view that was expressed in 5 that sentence? 6 A. I have no specific recollection of it. 7 This was an area in which I was not involved other 8 than that as a board member. 9 Q. But did you have discussions with 10 Mr. Coles regarding whether or not UFG would hold 11 adequate funds to meet its debt service through 12 1985? 13 A. I do not recall a specific 14 conversation. 15 Q. In October 28th of 1982, did you have 16 any views about United Savings Association of 17 Texass ability to meet its obligations through 18 1985? 19 A. I'm sure there were doubts in my mind. 20 I cannot recall back 17 years ago what my 21 conjecture might have been at that time. I don't 22 have anything to hang my recollection on. 1663 1 Q. Did you view in October of 1982 2 United Financial Group or United Savings 3 Associations ability to continue in existence or 4 be economic Lee viable as tentative? 5 A. Yes. I'd say tentative would be a fair 6 description. 7 Q. And that -- did you and the other 8 members of management in 1982 look for ways to 9 keep United Financial Group or United Savings 10 Association of Texas economic Lee viable? 11 MR. KEETON: Your Honor, I object to 12 the other executives. Mr. Bentley is perfectly 13 capable of testifying as to what he did but not 14 this global hearsay that we're looking for. 15 MR. GUIDO: That's fine, Your Honor. I 16 will amend my questions to only include 17 Mr. Bentley. 18 A. Yes, I would say that the people 19 employed at United, officers as well as employees, 20 were concerned with whatever measures might 21 contain by the institution to enhance its 22 earnings, potential in the future and its 1664 1 enhancement in net worth. 2 Q. (BY MR. GUIDO) You were the -- what 3 position did you hold at this time in October 1982 4 at United financial group? 5 A. I was the chairman but not the chief 6 executive officer. 7 Q. And the chief economic active officer 8 was Mr. Coles? 9 A. That's correct. 10 Q. And what position did you hold at USAT 11 at that time? 12 A. The same: Chairman. 13 Q. And who was the chief executive officer 14 of USAT at the time? 15 A. Mr. Coles. 16 Q. Pardon? 17 A. Mr. Coles. 18 Q. Okay. 19 THE COURT: Mr. Guido, how much more do 20 you have. 21 MR. GUIDO: Your Honor, I have quite a 22 bit more. I mean, if you'd like to break until 1665 1 tomorrow, this would be an appropriate time. 2 THE COURT: All right. We'll adjourn 3 until 9:00 o'clock. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22