Conclusions of Law

UNITED STATES OF AMERICA

DEPARTMENT OF THE TREASURY

OFFICE OF THRIFT SUPERVISION

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In the Matter of )

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UNITED SAVINGS ASSOCIATION OF )

TEXAS, )

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and UNITED FINANCIAL GROUP, INC. )

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MAXXAM, INC., ) OTS Order No. AP 95-40

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FEDERATED DEVELOPMENT CO., ) December 26, 1995

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and CHARLES E. HURWITZ, )

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Respondents. )

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OTS’S PROPOSED CONCLUSIONS OF LAW

The Office of Thrift Supervision hereby submits its proposed Conclusions of Law.

I. GENERAL CONCLUSIONS

1. On August 9, 1989, pursuant to the provisions of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), Pub. L. No. 101-73, 103 Stat. 183, the Office of Thrift Supervision (“OTS”) succeeded the Federal Home Loan Bank Board (“FHLBB”) as the regulatory agency charged with the supervision and regulation of savings association and savings and loan holding companies pursuant to Sections 3(q)(4), 8(b), 8(e) and 8(i) of the Federal Deposit Insurance Act (the “FDIA”), 12 U.S.C. §§ 1813(q)(4), 1818(b), (e) and (i), as amended by FIRREA. OTS, as the successor to the FHLBB, is the appropriate federal banking agency to maintain a proceeding to determine whether a cease and desist order requiring restitution, reimbursement and other affirmative relief should issue against institution-affiliated parties (“IAP”), and other persons participating in the conduct of the affairs of an insured savings institution, whether such persons should be prohibited from further participation in the conduct of the affairs of any insured depository institution, and whether civil money penalties should be assessed against such persons.

2. At all relevant times, United Savings Association of Texas (“USAT”): (a) was a savings association as defined by Section 2(4) and 10(a)(1)(A) of the Home Owners’ Loan Act (“HOLA”), 12 U.S.C. § 1462(4), 1467a(a)(1)(A), and Section 3(b) of the FDIA, 12 U.S.C. § 1813(b); and (b) was an insured depository institution as defined by Section 3(c)(1) of the FDIA, 12 U.S.C. § 1813(c)(1); and (c) was an insured institution as defined by the National Housing Act, Section 408(a), formerly 12 U.S.C. § 1730a(a). At all relevant times, USAT was a savings and loan association chartered by the State of Texas. The eligible deposits of USAT were insured by the Federal Savings and Loan Insurance Corporation from 1937 to December 30, 1988.

3. At all relevant times, until December 30, 1988, USAT was a subsidiary of United Financial Group, Inc. (“UFG”). UFG was a savings and loan holding company as defined by Section 408(a)(1)(D) of the NHA, former 12 U.S.C. § 1730a(a)(1)(D), and was a savings and loan holding company, as defined by Section 10(a)(1)(D) of the HOLA, 12 U.S.C.

§ 1467a(a)(1)(D), and Section 3(w)(3) of the FDIA, 12 U.S.C. § 1813(w)(3), relating to USAT. At all relevant times, UFG owned 100 percent of the voting stock of USAT.

4. At all relevant times, MAXXAM, Inc. (“MAXXAM”), or its predecessor, MCO Holdings, Inc. (“MCO”), was a controlling shareholder of UFG and, therefore, was a savings and loan holding company within the meaning of former 12 U.S.C. § 1730a(1)(D) and 12 U.S.C.

§ 1467a(a)(1)(D). At all relevant times, MAXXAM or MCO, through its officers, directors, or agents, participated directly or indirectly in the conduct of the affairs of UFG and USAT.

5. At all relevant times, Federated Development Co. (“Federated” or “FDC”) was a controlling shareholder of MAXXAM or its predecessor, MCO and, therefore, was a savings and loan holding company within the meaning of former 12 U.S.C. § 1730a(1)(D) and 12 U.S.C.

§ 1467a(a)(1)(D). At all relevant times, Federated or FDC, through its officers, directors, or agents, participated directly or indirectly in the conduct of the affairs of UFG and USAT.

6. At all relevant times, Charles E. Hurwitz (“Hurwitz”) was a controlling shareholder of Federated and MAXXAM and, therefore, of UFG and USAT. In addition, Hurwitz was a controlling person of UFG and USAT and participated directly or indirectly in the conduct of the affairs of UFG and USAT.

7. MAXXAM, Federated and Hurwitz are IAP’s of UFG and USAT, as that term is

defined in 12 U.S.C. § 1813(u).

8. The respondents participated in violations of law and regulations and engaged in unsafe and unsound practices as described below by taking actions alone and with others for or toward, causing, bringing about, participating in, counseling, or aiding and abetting violations. 12 U.S.C. § 1813(v) (1989).

II. FIRST CLAIM FOR RELIEF: MCO/FDC’S CONTROL OF UFG AND USAT; THE MCO/FDC NET WORTH MAINTENANCE OBLIGATION

9. At all material times, respondents MCO and FDC, and each of them, were savings and loan holding companies within the meaning of former 12 U.S.C. § 1730a(a)(1)(D) in that they directly or indirectly controlled UFG, a savings and loan holding company, and USAT, an insured institution. Specifically, MCO and FDC, and each of them:

(a) Exercised a controlling influence over the management or policies of UFG and USAT within the meaning of former 12 U.S.C. § 1730a(a)(2)(D);

(b) Acting in concert with Drexel Burnham Lambert, Inc. (“DBL”) and Jenard Gross, owned or controlled more than 25 per centum of the voting shares of UFG within the meaning of former 12 U.S.C. § 1730a(a)(2)(B);

(c) Through the operation of the Stock Option Agreement, owned or controlled more than 25 per centum of the voting shares of UFG within the meaning of former 12 U.S.C. § 1730a(a)(2)(B);

(d) Through their control of the conversion date of UFG’s Series C Preferred Shares, owned or controlled more than 25 per centum of the voting shares of UFG within the meaning of former 12 U.S.C. § 1730a(a)(2)(B).

10. At all material times, Hurwitz, as a controlling shareholder, and as Chief Executive Officer, of MCO and FDC, participated in MCO and FDC’s control of UFG and USAT. Further, Hurwitz acted in concert with MCO and FDC to effectuate their control.

11. At all material times, MCO and FDC and those acting in concert with them or on their behalf, including Hurwitz, first as applicants to become savings and loan holding companies and then as savings and loan holding companies, were subject to the terms of, and were required to comply with, FHLBB Resolution No. 84-712, including the net worth maintenance condition set forth in paragraph 4 thereof (the “MCO/FDC Net Worth Maintenance Condition”), which required them to contribute a pro rata share of any infusion of capital required in order for USAT to comply with the regulations relating to the minimum required net worth or capital.

12. The MCO/FDC Net Worth Maintenance Condition, contained in FHLBB Resolution No. 84-712, was a "condition imposed in writing by the agency in connection with the granting of any application or other request by the depository institution" within the meaning of 12 U.S.C. § 1818(b)(1). As such, it is enforceable in this cease-and-desist proceeding. Id.

13. MCO and FDC and those acting in concert with them or on their behalf, including Hurwitz, failed to comply with the MCO/FDC Net Worth Maintenance Condition.

14. At all material times, MCO and FDC and those persons acting in concert with them or acting on their behalf, including Hurwitz, engaged in unsafe and unsound practices and conduct that was in reckless disregard of the law, applicable regulations, and a prior order of the FHLBB, specifically paragraph 4 of FHLBB Resolution No. 84-712, within the meaning of 12 U.S.C. § 1818(b)(6)(A)(ii), in order to evade compliance with the MCO/FDC Net Worth Maintenance Condition. Specifically, as described more fully in the attached findings of fact, in furtherance of, and in connection with, their evasion of their obligations under the MCO/FDC Net Worth Maintenance Condition, MCO, FDC, Hurwitz, and others:

(a) Made false statements to the FHLBB in violation of 18 U.S.C. § 1001 and 12 C.F.R. § 563.18(b) (1986-88);

(b) Knowingly and willfully engaged in activities for the purpose and with the effect of evading applicable laws and regulations in violation of 12 C.F.R. § 584.2(a) (1984-88);

(c) Failed to register as a holding company in violation of former 12 U.S.C. § 1730a(b)(1) and 12 C.F.R. § 584.1(a)(1) (1984-88);

(d) Failed to file annual holding company reports in violation of former 12 U.S.C. § 1730a(b)(2) and 12 C.F.R. § 584.1(a)(2) (1984-88);

The foregoing acts were undertaken knowingly and willfully and in reckless disregard of the law, applicable regulations, and FHLBB Resolution No. 84-712, a prior order of the FHLBB. These violations continued through December 30, 1988, when USAT was placed in receivership.

15. The Director of OTS has the authority to issue an order directing MCO, FDC, and those acting in concert with them or on their behalf, to make restitution or provide reimbursement, indemnification or guarantee against loss in connection with respondents’ failure to comply with the MCO/FDC Net Worth Maintenance Condition pursuant to 12 U.S.C. § 1818(b)(6).

16. MCO, FDC, and Hurwitz, and each of them, are obligated to contribute a pro rata share equal to 28.58% of any net worth deficiency under the terms of the MCO/FDC Net Worth Maintenance Condition.

III. SECOND CLAIM FOR RELIEF: THE UFG NET WORTH MAINTENANCE OBLIGATION

17. At all material times, UFG was subject to the terms of, and was required to comply with, FHLBB Resolution No. 83-252, including the net worth maintenance condition set forth in paragraph 6 (the “UFG Net Worth Maintenance Condition”), which required that UFG cause the net worth of USAT to be maintained at the level required by the regulations relating to the minimum required net worth or capital (the “UFG Net Worth Maintenance Condition), and the stipulation (the “UFG Net Worth Maintenance Stipulation”) executed by UFG pursuant thereto in which UFG agreed to infuse additional equity capital to effect compliance with the UFG Net Worth Maintenance Condition.

18. The UFG Net Worth Maintenance Condition, contained in FHLBB Resolution No. 83-252, was a "condition imposed in writing by the agency in connection with the granting of any application or other request by the depository institution" within the meaning of 12 U.S.C. § 1818(b)(1). As such, it is enforceable in this cease-and-desist proceeding. Id.

19. The UFG Net Worth Maintenance Stipulation is a “written agreement entered into with the agency” within the meaning of 12 U.S.C. § 1818(b)(1). As such, it is enforceable in this cease-and-desist proceeding. Id.

20. Notwithstanding that USAT’s Supervisory Agent notified UFG that it was required to infuse additional capital pursuant to the terms of the UFG Net Worth Maintenance Condition and the UFG Net Worth Stipulation and demanded that it make such an infusion, UFG failed to do so. Instead, UFG engaged in practices designed to preserve the control of and shareholder equity in UFG and to move assets beyond the reach of regulatory authorities. Such practices were unsafe and unsound and were undertaken knowingly and willfully and with reckless disregard for the law, applicable regulations, and a prior order of the FHLBB.

21. UFG’s failure to infuse capital as directed by its supervisory agent was a violation of the UFG Net Worth Maintenance Condition and the UFG Net Worth Maintenance Stipulation.

22. At all material times, the Board of Directors of UFG consisted of persons selected for membership by MCO, FDC, and Hurwitz, and each of them.

23. At all material times, MCO, FDC, and Hurwitz, and each of them directly or indirectly controlled UFG and its Board of Directors. Acting through and with Hurwitz, MCO and FDC engaged in conduct “for or toward causing, bringing about, participating in, counseling or aiding and abetting” UFG’s violations of the UFG Net Worth Maintenance Condition and UFG Net Worth Maintenance Stipulation, and, thus, are liable as violators themselves pursuant to 12 U.S.C. § 1813(v) and 12 U.S.C. § 1818(b)(1).

24. As controlling shareholders of UFG, Hurwitz, MCO, and FDC, and each of them, had a fiduciary obligation to ensure that UFG complied with applicable laws, regulations, and orders. Hurwitz, MCO, and FDC, and each of them, breached this fiduciary obligation.

25. The Director of OTS has the authority to issue an order directing MCO, FDC, and those acting in concert with them or on their behalf, to make restitution or provide reimbursement, indemnification or guarantee against loss in connection with respondents’ failure to comply with the UFG Net Worth Maintenance Condition and the UFG Net Worth Maintenance Stipulation pursuant to 12 U.S.C. § 1818(b)(6).

26. MCO, FDC, and Hurwitz, and each of them, are obligated to contribute an amount equal to the net worth of UFG on December 30, 1988, the date that USAT was placed in receivership less any amounts that have been paid by the bankruptcy estate of UFG on account of the net worth deficiency. The amount of their joint liability is $15,856,807.

IV. THIRD CLAIM FOR RELIEF: FALSE AND MISLEADING STATEMENTS REGARDING CONTROL OF UFG

27. MCO, FDC, and Hurwitz, and each of them, caused settling respondents Berner (on March 4, 1987) and Munitz (on November 17, 1987) to make false and misleading statements concerning MCO and FDC’s purported lack of control of UFG in letters to the FHLBB, and to omit from such statements material facts necessary to make the statements not misleading, in violation of 12 C.F.R. § 563.18(b) (1986-88).

V. FOURTH CLAIM FOR RELIEF: RESPONDENTS VIOLATED THE HOLDING COMPANY ACT AND THE CONTROL ACT

28. The Savings and Loan Holding Company Act, 12 U.S.C. § 1730a (1982) (“Holding Company Act”) and the Change in Savings and Loan Control Act of 1978, 12 U.S.C. § 1730(q) (“Control Act”), are effectively identical in that both prohibit acquisitions of control of a savings association without prior regulatory notice or approval. “The Control Act and Holding Company Act prohibits similar activities and the language of the two statutes is substantially similar. The elements of an offense under each statute are the same.” In re Rapp, Decision And Order, OTS Order No. AP 92-148 (Dec. 4, 1992), p. 15, aff’d. 52 F.3d. 1510 (10^th Cir. 1995).

29. The Holding Company Act is violated when companies, or when persons acting in concert with companies, directly or indirectly, acquire control of a savings association without prior regulatory approval. 12 U.S.C. §§ 1730a(a)(2), 1730a(e)(i)(B) (1982-88). The Control Act is violated when individuals, acting directly or indirectly or through or in concert with one or more persons, acquire control of a savings association’s stock without prior regulatory approval. 12 U.S.C. § 1730(q) (1982-88).

30. Between February 28, 1984 and December 30, 1988, Federated, MAXXAM and Hurwitz committed continuous violations of the Holding Company Act by acquiring control of UFG and USAT without prior regulatory approval.

31. MAXXAM and Federated also failed to register with the FSLIC, as required by 12 U.S.C. § 1730a(b)(1) (1982-88) and 12 C.F.R. § 584.1(a)(1) (1985-88), as savings and loan holding companies within 90 days following February 28, 1984, in violation of the Holding Company Act. In addition, MAXXAM and Federated failed to file annual reports in 1984 - 1988 with the FSLIC, pursuant to 12 U.S.C. § 1730a(b)(2) (1982-88) and 12 C.F.R. § 584.1(a)(2) (1985-88), which were required to be filed by savings and loan holding companies within 120 days after the close of each fiscal year, in violation of the Holding Company Act. Hurwitz participated in these violations by failing to cause MAXXAM and Federated to comply with the Holding Company Act and applicable regulations.

32. Hurwitz continuously violated the Control Act between February 28, 1984 and December 30, 1988, by acting directly or indirectly and in concert with others to acquire control of UFG and USAT.

33. MAXXAM, Federated and Hurwitz committed willful violations of the Holding Company Act through their acquisition of more than 25% of the voting stock of UFG. They also committed willful violations of the Holding Company Act through their exercise of a controlling influence over the management and policies of UFG and USAT.

34. Hurwitz committed willful violations of the Control Act through his acquisition of more than 25% of the voting stock of UFG. He also committed willful violations of the Control Act through his acquisition and exercise of the power to direct the management and policies of UFG and USAT.

35. MAXXAM’s, Federated’s and Hurwitz’s violations of the Holding Company Act and the Control Act were in reckless, willful, and continuing disregard of those statutes and applicable regulations. These violations also involved personal dishonesty, and MAXXAM, Federated and Hurwitz were unjustly enriched in connection with such violations. As a result of these violations, UFG and USAT suffered damages and the interests of USAT’s savings account holders were seriously prejudiced.

VI. FIFTH CLAIM FOR RELIEF: AFFILIATED PARTY JUNK BOND TRANSACTIONS

36. At all material times, DBL was an affiliate of USAT within the meaning of former 12 U.S.C. § 1730a(a)(1)(I) and 12 C.F.R. § 583.15 (1984-88) by virtue of its acting in concert with MCO and FDC to control UFG and USAT within the meaning of former 12 U.S.C. § 1730a(a)(2)(B) and 12 C.F.R. § 583.26(a), (b) (1984-88).

37. At all material times, "any transaction between a savings association and its affiliate without the prior written consent of the FHLBB involving the purchase, sale or lease of property or assets (other than participating interests in certain mortgage loans) was prohibited if the consideration in the preceding 12 month period for all such transactions exceeded the lesser of $100,000 or 0.1 percent of the savings and loan association total assets. 12 U.S.C. § 1730a(d)(6)(A); 12 C.F.R. § 584.3(a)(7)(i) (1984-88).

38. USAT purchased millions of dollars in DBL underwritten junk bonds between 1984 and 1988. Such purchases were far in excess of $100,000 per 12-month period and were made without prior written consent of the FHLBB, in violation of 12 U.S.C. § 1730a(d)(6)(A) and 12 C.F.R. § 584.3(a)(7)(i) (1984-88). Over the period 1984 through the resolution of the USAT, USAT, or the FDIC as receiver for USAT, incurred losses of $45,918,938 on such unlawful transactions.

39. At all material times, USAT’s unlawful purchases of DBL-underwritten junk bonds were arranged, encouraged, and facilitated by MCO, FDC, and Hurwitz. USAT’s unlawful purchases of DBL-underwritten junk bonds were undertaken in reckless disregard of the law and applicable regulations.

40. It would be unjust and contrary to law to allow the respondents to set off against the losses incurred by USAT, or by the FDIC as receiver for USAT, any profits realized by USAT, or the FDIC as receiver for USAT, on other unlawful transactions involving purchases of DBL-underwritten junk bonds.

41. Accordingly, the Director of OTS has the authority to issue an order directing MCO, FDC, and those acting in concert with them or on their behalf, to make restitution or provide reimbursement, indemnification or guarantee against loss for the full amount of USAT’s losses on unlawful purchases of DBL-underwritten junk bonds pursuant to 12 U.S.C. § 1818(b)(6).

VII. SIXTH THROUGH ELEVENTH CLAIMS FOR RELIEF: VIOLATIONS RELATING TO THE MORTGAGE-BACKED SECURITIES PORTFOLIOS, INCLUDING VIOLATIONS OF MINIMUM REGULATORY CAPITAL REQUIREMENTS

A. Sixth Claim For Relief: Respondents Caused USAT To Engage In Unsafe And Unsound Practices And Speculation In USAT’s Mortgage-Backed Securities Portfolios

42. Respondents caused USAT to engage in trading and speculation in MBS's, interest-rate swaps, and interest-rate caps. In particular:

(a) Respondents caused USAT to trade MBS’s, interest-rate swaps and interest-rate caps to generate gains to satisfy the net worth requirements, which reduced the net interest spread, increased the market value loss in the portfolio, and increased the interest rate risk to the portfolios, and, therefore, were unsafe and unsound practices in violation of respondents’ obligation to manage the portfolios for long term spread income, not to speculate on short term gains to satisfy the net worth requirements.

(b) The Respondents caused USAT to engage in unsafe and unsound practices by speculating on an anticipated price rise in the securities purchased, which was not a proper activity for a savings and loan association, and by leveraging the MBS RCA by several multiples and leaving it under-hedged.

43. USAT’s speculation and trading in MBS's, interest-rate swaps, and interest-rate caps constituted unsafe and unsound management of USAT and the pursuit of unsafe financial policies that were inconsistent with economical home financing and the purposes of insurance of accounts constituted a breach of the respondents’ fiduciary obligations in violation of 12 C.F.R. § 563.17(a) (1983-1988).

44. Respondents caused USAT to engage in interest-rate swaps for reasons other than the reduction of interest-rate risk in violation of Reg. Bull. No. 59 (July 2, 1984). 12 C.F.R. § 563.17(a) (1983-1988).

45. Respondents caused USAT to engage in unsafe and unsound practices by engaging in sales and repurchases of futures contracts and options contracts to generate gains to satisfy USAT’s minimum regulatory net worth requirement, which had the effect of increasing the interest rate risk to the institution, in violation of 12 C.F.R. §§ 563.17-4 (b), 563.17-5 (b) & (d) (1985-88) and the Board of Directors policy that authorized purchases and sales of MBS and futures and options contracts only to “reduce the net interest rate risk to USAT.”

46. Respondents failed to, and failed to cause USAT to, devise, adopt, implement, and monitor policies and procedures to manage the interest-rate risk created by the mismatch of the effective maturities of USAT's assets and liabilities in violation of 12 C.F.R. §§ 563.17-6, 571.3 (1985-88). In particular:

(a) Respondents caused USAT to engage in unsafe and unsound practices by failing to obtain the board of directors approval for the MBS arbitrage strategy prior to its initiation, failing to obtain from the board of directors a specific written policy describing the MBS’s to be acquired, the hedging instruments to be used, and the expected returns;

(b) Respondents caused USAT to violate generally accepted standards of practice for thrift institutions when they failed to cause USAT to structure the MBS portfolios to mitigate the effect of prepayments and failed to cause USAT to monitor interest rates or the market value of the MBS portfolios with a scenario analysis, but instead simply waited until accelerated prepayments showed up in payments from the issuing agencies and had been incorporated into the market value of the portfolios contrary to the practices in the industry at the time;

(c) Respondents caused USAT to engage in unsafe and unsound practices by failing to cause USAT to include the details of the MBS RCA strategy in USAT’s business plan and in the interest rate risk (asset/liability management) and investment policies of USAT;

(d) Respondents caused USAT to engage in unsafe and unsound practices by failing to cause USAT to obtain the technical expertise and to have systems in place for the portfolio managers to monitor, evaluate, and supervise the investment program;

(e) Respondents caused USAT to engage in unsafe and unsound practices by failing to follow the applicable regulations, FHLBB guidance, and generally accepted standards of practice for managing the MBS portfolios in 1985 and 1986. Such unsafe and unsound practices included failure to monitor interest rates in order to protect against the harmful effect of prepayments and consequently, a failure to restructure the portfolio prior to the impact of an increase in prepayment rates on the market value of the portfolio;

(f) Respondents caused USAT to engage in unsafe and unsound practices by failing to analyze the potential returns of the MBS RCA portfolios in 1985 and 1986 under varying interest rate and prepayment scenarios;

(g) Respondents caused USAT to engage in unsafe and unsound practices by improperly relying upon a portfolio manager and supervisors who lacked the necessary expertise to manage a MBS RCA portfolio;

(h) Respondents caused USAT to engage in unsafe and unsound practices by “rolling down” the MBS portfolio to a negative interest rate spread between the interest earned on the mortgage backed securities and the interest paid on the hedged liabilities;

(i) Respondents caused USAT to engage in unsafe and unsound practices by failing to terminate the MBS RCA portfolios when the hedged cost of funding became more than the yield on the asset;

(j) Respondents caused USAT to engage in unsafe and unsound practices by failing to restructure the swaps, thereby permitting the assets and liabilities of a MBS RCA to be improperly hedged;

(k) Respondents caused USAT to engage in unsafe and unsound practices and practices that were not consistent with USAT’s stated purpose of managing a portfolio of MBS’s in a RCA to generate a net interest spread by trading MBS’s to generate gains to meet USAT’s regulatory minimum net worth requirement; and

(l) Respondents caused USAT to trade MBS’s to generate gains to meet USAT’s regulatory minimum net worth requirement in violation of USAT’s Board of Directors’ policy, which only allowed trading in the MBS portfolios only to reduce interest rate risk.

47. Respondents caused USAT to fail to comply with the required FHLBB regulations to maintain complete, accurate, and reliable books and records of all transactions to support its financial statements and reports to the FHLBB, in violation of 12 C.F.R. §§ 563.23-3(b), ( c ), 563.17-1(c) (1983-89).

48. Respondents’ causing USAT to trade and speculate in MBS’s, interest-rate swaps, and interest-rate capes constituted reckless disregard for the laws or applicable regulations or policies governing safe and sound banking practices within the meaning of 12 U.S.C. § 1818(b)(6) and constituted willful or continuing disregard for the safety and soundness of USAT within the meaning of 12 U.S.C. § 1818(e)(1)(C)(ii).

B. Seventh Claim For Relief: Respondents Misrepresented The Nature Of The Mortgage-Backed Securities Portfolios And The Transactions Therein

49. Respondents caused USAT to account for its holdings of interest-rate swaps and interest-rate caps as hedging instruments. Respondents represented and caused USAT to represent that the MBS portfolios were RCA portfolios hedged by corresponding interest-rate swaps, interest-rate caps, and interest-rate collars. Such representations were false and misleading in violation of 12 C.F.R. § 563.18(b) (1986-88).

50. Respondents caused USAT to account for its MBS portfolio as being held for investment. Respondents represented and caused USAT to represent to USAT’s outside auditors that the gains recognized on the sales of MBS’s out of USAT's portfolios were the result of the rebalancing of the portfolios to protect against interest rate risk and not the result of sales to generate gains to meet USAT's minimum net worth requirement. Such representations were false and misleading in violation of 12 C.F.R. § 563.18(b) (1986-1988).

51. Respondents represented and caused USAT to represent to USAT’s outside auditors and FHLBB examiners that United MBS was a hedged portfolio and was not structured to increase in value if interest rates moved in a particular direction. Such representations were false and misleading in violation of 12 C.F.R. § 563.18(b) (1986-1988).

52. Respondents caused USAT to file financial statements that materially overstated USAT’s net worth. Such financial statements were false and misleading statements in violation of 12 C.F.R. § 563.18(b) (1986-1988).

C. Eighth Claim For Relief: Respondents Caused USAT To Manipulate The Calculation Of Its Maturity Matching Credit In Order To Conceal Its Violation Of The Minimum Capital Regulation

53. Respondents caused USAT and United MBS to engage in sham exchanges of MBS's and interest rate caps in violation of 12 C.F.R. § 563.13(f) (1987-88), in order to manipulate USAT's maturity matching credit and thereby evade the minimum regulatory capital requirement, set forth in 12 C.F.R. § 563.13(b) (1987). Such sham transactions are to be disregarded pursuant to 12 C.F.R. § 563.13(f) (1987-88). Accordingly, USAT failed its minimum regulatory net worth as of September 30, 1987, in violation of 12 C.F.R. § 563.13(b) (1987). By reason of their actions, the respondents caused USAT to file false and misleading financial statements with the FHLBB in violation of 12 C.F.R. § 563.18(b) (1986-89).

D. Ninth Claim For Relief: Respondents Caused USAT To Guarantee The Liabilities Of A Subsidiary

54. Respondents managed United MBS directly through USAT and caused United MBS to be operated in a manner that failed to demonstrate to the public the separate corporate existence of the service corporation and the insured institution in violation of 12 C.F.R. § 563.37(a) (1983-89).

55. Respondents caused USAT to guarantee the net worth of United MBS, but failed to aggregate the liabilities it guaranteed with other USAT liabilities for the purpose of determining compliance with applicable limitations on investment and growth in violation of 12 C.F.R. § 563.37(b) (1983-89).

56. Respondents failed to cause USAT to include the assets and liabilities of United MBS in USAT’s balance sheet in its Thrift Financial Report in violation of 12 C.F.R. § 563.23-3 (1983-88).

E. Tenth Claim For Relief: Respondents Caused USAT To Violate The Liability Growth Regulation

57. By virtue of the respondents’ actions that caused USAT to guarantee the liabilities of United MBS, the liabilities of United MBS were required to be included in USAT's financial statements in 1986 and 1987. During that period, United MBS's separate liabilities grew to as much as $2.8 billion and, when consolidated with the assets and liabilities of USAT, caused USAT to exceed limitations placed on USAT's liability growth in violation of 12 C.F.R. § 563.13(a), (b) (1986-89). Respondents failed to cause USAT to seek prior approval of USAT's Principal Supervisory Agent for this additional growth in USAT's liabilities in violation of 12 C.F.R. § 563.13-1(a), (b) (1986-89).

58. By guaranteeing the debt of United MBS, USAT became obligated to include the assets and liabilities of United MBS in USAT’s balance sheet in the Thrift Financial Reports. Respondents failed to cause USAT to do so, causing USAT to violate 12 C.F.R. § 563.23-3 (1983-88), and to file false and misleading financial statements with the FHLBB in violation of 12 C.F.R. § 563.18(b) (1986-89).

F. Eleventh Claim For Relief: Respondents Caused USAT To Violate The Direct Investment Regulation

59. As a result of respondents’ actions to cause USAT to guarantee the liabilities of United MBS, those guaranteed liabilities were required by regulation to be included in USAT's calculation of its direct investment limits. When such liabilities were added to USAT’s other direct investments, USAT violated 12 C.F.R. § 563.9-8(c)(2) (1986-88).

60. As a result of respondents’ actions to cause USAT to guarantee the net worth of United MBS, USAT exceeded the limitations on the aggregate amount of direct investments (including guarantees) by an institution in the activities of service corporations like United MBS in violation of 12 C.F.R. § 563.9-8(a), (b)(7), (c) & (g) (1986-88).

VIII. TWELFTH CLAIM FOR RELIEF: UNSAFE AND UNSOUND REAL ESTATE LENDING AND INVESTMENT PRACTICES

61. Respondents caused USAT to engage in unsafe or unsound practices within the meaning of 12 U.S.C. § 1818(b), and in violations of regulations, 12 C.F.R. §§ 563.17(a) & 563.17-1(c), with respect to the Rosenberg/USAT Agreement as a result of:

(a) improper underwriting and lack of due diligence;

(b) failure to maintain accurate and complete books and records;

(c) causing exposure to more than $30 million in liability in connection with an over-concentration of assets when the institution was in precarious financial condition;

(d) the board of directors abdicating its responsibility to oversee and approve real estate investment activity.

62. Respondents caused USAT to engage in unsafe or unsound practices within the meaning of 12 U.S.C. § 1818(b), and in violations of regulations, 12 C.F.R. §§ 563.17(a) & 563.17-1(c), with respect to the 1986 $80 Million Park 410 Loan as a result of:

(a) improper underwriting and lack of due diligence;

(b) failure to maintain accurate and complete books and records;

(d) known prevailing negative real estate market and economic conditions;

(e) causing exposure to excessive loss in connection with an over-concentration of assets when the institution was in precarious financial condition.

63. In connection with the Park 410 transactions, the unsafe or unsound practices of respondents, USAT’s management and board resulted in losses of $87,419,202 for which restitution is available within the meaning of 12 U.S.C. § 1818(b).

64. Respondents caused USAT to engage in unsafe or unsound practices within the meaning of 12 U.S.C. § 1818(b), and in violations of regulations, 12 C.F.R. §§ 563.17(a) & 563.17-1(c), with respect to the Deauville Loans as a result of:

(a) improper underwriting and lack of due diligence;

(b) failure to maintain accurate and complete books and records.

65. Respondents caused USAT to engage in unsafe or unsound practices within the meaning of 12 U.S.C. § 1818(b), and in violations of regulations, 12 C.F.R. §§ 563.17(a) & 563.17-1(c), with respect to the Norwood Transaction as a result of:

(a) improper underwriting, lack of due diligence, and assumption of all the economic risk;

(b) known prevailing negative real estate market and economic conditions;

(d) causing exposure to excessive loss in connection with an over-concentration of assets when the institution was in precarious financial condition;

(e) the board of directors abdicating its responsibility to oversee and approve real estate lending and investment activity.

66. USAT’s real estate transactions constituted reckless and willful or continuing disregard for the laws, rules, regulations, or policies governing safe or sound banking practices within the meaning of 12 U.S.C. § 1818(b)(6).

67. Respondent Hurwitz personally participated in USAT’s real estate transactions, on behalf of MCO and FDC. Hurwitz acted with reckless and willful or continuing disregard for the laws, rules, regulations and safe or sound practices within the meaning of 12 U.S.C. § 1818(b), (e). Accordingly, Hurwitz, MCO, and FDC are responsible for causing the losses suffered by USAT with respect to the Park 410, Deauville and Norwood Transactions within the meaning of 12 U.S.C. § 1818(b).

IX. THIRTEENTH CLAIM FOR RELIEF: UNSAFE AND UNSOUND COMPENSATION PRACTICES

68. The Thirteenth Claim for Relief has been rendered moot by the settlement with respondents Munitz, Gross, Berner, Huebsch, and Crow.

X. RESPONDENTS’ CULPABILITY AND UNJUST ENRICHMENT

69. Respondents’ actions as set forth in the Findings of Fact constitute violations of law, regulations and orders, conditions imposed in writing by the FHLBB in connection with the granting of an application, and a written agreement entered into between a depository institution and the FHLBB. Respondents also committed breaches of fiduciary duty and violated orders issued by the FHLBB. Respondents’ violations, practices and breaches were willful, with knowledge, and done in reckless disregard of applicable statutes, regulations, orders, and conditions adopted by the FHLBB. Respondents’ violations, practices and breaches involved personal dishonesty and demonstrate willful or continuing disregard for the safety or soundness of UFG and USAT.

70. Respondents’ violations and unsafe or unsound practices involving a reckless disregard for the law, applicable regulations or prior orders of the FHLBB caused USAT to incur losses of $821,319,405.

71. In connection with respondents’ violations and unsafe or unsound practices, respondents, and each of them, were unjustly enriched in the amount of $362,554,413.

XI. RELIEF

72. The Director of the OTS should issue a cease and desist order against respondents, jointly and severally, pursuant to 12 U.S.C. § 1818(b)(6)(a), requiring that they make restitution and reimbursement in the amount of $821,319,405.

73. The Director of the OTS should issue an order of prohibition against respondent Charles E. Hurwitz, pursuant to 12 U.S.C. § 1818(e).

74. The Director of the OTS should assess second-tier civil money penalties against each of the respondents in the amount of $4,594,200.

Respectfully submitted,

_____________________________________

Richard C. Stearns

Bruce F. Rinaldi

Kenneth J. Guido, Jr.

Bryan T. Veis

Paul Leiman

Scott E. Schwartz

Enforcement Division

Office of Chief Counsel

Office Of Thrift Supervision

1700 G Street, N.W.

Washington, D.C. 20520

Tel: (202) 906-7966

Fax: (202) 906-7005

October 4, 1999