SECTION TWO

ACQUISITION OF USAT

AND THE ADOPTION OF THE WHOLESALE STRATEGY

I. Acquisition Of Control Of UFG

A. FDC And MCO’s Original Acquisition Of Up To A 25% Interest In UFG/USAT (1982-83)

1. Initial Acquisitions By FedRe

A1. In approximately 1981, Hurwitz brought the possibility of investing in the stock of UFG to the attention of the board of trustees of FedRe, a subsidiary of FDC, including George Kozmetsky. Tr. 2,356: 10-20. Hurwitz was Chairman of the Board, Chief Executive Officer, President, and a trustee of FDC and Chairman of the Board and a director of FedRe. Ex. A-2061, Tab 37, p. 4. FedRe began to acquire shares of UFG common stock on December 4, 1981. Ex. A-2061, Tab 37, p. 8. By February 11. 1982, FedRe had acquired 464,675 shares (7.86 % of the outstanding common stock) at a cost of $2,193,205.63. Id. pp. 2, 6. The acquisition of these shares was reported to UFG and the SEC in a Schedule 13D filed jointly on that date by FedRe and FDC. Id. The Schedule 13D identified the source of funds for the purchase of shares as “the general corporate funds of FedRe.” Id. p. 6. The Schedule 13D was filed on FedRe’s and FDC’s behalf by their counsel, Ezra G. Levin of the law firm of Kramer, Levin, Nessen, Kamin & Soll. Id. p. 1. Mr. Levin was also was a director of FedRe and a trustee of FDC. Id. pp. 15-16.

A2. Subsequent to the filing of its Schedule 13D, but prior to February 26, 1982, Hurwitz met with C.E. Bentley and James A. Coles, the Chairman and President of UFG, respectively. Ex. A-1680, Tab 136, p. 2; Tr. 1,624: 1-17. Hurwitz represented to Bentley and

Coles that FedRe and FDC “fully support[ed] management.” Id. Hurwitz also “inquired through Mr. Coles as to whether the Board objected to the acquisition of up to 20% of UFG’s stock.” Id. Coles noted that FedRe and FDC “[had] increased their holdings to approximately 8.2%.” Id. “The Board … concluded that it would be imprudent to respond to Mr. Hurwitz’s request.” Id.

A3. On February 19, 1982, FedRe notified the FHLBB, through its counsel, that “FedRe would like to increase its investment in UFG to between 10% and 20% of the outstanding shares.” Ex. T-1001, Tab 1. p. 1; A-2062, Tab 37, p. 10. In the letter notifying the FHLBB of its desire to increase its investment, FedRe sought to rebut the presumption, contained in 12 C.F.R. § 563.18-2(c)(2) (1982), that any person acquiring 10% or more of any class of voting securities of an insured institution thereby acquired the power to direct the management and policies of the institution. Id. In the letter, FedRe represented to the FHLBB that Hurwitz’ and FedRe’s initial interest in acquiring the shares arose as a result of a proposal by investor Daniel K. Ludwig to acquire USAT from UFG in exchange for cash and certain real estate. Ex. T-1001, Tab 1, p.2; Ex. A-2062, Tab 37, pp. 11, 13; Tr. 548: 15-24; see also Ex. A-12013, Tab 135 (UFG Board Minutes of Jan. 13, 1982) (discussing letter offer from Ludwig to acquire USAT and two affiliates). FedRe also represented that:

FedRe [was] investing in UFG not with a view toward controlling the management of a savings and loan institution but rather with the hope of benefiting from UFG’s intended disposition of United Savings, and FedRe has so advised UFG’s management. FedRe does not intend to acquire or exercise control over UFG, but rather intends to assume a passive role, generally supportive of present management, in its declared intention to make that disposition. Furthermore, Kaneb [Services, Inc.]’s and UFG’s managements own an estimated 9.4% of the UFG shares and FedRe does not have representation on the UFG board of directors.

Ex. T-1001, Tab 1, pp. 2-3; A-2062, Tab 37. Accordingly, FedRe argued,

[T]he proposed increase in FedRe’s investment should not be deemed to give it the power to direct UFG’s management or policies, since FedRe is investing in reliance on (rather than with the intention of changing) the existing management’s stated objectives and in any event could not expect by virtue of its shareholdings to exercise control in opposition to existing management.

Ex. T-1001, Tab 1, p. 3; A-2062, Tab 37 p. 1. FedRe also disclaimed any intention to seek control of UFG in Amendment No. 1 to its Schedule 13D filed on February 25, 1982. Ex. A-2062, Tab 37, p. 5.

A4. FedRe continued to acquire shares of UFG common stock. As of February 25, 1982, FedRe owned 571,675 shares (9.68%) of UFG common stock. Ex. A-2062, Tab 37, p. 2. The aggregate cost of the shares was $2,713,180.63. Id. p. 4.

A5. On March 25, 1982, Ludwig withdrew his offer to purchase USAT and two of USAT’s subsidiaries. Ex. A-1681, Tab 137. When the UFG Board of Directors learned of the withdrawal of the Ludwig offer, they authorized the President of UFG and USAT, James A. Coles, to “resume discussion, investigation and negotiations to identify potential S&L merger candidates for [USAT].” Id.

A6. On March 30, 1982, the FHLBB notified FedRe by letter that it had not rebutted the presumption that it would acquire the power to direct the management and policies of UFG if it acquired between 10% and 20% of the common stock of UFG. Ex. T-1003, Tab 2. The FHLBB had previously notified FedRe by telephone (on March 22, 1982) that the presumption had not been rebutted. Ex. T-1004, Tab 3, p. 1. The FHLBB letter stated:

Ownership of 10% to 20% of these shares would exceed the percentage owned by any other stockholder. If the ownership were 20%, it would exceed by 300% the percentage owned by the next largest shareholder.

Therefore, we have concluded that FedRe would ‘acquire power to direct the management and policies’ (emphasis [in original]) of [UFG] if between 10% and 20% of its outstanding common stock were acquired by FedRe. FedRe’s intention not to exercise this power could change if, for example, the intended disposition of [USAT] by UFG does not materialize or if FedRe decides for any other reason to direct the management and policies of [UFG].

Accordingly, we have determined that the acquisition of ten percent or more of the outstanding common stock of [UFG] by FedRe would require prior written notice in accordance with Section 563.18-2(c) of the Insurance regulations.

Id. pp. 1-2.

2. FedRe Announces Intent To Acquire Up to 24.9% Of UFG’s Common Stock

A7. On April 2, 1982, FedRe notified the FHLBB by letter that it “propos[ed] to acquire an indeterminate number of additional shares of UFG common stock, which is not expected in any event to aggregate more than 24.9% of such shares, including FedRe’s present holdings, but which will, if and when acquired, exceed an aggregate of 10% of such shares.” Ex. T-1004, Tab 3, pp. 1-2. FedRe continued to disavow “that, upon the acquisition of additional shares of UFG, it [would] exercise a controlling influence over the management or policies of such institution.” Id. at 2. At Hurwitz’ suggestion, a copy of the letter was sent to the Texas Savings and Loan Department. Ex. T-1005, Tab 4.

A8. On April 8, 1982, the FHLBB notified FedRe that “the [FSLIC] [did] not intend to disapprove the proposed acquisition by [FDC] and its wholly-owned subsidiary, [FedRe], of control of [UFG] , Houston, Texas, and its insured subsidiary, [USAT].” Ex. T-1008, Tab 5.

A9. Subsequently, FedRe purchased additional shares of UFG common stock. As of May 18, 1982, FedRe owned 711,000 shares (12.03%) of UFG common stock. Ex. A-2063, Tab 37, p. 2. The aggregate cost of those shares was $3,270,480.63. Ex. A-2064, Tab 37, p.2.

A10. Hurwitz contacted several members of the UFG board of directors and “stated that he was not interested in exercising control but would like to have a director elected to the Board.” Ex. A-1956, Tab 108, p. 1.

A11. On August 2, 1982, FedRe notified the FHLBB from its counsel by letter that FedRe was amending the April 8, 1982, notice “to include [FDC] as a person filing such notice.” Ex T-1010, Tab 6, p. 1. The reason given was that FDC was about to sell FedRe, and FedRe would transfer its shares of UFG common stock to FDC contemporaneously with the sale. Id. p.2.

A12. On August 13, 1982, the FHLBB notified FedRe’s counsel by letter that the FHLBB’s earlier letter should have referred to FDC in any event, since “[FDC] wholly-owned FedRe and of course, would also acquire control.” Ex. T-1011, Tab 7. The FHLBB revised its May 6, 1982, letter accordingly to include FDC. Id.; see Ex. T-1008, Tab 5.

3. Kozmetsky Purchases UFG Stock; Munitz Joins The UFG Board

A13. On September 13, 1982, FedRe and FDC filed a fourth amendment to their Schedule 13D. Ex. A-2065, Tab 37. They reported that Dr. George Kozmetsky and Ronya Kozmetsky joined in the filing of the Schedule 13D, because Dr. Kozmetsky, a trustee of FDC,
and his wife had acquired 90,941 shares of UFG common stock at an aggregate cost of $238,208.25 Id. pp. 4, 5, 7, 12.[3]

A14. The transactional information in the Schedule 13D amendment demonstrates that the Kozmetsky purchase was coordinated with FDC. FDC and the Kozmetskys purchased identical amounts of stock on the same days at the same price, indicating that they had split the shares purchased that day. On August 26, 1982, FDC and the Kozmetskys each purchased 43,423 shares of UFG common stock at $2.75 per share, and on August 31, 1982, they each purchased 47,518 shares each at $2.50 per share. Id. p. 12. The Kozmetskys disclaimed beneficial ownership of FDC’s and FedRe’s shares of UFG common stock, but neither FDC nor FedRe disclaimed beneficial ownership of the Kozmetskys’ UFG common stock. Id. pp. 8-9.

A15. The amendment to Schedule 13D amended Appendix A “to reflect the election, on August 18, 1982 of [Munitz] as President and Trustee of [FDC].” Id. pp. 6, 14. The Schedule 13D also reported that “[o]n August 26, 1982, [Munitz], President of [FDC], was elected to the Board of Directors of [UFG].” Id. at 8; see also Ex. 1061, Tab 109, p. 1. The UFG Board had acceded to Hurwitz’ expressed wish “to have a director elected to the Board.” From
that beginning, Hurwitz expanded his influence to control pervasively the activities of both UFG and USAT.

4. MCO Finances FDC’s Purchases Of Additional UFG Shares And Acquires The Additional Shares From FDC Pursuant To A Call Option; FedRe Withdraws From The 13D Group

A16. At the September 16, 1982, meeting of the Board of Directors of MCO, Hurwitz reported to the MCO Board “that [FDC] had recently purchased shares in UFG.” Ex. T-1012, Tab 38, p. 6. Hurwitz stated that UFG “presented an interesting investment opportunity.” Id. Because of their positions with FDC, Hurwitz indicated, he, Munitz, Kozmetsky, and Levin would abstain from voting on the acquisition of UFG shares by MCO. Id. The minutes indicate that “[a]fter a discussion regarding the financial condition of UFG, as well as an analysis of certain aspects of their business activities, upon motion made by Dr. William C. Leone and duly seconded, [certain resolutions dealing with acquiring UFG stock] were unanimously adopted with Messrs. Munitz, Levin, and Hurwitz abstaining and Dr. Kozmetsky not present at the meeting.” Id. At the time of the meeting, the entire board of MCO consisted of only seven directors, including the four who did not vote on the UFG resolutions. The remaining directors were: Joseph L. Hegener, Vice Chairman of the Board of MCO, William C. Leone, President of MCO, and Stanley D. Rosenberg, a business associate of Hurwitz (of whom, more later in connection with the OTS’s real estate lending claims, see R50 - R111 below). Id. p. 8; see also Ex. A-2066, Tab 37, pp. 22-23; T-1013, Tab 8, Appendix A (OMX 20881). The resolutions authorized MCO and its agents to purchase up to 10% of the outstanding shares of UFG common stock, to file a notice of its intent to acquire such shares with the FHLBB, to enter into a loan
agreement and call agreement with FDC, and to execute other necessary agreements and documents. Ex. T-1012, Tab 38, pp. 6-7.

A17. On September 28, 1982, pursuant to the resolutions adopted by the MCO board, FedRe and FDC filed an amendment to their previous notices to include MCO as a person filing the notice of intention to acquire up to 24.9% of the common stock of UFG. Ex. T-1013, Tab 8, p. 1 (OMX 20861). The notice explained that, pending the FHLBB’s response, FDC would “borrow funds from MCO to finance the purchase of [additional] shares of UFG.” If the FHLBB did not object to MCO’s acquisition of UFG shares, MCO would have the right to acquire the additional shares from FDC. Id. p. 3, Appendix B (OMX 20883). As FedRe and FDC had earlier done, MCO, disclaimed control of UFG and USAT. Id.

A18. As of October 1, 1982, MCO and FDC entered into a loan agreement whereby MCO would lend funds to FDC for the purchase of additional shares of UFG common stock, subject to a call option granted by FDC to MCO. Ex. T-1014, Tab 9, pp. 1-3; Tr. 25,868:13 - 25,869: 4. Hurwitz signed the loan agreement for FDC. Id. p. 11; Tr. 25,868: 4-16. On the same day, FDC and MCO separately entered into the call option described in the loan agreement. Ex. T-1015, Tab 1944 (OMX 20476-80). Hurwitz signed the call option for FDC. Id. (OMX 20480); Tr. 25,866: 2-10. The loans from MCO to FDC were interest-free in consideration of the grant of the call option to MCO. Ex. T-1013, Tab 8, p. 3; see also Ex. 1014, Tab 9, Loan Agreement, p. 3 (OMX 01434), Sample Promissory Note (OMX 01443) (interest accrues only from and after maturity of notes). In essence, then, FDC would pay interest on the loans only if MCO decided not to exercise its call option or to accept the shares in satisfaction of the loans.

A19. Periodically thereafter, FDC requested funding for purchases of additional shares of UFG, and Hurwitz executed promissory notes on FDC’s behalf. E.g., Ex. 1025, Tab 1945 (OMX 01451-54). Ultimately, MCO advanced FDC $1,461,312.50 to purchase shares of UFG common stock. Ex. A-2066, Tab 37, p. 9.

A20. On November 24, 1982, the FHLBB notified MCO by letter that the FSLIC “[did] not intend to disapprove the proposed acquisition by [MCO] of control of [UFG] and [USAT], provided that the acquisition [was] consummated within one year and that there [was] no material change in circumstances prior to consummation.” Ex. T-1026, Tab 10 (OMX 21149).

A21. On December 10, 1982, MCO and FDC filed a fifth amendment to the Schedule 13D. Ex. A-2066, Tab 37, pp. 1, 19, 20. The fifth amendment to Schedule 13D reported that FedRe had withdrawn as a member of the reporting group. Id. pp. 4-5. The reporting group then consisted of FDC, MCO, and, subject to a disclaimer, Dr. and Mrs. Kozmetsky. Id. p. 5. FDC beneficially owned 1,137,441 shares (19.2% -- not including the Kozmetskys’ stock) of the outstanding common stock of UFG, including 7,500 shares (0.13%) owned by MCO. Id. pp. 2-3. Dr. and Mrs. Kozmetskys’ holdings (90,941 shares – 1.5%) did not change. Id. p. 9. The aggregate ownership by the filing group was 1,228,382 shares (20.7%). The Schedule 13D amendment explained that the aggregate purchase price of the 1,137,441 shares of UFG beneficially owned by FDC and MCO was $5,003,751.38. Id. Of that amount, $3,270,480.63 related to 711,000 shares previously held by FedRe, which had been distributed to FDC in connection with its sale of the stock of FedRe to a third party. Id. In addition, $238,208.25 came from the general corporate funds of FDC, $1,461,312.50 was loaned to FDC by MCO, and $33,750 came from the general corporate funds of MCO. Copies of the Loan Agreement and the Call Option were attached to the Schedule 13D amendment as Exhibits II and III, respectively. Id. pp. 24-37, 38-42. The Schedule 13D amendment reported that:

[I]n early December, 1982, … Munitz, a director of [UFG], Vice Chairman of the Board of MCO and President and trustee of [FDC] requested that the members of the Group [defined to include Dr. and Mrs. Kozmetsky, see id. p. 5 (OFD 2449)] be given additional representation on the Board of Directors of [UFG] as a means of protecting and monitoring their investment in the company.

Id. p. 13 (emphasis added). Amendment No. 5 also revealed the relationship among Hurwitz, FDC, and MCO. It indicated that Hurwitz, together with members of his family, beneficially owned “a majority of the outstanding shares of beneficial interest of Federated.” Id. p. 6. Federated and its affiliates, in turn, owned approximately 53.8% of MCO’s total voting power.

A22. In June 1983, MCO exercised its call option and acquired 328,000 shares of UFG common stock from FDC in exchange for the cancellation of promissory notes receivable from FDC aggregating $1,461,312.50 (the same amount previously reported in the fifth amendment to Schedule 13D as having been advanced to FDC by MCO). Ex. T-1043, Tab 1946 (OMX 22708); see Ex. A-2066, Tab 37, p. 9; see also Ex. Lazard 6, Tab 199 (compilation of memoranda regarding MCO purchases of UFG stock from January to June 1983); Lazard 13, Tab 198 (12/31/83 MCO Form 10-K), pp. 64-65, Note (c) (description of FDC/MCO loan & option agreement).

5. MCO Acquires 24.9% Of The Shares Of First American Financial Of Texas, Inc.; Merger Of First American Financial With UFG

A23. UFG and First American Financial of Texas, Inc. had begun merger discussions in early 1982, and UFG’s board of directors had approved the offering of a letter of intent to First American Financial on May 27, 1982. Ex. A-1056, Tab 108, pp. 1-2. The UFG Board had
authorized the execution of a definitive merger agreement with First American Financial on August 26, 1982 – the same day that Munitz was elected to the UFG Board. Ex. A-1061, Tab 109, pp. 1-2. The UFG Board had approved the definitive merger agreement with First American Financial on September 23, 1982. Ex. A-10523, Tab 110, pp. 2-3. Although Munitz had abstained from the vote on the definitive merger agreement, the minutes noted specifically that Munitz “asked about the obligations and options available to the parties under the merger agreement with First American Financial dated August 27, 1982.” Id. p. 2.

A24. On December 15, 1982, Hurwitz informed the MCO Board of Directors that MCO “had an opportunity to purchase 603,448 shares amounting to approximately 20.2% of the outstanding common stock of First American Financial of Texas, Inc., a savings and loan holding company.” Ex. T-1032, Tab 40, p. 3. At the time, MCO owned 4,000 shares of First American common stock (approximately 0.13% of the outstanding common stock). Id. Munitz reported to the board that UFG and First American were parties to a merger agreement that was awaiting state and federal regulatory approval. Id. At the time, Munitz stated, MCO and FDC also owned in the aggregate approximately 19% of the outstanding common stock of UFG. Id. If the merger were consummated, MCO would exchange each of its First American shares for 0.7 UFG common shares, and would continue to own, with FDC, less than 24.9% of the outstanding shares of UFG common stock. Id. The Board of Directors approved the purchase of the First American shares for a total of $2,640,085 subject to receipt of notification that the FSLIC did not intend to disapprove the acquisition. Id. pp. 3-4.

A25. On December 21, 1982, Munitz informed the UFG board that negotiations between MCO and American Financial Corp. for the purchase of 20% of First American stock were “virtually complete,” and the purchase was expected to take place upon approval of the FHLBB under the Change of Control Act. Ex. A-10525, Tab 113, p. 5.

A26. On December 27, 1982, pursuant to a resolution adopted by the MCO board of directors, see Ex. T-1032, Tab 40, p. 4, Mr. Marlin of the Kramer Levin law firm notified the FHLBB by letter that MCO proposed to acquire approximately 20.2% of the outstanding common stock of First American Financial. Ex. T-1033, Tab 11, pp. 1-2. MCO denied that it would exercise a controlling influence over the management or policies of First American Financial or its wholly-owned subsidiary, Houston First American Savings Association. Id. p.2. The letter also described the pending merger between UFG and First American Financial. Id.

A27. In January 1983, Hurwitz and Dr. Kozmetsky became members of the First American Financial Board of Directors. Ex. A-2067, Tab 37, p. 5.

A28. On March 11, 1983, the FHLBB notified MCO and FDC that the FSLIC did not intend to disapprove the acquisition of control of First American Financial and Houston First American Savings Association by MCO and FDC. Ex. T-1035, Tab 12.

A29. MCO consummated its purchase of 603,448 First American Financial shares on March 14, 1983, paying a total of $2,640,085 ($603,448.00 on December 27, 1982, and an additional $2,036,637.00 on March 14, 1983) to American Financial Corporation. Ex. T-1043, Tab 1946 (OMX 22709). In the interim, MCO had already purchased an aggregate of 60,200 shares of First American Financial common stock (including the 4,000 shares it owned as of December 15, 1985) for a total of $251,378.00. Id. Subsequently, MCO purchased an additional 83,350 shares of First American Financial common stock, bringing its total holdings as of April 11, 1983 to 746,998 shares (24.9%) at an aggregate cost of $3,278,886.75. Id.

A30. On April 29, 1983, UFG and First American Financial consummated their merger. MCO exchanged its First American Financial stock for 522,898 shares of UFG common stock. Following the merger, the UFG Board of Directors expanded to sixteen members, three of whom were affiliated with MCO and FDC, as Hurwitz and Dr. Kozmetsky joined the UFG Board, and Munitz remained on the Board. Ex. A-2069, Tab 37, pp. 8-9. Thus, Hurwitz had achieved his desire for the “additional representation on the Board of Directors” that Munitz had requested in December 1982. Furthering FDC and MCO’s influence, two of the FDC/MCO affiliated directors, Hurwitz and Munitz were appointed to the Executive Committee of the UFG Board on May 26, 1983, at the first meeting of the UFG board following the consummation of the merger with First American Financial. Ex. A-1083, Tab 115, p. 1. At the May 26, 1983, meeting, Chairman C.E. Bentley told the board that Hurwitz had informed him that MCO and FDC intended to increase their holdings beyond 24.9% and become savings and loan holding companies. Id., p. 7.

6. MCO Continues Its Acquisition Of UFG Common Stock

A31. Even as it awaited the consummation of the First American Financial merger into UFG, MCO continued very actively to purchase UFG common stock. The filing group filed five amendments to its Schedule 13D in March through July of 1983. Amendment No. 6 to the Schedule 13D, filed March 14, 1983, reported that MCO had purchased an additional 67,900 shares of UFG common stock at a cost of $390,212.50, bringing its ownership to 75,400 shares, and the aggregate holdings of the filing group to 1,296,282 shares (21.9%) of the common stock of UFG. Ex. A-2067, Tab 37, pp. 2-3, and 8-9.

A32. On March 24, 1983, MCO, FDC, and Dr. Kozmetsky filed Amendment No. 7 to their Schedule 13D. Amendment No. 7 reported that MCO had purchased an additional 57,800 shares of UFG stock at a cost of $487,811.00. Ex. A-2068, Tab 37, pp. 7-8. MCO owned a total of 133,200 shares (2.3%), and the filing group owned 1,354,082 shares (22.9%) of the common stock of UFG. Id. Amendment No. 7 also revealed that Federated and related parties had increase their voting power in MCO to 57.2%, owning 24.3% of MCO’s outstanding common stock and 92.2% of its Class A preferred stock. Id. pp. 5-6.

A33. On May 18, 1983, the filing group filed Amendment No. 8 to the Schedule 13D. Ex. A-2069, Tab 37. Amendment No. 8 reported that MCO’s First American Financial shares had been converted to 522,898 UFG common shares, increasing MCO’s holdings to 656,098 shares (8.2% after dilution caused by the issuance of shares in the merger) of UFG common stock. Id. pp. 8, 14. FDC continued to hold 1,129,941 shares (14.1% after dilution), and Dr. and Mrs. Kozmetsky continued to hold 90,941 shares (1.1% after dilution). The group held an aggregate of 1,876 980 shares, or 23.46% of the 8,000,634 then outstanding shares of UFG common stock. Id. pp. 13-14.

A34. On June 1, 1983, MCO exercised its call option to acquire 328,000 shares of UFG common stock from FDC in return for MCO’s cancellation of promissory notes amounting to $1,461,312.50 and reported the event in Amendment No. 9 to the Schedule 13D. Ex. A-2070, Tab 37, p. 8. After the transfer of shares to MCO, MCO owned 984,098 shares (12.3%), FDC owned 801,941 shares (10.0%), and the Kozmetskys owned 90,941 shares (1.1%) of the common stock of UFG. The filing group continued to own an aggregate of 1,876,980 shares (23.46%). MCO and FDC also reported, for the first time, that they “[were] considering the acquisition by MCO of additional Shares so that the aggregate number of Shares held by MCO and Federated would exceed 25% of the outstanding Shares [of UFG common stock].” Id., pp. 5-6.

B. The Filing Of The Holding Company Application

A35. On July 12, 1983, MCO, FDC, and the Kozmetskys filed Amendment No. 10 to their Schedule 13D to reflect reportable events as of June 29, 1983. Ex. A-2071, Tab 37. MCO reported that it had purchased an additional 120,000 shares UFG common stock at a cost of $1,125,000 on June 29, 1983. Id. pp. 5, 7. That purchase increased MCO’s holdings of UFG common stock to 1,104,098 shares (13.8%), purchased at a total cost of $6,796,972.75. Id. FDC continued to hold 801,941 shares (10.0%) of common stock of UFG, purchased at a total cost of $ 3,508,688.88. The Kozmetskys continued to hold 90,941 shares (1.1%) of common stock of UFG, purchased at a total cost of $238,208.25. Id. p. 7; see Ex. A-2065, Tab 37, pp. 4, 5, 7, 12 (Kozmetsky purchase price). The filing group owned an aggregate of 1,996,980 shares (24.96%) of UFG common stock, purchased at a total cost of $10,543,869.88. Ex. A-2071, Tab 37.

A36. Amendment No. 10 also identified the then current officers and directors of FDC and MCO. Ex. A-2071, Tab 37, pp. 10-14. Federated’s board consisted of five trustees, including Hurwitz, Munitz, Dr. Kozmetsky, and Mr. Levin. Id. pp. 10-11. MCO’s board consisted of seven directors including Hurwitz, Munitz, Dr. Kozmetsky, and Mr. Levin. Id. pp. 12-13.

A37. On June 29, 1983, the same day as the reportable events reflected in Amendment No. 10 to the Schedule 13D, Mr. Marlin of the Kramer Levin law firm filed, on behalf of MCO and FDC, an application to become a savings and loan holding company on Form H-(e)1. Ex. T-4040, Tab 13. The cover letter for the application stated that MCO and FDC owned 12.3% and 10.0% of the outstanding shares of UFG, respectively. Id. p. 1. The same representation was made in the body of the application, which also stated that MCO owned 984,098 shares of UFG stock. Id. p. 7. In fact, however, this number understated MCO’s ownership by 120,000 shares, which were purchased on the same day as the application was filed, and subsequently reported on Schedule 13D Amendment No. 10 (also filed by Mr. Marlin). See A35 - A36 above. The application did aggregate the Kozmetskys’ shares with those of MCO and FDC in the body of the application, but reported a total of 1,876,980 shares (23.5%) of UFG common stock owned by MCO, FDC, and the Kozmetskys, again understating their holdings by 120,000 shares, or approximately 1.5%. Id. p. 16. The transaction settled on July 7, 1983. Ex. T-1043, Tab 1946, p.1. There is no evidence in the record that the application was ever amended or corrected to reflect the additional shares purchased by MCO on June 29, 1983.

A38. The application stated that MCO and FDC anticipated that after the proposed acquisition of additional shares, MCO would own 25% of the outstanding common stock of UFG, and FDC would own 10% of the common stock. Ex. T-4040, Tab 13, p.7. MCO and FDC did “reserve the right, however, to decide to purchase additional shares ….” Id. Thus, contrary to the testimony of respondents’ expert witness, Rosemary Stewart, the application was not “very specific in an intention to buy approximately 10 percent more,” Tr. 26,565: 6-8, rather, it contemplated the acquisition of an amount that would approximate 10% of the outstanding shares, but which might well be more.[4] The language of Resolution 84-712, see A62, below,
indicates that this was the FHLBB’s understanding as well. The net worth maintenance condition covers not only the acquisition of an additional 10%, but also reflects the possibility that the acquisition might be an additional 25% or even more. Specifically, it imposes a 100% net worth maintenance requirement if MCO and FDC’s ownership should exceed 50% of the outstanding shares. Ex. T-1059, Tab 15 (OMX 22878).

C. The Involvement Of DBL Through June 1983

A39. Hurwitz, MCO, and Federated were already deeply involved with the investment banking firm of Drexel Burnham Lambert and Michael Milken, the head of its high-yield (or “junk”) bond department prior to the filing of the holding company application. The discussion below describes DBL’s assistance in the acquisition of UFG stock in 1982 and 1983, the personal investments of Michael and Lowell Milken in MCO stock beginning in 1981, DBL’s investment in FDC stock beginning in 1981, and DBL’s financing of MCO’s working capital needs in 1982 – just as MCO was lending funds from working capital to FDC for the purpose of acquiring additional UFG stock.

1. DBL’s Assistance In The Acquisition Of UFG Stock

A40. DBL directly assisted in the accumulation of UFG stock for FDC and MCO. Ex. 1043, Tab 1946, an internal MCO memorandum, shows that MCO acquired a total of 1,104,098 shares of UFG stock in its own name. Of that number, 328,000 shares were acquired from FDC under the call option, 522,898 were acquired in the First American Financial merger discussed above at A23 - A30, and the remainder (253,200) were purchased in the open market. Of the open market purchases, 220,300 shares (87%), were purchased from DBL. While the bulk of the investment in First American Financial shares came through a private purchase, DBL also assisted with the acquisition of shares of First American Financial, selling 68,550 shares (equal to 47,985 shares of UFG at a merger conversion ratio of 0.7 shares of MCO stock to 1.0 share of First American stock) to MCO. DBL transaction records (“Trade Runs”) for the period January 1, 1982, through December 31, 1985, not only confirm the foregoing sales to MCO, but also
show that DBL began accumulating UFG stock in the DBL high-yield bond department’s equity trading account (Acct. No. 06-12942-3, the so-called “42 Account”)[5] in early 1982 for the benefit of FDC and MCO. See Ex. 1206, Tab 216. The following table summarizes DBL’s sales of UFG stock to MCO and FDC through June 29, 1983, as described in the “Trade Runs” (Ex. T-1206). In addition, trade tickets for many of the listed trades can be found in Ex. T-1198, Tab 56.

Date	Purchaser	UFG Shares	Cumulative Total Purchased by FDC/MCO	Bates Number
05/11/82	MCO[6]	139,325	139,325	OW026136
10/11/82	FDC	10,000	149,325	OW026136
10/20/82	FDC	9,000	158,325	OW026137
10/22/82	FDC	17,000	175,325	OW026137
10/25/82	FDC	2,000	177,325	OW026138
10/27/82	FDC	60,000	237,325	OW026139
10/28/82	FDC	10,000	247,325	OW026139
10/29/82	FDC	90,000	337,325	OW026139
10/29/82	FDC	10,000	347,325	OW026140
11/01/82	FDC	10,000	357,325	OW026140
11/03/82	FDC	25,000	382,325	OW026140
11/23/82	FDC	10,000	392,325	OW026141
11/30/82	MCO	7,500	399,825	OW026141
1/21/83	MCO	6,000	405,825	OW026142
1/25/83	MCO	15,000	420,825	OW026142
2/23/83	MCO	2,000	422,385	OW026143
3/04//83	MCO	12,000	434,385	OW026143
3/15/83	MCO	47,800	482,185	OW026144
3/17/83	MCO	10,000	492,185	OW026145
6/29/83	MCO	120,000	612,185	OW026148

From January 1982 through June 1983, however, there were only four sales of UFG shares out of the “42 Account” to parties other than MCO or FDC, and those sales totaled only 40,900 shares. Ex. T-1206, Tab 216, pp. 1-16.

2. Michael And Lowell Milken’s Investments In MCO Stock

A41. Michael Milken, who ran DBL’s High Yield Bond Department, see, e.g., Tr. 1,056: 19-21 (Deignan) (“We all worked for Michael.”), and his brother, Lowell Milken, had been minority investors in MCO since at least 1981, through several entities in which they and their wives were the sole partners or owners. Mr. Arthur Oliver, a summary witness called by the OTS,[7] reviewed voluminous documents reflecting the ownership, balances, and transactions in certain Milken-owned securities accounts and summarized those documents in a series of exhibits. See Ex. T-1217, Tab 219; 1221, Tab 220; T-1218, Tab 222; T-1219, Tab 223. The respondents stipulated the authenticity of the documents Mr. Oliver reviewed, Tr. 2,594: 6 - 2,595: 8, and after examination, the Court admitted Mr. Oliver’s summaries into evidence. Tr. 2,646, 2,666, 2,676, 2,737.

A42. Mr. Oliver’s summaries establish, among other things, that as of January 1, 1982, the Milken brothers owned 101,000 shares of MCO stock through a partnership known as GLJ, which held the securities in two brokerage accounts, one at DBL (with 59,500 shares) and the other at Bear Stearns (with 41,500). Ex. T-1217, Tab 219. On January 8, 1982, GLJ transferred the 59,500 shares in the DBL account to a GLJ brokerage account at US Trust Company. Id. On May 19 and 20, 1983, the Milken brothers acquired an additional 12,000 shares of MCO common stock in the GLJ - US Trust account, bringing their holdings of MCO common stock to 113,000 shares. Id. There were various subsequent transfers totaling 13,000 shares of MCO stock from GLJ through the Milken brothers’ personal accounts to two other entities owned and controlled by the Milken brothers, ML Associates and Wilcam Financial, in 1983. Id. Both the ML Associates account and the Wilcam Financial account were brokerage accounts at DBL. GLJ continued to hold 100,000 shares of MCO stock (41,500 shares at Bear Stearns and 58,500 shares at US Trust) until 1985 and 1986, when the stock was transferred from the Bear Stearns and US Trust brokerage accounts to the GLJ account at DBL. Id. The Milken brothers, acting through these entities continued to hold 113,000 shares of MCO stock until April 1988, when they began to liquidate their holdings. The Milken brothers sold 41,000 shares from the GLJ, ML Associates, and Wilcam accounts in April 1988, and transferred the remaining 72,000 shares
to their personal accounts in May 1988. Id. Thus, at all times from January 1, 1982, through at least May 1988 Michael and Lowell Milken were shareholders in MCO.

A43. The Milken brothers’ proportionate share of the ownership of MCO grew over time because MCO engaged in a program of buying its own shares in the open market, thereby reducing the amount of common stock outstanding. Mr. Jacques Lazard, former Corporate Comptroller of MCO, described the program in his testimony as he reviewed Forms 10-K filed by MCO over time. Tr. 2,495: 2-9; Tr. 2,499: 6 - 2,500: 14; Tr. 2508: 6-21; Tr. 2514: 4-2,515: 17; see Ex. Lazard 14, Tab 195 (12/31/81 MCO 10-K) p. 43; Ex. Lazard 12, Tab 196 (12/31/82 MCO 10-K), p. 54; Ex. Lazard 13, Tab 198 (12/31/83 MCO 10-K). Indeed, Mr. Lazard stated that Ex. Lazard 13, Tab 198 showed that in the period 1981-83, MCO spent some $67,815,000 to repurchase more than 4.5 million shares of common stock. Tr. 2,515: 3-17; see Ex. Lazard 13, Tab 198, p. 50, Note 12 (Stockholders’ Equity); see also Ex. Lazard 12, Tab 196, p.71 (application of funds for acquisition of treasury stock actually exceeds $70 million for years 1981 and 1982; cost of acquisition of treasury stock in 1980 was $51,622,000). MCO’s Annual Reports for the years 1981 through 1987 demonstrate that the outstanding shares of MCO common stock fell from 9,238,061 on December 31, 1981 to 5,600,869 on December 31, 1986, and rose only slightly by December 1987 to 5,605,869 shares. Due to a merger with a subsidiary, the MAXXAM Group, Inc. in 1988, the number of outstanding shares of MCO (renamed, at that time, MAXXAM, Inc.) rose to 7,512,418 as of May 20, 1988. Mr. Oliver summarized the outstanding shares at year-end for the years 1981 through 1988 in Exhibit T-1218 (Tab 222). See also Ex. A-2055, Tab 221 (1983 Annual Report); 2056, Tab 210 (1984
Annual Report); A-2057, Tab 211 (1985 Annual Report); A-2058, Tab 214 (1986 Annual Report); A-2059, Tab 213 (1987 Annual Report); A-2060, Tab 197 (1988 Annual Report). Mr. Oliver’s summary also demonstrated that the decrease in outstanding shares and the purchase of the additional 12,000 shares in 1983 nearly doubled the Milken brothers’ proportionate holdings of MCO stock from 1.09% to 2.02% by the end of 1987. Ex. T-1218, Tab 222.

3. DBL’s Increasing Investments In FDC Stock

A44. DBL’s transaction records demonstrate that DBL began to accumulate shares in FDC as early as 1981. Exhibit A-14005, Tab 1356, the Supplemental Expert Report of Lois M. Suder,[8]^/ analyzed DBL holdings of both FDC and MCO stock. (Ms. Suder’s conclusions concerning holdings of MCO stock by DBL are discussed below at FOF A102 - A103.) Based upon a review of a database detailing trading activity of DBL that had been obtained from DBL and comprehensively reviewed and verified under Ms. Suder’s supervision, see Tr. 14,322: 20 - 14,330: 10, Ms. Suder’s report shows that DBL had begun to acquire shares of FDC in account number 06-12942 (the High Yield Bond Department equity trading account) as early as August
1982 and steadily increased its holdings thereafter through April 1987 to some 69,432 shares at a cost of approximately $5,690,957.50. DBL disposed of its shares, apparently in connection with FDC’s “going private” transaction, in May 1987. Ex. A-14005, Tab 1356, Appendix B; see Tr. 56: 9-14 (remarks of Mr. Griffith) (“[Federated] went private in 1987.”); Tr. 14,353: 17-21 (Suder); Tr. 14,358: 10-16 (Suder). Remarkably, although the “42 Account” was described in testimony as a “trading” account, Tr. 821: 5 - 17, Tr.; 1,045: 15 - 1,046: 11, there were only three sales of FDC stock (totaling 77 shares) out of the account after 1981; instead, there was a steady pattern of accumulation of shares over time.

4. DBL Begins To Provide Or Arrange Financing For MCO; The Effect On Working Capital And Available Cash

A45. In addition, DBL began to arrange, indeed, to provide, financing to MCO around the same time. In July 1982, DBL entered into a Note Purchase Agreement with MCO, whereby DBL paid MCO $3,496,620.11 and MCO delivered to DBL “Zero Coupon Senior Subordinated Notes” due July 25, 2007, in the face amount of $260,000,000. Ex. Lazard 1, Tab 76, p. 1. The effective interest rate was over 15%. Tr. 923: 15-22. MCO represented in the Note Purchase Agreement that “[t]he net proceeds from the sale of the Notes will be added to [MCO’s] working capital and will be utilized for general corporate purposes.” Id. p. 17. Mr. Lazard testified that the proceeds were added to working capital and utilized for general corporate purposes. Tr. 2,491: 15-21. Mr. Schwartz concurred. Tr. 925: 6-20.

A46. MCO’s Forms 10-K for the years 1981 through 1983 show that MCO’s unconsolidated working capital and available cash positions were precarious during those years. In 1981, MCO’s working capital decreased by $28,860,000, and its cash and cash equivalents
(i.e., commercial paper, etc.) declined by $18,347,000. Ex. Lazard 14, Tab 195, p. 88. At the end of 1981, MCO’s cash and cash equivalents were only $496,000. Id. at 86; Tr. 2,496: 10-22 (Lazard). While working capital increased by $35,947,000 in 1982, the increase was attributable primarily to large receivables from subsidiaries ($23,414,000), and deferred liabilities of $6,038,000. Ex. Lazard 12, Tab 223, p. 71. At the end of 1982, MCO’s cash or cash equivalents had decreased by $496,000 – to zero. Id. at 69, 71; Tr. 2,501: 7-17 (Lazard).

A47. As noted above at A21, through December 1, 1982, MCO advanced Federated $1,461,312.50 for the purchase of UFG common stock. See Ex. A-2066, Tab 37, pp. 9 (amount of advances), and 16 (settlement date of last transaction). These advances were materially assisted by the receipt of the proceeds of the $260 million zero coupon notes, as MCO had no cash or cash equivalents after its advances to FDC, and would have had to borrow elsewhere if it had not received the proceeds of the zero coupon notes from DBL.

D. MCO And Federated Acquire Series C Preferred Shares Of UFG

A48. In approximately 1983, UFG began to consider raising capital through the issuance of preferred stock. The subject of issuance of preferred stock appears to have first surfaced at the December 19, 1983, UFG Executive Committee meeting. Ex. A-10538, Tab 122. One of the issues discussed was “[a]n offering of non-convertible preferred stock to the holders of UFG Common Stock, which offering would be underwritten by MCO Holdings, Inc. and Federated Development Co.” Id. (emphasis added). By this date, both Hurwitz and Munitz were members, not only of the board of UFG, but also of the Executive Committee. See A 5, A30 above.

A49. Shortly afterward, the proposal changed to an offering of convertible, rather than non-convertible, preferred stock, to be underwritten by FDC “or an affiliate.” The minutes of the UFG Board of Directors’ meeting on February 28, 1984, noted:

The Board discussed the proposed Rights offering. The Board received prior to the meeting a copy of the S-1 Registration Statement for the offering. The offering as proposed, would involve the issuance of 750,000 shares of Series C Convertible Preferred Stock. Pricing will be established after consultation with Goldman Sachs & Co. All stockholders will be entitled to purchase their pro rata portion of shares plus a supplemental subscription of shares equal to their pro rata portion. Shares not acquired pursuant to the offering to stockholders will be acquired pursuant to a purchase agreement between the Company and Federated Development Company or an affiliate thereof. It is expected that the shares of Series C Stock will be traded in the over-the-counter market. On Motion by Dr. Munitz and second by Mr. Duckett, the following motion was unanimously approved: …

Ex. A-1092, Tab 127, p. 4. The resolutions following the foregoing excerpt: (1) authorized the filing of a Form S-1 Registration Statement; (2) delegated to the Executive Committee of UFG (of which Hurwitz and Munitz were members) the authority to establish the terms and conditions applicable to the securities and the offering and sale thereof; (3) authorized the issuance of Series C Convertible Preferred shares; (4) authorized UFG to enter into a Purchase Agreement with FDC (or any of its affiliates) to purchase all Series C Convertible Preferred shares not purchased by other stockholders; and, (5) authorized the issuance of such shares of common stock as would be required to accomplish the conversion of the preferred stock to common. Id. pp. 4-6. Further, on a motion seconded by Munitz, the Board approved a resolution to propose to the shareholders that UFG’s certificate of incorporation be amended to increase the authorized number of common and preferred shares of stock to 20 million and 5 million shares, respectively, to be issued as determined by the board of directors. Id. pp. 6-7.

A50. At the same meeting, Hurwitz moved that Crow be elected Senior Vice President and Chief Financial Officer of UFG. Id. p. 7.

A51. The authorization of convertible preferred stock marked a sharp and complete about-face for UFG. Sixteen months earlier, with the strong support of MCO, UFG had gone to great lengths to eliminate convertibility as a feature of its preferred stock.[9] Ex. A-1064, Tab 111; Ex. A-1065, Tab 112; see also Ex. B-398, Tab 1949, p. 2, ¶ 3 (04/17/86 Memorandum from Berner to Hurwitz, et al. Re: Proposed subordinated debt offering; opposing convertibility feature that DBL sought).

A52. On April 17, 1984, MCO and FDC filed Amendment No. 12 to their Schedule 13D. Ex. A-2073, Tab 27 & Tab 37. Amendment 12 disclosed the pending UFG rights offering and also disclosed that Hurwitz, personally, had acquired 500 shares of UFG stock by inheritance. Id. pp. 11-12, 16. With respect to the rights offering, Amendment 12 stated:

The Company [UFG] has announced that it plans to make a rights offering (the ‘Rights Offering’) to its stockholders pursuant to which the Company’s stockholders will receive non-transferable rights (the ‘Rights’) to purchase an aggregate of 750,000 shares of the Company’s Series C Convertible Preferred Stock (the ‘Preferred Stock’). As currently contemplated, the holders of Preferred Stock will be entitled to convert each share of Preferred Stock into two Shares [of common stock] at any time commencing on the third anniversary of the issuance of the Preferred Stock and terminating on the tenth anniversary of the issuance of the Preferred Stock. MCO and Federated expect to subscribe for as many shares of Preferred Stock as they will be permitted to subscribe for pursuant to the terms of the Rights Offering. If all shares of Preferred stock acquired in the Rights Offering were converted into [common] Shares, the [common] Shares held by Federated and MCO would aggregate approximately 23.5% (assuming stockholders exercise their rights in full) and approximately 35.4% (assuming no
Rights are exercised by stockholders other than Federated or MCO) of the outstanding [common] Shares of the Company. The purchase of shares of Preferred Stock by MCO and Federated pursuant to the Rights Offering could be in addition to any Shares which MCO or Federated may acquire in the event the Application is approved.

Id. pp. 11-12 (emphasis added).

A53. On April 19, 1984, Munitz (in his dual capacities as President of FDC and Vice Chairman of MCO, see OMX 20274) wrote to the TX S&L Commissioner seeking a ruling that the purchase of the Series C Preferred Stock by MCO and FDC would not fall within the Texas regulations regarding change in control of Texas savings associations. Ex. T-1049, Tab 1931. After describing the terms of the Series C Preferred Stock, Munitz asserted noted that if any stockholders did not exercise their rights, the remaining stockholders would be entitled to purchase additional shares. Id. p. OMX 20273. In justifying the request for a ruling, Munitz further stated: “Even assuming the unlikely situation that no other stockholders will exercise any of their rights, the aggregate number of shares of Common Stock held by [FDC] and [MCO] upon conversion of the Preferred Stock would not exceed 35.4% of the outstanding shares of common stock of UFG.” Id. pp. OMX 20273-74 (emphasis added). The representation that it was “unlikely” that no other stockholders would exercise their rights was disingenuous, to say the least. As discussed in detail below, the terms of these shares were such that virtually no one other than FDC and MCO would subscribe, and in fact, very few did.

A54. On May 10, 1984, Hurwitz executed a subscription agreement on behalf of MCO for 453,000 shares of Series C Preferred Stock, and James Paulin executed a subscription agreement on behalf of FDC for 302,000 shares of Series C Preferred Stock. Both subscription
agreements were accepted and agreed to by Gerald Williams on behalf of UFG. Ex. T-1051, Tab 1932.

A55. The Minutes of Annual Meeting of Board of Directors of MCO on June 12, 1984, reflect that Hurwitz reported to the Board that MCO “had an opportunity to acquire up to a total of 755,000 subscription rights to the corresponding number of shares of newly issued Series C convertible preferred stock … of [UFG] at $14 per right for an aggregate purchase price of up to $10,570,000.…” Ex. T-1053, Tab 59, p. 4. Pursuant to Hurwitz’ recommendation, the Board adopted a resolution authorizing the acquisition of up to 755,000 Series C Preferred Shares, and the borrowing of sufficient funds to do so. Id. p. 5.

A56. The Rights Offering took place on June 15, 1984, and involved 755,000 shares, not 750,000 as originally authorized. Ex. A-2074, Tab 37, p. 12 (Amendment 13 of FDC/MCO Schedule 13D). FDC and MCO acquired 47,702 (6.3%) and 688,824 shares (91.2%), respectively, of UFG’s Series C Preferred Stock in the Rights Offering – an aggregate of 736,526 shares (97.55%). Id. p. 13. Amendment 13 disclosed that “[i]f the shares of Preferred Stock distributed in the Offering were converted into [common] Shares, the [common] shares held by Federated and MCO would aggregate approximately 35% of the outstanding [common] Shares of the Company [UFG].” Id. p. 13.

A57. In his testimony, Hurwitz described the role that MCO and FDC played in the rights offering as that of an “underwriter.” Tr. 25,992: 17 - 25,993: 4. He admitted that MCO and FDC’s advance approval of and participation in the Rights Offering was essential to its success, stating, “Well, it's apparent that the fact that I -- I think it ended up being 90-some-odd percent of the offering would have been a dismal failure unless there was someone standing there to buy the shares, even though it was offered to all shareholders.” Tr. 25,994: 7 - 25,995: 14 (emphasis added).

A58. That failure is hardly surprising, indeed, it appears to have been intentional. There would be little incentive for most holders of common stock to invest additional funds to purchase shares of preferred stock in an institution in which two affiliated shareholders already owned nearly 25% of the common stock and had given notice that they intended to acquire significantly more stock and control of the institution. Moreover, the terms of the stock also discouraged investment: The stock paid no dividends; and, unless converted to common stock after three or more years, the stock would be redeemed after ten years for the same price that was paid for it in the first place. In effect, the “offering” was a request to shareholders for a ten-year, interest-free loan with an optional conversion feature. Moreover, the conversion option was no incentive at all for most shareholders: The offering price was $14 per preferred share, but throughout most of the offering period, May and June 1984, the UFG common stock could be purchased for less than $7 per share. Ex. T-1184, Tab 218 (OW035902-03). Thus, it would have been cheaper simply to buy common shares than to pay $14 per share for preferred shares convertible to twice as many common shares three years in the future.

A59. The patent economic disincentive to most shareholders to exercise their rights to make an interest-free loan to UFG becomes even more stark when the Court considers that two years later, UFG was advised by DBL that UFG could not realistically expect to be able to consummate a subordinated debt offering that would have paid the purchasers between 12 and 14%. See Ex. B-954, Tab 89, p. CN152263; T-1118, Tab 1643.

A60. This was, simply put, not an arm’s-length transaction. MCO and FDC were by far the largest holders of common stock, and the only readily available source of substantial additional invested capital, and had already indicated their intent to solidify their control by acquiring additional common shares. They leveraged their already dominant position to acquire preferred stock convertible to approximately 10% of the common shares of UFG – on terms that Hurwitz and Munitz virtually dictated by their participation on both sides of the transaction. The terms that virtually guaranteed that no shareholders other than MCO and FDC would purchase preferred shares, allowing MCO and FDC, as “underwriters” to lock up an additional 10% of the fully diluted common shares of UFG at a price that was less than the DBL option price. See A 94 below.

A61. Moreover, MCO and FDC, through Hurwitz and Munitz, not only caused the preferred stock to be issued as convertible preferred stock, they also set the conversion date. Later, the nominal conversion date was twice “extended” at MCO and FDC’s behest, through the exchange of the Series C preferred shares for new classes of preferred shares with later conversion dates in order to avoid MCO and FDC being deemed to own the common stock underlying the convertible preferred stock. Tr. 19,247: 19 - 19,250: 19; see discussion below at S171 - S184.

E. The FHLBB Grants The Holding Company Application — Conditionally

A62. The FHLBB granted FDC and MCO’s Holding Company Application on December 6, 1984. FHLBB Resolution No. 84-712 (Dec. 6, 1984), Ex. T-1059, Tab 15. Of particular importance in this case, the approval resolution contained a “net worth maintenance condition.” Specifically, paragraph 4 of the resolution provided:

4. For as long as [MCO and Federated] directly or indirectly control [USAT], Applicants shall contribute a pro rata share based on their UFG holdings, of any additional infusion of capital, in a form satisfactory to the Supervisory Agent, that may become necessary for the Insured Institution to maintain its net worth at the level required by [FSLIC's] Net Worth Regulation. Further, if Applicants acquire additional voting shares of UFG, directly or indirectly, such that their aggregate holdings voting shares [sic] of UFG exceeds 50 percent of the outstanding voting shares of UFG, Applicants shall contribute 100 percent of any additional capital that may be required to maintain the net worth of the Insured Institution, in a form satisfactory to the Supervisory Agent, at the level required by the [FSLIC]'s Net Worth Regulations.

Ex. T-1059, Tab 15, p. 2. The FHLBB notified MCO of the approval by letter dated December 19, 1984. Id.

A63. The determination to require a net worth maintenance condition was made after consideration of a number of alternatives in view of the circumstances presented by the activities of Hurwitz, FDC, and MCO. FDC and MCO had already made it known to the FHLBB that they were unwilling “to stipulate to the standard net worth maintenance condition that would require them to maintain 100 percent of United Savings required net worth.” Ex. B-372, Tab 168, p.4. MCO and FDC proposed instead that they “use their best efforts” to ensure compliance with net worth requirements and that they would “infuse their pro rata portion of additional equity … but only [if they], directly or indirectly, acquire and retain control over more than 50% of the outstanding shares.” Id.; see also id. at OW120257-59 (Letter from Barry Munitz to Jearlene Miller, 10/13/83, with proposed condition). The FHLBB Office of Examinations and Supervision recommended against acceptance of MCO and FDC’s proposal, id. p. 5, and proposed instead that a 100% net worth maintenance condition be imposed, as did the Supervisory Agent and Principal Supervisory Agent in Dallas. Id. at OW120260- 64 (Memo from Allen Dermody to J.J. Finn, 12/05/83). The language that eventually became the net worth maintenance condition embodied in paragraph 4 of Resolution 84-712 can be traced directly to the legal analysis and recommendations of the FHLBB’ Office of General Counsel. See id. at OW120276- 81 (legal opinion issued by Laura Patriarca and concurred in by Julie Williams). The specific recommendation is found on page 5 of the legal opinion.

A64. Resolution 84-712 required that MCO and FDC consummate their proposed acquisition of UFG shares within 120 days of the resolution. Resolution ¶ 1, Ex. T-1059, Tab 15 (OMX 22877). MCO and FDC sought to “negotiate” with the FHLBB on the extent of any net worth maintenance condition and continued to do so until December, 1987. As will become evident from the discussion below at S13 - S16, the “negotiations” consisted of a series of proposals by FDC and MCO, none of which were acceptable to the FHLBB, which never agreed to any change in the net worth maintenance condition in Resolution 84-712. In furtherance of their “negotiations,” MCO and FDC sought and received numerous extensions of time to “consummate the UFG acquisitions.” See Ex. T-1065, Tab 1621; T-1068, Tab 1622; T-1079, Tab 1623; B-683, Tab 1624; T-1117, Tab 105; B-904, Tab 1625; B-1046, Tab 1622; B-1055, Tab 1627; B-1221, Tab 1628; B-1246, Tab 1629; B-1354, Tab 1630; B-1361, Tab 1631; B-1523, Tab 1632; B-1538, Tab 1633; B-1668, Tab 1634; B-1696, Tab 1635; B-1754, Tab 1636; Ex B-1782, Tab 1637; T-1139, Tab 1638.

A65. On December 21, 1987, FDC and MCO notified the Supervisory Agent, Cornelius (“Neil”) Twomey of the Federal Home Loan Bank of Dallas, through counsel that they would seek no more extensions, but “anticipate[d] submitting a new application in the near future.” Ex. T-1140, Tab 102, p. OW009471. The Resolution lapsed on December 22, 1987. See Ex. T-1782, Tab 1637. During the entire time that they sought to “negotiate” concerning the net worth maintenance condition, FDC and MCO maintained that they had not consummated their proposed acquisition of up to an additional 10% of the shares of UFG common stock.

F. DBL Facilitates FDC And MCO’s Acquisition Of An Additional Interest In UFG Through The Put/Call Option

A66. Notwithstanding that MCO and FDC’s Series C Preferred Stock was convertible into a sufficient number of shares of UFG common stock to take their interest up to approximately 35%, the level initially described in the Holding Company Application, Ex. T-4040, Tab 13, p.8, MCO also entered into a Stock Option Agreement with DBL to acquire additional shares. As explained below, the arrangement with DBL, and the accumulation of additional shares, began immediately after the filing of the Holding Company Application, even though the Stock Option Agreement was not actually signed until December 24, 1985.

1. DBL’s Accumulation And Long Term Holding Of UFG Common Stock

A67. On July 11, 1983, less than two weeks after DBL’s sale of 120,000 shares of UFG stock on June 29, 1983, and MCO’s filing of its holding company application on the same day, DBL began to accumulate additional shares of UFG common stock in the “42 Account,” that is in the High Yield Bond Department equities “trading” account, 06-12942. The accumulation is easily tracked, as the evidence includes: (1) transactional information from DBL trade tickets reflecting purchases (and a relative few sales) of UFG stock (Ex. T-1198, Tab 56; T-1199, Tab 57) and from DBL “trade runs” (Ex. T-1206, Tab 216; T-1207, Tab 217); (2) weekly balance information from DBL “Stock Record Weekly” reports (Ex. T-1193, Tab 64); (3) three Schedules 13G filed by DBL with the Securities and Exchange Commission on February 13, 1985 (Ex T-1063, Tab 42 & A-3075, Tab 50 (duplicates)), February 13, 1986 (Ex. T-1116, Tab
51), and February 13, 1987 (Ex. T-1129, Tab 48); and (4) daily price and trading information for UFG common stock obtained from The NASDAQ Stock Market, Inc. Historical Research Office (Ex. T-1194, Tab 218). In addition, there is evidence in the form of charts and a spreadsheet prepared by Mr. Oliver that summarize the information contained in the DBL records. Ex. T-1213, Tab 224; T-1214, Tab 225; T-1215,Tab 226; T-1216, Tab 227. (The Respondents stipulated to the authenticity of the documents whose contents Mr. Oliver summarized. Tr. 2,594: 6 - 2,596: 2.) Finally, there is Mr. Oliver’s testimony concerning the manner in which he compiled and summarized the data contained in the exhibits he prepared. Tr. 2,602: 8 - 2,636: 22.

A68. Exhibit T-1213 sets out, side-by-side, and on a daily basis, the trading information from the DBL “trade runs,” Ex. T-1206, Tab 216; T-1207, Tab 217, including balance information derived from the trades, and balance information taken from the “stock record weekly” records, Ex. T-1193, Tab 64. While the balance information from the two sources does not correlate exactly, the pattern is clear: DBL acquired a substantial position in UFG stock beginning in 1983. Exhibit T-1213 shows that during the first three months of 1983, the balance remained relatively low, as purchases were offset by sales (many of them to MCO). Beginning in March 1983, DBL began to accumulate the 120,000 shares that were ultimately sold to MCO on June 29, 1983. As of June 30, 1983, DBL owned a mere 31,871 shares of UFG common stock. Ex. T-1213, Tab 224, p. 3. Exhibit T-1213 also shows that from June 30, 1983, to March 19, 1985 DBL acquired over 550,000 more shares of UFG stock, but sold not a single share from its “trading account.” Id. pp. 3-7. Thereafter, DBL sold a few shares into the market periodically (including the sale of 5,000 shares to Gross, see A129, below), but continued to increase its position in UFG stock. By December 1985, DBL had increased its position by more than an additional 200,000 shares, to 788,931. Id. pp. 7-12. For the next fourteen months (until March 1987), DBL maintained its position at a level between 782,856 shares (02/21/86) and 799,067 shares (08/01/86). Id. pp. 12-17. The balance dropped slightly from March to September 1987, when DBL began liquidate its position. Id. p 17. As of June 17, 1988, DBL retained only 300,000 shares of UFG common stock in the “42 Account,” which shares will be discussed further below.

A69. DBL’s Schedules 13G confirm the balance information contained in the Stock Record Weekly as summarized by Mr. Oliver.[10] Similarly, the trade tickets, Ex. T-1198, Tab 56; T-1199, Tab 57, confirm the contents of the trade runs. Mr. Oliver testified that he was able to reconcile the trade tickets to the trade runs with a 90 to 95 percent correlation. Tr. 2,635: 9 - 2,636: 13.

2. False Starts: The Precursors Of The Put/Call Option

A70. MCO and FDC began planning the acquisition of additional shares of UFG stock with the participation of a third party even before filing their holding company application. The goal of these efforts was to “lock up” stock without having to concede legal ownership,
presumably to facilitate the “consummation” of the proposed acquisition of an additional 10% of the common stock of UFG. On June 29, 1983, the day the application was filed, Roni Fischer of MCO wrote in a memorandum to Munitz (with a copy to Paul Schwartz):[11]

At Paul Schwartz’s request, I am forwarding two copies of a structure by which we might acquire additional shares of United Financial Group stock at some future time. This scenario involves the participation of an outside party, referred to as EXCO.

A copy of the enclosed analysis was previously sent to Richard Marlin[12] at Kramer, Levin, Nessen, Kamin & Frankel, who feels relatively comfortable with this concept.

Ex. T-1041 Tab 58. Mr. Schwartz has testified that he began working on a project to explore means of acquiring additional shares of UFG stock sometime prior to June 1983. Tr. 948: 9-19.

i. Initial Discussions With DBL

A71. By November 1984, Mr. Schwartz was proposing “EXCO Corp.” scenarios directly to DBL. Ex. T-1055, Tab 60; T-1056, Tab 61. These scenarios involved highly leveraged transactions using convertible debentures, convertible debentures with attached warrants, or zero coupon debentures as financing mechanisms. Each of the EXCO scenarios proposed, as can be seen from the “cash flow” section of each scenario, that a third-party company with capital of $100 purchase stock worth more than $5 million, funding the purchase
through the issuance of debentures in amounts ranging from $5.5 million to $7.7 million. Id. The stock would eventually be purchased by MCO. See Ex. T-1041, Tab 58.

A72. Significantly, however, rather than seek the advice of the corporate finance specialists at DBL or other investment bankers, Mr. Schwartz was discussing these transactions with Mr. Carl Deremer, a bond salesman in DBL’s High Yield Bond Department – a man who had been hired by Michael Milken in 1974 and was directly supervised by Michael Milken until sometime in 1985 or 1986, when DBL installed an institutional sales manager in the High Yield Bond Department.[13] Tr. 796: 13 - 797: 16. Mr. Schwartz was unable to recall, he testified, how he had come to contact Mr. Deremer or whether he or Mr. Deremer initiated the discussion of the purchase of additional UFG shares through “EXCO.” Tr. 964: 20 - 965: 3; Tr. 965: 19 - 966: 1.

A73. Each of the “scenarios” proposed that “EXCO” purchase 585,000 shares of UFG common stock and 47,700 shares of UFG preferred stock.[14] Id. The fact that the “EXCO” proposals sent from MCO to DBL in November 1984 specified 585,000 shares of UFG common stock as the amount to be purchased in the proposed transactions indicates very clearly that MCO and DBL had engaged in prior private discussions of DBL’s holdings of UFG stock. DBL’s first public securities filing (the Schedule 13D) with respect to the 585,000 shares UFG common stock was not filed until February 13, 1985 – almost three months after Mr. Schwartz sent the “EXCO” scenarios to Mr. Deremer and eight-and-one-half months after DBL’s holdings had
reached that level. Mr. Schwartz’ recollection on this point was extremely vague. He remembered learning at “some point,” Tr. 966: 12-14, that DBL owned that number of shares, but could only recall that “[s]omeone told me, but I don't remember who.” Tr. 966: 17-18; see also Tr. 967: 18 - 968: 1. Moreover, as shown above, MCO had begun to consider an “EXCO” transaction as early as June of 1983, and DBL had begun accumulating UFG stock nearly simultaneously (in July of 1983). The only reasonable inference from these facts is that DBL’s accumulation of UFG stock was the result of a cooperative arrangement between DBL and MCO for their mutual benefit. There was no question between them that the shares would ultimately be transferred to MCO, the only questions were when, how many, and by what means.

ii. The EF Hutton Proposal

A74. Mr. Schwartz testified that he had contacted EF Hutton at the suggestion of “someone at Kramer Levin,” Tr. 977: 10-16, concerning a possible “EXCO” transaction. Tr. 976: 10-18. In a letter dated January 17,1985, Michael Mendelson of EF Hutton, sent Mr. Schwartz a “revised draft term sheet for the proposed transaction,” with a copy indicated to Howard Sobel, Esquire (an attorney at the Kramer Levin firm, Tr. 981: 8-11). Ex. T-1061, Tab 62 (OW009629). On January 18, 1985, Mr. Schwartz supplied a copy of the letter and term sheet to Hurwitz, indicating copies to W.C. Leone, J.V. Iaco, and H.J. Bressler. Id.

A75. The draft term sheet described the proposed transactions as EF Hutton’s purchase of 585,000 shares of UFG stock from DBL at a price of $8.25 per share and EF Hutton’s simultaneous execution of a put/call agreement with MCO,[15] that is, an agreement whereby EF Hutton would sell MCO a call and MCO would grant a put to EF Hutton covering the 585,000 shares of UFG common stock. Id. (OW009630). The call was to be exercised during a thirty-day period from June 15, 1987, to July 15, 1987, with the possibility of renewal at six-month intervals through July 15, 1990, at the election of MCO. Id. The strike price was defined as the “Purchase price plus ___x____ per share.” Id. The premium was to be $2,010,000 (approximately $3.44 per share), with a renewal premium of “Prime plus 1% of the Purchase Price (for six months) plus $35,000.000 payable by MCO to EFH if MCO elect[ed] to renew.” Id. (OW009631). (Tying the renewal premium to the prime interest rate clearly shows that the renewal premium was intended to compensate EF Hutton for its costs of holding the shares for MCO; effectively, the parties were treating the proposed transaction as a financing, that is, a loan secured by the UFG shares.) EF Hutton’s put option was to be exercisable at Hutton’s option during the thirty-day period following any “call exercise period” at a strike price equal to the purchase price. Id. In addition, MCO was to indemnify EF Hutton from all losses it might incur and to reimburse EF Hutton for up to $25,000 in attorneys’ fees. Id. MCO was to have the option to secure the transaction with an irrevocable letter of credit for the full amount of the purchase price or to escrow the purchase price. Id.

A76. Mr. Schwartz could not recall whose idea it was to structure the transaction as a put/call option. Tr. 985: 18, Tr. 986: 13; Tr. 991: 7 - 992: 2. Ultimately, the proposed transaction with EF Hutton was abandoned. One reason given by Mr. Schwartz was that it was “very expensive.” Tr. 992: 18 - 993: 1. Mr. Schwartz could not recall what other reasons there
might have been. Id. Mr. Schwartz indicated that Munitz was involved in the determination that the EF Hutton proposal was unacceptable and the decision to engage in a transaction with DBL instead. Tr. 993: 15 - 994: 16.

A77. Munitz, on the other hand, stated that he had no recollection of any conversation concerning the proposed EF Hutton transaction with Mr. Schwartz, although he did acknowledge that he spoke frequently with Mr. Schwartz during the time the Hutton proposal was being considered. Tr. 25,180: 19 - 25,181: 19. Indeed, Munitz testified in his deposition in this matter and affirmed during the hearing that he was unaware of DBL’s status as the owner of 585,000 shares of UFG stock until approximately March 15, 1985 – well after the EF Hutton proposal had been abandoned and also after the first conversations with DBL concerning what became the so-called “Drexel Option,” which is discussed in detail below at A80 - A87, A90 - A97. Tr. 25,182: 20 - 25,185: 10.

A78. Similarly, Hurwitz testified that he had no recollection of any conversation with Mr. Schwartz concerning the EF Hutton proposal. Tr. 26,015: 10-14. A typewritten notation in the upper right corner of the EF Hutton letter, however, indicates that it was telecopied to Mr. Hurwitz by Mr. Schwartz.[16] Ex. T-1061, Tab 62. Mr. Schwartz’ testimony on the subject of contacts with Mr. Hurwitz concerning the EF Hutton proposal was quibbling and evasive.[17]

A79. Notwithstanding the principals' utter lack of recollection, it is simply not credible that an underling like Mr. Schwartz, knowing of the consequences of owning more than 25% of the stock of a savings and loan holding company, see Tr. 954: 5 - 955: 20, would have conducted such extensive planning and negotiations over the put/call option in all of its proposed forms for two-and-one-half years with no direction from his superiors. The net worth maintenance issue was of great significance to MCO and FDC, and thus, also to Munitz and Hurwitz. Munitz, himself, testified that Hurwitz was “very hands on in terms of major strategic decisions,” Tr. 25,139: 21 - 25,141: 10, that he was “in the middle of the shaping of all major policy and certainly in the middle of deciding all major choices,” Tr. 25,139: 18-20, and that he would have been “in the middle of” Federated and MCO’s acquisition of UFG, as well. Tr. 25,141: 11-14. Munitz also testified extensively concerning ongoing “conversations” with the FHLBB and
FHLB-D over the net worth condition, Tr. 25,141: 20 - 25,165: 15; 25,173: 20 - 25,174: 17, which were reported to Hurwitz and regularly described to the MCO Board of Directors. Tr. 25,170: 7 - 26,171: 15. Indeed, Munitz also recalled Mr. Schwartz looking at different alternative means to acquire additional shares of UFG. Tr. 25,178: 17 - 25,179: 5. Moreover, Hurwitz testified that, at least as to the option price, he was “satisfied that he [Schwartz] had a lot of contact with all the people [Hurwitz] had mentioned earlier [in his testimony], that being Dr. Leone, [him]self, Barry Munitz, Jim Iaco. Tr. 26,030: 13-16.

iii. Negotiation Of The Put/Call Agreement With DBL

A80. Shortly after the EF Hutton proposal was abandoned, MCO began to negotiate with DBL directly for what ultimately became the “Drexel Option.” On the DBL side, the substantive aspect of the negotiations was handled by Kevin Madigan. Tr. 723: 7-11. Mr. Madigan, a lawyer employed in the Los Angeles office of the DBL high-yield bond department, Tr. 722: 21 - 723: 3, testified that “someone” in the high-yield bond department, whom he believed to be Carl Deremer, either told him to contact Mr. Schwartz or told him that Mr. Schwartz would contact him concerning a proposed transaction. Tr. 726: 17 - 727: 6. Subsequently, Mr. Madigan and Mr. Schwartz “explored the feasibility of structuring some sort of put call arrangement dealing with [the UFG] shares [held by DBL.]” Tr. 727: 21 - 728: 6. From the outset, a put-call option was the only type of transaction that Mr. Madigan discussed with Mr. Schwartz. Tr. 728: 7-12. Mr. Madigan used DBL’s outside counsel, Cahill Gordon & Reindel, to draft the agreement. Tr. 728: 13-18.

A81. On February 11, 1985, at the request of Richard Marlin, Deborah Shulevitz of the Kramer Levin law firm sent a letter to David Yeres of the law firm of Cahill Gordon & Reindel,
enclosing a draft option agreement. Ex. T-1062, Tab 16. Mr. Marlin recalled dealing with Paul Schwartz of MCO with respect to the option agreement and thought that he might have dealt with Munitz, as well. Tr. 389: 19 - 390: 1. The February 11, 1985, draft option agreement created by MCO’s counsel recited that DBL owned 585,000 shares of UFG common stock. Ex. T-1062, Tab 61 (OW009647). The date of the draft was two days prior to DBL’s filing of its Schedule 13G. Ex. T-1063, Tab 42 & A-3075, Tab 50.

A82. Mr. Yeres responded to Ms. Shulevitz (with copies shown to Paul Schwartz and Kevin Madigan, among others) on February 15, 1985, with a draft option agreement of his own. In the cover letter he noted, “It is our understanding that the enclosed draft will serve as the basis for the proposed agreement and we, therefore, request your comments on it.” Ex. T-1064, Tab 17. On March 26, 1985 Mr. Yeres sent a revised draft option agreement, this time directly to Mr. Marlin (with copies shown to Messrs. Madigan and Schwartz and Ms. Shulevitz). Ex. T-1066, Tab 18. The March 26, 1985, draft contained the provisions that ultimately became the core of the final agreement – the put/call arrangement and the posting of a letter of credit by MCO for the benefit of DBL. Id. (OW009126-27; OW009129-30); Tr. 403: 16 - 406: 5. It contained, as well, provisions requiring that MCO indemnify DBL against loss from the transaction and pay its attorneys’ fees in connection with the transaction. Id. (OW009136-37; OW009140); Tr. 411: 9 - 413: 4 The cover letter specifically noted that the draft did not include price and premium figures. Id. (OW009125).

A83. On May 17, 1985, Mr. Yeres sent Mr. Marlin (with copies shown to Kevin Madigan and Paul Schwartz) another revised draft, Ex. T-1067, Tab 19 (OW009259) along with
a draft request to the National Association of Securities Dealers seeking approval of the transaction. Id. (OW009260-61). Mr. Madigan explained in his testimony that:

Drexel was a member of the NASD, which had certain rules governing option transactions, and although the transaction we were structuring was not an exchange-traded option, a publicly-traded option, we were concerned that the NASD might view their rules as applying to this transaction. So, we decided to contact them and get their approval for it.

Tr. 744: 22 - 745: 7. The draft letter to the NASD described the transaction as one involving a block of 585,371 shares of common stock of UFG, “which were acquired by DBL in its ordinary market operations, and … represent approximately 7.1% of the 8,160,344 UFG common shares outstanding.” Ex. T-1067, Tab 19 (OW009260). The draft letter to the NASD further described a transaction in which the put and call options would be granted simultaneously. Id. (OW009261-62). Mr. Madigan confirmed that the parties contemplated a transaction involving the simultaneous grant of put and call options as of the date of the letter, but explained that “[he] believe[d] [the transaction] was changed to provide that the option Drexel received was granted after the expiration of the option MCO received and that was to comply with some advice [DBL] got from the NASD.” Tr. 746: 10-14.

A84. On June 24, 1985, Mr. Yeres sent another revised draft stock option agreement to Ms. Shulevitz. Ex. A-10106, Tab 33; T-1073, Tab 44. On July 12, 1985, Mr. Marlin wrote to Munitz:

I understand that the DBL option transaction has once again become a priority item.

You may recall that the Change of Control provisions of the Texas Savings and Loan Department Rules present a problem which must be resolved before we could acquire those UFG shares.

As you may know, DBL is requesting an opinion from us[18] to the effect that all legal steps have been taken which are required to be taken, in connection with entering into the Option Agreement and in connection with consummating it.

I am attaching copies of the relevant provisions of Rule 71.3 so that you will have a chance to review them.

After you look them over, let’s talk on the telephone about how to proceed.

Ex. T-1074, Tab 20 (OW009194-95).[19]

A85. In a marginal note on the letter, Mr. Schwartz wrote: “7-12. Marlin noted that in view of Texas statute, Munitz will need to visit with S&L commissioner and that 30-day option period will probably [illegible] be made longer.” Id. (OW009194); Tr. 1,010: 17-21. In his testimony Mr. Marlin explained: “Those rules required a notification be given before a party could enter into an agreement to acquire securities that would effect the change in control, and securities were defined to include options to acquire of [sic] the securities.” Tr.432: 9-13. Curiously, however, Munitz did not provide any such notice to the Texas S&L Commissioner until after the option agreement had been entered into. See Ex. A-10155, Tab 34 (discussed below at A98.)

A86. MCO and DBL continued to negotiate, or at least to exchange drafts of the proposed UFG stock option agreement between the attorneys involved. On August 20, 1985, Ms. Shulevitz of the Kramer Levin firm, counsel for MCO, sent Mr. Yeres a copy of a draft dated August 9, 1985, marked to show suggested changes. Ex. T-1078, Tab 21 (OW009209). A marginal note in the attached draft stated with reference to the number of shares that were the subject of the agreement “[T]his number will change.” On September 26, 1985, Mr. Yeres responded to Ms. Shulevitz’ letter of August 20, with a revised draft agreement dated September 25, 1985. Ex. T-1080, Tab 22 (OW009232 - 56).

A87. In a memorandum dated December 2, 1985, Robert Pozen of the law firm of Caplin & Drysdale advised Mr. Schwartz (with a copy shown to Munitz) that either the proposed option agreement should be signed before December 26, 1985, the effective date of certain new federal regulations that would otherwise be applicable to it or it should not be signed until after MCO had received approval “as a S&L holding company on terms acceptable to MCO.” Ex. T-1084, Tab 65 (MX 00248-49). Mr. Pozen also suggested the addition of certain language by which the parties would purport to deny that the agreement “confer[red] on MCO any economic interest in the Shares or any voting interest in the shares, unless and until MCO exercises its option to purchase such shares pursuant to this Agreement.” Id. (MX 00248). Mr. Pozen noted, in addition, that, at least for reporting purposes under § 13(d) and, perhaps, § 16(a) of the Securities Exchange Act, “[t]he options appear[ed] to be immediately exercisable because MCO has received all required approvals, although the terms of such approvals may not be to MCO’s liking.” Id. (MX 00249). Finally, Mr. Pozen observed, “By our calculations, this option plus the conversion of the preferred 1987 will put MCO into a position to own 45% of United Financial’s stock at that time.” Id.; see A48 - A61, below for a discussion of UFG preferred stock.

iv. A Brief Digression: MCO And FDC Continue To Seek Changes To Their Net Worth Maintenance Obligation Under The Condition Imposed in Resolution 84-712

A88. On December 3, 1985, the day after Mr. Pozen wrote his memorandum to Mr. Schwartz, William S. Eckland, a lawyer from a different firm, McKenna, Conner & Cuneo in Washington, DC, wrote to Julie L. Williams, then the Associate General Counsel of the Federal Home Loan Bank Board (with a copy to Munitz), concerning the net worth maintenance requirement of Resolution No. 84-712. Ex. T-1109, Tab 67; see also Ex. T-1113, Tab 68. Mr. Eckland’s letter sought a modification of the net worth maintenance provision of the resolution “so that a limit would be placed on the aggregate amount of capital that the Holding Company would be obligated to infuse in order to maintain [UFG’s] net worth requirement.” Id. (OW009866). Specifically, Mr. Eckland’s letter “propose[d] that the aggregate amount of [MCO’s and FDC’s] commitment not exceed an amount equal to [UFG’s] minimum regulatory net worth as of the close of the quarter preceding the quarter in which the acquisition of control that is the subject of [Resolution No. 84-712] is completed.” Id. (OW009867).

A89. Mr. Eckland’s letter argued that the net worth requirement as written in Resolution No. 84-712 would adversely affect FDC’s and MCO’s ability to raise capital. In support of its position, Mr. Eckland attached a letter from “its investment banker – Salomon Brothers, Inc.” Id. (OW009867). (The referenced Salomon Brothers letter is found at Ex. T-1113, Tab 68, Exhibit C (OW009491). While it may or may not be material, that statement was a misrepresentation. Salomon Brothers, Inc. was not FDC’s or MCO’s investment banker.[20] The representation that Salomon Brothers, Inc. was MCO’s and FDC’s investment banker was, at the very least, disingenuous and casts doubt on the veracity, reliability, and completeness of other statements made to the government.

v. The NASD Denies Approval Of A Transaction Involving 790,459 Shares Of UFG Common Stock

A90. On December 20, 1985, Jon Mark of the Cahill Gordon law firm sent a letter to Mr. Peter Canada, Assistant Director of NASDAQ Operations for the NASD, with a telecopy to Richard Marlin of the Kramer Levin firm. Ex. T-1088, Tab 23. A draft of the letter had previously been sent to Mr. Schwartz on December 17, 1985. Ex. T-1083, Tab 45. Mr. Mark sought, on behalf of DBL, “approval of a proposed option transaction between DBL … and [MCO] involving a block of 790,459[21] shares of common stock of [UFG].” Ex. T-1088, Tab 23 (OW009561). The letter described an agreement that would involve the grant of a call option by DBL to MCO and the grant of a put option by MCO to DBL that would be exercisable only if the call option were not exercised. Id. The shares would be escrowed during the life of the put and call options. Id. Mr. Mark argued that the transaction should be approved in view of the “unique facts and circumstances presented by a privately negotiated transaction on a security for which there is no listed option.” Id. He noted that the parties wished to close the transaction no later than December 26, 1985, in order to “avail themselves of [an] exemption afforded by” “recently adopted regulations of the FHLBB.” Id. (OW009562-63). Mr. Mark requested a prompt response so that the transaction could be closed the following week. Id. (OW009563). Nevertheless, he stated that “in the event approval is not obtainable in the time frame requested, the parties would intend to close a portion of the transaction relating to 490,459 shares subject to being rescinded in the event NASD approval is not obtained within 90 days.” Id.

A91. On the same day, Mr. Mark wrote to Mr. Marlin, enclosing a copy of the form of Stock Option Agreement with blanks for dollar and share amounts to be filled in. Ex. T-1090, Tab 24. Mr. Mark also enclosed “a form of amendment in the event the transaction must be done in two blocks with an agreement to rescind, in 90 days, the portion of the transaction requiring NASD approval.” Id. Apparently the form of agreement had been substantially agreed to before then, however, because the minutes of the MCO Board of Directors meeting on December 17, 1985, indicate that the board approved of transaction that day and authorized the officers of the corporation to execute a form of agreement “attached [thereto] as Exhibit A.” Ex T-1085, Tab 26, p. 4 (OW009567). In fact, the contract attached to the minutes is the executed agreement, which actually was executed not earlier than December 24, 1985. Id. Tr. 733: 6 - 734: 1. Moreover, the approval is for a contract involving 300,000 shares, but as of December 17, 1985, the parties were still contemplating a transaction involving 790,000 shares as evidenced by Mr.
Mark’s letters to the NASD and Mr. Marlin. Ex. T-1088, Tab 23; T-1090, Tab 24. Thus, it appears that the minutes were written after the fact to reflect approval of the transaction that ultimately took place rather than to reflect approval of the transaction that was presented to the board at the December 17, 1985 meeting.

A92. The NASD responded to Mr. Mark on December 24, 1985. Ex. T-1105, Tab 25. The NASD committee charged with considering the matter determined that there were no “highly unusual circumstances” that would justify granting the requested exemption, and therefore, denied the request. Id. Significantly for the parties, Mr. Canada, writing for the NASD stated:

You are further reminded that Section 3 of Appendix E [of Article III, Section 33 of the NASD Rules of Fair Practice] states that, for purposes of determining position limits, long calls and short puts, and short calls and long puts covering the same underlying securities must be aggregated. As parties to the UFG options transactions set forth in your letter will be holding equal numbers of long and short options on the same side of the market, option positions covering in excess of 150,000 shares of UFG common stock would not be permitted under Section 3 of Appendix E.

Id. (emphasis added).

vi. DBL And MCO Execute The Stock Option Agreement

A93. The Stock Option Agreement was executed on December 24, 1985. Tr. 733: 6 - 734: 1. The Stock Option agreement granted MCO a call option (the “MCO Option”) on 300,000 shares of UFG stock exercisable from July 1 through July 31, 1988. Ex. T-1085, Tab 26 (OW009576-80). In order to comply with the NASD’s ruling, however, the parties made several changes to the agreement. The most significant change, handwritten into the final agreement, was that the paragraph dealing with the “DBL Option” (paragraph 3 of the Stock Option Agreement) was changed from an immediate grant of a put option (i.e., the right to sell the shares to MCO at the agreed price), to an agreement to grant such an option in the future “in the event the MCO Option expires unexercised … at such time [as the MCO Option expired].” Id. (OW009580); see also Tr. 746: 10-14 (Madigan). The DBL Option was to be exercisable from August 1 through August 31, 1988. Id. The parties apparently believed that deferring the grant of the put to a future date relieved them of the aggregation requirement outlined in Mr. Canada’s letter, since there was no presently existing put covering shares that would be required to be aggregated with the shares covered by the call option. Accordingly, the Stock Option Agreement stated that it covered 300,000 shares of common stock of UFG. Id. (OW009576).

A94. Other terms of the Stock Option Agreement included the payment of a premium by MCO of $683,147 ($2.277 per share) by cashiers check. Id. (OW009577); see Ex. T-1103, Tab 47 (copy of cashiers check). The exercise price was $2,577,000 ($8.59 per share) for both the put and the call. Id. (OW009577, OW9580). MCO was required to post an irrevocable letter of credit in the amount of the purchase price at the closing, id. (OW009577), and in fact did so. Ex. T-1093, Tab 46; T-1092, Tab 204; Tr. 768: 11 - 769: 5. MCO agreed to indemnify and hold DBL harmless for any loss based upon or relating to the DBL option, a further assumption of the economic risks of ownership of the shares. Id. (OW009592). Additionally, MCO reimbursed DBL for all of its legal costs associated with the negotiation of the Stock Option Agreement. Id. (OW009592).

A95. Upon execution of the transaction, DBL issued a confirmation of MCO’s purchase of 3,000 calls (i.e., a call on 300,000 shares of stock) at $2.277 per share for an aggregate purchase price of $683,147, with an exercise price of $8.59 per share (an aggregate exercise price
of $2,577,000). Ex. T-1103, Tab 47. MCO’s brokerage account statement reflected the transaction in an identical fashion. Ex. T-1119, Tab 207.

A96. Subsequently, in an interoffice memorandum, Mr. Lazard described the transaction and distributed to four individuals at MCO copies of the transactional documents relating to the Stock Option Agreement, including copies of the agreement, the escrow agreement, the letter of credit, the cashiers check, and the trade confirmation. Ex. T-1099, Tab 203. In addition, Mr. Lazard distributed documentation with respect to transactions not consummated. Id. In particular, Mr. Lazard distributed copies of a letter of credit in the amount of $4,213,043 and a cashiers check in the amount of $1,116,853. These amounts are consistent with the proposed option to be granted on an additional 490,459 shares at an option price of $2.277 per share and an exercise price of $8.59 per share as outlined in Mr. Mark’s letter to the NASD, which had represented to the NASD that DBL held a total of 790,459 shares which it proposed to option to MCO. Indeed, Mr. Schwartz testified that he had gone to the closing prepared to close the transaction with respect to the full amount of the shares. He stated:

A. … I remember taking more than one check, though, yes.

Q. Why did you take more than one check with you?

A. Well, I think it was not until perhaps when we were even sitting in the offices that we came to understand how many shares we could actually close upon and, as best as I can remember, we took one check for 300,000 shares' worth of options, if you will, and another check for any additional amount that we might be able to accomplish; but at the closing, what we found was all we could do it for was 300,000 shares, that is to say an option for 300,000 shares, and we gave them the check for 300,000 representing the option for 300,000 and took the other check back with us.

Q. And that -- what happened to that second check, to the best of your knowledge?

A. I would imagine they voided it or redeposited it or whatever they do with those kinds of things.

Tr. 1,408: 22 - 1,409: 20.

A97. As noted above at A76, Mr. Schwartz had testified earlier that EF Hutton proposal had been rejected, at least in part, because of the expense involved. By comparison, the DBL transaction was significantly more favorable to MCO than the Hutton proposal had been. The option premium was $1.163 less per share than the Hutton proposal, a difference of 33.8%; the exercise price was slightly greater ($0.39 per share), but the impact of that slight increase was ameliorated by the fact that it was not payable for at least 2-1/2 years from the date of the Stock Option Agreement and constituted only a 4.7% increase in the exercise price.

vii. DBL Amends Its Schedule 13G; MCO Selectively Reports The Stock Option Agreement To The Regulators

A98. On January 25, 1986, a month after the transaction had closed, Munitz wrote to the Commissioner of the Texas Savings & Loan Department, Mr. L.L. Bowman, describing the essential terms of the Stock Option Agreement. Ex. A-10155, Tab 34. Following the description of the transaction, Munitz stated:

I would appreciate your confirming to me that the Texas Regulations regarding change in control of Texas chartered savings and loan associations do not apply to the Call or the Put at this time, in view of the fact that neither the Put nor the Call is presently exercisable, and would, therefore, not be a security under the provisions of Chapter 71 of those regulations.

Id. (OMX 21930). Munitz did not enclose a copy of the Stock Option Agreement with his letter to Mr. Bowman. Munitz did not send a similar letter to the FHLBB describing the Stock Option
Agreement and seeking its views on whether the execution of the Stock Option Agreement would constitute a change of control under federal law and regulations.

A99. In response to Munitz’ letter, after paraphrasing Munitz’ description of the Stock Option Agreement (but making no reference to the letter of credit), Mr. Bowman wrote:

Assuming the 300,000 shares of common stock of [UFG] do not represent ‘control’ of [UFG], or its subsidiary, [USAT], as defined in the Texas Savings and Loan Act, this Department will not require a change of control application by either party as a result of the agreement.

Essentially, Mr. Bowman assumed the very fact that is in dispute in this case, that is, whether the option on 300,000 shares of UFG stock, in fact, gave MCO and FDC “control” of UFG.

A100. On February 13, 1986, DBL amended its Schedule 13G to report that it held 488,931 shares of UFG common stock. Ex. T-1116, Tab 51 (OW008869, 008870, 008871, 008872). Later, on February 13, 1987, DBL filed its Amendment 2 to its Schedule 13G. Ex. T-1129, Tab 48. This amendment reflected that DBL held 789,853 shares of UFG stock. Id.

viii. DBL Acquires Warrants To Purchase 250,000 Shares Of An MCO Subsidiary and Becomes A Shareholder of MCO

A101. Shortly before the closing of the Stock Option Agreement, as part of the Pacific Lumber junk bond financing (see J5), DBL acquired warrants to purchase stock in MAXXAM Group, Inc., a subsidiary of MCO. In a Warrant Agreement dated as of December 1, 1985, MAXXAM Group, Inc. agreed to issue warrants to DBL to purchase up to 250,000 shares of MAXXAM Group, Inc. common stock for $15 per share. Ex. T-4140, Tab 202, pp. 1, 5; Tr. 2,535: 16 - 2,536: 10.

A102. Sometime after June 30, 1986, and before September 30, 1986, DBL became even further involved with MCO, as it became the owner of 233,600 shares of MCO stock. The
Supplemental Expert Report of Lois M. Suder, Ex. A-14005, Tab 1356, Attachment A summarizes the Schedules 13F filed by DBL with the Securities and Exchange Commission. Tr. 14,350: 15 - 14,352: 17. Ms. Suder explained that Schedule 13F is a form filed with the SEC by institutional investors to report their holdings of publicly traded securities. Tr. 14,344: 9-16. Ms. Suder obtained copies of publicly available Schedules 13F from two sources, Disclosure, Inc. and CDA Spectrum. Id.: 17-22. Samples of the Schedules 13F that she obtained from these sources are in evidence as Exhibits A-14002 (Tab 1353), A-14003 (Tab 1354), and A-14004 (Tab 1355).

A103. Ms. Suder’s Supplemental Expert Report shows that DBL reported holding 233,600 shares of MCO stock with a market value of $3,095,000 as of September 30, 1986. Ex. A-14005, Tab 1356, Attachment A; see also Ex. A-14002, Tab 1353 (9/30/86 Schedule 13F); Tr. 14,345: 5-18. DBL’s proportionate ownership of MCO was 4.1744% of the outstanding stock as of September 30, 1986, Ex. A-14002, Tab 1353, p. 17; Tr. 14,346: 2 - 14,347: 10, and as of December 31, 1986. Ex. A-14003, Tab 1354, p.14; Tr. 14,347: 11 - 14,348: 14. The Supplemental Expert Report further shows that DBL continued to report ownership of 233,600 shares of MCO stock for each quarter through March 31, 1988. DBL reported ownership of 225,100 shares of MCO stock through September 30, 1988, and ceased to report ownership of MCO stock as of December 31, 1988.

A104. Exhibit T-1200, Tab 63, demonstrates that the 233,600 shares of MCO owned by DBL were held in the “42 Account,” that is, Account 06-12942-3-0. As explained above at A67, the “42 Account” was the High Yield Bond Department’s equity trading account. Exhibit T-1200 further indicates, and Mr. Deignan testified, that those shares were voted with management in connection with MCO’s February 1987 proxy solicitation. Tr. 1,042: 7-17; see Ex T-1200, Tab 63, pp. 1200-B (“‘Yes’ As Per Gail”), 1200-C, 1200-D, 1200-E (Acct. 06-12942-3-0 to vote “w/ mgmt”).

A105. Mr. Oliver reviewed Mr. Deignan’s testimony and Exhibit T-1200 in conjunction with his review of the Milken brothers’ holdings of MCO stock. Tr. 2,681: 8 - 2,684: 10. Using that information, Mr. Oliver calculated the combined holdings of DBL and the Milken brothers as of December 31, 1986 to be 6.19% of the outstanding common stock of MCO. Ex. T-1219, Tab 223. At the time of Mr. Oliver’s testimony, Ms. Suder’s Supplemental Expert Report was not in evidence. Utilizing the data concerning DBL’s holdings of MCO stock contained in Ms. Suder’s Supplemental Expert Report Exhibit and the data concerning the net shares outstanding contained in Exhibit T-1218 prepared by Mr. Oliver, a simple calculation[22] shows that the combined Milken-DBL position in MCO stock was nearly the same (6.18%) throughout 1987. Significantly, DBL’s position in MCO stock was held in an account within the High Yield Bond Department, which was run by Michael Milken.

ix. DBL And MCO Amend The Stock Option Agreement

A106. The Stock Option Agreement was amended twice. The first amendment was a one-page letter agreement entered into “as of May 18, 1988,” which extended the exercise periods for both the put and the call by four weeks. Ex. T-1144, Tab 48, Specifically, the first amendment changed MCO’s “Option Exercise Period” from July 1 through July 31, 1988, to July 29 through August 29, 1988, and changed DBL’s “Option Exercise Period” from August 1 through 31, 1988, to August 30 through September 30, 1988. Id. The extension appears to have been agreed to by DBL without requiring the payment of any fees, as there is no mention of fees in the letter. Id. At the same time, MCO arranged for modification of the letter of credit so that it would not expire until September 30, 1988. Ex. T-1143, Tab 208; Tr. 2539: 4-10.

A107. The “Second Amendment to Stock Option Agreement and Agreement” was executed “as of August 2, 1988.” Ex. T-1146, Tab 70. It superseded the first amendment and amended the underlying Stock Option Agreement. MCO’s “Option Exercise Period” was extended to July 1 through July 31, 1990, and DBL’s “Option Exercise Period” was extended to August 1 through August 31, 1990. Id. Thus, between the two amendments, the period was extended for exactly two years. The Second Amendment required, as before, an irrevocable letter of credit, but eliminated the requirement that the UFG shares be maintained in escrow. Id. (OW009852, OW009854-55). MCO paid DBL a premium of $524,664 ($1.749 per share). Id. (OW009853). Jacques Lazard executed the Second Amendment to Stock Option Agreement for MCO, and Joseph Radecki, a vice president, executed the amendment for DBL. Id.; Tr. 2,539: 19 -2,540: 5. Mr. Madigan testified that Mr. Radecki worked in the operations department of the High Yield Bond Department of DBL. Tr. 774: 12-17. Mr. Deignan testified that Mr. Radecki reported through an intermediate supervisor (Charles Thurnher) to Michael Milken. Tr. 1,028: 13-22.

A108. Munitz reported the extension of the Stock Option Agreement to James L. Pledger, Commissioner of the Texas Savings & Loan Department by letter dated August 3, 1988. Ex. T-1149, Tab 103. He enclosed with his letter a copy of Mr. Bowman’s earlier letter (Ex A-10156, Tab 35), but did not enclose a copy of his own original letter to Mr. Bowman or discuss the structure of the transaction as he had described in his letter to Mr. Bowman.

x. DBL Exercises Its Put Option

A109. On August 9, 1990, DBL notified Howard Sobel of the Kramer Levin law firm by letter that DBL had elected to exercise its put option. Ex T-1150, Tab 32. DBL transmitted to Mr. Sobel, stock certificates representing 300,000 shares of UFG stock, stock powers endorsed by an authorized representative of DBL, and the original letter of credit securing the transaction. Id. (OW009879-89). Mr. Sobel acknowledged receipt of the documents and supplied DBL with the “fed reference number [(2968)] in regard to the $2,577,000 federal funds wired today.” Id. (OW009879).

xi. How Much UFG Common Stock Did DBL Hold, When Did It Hold It, And Who Knew About It?

A110. Mr. Oliver summarized DBL’s holdings of UFG common stock in Exhibit T-1213, Tab 224. In addition, however, all the relevant DBL records are in evidence. Apparently, there was some initial confusion at DBL as to how to account for the transaction. DBL’s records first showed a reduction in its holdings of UFG common stock in the “42 Account” from 790,459 shares on December 20, 1985, to 490,200 on December 31, 1985. Ex. T-1193, Tab 64 (OW025153) with id. (OW025154). The Stock Record Weekly showed a balance approximately 490,000 shares in the “42 Account” through March 14, 1986. Id. (OW025153-63).

A111. On March 21, 1986, however, the balance in the Stock Record Weekly was restored to approximately 790,000 shares. Id.(OW025164). The trade runs for the relevant period do not reflect the purchase of additional shares in the “42 Account” during March 1986. See Ex. T-1207, Tab 217 (OW026217-23). The Stock Record Weekly for March 21, 1986, and subsequent dates, however, does present a rational explanation for the 300,000 share discrepancy. There are multiple entries under account number 06-12942-3, designated by suffixes: “00,” “01,” and “07.” Ex. T-1193, Tab 64 (OW025164). Mr. Deignan, who was familiar with such matters by virtue of his employment at DBL, his extensive securities licensing, and his years of experience in the securities industry, explained with respect to Ex. T-1200, Tab 63, the account number consists of a number of parts: The first two digits, “06,” indicate that it is a house account, that is, an account actually owned by DBL; “12942” is the actual account number; the following “3” is a check digit. Following the check digit is a numerical code for the account type: “0” was a default number for most house accounts; “type 1” was a cash account; “type 2” was a margin account; and “type 7” was reserved for restricted securities. Tr. 1,045: 15 - 1047: 21. As Mr. Deignan put it: “Anything that was not freely tradable for one reason or another would go into a Type 7.” Tr. 1,047: 19-21.

A112. The March 21, 1986, Stock Record Weekly reflects a “settled long” balance of approximately 788,096 shares of UFG common stock in the “00” type subaccount (06-12942-3-00), a “settled short” balance of 300,000 shares in the type “01” subaccount (06-12942-3-01), and a “settled long” balance of 300,000 shares in the “type “07” subaccount (06012942-07). Ex. T-1193, Tab 64 (OW025164). The March 27, 1986, Stock Record Weekly reflects a settled long balance of 488,821 in the type “00” account (06-12942-3-00) and 300,000 in the type “07” account. From that time forward, until September 11, 1987, DBL recorded its holdings of UFG stock in the “42 Account” consistently, that is it recorded 300,000 shares in the type “07” restricted account, which is consistent with the shares being under option, and the remainder in the type “00” account. Id. (OW25165-243).

A113. Mr. Oliver compiled the information in Ex. T-1213, Tab 224 using the assumption that the holdings in the various subaccounts of the “42 Account” should be aggregated on the basis of the facts set forth above. The Court finds that Mr. Oliver’s assumption is a reasonable one and is supported by the evidence. For that reason , the Court finds that Exhibit T-1213 sets forth with the greatest accuracy attainable with the available evidence DBL’s holdings of UFG common stock in the “42 Account” from February 16, 1982, though December 30, 1988.

A114. The apparent confusion in the Stock Record Weekly and the correction thereof is significant. UFG’s 1986 Proxy Statement, dated March 31, 1986, reported the following:

(5) Based upon information provided to the Company, as of March 14, 1986, the Drexel Burnham Lambert Group, Inc. as a group, through its broker-dealer subsidiary, Drexel Burnham Lambert Incorporated (‘DBL’), beneficially owned 488,931 shares of Common Stock of the Company. In December 1985, DBL granted to MCO a call option on 300,000 of the shares of the Company’s Common Stock which DBL holds (the ‘Call’). The Call is exercisable during a one month period commencing July 1, 1988. In the event that MCO does not exercise the Call, it is required to grant to DBL a put option in respect of such shares, exercisable during a one month period commencing August 1, 1988.

Ex. A-3013, Tab 88, p. 3. UFG could not have been relying on DBL’s Schedule 13G (Ex. T-1116, Tab 51), because that was filed on February 13, 1986, reflects holdings as of December 31, 1985, (see id. p. 4), and would have been forwarded to UFG in due course. The Proxy Statement indicates specifically that the DBL holdings reported are “as of March 14, 1986.”

A115. The Proxy Statement itself was dated March 31, 1986. Prior to that time DBL corrected its own books, but did not inform UFG of the correction. However, Hurwitz, Munitz, and Dr. Kozmetsky, who were all members of the UFG Board, were also members of the MCO Board and were present at the December 17, 1985, MCO Board meeting at which the Stock Option Agreement had been approved. See Ex. T-1085, Tab 26. As discussed above at A90 - A92, at the time of the MCO Board meeting, MCO and DBL were still attempting to gain approval for a transaction covering 790,459 shares of UFG. It was only later that MCO and DBL learned that the NASD would not allow that proposed transaction to take place. It is simply not credible that sophisticated businessmen such as they would have forgotten within three months that DBL owned approximately 790,000 shares of UFG common stock. Moreover, the Proxy Statement note is simply misleading as it implies that the 300,000 shares subject to the “Call” were included within the 488,931 shares referenced. (A further implication was that after exercise, DBL would own only 188,931 shares of UFG, a relatively less significant position.) Hurwitz (who signed the cover letter to the Proxy Statement as Chairman of the Board of UFG, Ex. A-3013, Tab 88), Munitz, and Dr. Kozmetsky must have known full well that was not correct. Notwithstanding their knowledge, none of them corrected this misleading statement.

A116. Based upon his compilation of balances of UFG common stock in the “42 Account,” and the NASD’s records of the trading prices of UFG common stock from February 1982 through December 1988, Mr. Oliver also prepared three charts (Ex. T-1214, Tab 225; 1215, Tab 226; T-1216, Tab 227) as graphic representations (1) showing the amount of DBL’s holdings at the end of each quarter from March 30, 1983, through December 30, 1988, (Ex. T-1214), (2) showing the price of UFG common stock on the NASDAQ market from January 21, 1983, through December 30, 1988, (Ex. T-1215), and (3) superimposing the price information over the balance information. Ex. T-1214, Tab 225 and T-1213, Tab 224, show that DBL’s holdings of UFG common stock remained nearly constant at the level of approximately 790,000 shares from December 1985 through early 1987, when DBL began a gradual sell-off of its position. By December 31, 1987, DBL had reduced its holdings to 574,074 shares. Ex. T-1213, Tab 224, p. 18. By June 17, 1988, the position had been reduced to 300,000 shares , id., where it remained through the end of 1988. Id. p. 19.

A117. As can be seen from Exhibit T-1213, DBL purchased some of the shares it held in the “42 Account” for more than $10 per share immediately following the filing of the MCO/FDC holding company application. See Ex. T-1213, p. 3. Exhibits T-1215, Tab 226, and T-1216, Tab 227, demonstrate that DBL continued to hold its approximately 790,000-share position for nearly two years, while the price of UFG stock plummeted from over $7.00 per share to approximately $2 per share. Only after the price had fallen below $2.00 per share did DBL even begin to sell off its UFG common stock. See Ex. T-1213, Tab 224, p. 16 (data for January 1987). Indeed, the price had fallen to less than $1 per share before DBL was able to sell off the bulk of its shares in excess of the 300,000 shares subject to the Stock Option Agreement. Id. p. 17. (data for November 20, 1987: holdings - 674,324 shares, price - $0.875). Thus, some 374,324 shares of UFG stock were sold off by DBL at less than $1 per share. See id. pp. 17-18 (high bid prices all below $1).

A118. As noted above at A65, MCO and FDC finally notified the FHLBB that they would seek no more extensions of the time to consummate the acquisition of up to 10% of the shares of UFG on December 12, 1987, and Resolution 84-712 lapsed on December 22, 1987. DBL continued to hold the bulk of its position (more than 700,000 shares) until November 6, 1987, only approximately 1-1/2 months before MCO and FDC’s notice. Thus, DBL’s sell-off of
shares from the “42 Account” began in earnest only when the MCO/FDC withdrawal of the H(e)-1 Application was imminent.

xii. Who Bore The Risk Of Loss In The Stock Option Agreement?

A119. As discussed in the Court’s Conclusions of Law, much in this case turns on which party bore the risk of loss with respect to the 300,000 shares that were the subject of the Stock Option Agreement. Virtually all of the witnesses who testified on the matter were in agreement that MCO bore the risk of loss. Mr. Schwartz, who negotiated the transaction for MCO, agreed that “[Y]es, it's true that having a put did, in response to your question earlier, give MCO the risk of a downside … [a]t a future point in time.” Tr. 1,213: 14 - 18. Mr. Madigan, somewhat more expansively, agreed:

Q. (BY MR. RINALDI) Mr. Madigan, in connection with this stock option arrangement, as between MCO and Drexel Burnham Lambert, who had the market risk with respect to the shares of UFG?

A. I believe it was MCO.

Q. And why do you say that?

A. We went to whatever length we could to ensure that if they did not exercise their option, we were given a position to exercise ours and payment would be guaranteed by the letter of credit.

Q. And if the shares that were the subject of the option had declined in value, would you -- who would have borne the risk of that decline in value?

A. As between ourselves and MCO?

Q. Yes.

A. I believe MCO.

Q. And would that be because you would have put the shares back to MCO and collected the strike price from the letter of credit?

A. That's what my intention was.

Tr. 778: 11 - 779: 10.

A120. Hurwitz also testified that that MCO got “all of the upside,” Tr. 26,033: 4-10, and also had the “downside risk.” Tr. 26,033: 11 - 26,034: 3. As Hurwitz described the transaction, one of his goals was “to own more economics in something that we thought was a very attractive investment.” Tr. 26,032: 10-12.[23]

A121. The respondents have elicited testimony to the effect that DBL “gave up the upside.” See, e.g., Tr. 780: 4-22 (Madigan). The fact that DBL would not realize additional appreciation, however, was not a “risk” nor was there a “loss” involved. It merely indicates that both the risks and rewards of ownership were transferred to MCO by the Stock Option Agreement. In other words, DBL transferred the rewards of ownership (i.e., potential capital appreciation) to MCO in exchange for MCO’s assumption of the risks of ownership (i.e., potential capital depreciation) – and a sizable cash premium.

A122. Even the respondents’ expert witness, Rosemary Stewart agreed, although, perhaps, she did not intend to. When asked what would have happened if DBL had exercised its put and MCO had refused to take the UFG stock, she stated:

A. I believe that Drexel could have then been expected to put the option [sic] to them; and upon hearing that MCO was not willing to take the stock, Drexel would then have had a right to call on the letter of credit. And I believe the shares would have gone to the bank that issued the letter of credit for that bank then to dispose of them.

Q. And at that point, what? It would be an issue between MCO and the bank as to what happened to the shares?

A. Well, yes. If the bank received any price for the shares above what it had already received on a letter of credit, it would have paid it over to MCO. If it was a complete loss, it would have simply been, you know, the company's to bear and to work out with the bank.

Tr. 26,527: 14 - 26,528: 7. In other words, MCO had both the risks and the rewards of ownership.

A123. DBL was to be paid a fixed price, significantly above the market price as of December 24, 1985, for the stock, and it had no risk of loss on the stock. Thus, with respect to its investment in those 300,000 shares, DBL had constructed the perfect hedge. Unlike the unsuccessful, putative hedging transactions discussed below in the MBSs section, by fixing its sales price, DBL actually locked in the gain on its investment in the 300,000 shares of UFG stock. The only apparent risk to DBL was the remote possibility that the bank issuing the letter of credit might fail. Ultimately, DBL exercised its put option on the 300,000 shares, transferred them to MCO, and realized the full exercise price under the Stock Option Agreement, $8.59 per share, or $2,577,000, at a time when the 300,000 shares were worthless in the market.

A124. In stark contrast, DBL not only retained, but actually realized the risk of loss with respect to the remaining 490,000 shares of UFG stock (i.e., the shares not covered by the put/call arrangement) and suffered the consequences of their decline in value in 1987 and 1988, as described above at A116 - A117. On the other hand, it was MCO that suffered the loss of value on the 300,000 optioned shares of UFG stock. No set of facts could illustrate more clearly that the risk of loss on the 300,000 optioned shares was borne by MCO.

G. FDC and MCO Convert Their Class C Preferred Shares of UFG To Class D Preferred Shares

A125. As the convertibility date for MCO and FDC’s Series C Convertible Preferred Stock neared, MCO and FDC began to express concern that the convertibility of their preferred shares might cause their ownership of the UFG preferred stock to be considered ownership of UFG common stock, and that they might, therefore, be deemed to have acquired control of UFG and, thus, have become obligated under the net worth maintenance condition of Resolution No. 84-712. As discussed more fully below at S171 - S184, Berner, purportedly on behalf of UFG, but at the behest of Hurwitz, initiated discussions with the FHLBB of a plan, ultimately carried out, to delay the convertibility of the Series C Preferred Shares by converting them to a new class of Series D Preferred Shares.

H. Hurwitz Arranges For Gross, Crow, And Williams To Purchase UFG Stock With Loans From UFG

A126. In addition to the above-mentioned methods of controlling shares without appearing to “control” them, Hurwitz, acting for MCO and FDC, arranged for UFG to lend officers of UFG and USAT $2,199,969 to purchase approximately 303,444 shares (3.7%) of UFG common stock at $7.25 per share in approximately June 1985. Ex. A-3013, Tab 88, pp. 1, 16 (UFG 06338, 06353); see Ex. T-8175, Tab 1799 (Gross transactional document 06/24/85). In particular, Gross borrowed $761,250 to purchase 105,000 shares, Crow borrowed $250,006 to purchase 34,483 shares,[24] and Gerald Williams borrowed $186,250 to purchase 25,690 shares. Id. p. 16 (UFG 006353).

A127. Mr. Gerald Williams testified that Hurwitz brought the availability of the shares to their attention and made it known to them that UFG would finance the purchase of the UFG shares. Mr. Williams’ testimony is illuminating:

Q. (BY MR. GUIDO) I'd like to direct your attention to Page 16, Mr. Williams. A discussion of the purchase of stock by certain officers. Do you recall the transaction in which you were offered stock in UFG sometime in 1985?

A. Yes, sir.

Q. And who offered that stock to you?

A. Mr. Hurwitz.

Q. And who financed the purchase of that stock?

A. UFG, the parent company, not the thrift.

Q. Who offered the parent company to finance that stock?

A. Mr. Hurwitz.

Q. And did you purchase that stock?

A. Unhappily, I did.

Q. And did you receive a loan of $186,250?

A. I did. I paid it back.

Q. Did you ever learn how that stock became available to be purchased?

A. This is somewhat vague, but there was a block of stock held by I believe a real estate developer in the city. I don't recall his name. He had all the stock and was going to sell it. We became aware of it and the next thing I knew is that that's when Mr. Hurwitz came to us and said this would be something that might be good for the executives and he offered the proposal I just outlined.

Q. Did he make the same proposal to all of the individuals that are listed on Page 16, to your knowledge?

A. Well, I can only answer that he must have. I was never part of his discussion with them. He talked to us all as -- I guess talked to me individually.

Q. So, you don't know whether or not he offered any stock to any other individuals?

A. No. Just this group here that's in the proxy.

Q. These are the only ones you know that offers were made to?

A. I don't know of any other offers.

Tr. 2,200: 12 - 2,202: 12.

A128. Gross was less specific about the mechanics of the purchase of stock, but recalled that either Hurwitz or Munitz had initially approached him:

Q. Now, who brought the subject of the stock's availability to your attention, sir?

A. It would either have been Barry Munitz or Charles Hurwitz.

Q. Okay. And do you recall what you were told at that point in time when the stock was brought to your attention?

A. Yes. We were told that this would be -- this was something that was being provided by the company as an added incentive to the officers and that the company was willing to do this because if we had additional ownership in the institution, we would have additional incentive and motivation to strive to make it successful because we would derive more benefit from its success.

Q. And the company, therefore, agreed to loan you the $761,250 to purchase the 105,000 shares?

A. Yes.

Tr. 21,019: 21 - 21,020: 18 (emphasis added).

A129. Apparently attempting to minimize the significance of this purchase under questioning by his counsel, Gross testified that this was not the first time he had purchased UFG stock – that he had purchased 7,000 shares previously, in two blocks of 2,000 and 5,000 shares, respectively for his IRA. Tr. 21,628: 13 - 21,630: 3. The source of the first 2,000 shares is not identifiable from the record in this case, but the DBL “Trade Run,” Exhibit T-1206, Tab 216, reflects two transactions totaling 5,000 shares (350 and 4,650 shares) on April 24 and 26, 1985 at $6.50. See id. at pp. 43, 45. Thus, Gross appears to have been one of the few favored purchasers of UFG stock out of DBL’s “42 Account” during the period that DBL was accumulating UFG shares for ultimate sale to MCO. This purchase took place barely three months after he had become Chairman and CEO of USAT and contemporaneously with his election as a director of UFG. See A163 - A167 below. Moreover, there are also two offsetting transactions relating to Gross’ IRA on p. 44 of Exhibit T-1206 that appear to cancel out a purchase of 4,650 shares at a higher price -- $6.75 per share. It appears that Gross may have received favorable price treatment from DBL.

A130. Crow testified that he was told of the possibility of purchasing shares of UFG common stock by Gerald Williams and that he was unaware of the source of the stock. Tr. 14,987: 4-14; 14,988: 4-9.

A131. It is significant that Gross stated that he was told that the stock purchase transaction was being offered “by the company.” Both he and Gerald Williams were not only directors, but members of the Executive Committee, as well as senior managers, of UFG at the time of these transactions. See A159, A163 - A167, A170, A176 (Chart), below. Yet, the testimony of Gross and Gerald Williams indicates that Hurwitz and/or Munitz unilaterally
determined that UFG would lend members of management some $2.2 million to purchase company stock and then told the officers of the benefit UFG was extending them. Had the UFG board of directors been operating properly, one would reasonably expect that Gross and Gerald Williams would have heard of the proposal through the board, not directly from Hurwitz and/or Munitz, and would at least have been involved in the consideration and approval of loans to the other officers either as directors or as members of the Executive Committee.

A132. Moreover, one would have expected that the minutes of the Board of Directors would reflect discussions and approvals of such insider loans, but a review of the board minutes in the record reveals no evidence that any such discussions or approvals took place. The Acknowledgment of Receipt of Pledged Stock, Ex. T-8175, Tab 1799, recites that Gross executed his promissory note for $761,250 on June 24, 1985. There is no 1985 minute of either the Board of Directors or of the Executive Committee of UFG in the record reflecting approval or discussion of the loan reflected by Gross’ promissory note or any of the other loans to officers of UFG to buy UFG shares.[25]

II. Corporate Governance

A. Hurwitz Places FDC And MCO Representatives On The UFG And USAT Boards

A133. Shortly after FDC filed the notice with the Federal Home Loan Bank Board on August 2, 1982, of its intention to acquire up to 24.9% of the outstanding shares of UFG, Hurwitz (the Chairman of the Board, CEO and Trustee of FDC and the Chairman, CEO and Director of MCO) (Ex. T-4040, Tab 13 (H-(e) 1 application) p. OW010492) began to takes steps to place representatives of the “Group” composed of FDC and George Kozmetsky (a Trustee of FDC and personal friend of Hurwitz) on the Boards of UFG and USAT. Ex. A-2066, Tab 37 p. OFD 2457.

1. Barry Munitz Goes On The USAT And UFG Boards And Executive Committees

A134. Barry Munitz, who Hurwitz had known socially (Tr. 25,063: 9 - 25,065: 9 (Munitz)), was recruited by Hurwitz in 1982 to serve as President of FDC and Vice Chairman of MCO. Tr. 25,065: 10 - 25,067: 15 (Munitz). According to Hurwitz, Munitz was part of the FDC/MCO “management team” and a person Hurwitz relied upon to solve problems which arose. Tr. 25,855: 16 - 25,856: 12. On August 26, 1982, eight days after becoming a Trustee of FDC, Munitz was elected to the Board of UFG. Ex. A-2065, Tab 37 (08/26/82 Schedule 13D, Amendment No. 4) pp. CN007060, and 62; A-1061, Tab 109 (08/26/82 UFG Board Minutes). Hurwitz testified that he urged that Munitz be placed upon the Board of UFG in order to give representation to FDC, the largest shareholder of UFG. Tr. 25,834: 7 - 25,835: 18 (Hurwitz); Tr. 1,636: 3-11 (Bentley). Munitz also served as a Trustee and President of FDC and the Vice Chairman of MCO. Ex. T-4040, Tab 13 (H-(e) 1 application) p. OW010492.

A135. The following month, at the USAT Board meeting on September 28, 1982, Munitz was also named as a Director of USAT. Ex. T-10523, Tab 110. Munitz was Hurwitz’s “designee” on the USAT Board, and had been place on the Board as part of an agreement reached with between Bentley and Hurwitz. Tr. 1,645: 12 - 1,646: 2 (Bentley). Munitz represented the interests of MCO and FDC. Tr. 1,637: 2-22 (Bentley); Ex. A-1056, Tab 108 (05/27/82 UFG Minutes). He remained on the USAT Board until the institution was placed in receivership. Ex. A-3016, Tab 93 (1989 Proxy) p. 5.

A136. According to Munitz, when he was first approached by Hurwitz to assume a position at MCO/FDC, Hurwitz told him “I can handle the business side and the deal-making side in the financial transactions; but I'm going to need somebody…to help me on the people process political side of the house.” Tr. 25,132: 11 - 25,134: 18; Tr. 25,067: 2 - 25,068: 5; Tr. 25,071: 17 - 25,072: 11.

A137. After joining the Boards of UFG and USAT, Munitz had regular conversations with Hurwitz and reported to the MCO Board regarding the operations of UFG. Ex. T-1032, Tab 40 (12/15/82 MCO Board Minutes); T-1036, Tab 1947 (03/21/83 MCO Board Minutes); Tr. 25,886: 11-13 (Hurwitz); Tr. 25,150: 3 - 25,151: 10; Tr. 25,306: 17 - 25,308: 5 (Munitz).

A138. Over time, Munitz, who was “Charles Hurwitz right hand man” (Tr. 3,747: 5-7 (Orr)), began to assume a more and more active role in the management of USAT and UFG. Munitz testified that he became a member of the Executive Committees of both UFG and USAT, ultimately assuming the position of Chairman of the Executive Committee with respect to both entities. Tr. 25,272: 16 - 25,276: 9. The Minutes of the UFG Board show that on May 26, 1983, Munitz and Hurwitz were designated to serve on the UFG Executive Committee (Ex. A-1083, Tab 115 (05/26/83 UFG Minutes) p. W101988 to represent the interests of MCO and FDC. Tr. 1,691: 5-15 (Bentley). On February 14, 1985, Munitz became the Chairman of the UFG Executive Committee (Ex. A-1105A, Tab 2100 p. K003965), and remained in that capacity until after the failure of USAT. Ex. A-3014, Tab 92, p. 5.

A139. Munitz was also named a member of the USAT Executive Committee on January 25, 1984, (Ex. A-1090, Tab 125, p. US-3003023) and on February 14, 1985, was named Chairman of the Committee. Ex. A-1102, Tab 128, p. US-3 003064.

A140. On May 8, 1986, where USAT created its Investment Committee, Munitz was named as chairman. Ex. T-7587, Tab 655 (05/08/86 USAT minutes) p. US-3 003144. Prior to May 1986, Munitz had been part of the informal group that approved USAT’s investments. See A202.

2. George Kozmetsky Goes On The USAT And UFG Boards

A141. Shortly after joining the UFG and USAT Boards “[i]n early December, 1982, Dr. Barry Munitz …requested that the members of the Group [composed of MCO and FDC] be given additional representation on the Board of Directors of [UFG] as means of protecting and monitoring their investment in [UFG].” Ex: A-2066, Tab 37 (12/10/82, Schedule 13D, Amendment 5) p. CN026612; Tr. 1,684: 8 - 1,686: 6 (Bentley).

A142. On May 26, 1983, George Kozmetsky, a Trustee of FDC and a long time acquaintance of Hurwitz, was named to the Board of UFG. Ex: A-1078, Tab 190, (05/26/83 UFG Minutes) p. 1. As discussed previously, Kozmetsky had acquired 90,941 shares of UFG in August 1982 at precisely the same time FDC was increasing its ownership interest in UFG. Ex. A-2065, Tab 37, p. CN007062.

A143. The investment in UFG was first brought to Kozmetsky’s attention by Hurwitz. Tr. 2,348: 9 - 2,349: 9 (Kozmetsky). Kozmetsky represented the interests of Hurwitz, MCO and FDC on the Board of UFG. Tr. 1,683: 21 - 1,684: 20 (Bentley). On February 14, 1985, Kozmetsky also became a member of the Board of USAT. Ex. A-1102, Tab 128 (02/14/85 USAT Minutes), p. US-3 003063.

3. Charles Hurwitz Goes On The UFG Board And The Executive Committee

A144. Charles Hurwitz joined the UFG Board on May 26, 1983, at the same time as Kozmetsky. Ex: A-1078, Tab 190, p. W 102002. That same day Hurwitz, along with Munitz, became a member of the UFG Executive Committee. Ex: A-1083, Tab 115 (05/26/83 UFG Minutes) p. W101988. Hurwitz immediately asked “what planning had taken place in the area of corporate direction and strategy.” Id. at W101993

A145. On December 19, 1983, the Executive Committee of UFG discussed the “election of Mr. Hurwitz to the Board of United Savings Association of Texas” (Ex. A-10538, Tab 122 (UFG Executive Minutes) p. K 003377), but, unlike Munitz and Kozmetsky, Hurwitz did not take a position of the USAT Board. Tr. 26,091: 2 - 26,092: 1 (Hurwitz).

A146. On August 29, 1984, Hurwitz was elected President and CEO of UFG when Sonny Bentley resigned those positions. Ex. A-10544, Tab 191 (UFG Minutes) p. K 003675-76. The Minutes of the August 29, 1984, UFG Board meeting state as follows:

Mr. Bentley reviewed the history of the relationship of Federated Development Company and MCO Holdings, Inc. with the Company and outlined their activities with the Company including their pending application to become a savings and loan holding company. He explained that based on this significant role and the fact that Mr. Bentley now plans to devote more time to investor relations and concentration on
the Company’s regulatory relations, the Executive Committee unanimously recommended that Mr. Hurwitz be elected President of the Company.

Mr. Bentley said that there will also be a number of changes in the management reporting within the Association. Mr. Bentley will remain as the Association Chairman and Chief Executive Officer through 1985 and will take more of a policy role. Mr. Williams will take over additional direct reporting obligations of the managers who now report to Mr. Bentley.

Ex. A-10544, Tab191 p. K 003676 (emphasis added).

A147. A year later, on November 14, 1985, Hurwitz assumed the position of Chairman of the UFG Board when Bentley resigned as the Chairman of UFG. At the same time, Jenard Gross took over the positions of President and CEO from Hurwitz. Ex. A-3013, Tab 88 (1986 UFG Proxy) p. UFG 06343; A-10583, Tab 134 (11/14/85 UFG Minutes) p. K 004490.

B. Hurwitz Participates In The Creation Of A New Management Team For UFG And USAT

1. Hurwitz Expresses An Interest To Become More Actively Involved UFG And USAT

A148. By May 18, 1983, MCO and FDC had acquired 23.46% of the outstanding shares of UFG (Ex. A-2069, Tab 37 (Schedule 13D, Amendment 8) p. OFD 2521-22) and Hurwitz informed Bentley “…of the intention of MCO Holdings, Inc. and Federated Development Company to increase their ownership of UFG beyond the presently authorized 24.9 percent and for MCO and Federated to become savings and loan holding companies.” Ex. A-1078, Tab 190 (05/26/83 UFG Board Meeting) p. W 102006. Upon learning this information, Bentley questioned Hurwitz at the May 26, 1983, UFG Board meeting when Hurwitz joined the UFG
Board regarding MCO’s and FDC’s future plans with respect to UFG and USAT. Id. The Minutes of the May 26, 1983, Board meeting state as follows:

Mr. Bently pointed out that the Board’s prior understanding of MCO and Federated’s interest was limited strictly to an investment interest but that this increase raises the issue of control. … Mr. Hurwitz discussed other plans of the Company in response to questions from the board and expressed an interest in becoming more actively involved with UFG and United [USAT].

Ex. A-1083, Tab 115, p. W 101994 (emphasis added).

A149. Consistent with his statement at the May 26, 1983, UFG Board meeting, as time went by Hurwitz began to become “more actively involved with UFG and United” (id.), and, along with Munitz, attempted to influence the activities of UFG and USAT. Tr. 1,697: 15 - 1,698: 4 (Bentley).

2. Munitz’ Involvement In The Selection Of New Management Of USAT And UFG

A150. After joining the Boards and Executive Committees of UFG and USAT, Munitz became increasing involved in helping Hurwitz with what Munitz termed the “people process political side of the house.” Tr. 25,134: 4; Tr. 25,138: 14-18; Tr. 25,299: 18 - 25,300: 15; Tr. 25,303: 13 - 25,304: 17 (Munitz). Beginning in 1984, Munitz assisted in the hiring of key personnel for UFG and USAT Tr. 25,277: 3 - 25,278: 14; Tr. 25,284: 1 - 25,291: 2 (Munitz). By the beginning of 1985, Munitz had become so involved in the operations of USAT and UFG that he became an officer of UFG, not just a consultant. Tr. 25,275: 5 - 25,276: 9; Tr. 25,297: 9 - 25,300: 15 (Munitz). His responsibilities included: “compensation, executive recruitment, board relationships and board appointments, strategic planning, and overall what I would refer to as administrative governance process…” Tr. 25,304: 1-5. Munitz testified that, although he was never a paid employee of USAT, “I was obviously doing work with them [USAT] because it was very hard to distinguish between the two. I mean, the major asset of UFGI was USAT.” Tr. 25,305: 6-9. As a consequence, most of the work that Munitz performed at UFG was done in connection with employees and operations at USAT. Tr. 25,306: 17-20 (Munitz).

A151. Between 1985 and 1987, Munitz’ involvement with UFG and USAT continued to increase (Tr. 25,302: 7 - 25,303: 5) to the point that by 1987 he was devoting a “relatively large percentage” of his time to the “administrative governance” of both entities. Tr. 25,302: 20 (Munitz). Gross, who was head of operations and the CEO and COB of USAT to which the various division heads all reported (Tr. 20,851: 14 - 20,854: 12; Tr. 20,859: 13 - 20,860: 7 (Gross)), testified that he had a “collegial” (Tr. 20,855: 17 - 20,856: 22 (Gross)) relationship with Munitz, but Munitz was not under his direction. Tr. 20,858: 8-13; Tr. 20,854: 13-21 (Gross).

A152. As the Chairman of the Executive Committee of UFG, Munitz reported to Hurwitz about his activities with respect to UFG and USAT, particularly after November 1985, when Hurwitz assumed the position of Chairman of the UFG Board. Tr. 25,307: 8 - 25,308: 5 (Munitz); Tr. 8,504: 22 - 8,505: 14 (B. Williams). Munitz testified that the entire time he was involved with UFG and USAT he occupied an office adjacent to Hurwitz and was in daily communications with him. Tr. 25,150: 3 - 25,151: 10; Tr. 25,306: 21 - 25,307: 7 (Munitz). As Gross testified: “Barry [Munitz] worked for Charles [Hurwitz], and I think that they tended to see things similarly.” Tr. 20,505: 20-21. Munitz was Hurwitz’ “right hand man.” Tr. 3,747: 5-7 (Orr).

A153. Munitz and Gross were the top level of executive management of USAT (Tr. 14,868: 16-20 (Crow)) and Munitz interacted with the senior executives of USAT on a “daily
basis.” Tr. 25,308: 6 - 25,314: 3 (Munitz). In addition to being involved in “strategic planning,” “compensation issues,” and “hiring and firing type issues, for USAT” (Tr. 14,869: 20 - 14,870: 13 (Crow); Tr. 15,927: 22 - 15,928: 14 (Crow)), Munitz served as a “liaison with board members” such as Hurwitz. Tr. 14,870: 8-10 (Crow); Tr. 25,871: 10-18 (Hurwitz).

3. Munitz Assembled A New Management Team

A154. The Minutes of the March 27, 1986, MCO Board of Directors meeting state that “[t]he Chairman [Hurwitz] reported that a valuable management team had been formed at UFG.” Ex. T-1120, Tab 1930, p. OMX 23224.

A155. Munitz assembled the USAT management team after he was retained by Hurwitz to hire “the appropriate people that you needed in order to make the businesses run.” Tr. 25,167: 5 - 25,168: 2 (Munitz). According to Hurwitz, Munitz “…was involved in putting together a management team at United Financial” which included Gross, Williams, Berner and Crow. Tr. 25,950: 1-21 (Hurwitz); Tr. 25,168: 4-17 (Munitz). Hurwitz also participated in the hiring of the new management team and in particular was interested in the selection of “the top leadership role.” Tr. 25,168: 18 - 25,170: 4 (Munitz).

A156. Bentley testified that between December 31, 1981, when FDC first began acquiring shares of UFG, and December 31, 1985, (shortly after Bentley resigned), control of UFG effectively shifted to MCO/Federated. Tr. 2,050: 17 - 2,051: 9. During that time frame all of the officers of UFG, with the exception of Pledger, had been replaced (Tr. 2,050: 6-9 (Bentley)) by members of the management team assembled by Munitz. Tr. 2,049: 10-20 (Bentley); Tr. 25,168: 6-17 (Munitz). Pledger, who remained on as Secretary of UFG, was
replaced as General Counsel by Berner in September 1985. Tr. 18,496: 15-21 (Berner); Tr. 2,049: 5-9 (Bentley).

4. Old Management Is Replaced

A157. As part of MCO/Federated’s acquisition of Control of UFG and USAT, Munitz and Hurwitz engineered the replacement of most of USAT’s senior management with representatives of their own selection, as follows:

i. Coles Departure.

A158. At the November 10, 1983, meeting of the Boards of USAT and UFG, James A. Coles, the CEO and Chairman of USAT and the President and a Director of UFG, resigned and was replaced by C. E. Bentley as Chairman and CEO of USAT and Chairman, President and CEO of UFG. A-1087; Tab 119 (11/10/83 USAT Minutes); A-1086, Tab 118 (11/10/83 UFG Minutes); Tr. 1,611: 2-10 (Bentley). Coles had some difficulties with Hurwitz and decided to leave. Tr. 2,198: 12-17 (G. Williams). According to Bentley, Coles became “incensed” when Hurwitz and Munitz suggested that the position Coles held as President of UFG should be converted to an office of the president consisting of four members including Munitz and Hurwitz. Tr. 1707: 14 - 1,708: 3. Ultimately, Coles resigned after Munitz and Hurwitz “offered him the full severance program that was due him under his employment agreement.” Tr. 1,709: 10-18 (Bentley).

ii. Bentley’s Departure

A159. Less than a year after Cole’s resignation, Bentley resigned as President and CEO of UFG. Ex. A-10544, Tab 191 (08/29/84 UFG Minutes) p. OW006614; Tr. 1,611: 11 - 1,613: 1
(Bentley). The board minutes state that Bentley “outlined [MCO and FDC’s] activities with [UFG]” and “that based on this significant role and the fact that Bentley plans to devote more time to investor relations and concentration on the Company’s regulatory relations” he was replaced by Hurwitz as President and CEO of UFG. Ex. A-10544, Tab 191 (08/29/84 UFG Minutes) p. 1. Bentley continued to serve as the Chairman of both the UFG and USAT Boards (Tr. 1,611: 11 - 1,612: 6 (Bentley)) and the CEO of USAT (Ex. A-10544, Tab 191 (08/24/84 UFG Minutes) p. 2), but the minutes state that Mr. Williams took over the “direct reporting obligations of the managers who now report to Mr. Bentley,” and Bentley took on “more of a policy role.” Ex. A-10544, Tab 191 (08/29/84 UFG Minutes) p. 2.

A160. In February 1985, Gross took over as Chairman and CEO of USAT and Bentley became the Senior Chairman and “effectively left” USAT. Ex. A-1102, Tab 128 (02/14/85 USAT Minutes) p. 4; Tr. 1,612: 11-14; Tr. 2,241: 21 - 2,242: 5 (Bentley). Gerald Williams testified that: “Mr. Bentley told me that he had lunch with Mr. Hurwitz and that this change was going to be made. Mr. Gross was going to come in and while he [Bentley] was not going to be leaving right away, he was going to be phasing out, to use his term, over the rest of the year.” Tr. 2,242: 16-21; Tr. 2,243: 17 - 2,244: 14. On November 14, 1985, Bentley resigned all director and officer positions at both UFG and USAT and severed all relationships with the entities. Ex. A-10583, Tab 134 (11/14/85 UFG Minutes) p. 4. Hurwitz replaced Bentley as the Chairman of UFG. Id.

iii. Ronald Huebsch Goes To Work For USAT Managing Investment Activities

A161. In the beginning of 1984, Ron Huebsch was asked by Hurwitz and Mr. Williams to begin planning to create a USAT trading facility. Ex. T-4061, Tab 173 (03/29/84 Huebsch memo on a USAT Investment Facility); Tr. 13,425: 2-5 (Huebsch). At the time, Huebsch was an employee of FDC, where he had been employed by Hurwitz since 1974 as a portfolio manager. Ex. A-10663, Tab 184, (1986 Business Plan) p. OW150620; Tr. 13,403: 1-4; Tr. 13,407: 5-8; Tr. 13,420: 10 - 13,421: 9 (Huebsch). In the latter half of 1984, Huebsch, at the direction of Hurwitz, began “planning” and doing the “background work” for the creation of a MBSs portfolio and an equity arbitrage portfolio for USAT. Tr. 13,422: 15 - 13,425: 1 (Huebsch). At Hurwitz’s direction he also began to research a high-yield bond portfolio, purchased high-yield bonds on behalf of USAT, and hired Joe Phillips to manage USAT’s high-yield bond portfolio. Tr. 13,421: 13 - 13,424: 10 (Huebsch). After doing the background work to set up the USAT investment portfolios, Huebsch was hired by USAT as an Investment Manager and Executive Vice President in February 1985. Ex. A-10663, Tab 184 (1986 Business Plan) p. OW150620. During the time Huebsch worked for USAT, he occupied an office on the same floor as Munitz and Hurwitz, and where the investment trading floor was located. Tr. 26,102: 19 - 26,103: 22 (Hurwitz).

A162. Huebsch also managed the equity arbitrage portfolio jointly with the same portfolios for UFG Federated and MCO. Tr. 13,900: 3 - 13,901: 6 (Huebsch). All four portfolios had the same investment goals and would buy the same securities. Tr. 13,901: 9-21 (Huebsch).

iv. Jenard Gross, Who Had No Prior Thrift Experience, Is Hired As USAT’s CEO

a. Gross Becomes The CEO And President Of USAT

A163. At the beginning of 1985 Jenard Gross replaced Sonny Bentley as the CEO of USAT. Ex. A-1102, Tab 128 (o2/14/85 USAT Minutes) p. US-3 003066. Munitz testified that Hurwitz “mentioned that Jenard [Gross] as one of what he thought was a prime candidate to take that job” and asked Munitz to approach Gross to see whether Gross would be interested in the position. Tr. 25,433: 14-22. Gross had been a friend of Hurwitz and Munitz for a number of years. Tr. 20,468: 9-14 (Gross); Tr. 1,764: 16-19 (Bentley); Tr. 26,097: 18 - 26,098: 3 (Hurwitz).

A164. Thereafter, Gross became a Director of USAT on January 24, 1985, (Ex. A-1102, Tab 128 (02/14/85 USAT Minutes) p. US-3 003063) and at the next meeting of the USAT Board on February 14, 1985, Gross replaced Bentley as the Chairman and CEO of the Association (Id. p. US-3 003066; Tr. 20,472: 15-18; Tr. 20,496: 22 - 20,497: 1-4 (Gross)) and was named to the Executive Committee of USAT. Id. p. US-3 003064.

A165. Initially, Gross had served as a consultant at USAT helping with problems in the USAT Real Estate Department. Tr. 20,467: 5-16; Tr. 20,466: 2 - 20,467: 2 (Gross). Prior to joining USAT, he had been in the real estate development business, developing mainly apartment projects. Tr. 20,453: 18-22; Tr. 20,454: 12-16, Tr. 20,465: 6-7; Tr. 20,459: 3 - 20,961: 19 (Gross). After working as a real estate consultant for USAT for less than a year, Gross assumed the position of CEO of USAT. Tr. 20,470: 13-22; Tr. 20,472: 6-10 (Gross).

A166. In January 1987, after Gerald Williams resigned, Gross also became President of USAT. Ex. A-1122, Tab 394, (01/08/87 USAT Minutes) p. US-3 003136.

b. Gross Becomes CEO And President Of UFG

A167. In April 1985, Gross became a member of the UFG Board of Directors. Ex. A-3012, Tab 194, (1985 UFG Proxy) p. UFG 08757; Tr. 20,473: 12-14 (Gross). On November 14, 1985, Gross also became the CEO of UFG and took over from Hurwitz as the President of UFG. Ex. A-3013, Tab 88 (1986 UFG Proxy) p. UFG 06343. Gross also became a member of the UFG Executive Committee in 1985. Id. p. UFG 06345. On February 11, 1988, after Hurwitz resigned as Chairman of UFG, Gross became the Chairman of the UFG Board as well. Ex. A-1140, Tab. 1407, (02/11/88 UFG Minutes) p. W 400350.

A168. Prior to assuming these positions at USAT and UFG, Gross had been president of Gross Builders, a real estate investment company, and the director of an insurance company. Ex. A-3013, Tab 88, (1986 UFG Proxy) p. UFG 06343. Gross’ only prior savings and loan experience was limited to serving as a director of two small Texas savings associations with assets of approximately $50 million and $100 million, respectively. Tr. 20,449: 17 - 20,450: 1; Tr. 20,450: 19-22; Tr. 20,451: 21-22; Tr. 20,452: 1-3 (Gross). Gross had never been employed as an officer of a savings and loan prior to being approached by Munitz to work for USAT. Tr. 20,455: 7-14 (Gross).

A169. Gross remained on as Chairman, CEO and President of both USAT and UFG until he resigned from all of his positions at both companies on October 31, 1988. Ex. T-8114, Tab 446 (Gross letter).

v. Gerald Williams Hired

A170. In early 1983 Hurwitz approached Gerald Williams, who he knew from when Williams was employed at First City Bank Corporation, and advised him that there was a position at USAT in which Williams might be interested. Hurwitz referred Williams to Coles and he was hired by Coles as President of USAT. At the same time he also became an Executive Vice President of UFG. Tr. 2,193: 9 - 2,195: 17 (G. Williams). When Coles left at the end of 1983, G. Williams reported to Bentley, and, when Bentley “effectively left” USAT at the beginning of 1985, G. Williams reported to Gross, at both USAT and UFG. Tr. 2,198: 18 - 2,199: 12 (G. Williams).

A171. In January 1987, G. Williams had a disagreement with Hurwitz and others (Tr. 20,508: 10 - 20,510: 6 (Gross)) and was thereafter asked to resign by Munitz. Tr. 2,312: 6 - 2,314: 15 (G. Williams). Williams talked to Hurwitz about his termination; Williams testified “he [Hurwitz] thought it was best, that Jenard [Gross] could handle it all. And he thanked me for what I had contributed but there was no need for me to remain.” Tr. 2,315: 2-7 (G. Williams); Ex. A-3014, Tab 92 (1987 UFG Proxy 03/31/87) p. 9-10. Williams also asked Hurwitz to buy back the UFG stock which he had purchased in order to satisfy the debt which Williams owed UFG as a result of the purchase. Hurwitz responded “Dr. Munitz will work out your settlement, and we'll be fair to you on your contract," but they did not buy back the stock. Tr. 6,319: 2 - 7 (G. Williams).

vi. Crow Hired

A172. Shortly after G. Williams was hired as President of USAT, he hired Crow as Chief Financial Officer (“CFO”) of USAT. Tr. 2,196: 19-22; Tr. 2,197: 1-6 (G. Williams). Crow also became the CFO of UFG. Tr. 14,466: 5-8 (Crow). At the February 28, 1984, UFG Board meeting, Hurwitz moved to elect Crow as Senior Vice President and CFO of UFG. Ex. A-1092, Tab 127.

vii. Berner Replaces Pledger As The General Counsel Of UFG/USAT

A173. In the latter part of 1985, UFG began looking for a new General Counsel to replace James Pledger. Berner was initially contacted by Kenny Friedman, an attorney with the firm of Mayor, Day, Caldwell, and Keeton, whose ex-wife was Hurwitz’ cousin. Tr. 18,492: 14-17 (Berner). After Berner advised Friedman that he might have an interest in working for UFG (Tr. 18,493: 1-3 (Berner)), he was contacted by Munitz and had a series of interviews with USAT’s and UFG’s management, including Hurwitz. Tr. 18,493: 8 - 18,494: 8 (Berner). Berner was hired as General Counsel for UFG and began work there on September 30, 1985. Tr. 18,496: 15-21 (Berner). As General Counsel for UFG his duties included supervising the entire legal staff of USAT, including USAT’s General Counsel, James Pledger. Tr. 18,497: 18 - 18,498: 2 (Berner).

A174. Berner testified that, unlike Pledger, he did not have any experience in dealing with the regulations that covered savings and loan institutions prior to going to UFG. Tr. 18,492: 7-10; Tr. 18,499: 11-12. When asked why he was hired, Berner stated that, “I think [USAT’s management] were looking for someone that had more of a business background and a securities background,” because, “they were doing the CMO transactions and the DARTS and the AMPS transactions” and he didn’t believe Pledger had expertise in those areas. Tr. 18,560: 8-10; Tr. 18,560: 17-19 (Berner).

A175. Approximately a year after Berner replaced Pledger as UFG’s General Counsel, Pledger resigned and Berner additionally took over Pledger’s positions as General Counsel, Senior Vice President and Secretary of USAT. Ex. T-7595, Tab 656; Tr. 18,500: 18-20 (Berner). Berner served as General Counsel of USAT until it was placed in receivership and remained on as the General Counsel of UFG until after 1992. Ex. A-3016, Tab 93 (03/31/89 UFG Proxy) p. 8-9; T-8173, Tab 1641,(04/07/92 UFG Proxy).

A176. Thus, by the end of 1985, virtually all of the officers of USAT and UFG, as well as the members of the Executive Committee of both entities had been replaced by people recruited by Munitz and Hurwitz. Additionally, the chairman of the USAT and UFG Boards were respectively, Gross and Hurwitz. The following charts depict these changes:

viii. UFG And USAT Had Joint Management

A177. The members of USAT’s management team, including Munitz, Gross, Crow and Berner, were also each “executive officers” of UFG, who were subject to the direction of Hurwitz, UFG’s controlling shareholder and the Chairman of its Board of Directors. Ex. A-3014, Tab 92, (1987 UFG Proxy 03/31/87) p. 6 and 9. Each of these individuals expended a portion of his time performing services on behalf of UFG and all or a portion of their salaries was allocated to UFG. Ex. T-8120, Tab 449 (11/07/88 letter from Berner to Twomey). Frequently services performed for UFG were done for the benefit of USAT because USAT was the major asset of UFG. Tr. 25,305: 6-9; Tr. 25,306: 17-20 (Munitz).

C. UFG/USAT’s Shift To Joint And Quarterly Meetings

1. Quarterly Meetings Of The USAT Board

A178. Prior to August 29, 1984, the Boards of USAT and UFG generally met on a monthly basis.

A179. According to the minutes of the August 29, 1984, UFG Board of Directors meeting, at which Hurwitz was elected President and Chief Executive Officer of UFG, it was “. . . suggested that the Board consider holding joint United Savings and United Financial Group, Inc. Board meetings on a quarterly basis approximately 6 weeks following the end of each quarter.” The proposal was to be, “. . . reviewed and discussed at the November 13 meeting.” Ex. A-10544, Tab 191, p. K003675.

A180. There is no evidence in the minutes that the proposal was ever discussed at the November 13, 1984, meeting, which was a joint meeting of the UFG and USAT Boards. Ex. A-1100, Tab 155. Subsequent to August 29, 1984, the regular Board meetings for USAT and UFG were held quarterly rather than monthly. See A187 (Chart); Tr. 2,211: 7-10 (G. Williams); Tr. 16,989: 13-17 (Carlton); Tr. 26,136: 11-12 (Hurwitz).

A181. The FHLBB 1988 Southwest Examination of USAT found that quarterly meetings of the BOD were inadequate. The report states: “The Board of Directors is scheduled to meet on a quarterly basis. Based on United Savings size and financial condition, monthly meetings would be a prudent practice.” Ex. B-2699, Tab 1863 p. OW154207.

A182. John Stone, the former Executive Director, Division of Supervision, Resolutions and Compliance for the FDIC, who had over 20 years experience in the examination and supervision of insured depository institutions (Ex. T-7451, Tab 1022 (Stone Expert Report) p. 2) found the fact that the Boards of USAT/UFG met only quarterly to be, “[a]bsolutely incomprehensible.” Tr. 10,694: 3-4. Stone testified that:

. . . [H]ow a board of directors can believe that they are properly administering the affairs of the institution that they are charged with administering by meeting only quarterly, even in a well-run institution with no evident problems, is – again, I don’t see how a director could feel comfortable, even in the best-run institution in the …[country], be it thrift, be it bank, credit union, whatever.

Tr. 10,695: 12-20.

2. Joint USAT/UFG Board Meetings

A183. Subsequent to August 29, 1984, the regular Board meetings for USAT and UFG were held jointly. In all but three sets (six meetings) of regularly scheduled UFG and USAT Board meetings, the minutes of the UFG meeting, the USAT meeting, or both meetings specifically state that the meeting was a joint meeting of both the USAT and UFG Boards. Ex. A-1075, Tab 2096; T-8010, Tab 406; A-1078, Tab 190; A-1082, Tab 2097; A-1086, Tab 118; A-1087, Tab 119; A-1089, Tab 123; A-1090, Tab 125; A-1092, Tab 127; A-1093, Tab 2098; A-1096, Tab 154; A-1097, Tab 126; A-1098, Tab 792; A-1100, Tab 155; A-1102, Tab 128; A-1104, Tab 130; A-1105A, Tab 2100; A-12026, Tab 2101; A-1106, Tab 2046; A-14203, Tab 2381; A-10583, Tab 134; A-1108, Tab 131; A-1109, Tab 132; A-1110, Tab 133; A-1112, Tab 1307; T-7587, Tab 655; T-7595, Tab 656; A-1119, Tab 2101; A-1117, Tab 1447; A-1118, Tab 2103; A-1120, Tab 2104; A-1121, Tab 2105; A-1122, Tab 394; A-1125B, Tab 2380; A-1124, Tab 1306; T-8013, Tab 391; A-1126, Tab 2106; A-1127, Tab 2107; A-1130, Tab 1675; A-1132, Tab 2110; A-1133, Tab 1402; A-1136, Tab 2111; A-1139, Tab 2112. For example, the minutes for the USAT Board meeting on November 13, 1984, report that, “[t]his meeting was conducted as a joint meeting of the Board of the Association and its parent company, United Financial Group, Inc.” Ex. A-1100, Tab 155.

A184. The USAT and UFG Board members were given a single joint Board Report before each joint meeting. Ex. A-1116, Tab 718; A-14202, Tab 2376.

A185. In response to questions regarding what constitutes a “joint” meeting, Gross testified that, “I guess if we looked at the meetings of UFGI and see if they were dated the same day, it would be likely we did have a joint meeting.” Tr. 20,932: 15-17. Gross also testified that, “we would meet at one big meeting,” as opposed to holding the meetings one after the other. Tr. 20,933: 14.

A186. Hurwitz testified that, “Yes. It was actually one big meeting, and people would come and hear both presentations, yes.” Tr. 26,117: 21 - 26,118: 1. According to Hurwitz the meetings were held as joint meetings because, “it was the same information, I suspect. Just to bring everyone up to date.” Tr. 26,118: 12-13.

A187. Because UFG and USAT had joint board meetings, Hurwitz attended the USAT meeting although he was not a member of the USAT Board. USAT minutes reflect that Hurwitz was present at 20 of 25 USAT Board meetings held between May 26, 1983, when he went on the UFG Board, and his resignation from UFG on February 11, 1988, as indicated on the following chart:

USAT AND UFG BOARD MINUTES

TAB#

EXHIBIT#

DATE

USAT

UFG

JOINT

HURWITZ ATTENDED

1983

190¹	A-1078	5/26/83		X		X
791	A-1079	6/29/83	X
2097	A-1082	7/28/83		X		X
117	A-1084	8/25/83	X
119	A-1087	11/10/83	X		X	X
118	A-1086	11/10/83		X	X	X
123	A-1089	12/21/83	X			X

1984

125	A-1090	1/25/84	X			X
127	A-1092	2/28/84		X		X
2098	A-1093	2/29/84		X		X
2099	A-1094	5/3/84	X
154	A-1096	6/27/84	X			X
792	A-1098	8/29/84	X		X	X
126	A-1097	8/29/84		X	X	X
155	A-1100	11/13/84	X			X

1985

128	A-1102	2/14/85	X		X	X
2100	A-1105A	2/14/85		X	X	X
130	A-1104	5/16/85	X		X	X
2101	A-12026	5/16/85		X	X	X
2046	A-1106	8/15/85	X		X	X
2381	A-14203	11/13/85		X	X	X
131	A-1108	11/14/85	X		X	X
134	A-10583	11/14/85		X	X	X

1986

133	A-1110	2/13/86	X		X	X
132	A-1109	2/13/86		X	X	X
655	T-7587	5/8/86	X		X	X
1307	A-1112	5/8/86		X	X	X
656	T-7595	8/14/86	X			X
2102	Part of A-1119	8/14/86		X		X
1447*	A-1117	10/14/86	X		X	X²
2103*	A-1118	10/14/86		X	X	X
2104	A-1120	11/13/86	X			X
2105	A-1121	11/13/86		X		X

* Special Meeting

¹^.Hurwitz joins UFG Board.

^2.The 10/14/86 USAT Board minutes do not list Hurwitz as present, but the meeting was held on the same day as the UFG meeting that Hurwitz attended. Ex. A-1117, Tab 1447.

TAB#

EXHIBIT#

DATE

USAT

UFG

JOINT

HURWITZ ATTENDED

1987

394	A-1122	1/8/87	X		X	X
2380	A-1125B	1/8/87		X	X	X
391	T-8013	2/19/87	X		X	X³
1306	A-1124	2/19/87		X	X	X
2107	A-1127	5/7/87	X		X	X
2106	A-1126	5/7/87		X	X	X
2108*	A-1129	5/15/87	X
2109*	A-1131	6/9/87	X
1675*	A-1130	6/9/87		X
2110	A-1132	9/9/87	X			X
1402	A-1133	9/9/87		X		X
2111	A-1136	11/10/87	X		X	X

1988

2112	A-1139	2/10/88		X		X
1407⁴	A-1140	2/11/88		X

*Special Meeting

³The 02/19/87 USAT Board minutes do not list Hurwitz as present, but the meeting was a joint meeting with the UFG Board and Hurwitz attended the UFG meeting. Ex. T-8013, Tab 391.

⁴Hurwitz resigns from UFG Board.

A188. The minutes reflect that even though Hurwitz was not on the USAT Board, he frequently contributed to and led discussions during the joint Board meetings concerning matters relating to USAT’s operations. Ex. A-1089, Tab 123; A-1090, Tab 125; A-1094, Tab 2099; A-1098, Tab 792; A-1104, Tab 130; A-1106, Tab 2046; T-7587, Tab 655. For example, at the May 8, 1986, USAT Board meeting, Hurwitz seconded a motion to approve USAT’s financials. Ex. T-7587, Tab 655.

D. The Executive Committees For UFG/USAT, Which Were Dominated By Management, Were Delegated All Authority To Act On Behalf Of Boards

1. USAT’s Executive Committee Was Authorized To Act For The USAT Board

A189. The minutes of the February 14, 1985, USAT Board Meeting contains a resolution which delegated all authority of the Board to an Executive Committee composed of a lesser number of Directors. Ex. A-1102, Tab 128 (02/14/85 USAT Minutes) p. 2; Tr. 2,240: 18 - 2,241: 6 (G. Williams). The minutes state:

WHEREAS: It is the intention of the Board of Directors of United Savings Association of Texas to have certain matters which would come before the entire board of Directors be brought before a lesser number of Directors and that these matters be acted upon by a lesser number of Directors constituting a committee with the same effect as if acted on by the entire Board, which matters shall include but by not be limited to, the intent to declare dividends on its capital stock and the actual declaration of dividends on its capital stock;

RESOLVED: That an Executive Committee of five Directors is appointed to serve until their successors are named, that the committee appointed is: C. E. Bentley, Jenard M. Gross, Gerald R. Williams, James R. Whatley and Barry Munitz, Chairman.

Ex. A-1102, Tab 128 (02/14/85 USAT Minutes) p. 2.

A190. A similar resolution was approved by the full Board in 1986 and 1987. Ex. A-1110, Tab 133 (02/13/86 USAT Minutes) p. 2; Ex. A-1124, Tab 1306 (02/19/87 USAT Minutes) p. 1-2.

2. The USAT And UFG Executive Committees Met Jointly

A191. From 1985 through February 1988, when Hurwitz resigned all positions at UFG, the USAT and UFG Executive Committees were identical except the UFG Executive Committee had one additional member, Hurwitz. Ex. A-1102, Tab 128 (02/14/85 USAT Board) p. 2; A-3112, Tab 194 (1985 UFG Proxy 03/22/85) p. 11-12; A-1110, Tab 133 (02/13/86 USAT Minutes) p. 2; A-3013; Tab 88 (1986 UFG Proxy 03/31/86) p. 8; A-1124, Tab1306 (02/19/87 USAT Minutes) p. 2; A-3014, Tab 92 (1987 UFG Proxy 03/31/87) p. 8. For example, in February 1985 the USAT Executive Committee members were G. Williams, Bentley, Gross, Whatley and Munitz. The UFG Executive Committee was comprised of the same individuals, plus Hurwitz. Tr. 2,240: 20 - 2,241: 14 (G. Williams).

A192. It was the practice of the UFG and USAT Executive Committees to meet “primarily jointly.” Tr. 2,241: 15-20 (G. Williams). This practice permitted Hurwitz, as a member of the UFG Executive Committee, to attended the USAT Executive Committee meetings, which were held jointly with UFG.

3. The USAT Executive Committee Was Dominated By Management

A193. At all relevant times the Executive Committee of USAT had only one outside director; the remaining members were officers of USAT. For example, by February 1986 the Executive Committee was composed of G. Williams, Gross, Munitz and James Whatley, the sole outside director. Ex. A-1110, Tab 133 (02/13/86 USAT Minutes) p. 2. By February 1987 the membership consisted of Munitz, Gross and Whatley. Ex. A-1124, Tab1306 (02/19/87 USAT Minutes) p. 2.

A194. Whatley, who did not reside in Houston, Texas, frequently did not attend the meetings of the UFG and USAT Executive Committees. Tr. 4,194: 2 - 4,195: 19 (Whatley). Generally, he attended those meetings of the Executive Committees that coincided with the meetings of the Boards of UFG and USAT, but he could not recall making any special trips to Houston for meetings of the Executive Committees. Tr. 4,195: 2-19 (Whatley). Consequently, at most meetings of USAT’s Executive Committee there was no outside director in attendance and the membership consisted entirely of members of USAT’s senior management.

Expert witness John Stone stated in his expert report:

The undersigned has had occasion as a financial institution supervisor to observe Boards of Directors’ delegations of authority for substantive matters to ‘representative’ committees of the Board. In such instances designated committees were comprised of a majority of the board of directors and could speak on behalf of the entire board. Moreover in such instances a majority of the committee members were ‘outside’ directors, who were not active employees or officers of the institution.”

Ex. T-7451, Tab 1022 (Stone Expert Report) p. 5.

A195. In the opinion of Mr. Stone, the USAT Executive Committee was not a representative committee that could serve as a substitute for the USAT Board. Tr. 11,162: 10 - 11,163: 20; Tr. 11,197: 13 - 11,198: 5. He testified:

I think I may have even said in my report about having observed representative committees of the board for certain actions wherein if that committee was comprised of a number of people that could pass on an action as a body on their own before the board and if that committee was comprised of a majority of outside directors -- by ‘outside’, I mean directors, not officers, of the entity -- within certain parameters, I have seen that work unobjectionably in financial institutions.

A196. (Tr. 11,163: 1-12 (Stone)). However, “for someone to act with the -- and commit the institution to the same extent of the board, I would want to see the predominant membership of non-officer/directors.” Tr. 11,198: 2-5 (Stone).

E. The Executive Committee Was Delegated Authority To Approve All Investments Made By USAT

A197. On February 14, 1985, the Board of Directors of USAT approved a resolution authorizing the management of USAT to engage in a broad variety of financial and investment transactions including “forward commitments, financial futures and financial options transactions and such additional financial and investment transactions as may be approved and authorized pursuant to the procedures set forth herein.” Ex. A-1102, Tab 128, p. 20-21. A similar resolution was included in the minutes of the Board on February 13, 1986. Ex. A-1110, Tab 133 (02/13/86 USAT Minutes) p. 19-20.

A198. Pursuant to these resolutions, the Executive Committee was responsible for approving an investment plan, subject to the subsequent ratification by the USAT Board. The resolutions stated that “Management shall prepare and submit to the Executive Committee for adoption a written plan for the use of such investment alternatives” and “[t]hat upon approval of such plan by the Executive Committee, such plan shall be included in the minutes of the Executive Committee and distributed to and ratified by the Board at its next regular meeting.” Ex. A-1102, Tab 128, p. 20-21; Ex. A-1110, Tab 133 (02/13/86 USAT Minutes) p. 19-20.

A199. Pursuant to the procedures approved in the resolutions, at the quarterly meetings of the Board, USAT management was to provide to the Board of Directors of USAT for review “the position limits for all such approved transactions, all outstanding contract positions and the unrealized gains and losses in each of these positions.” Ex. A-1102, Tab 128, p. 20; A-1110, Tab 133 (02/13/86 USAT Minutes) p. 19.

A200. Pursuant to the resolutions, management was also to “maintain such other documentation as is necessary to identify the purpose of each transaction, any assets or liabilities for which the net interest rate exposure is being reduced and any cash or forward commitment with which the transaction is matched.” Ex. A-1102, Tab 128, p. 21; A-1110, Tab 133 (02/13/86 USAT Minutes) p. 20.

A201. The minutes of the USAT Board Meetings sometime indicate that the Directors of USAT approved or ratified the actions of the Executive Committee. See, e.g., Ex. A-1106, Tab 2046 (08/15/85 USAT Minutes), p. US-3 00103; A-1110, Tab 133 (02/13/86 USAT Minutes) p. US-3 003141. On occasion, the Board minutes reflect deliberations by the USAT Board prior to the approval of the actions of the Investment Committee. Ex A-1108, Tab 131 (11/14/85 USAT Minutes) p. US-3 003107. Usually, however, the ratification or approvals were routine and did not identify the specific acts of the Executive Committee that were being approved or reflect any deliberations by the Board with respect to the ratified activities. Ex. A-1106, Tab 2046 (08/15/85 USAT Minutes), p. US-3 00103; A-1110, Tab 133 (02/13/86 USAT Minutes) p. US-3 003141; T-7587, Tab 655 (05/08/86 USAT Minutes) p. US-3 003147; T-7595, Tab 656 (08/14/86 USAT Minutes) p. US-3 003153; A-1120, Tab 2104 (11/13/86 USAT Board) p. US-3 003170. On other occasions, the Board was simply advised that the Executive Committee had acted and there is no approval or ratification of the Executive Committee’s actions by the Board. For example, at the November 13, 1984, USAT Board meeting, the Board was advised that “the Executive Committee acted prior to this meeting to increase the Association’s investment in high-yield floating rate debt securities from $100 to $200 million,” but there is no indication the Board discussed the increase or ratified the actions of the Executive Committee. Ex. A-1100, Tab 155, p. US-3 00360.

F. The Creation Of The USAT Investment Committee In May 1986 And The Delegation Of All Investment Authority To The Investment Committee

1. No Investment Committee Existed Before May 1986

A202. Prior to May 1986, USAT did not have an Investment Committee. Tr. 6,343: 2 - 22 (Williams); Tr. 13,429: 10 - 13,430: 6 (Huebsch). Prior to this date, members of management met informally with Huebsch and Joe Phillips and “would ask questions specifically, not only about new proposals but how things were behaving that we had purchased earlier and -- and how the market was and was it the time to do additional securities. So, the committee was far-ranging in discussions.” Tr. 6,342: 7-13 (G. Williams); Tr. 13,429: 17-19 (Huebsch). The persons who participated in these investment considerations included Hurwitz, Gross, Munitz, Williams and Crow. Tr. 6,343: 2 - 9 (G. Williams); 13,429: 17 - 13,430: 8 (Huebsch).

2. The Creation Of The Investment Committee In May 1986

A203. On May 5, 1986, members of the supervisory staff of the FHLB-D, including Supervisory Agent James Halverson, met with the management of USAT and raised a number of questions regarding USAT’s “securities activities.” Ex: B-1007, Tab 1872 (05/29/86 Baugh Memo) p. 1. Halverson requested that USAT’s management “provide a written description of their bond purchases, arbitrage activities, and other securities transactions common to United.” Id. p. 2. In a letter dated May 9, 1986, Berner responded to Halverson’s request on behalf of USAT. Ex. T-4197, Tab 720.

A204. Berner described USAT investment activities in high-yield bonds, equity securities and its GAP management as using a “sophisticated government securities matched program.” Ex. T-4197, Tab 720, pp. 2, 3, and 4. In the letter, Berner described the role of USAT’s Investment Committee in corporate bond investments as follows:

After this initial screening, the Association’s investment team make its recommendation to the Investment Committee of the Association.

* * *

This Committee, which brings close to 200 years of corporate, investment and business experience in the capital markets, and consists of the Chairman of the Association [Gross], President of the Association [G. Williams], Chairman of the Executive Committee [Munitz], Chief Financial Officer [Crow], Corporate Counsel [Berner], Treasurer [Wolf] and the Association’ team of investment Analysts, thoroughly discusses and examines each potential investment.

Id. p. 2.

A205. Berner also described the Investment Committee’s involvement in equity securities investments:

If the Investment Committee agrees with the securities analyst’s view, it will authorize an investment in this highly liquid common stock program. The Association’s analysts and Investment Committee then continually monitor an investment in order to assure themselves that no deterioration in the transaction has occurred.

Id. p. 4.

A206. On May 8, 1986, one day prior to Berner writing to the regulators explaining the role of the Executive Committee in USAT investment activities, the Board of USAT, on the motion of Munitz and with Hurwitz in attendance, authorized the creation of the USAT Investment Committee described in Berner’s May 9, 1986, letter to the regulators. Ex. T-7587,
Tab 655, pp. US-3 003144-46. That same day the UFG Board, on the motion of Hurwitz, also created a UFG Investment Committee. Ex. A-1112, Tab 1307, p. 1-3.

A207. Prior to its approval by the USAT Board, there are only minutes of two Investment Committee meetings, on April 25, 1986, and May 2, 1986. Ex. A-1388, Tab 525; A-1389, Tab 526. The Minutes of the April 24, 1986, meeting states:

Mr. Gross stated that it was appropriate for the Investment Committee to began formalizing its actions. He noted that the Investment Committee had been carrying out its functions without formal minutes having been taken but he thought it was appropriate at this time to begin such formal minutes. Mssrs. Huebsch and Phillips then reviewed the current portfolio of the Association’s common stock and corporate debt securities. After which the Investment Committee passed the following resolution:

RESOLVED: That the Investment Committee hereby approves, ratifies and affirms all of the acquisitions of equity and debt instruments currently held by the Association.

Ex. 1388, Tab 525, emphasis added.

A208. At or about the time the Investment Committee approved, ratified and affirmed all of USAT’s previously acquired equity and debt instruments, USAT held a total of $558,546,385 in “non-liquidity investments” composed of $390,537,584 in corporate bonds and $168,008,801 in equity securities (Ex. B-935, Tab 621 (04/15/86 Phillips letter to the TXS&L) p. CN 159535), and approximately $1 billion in MBSs. Ex. B-982, Tab 1305 (05/14/86 B. Williams letter). All of these investments had been purchased by USAT prior to the Board approving the establishment of the Investment Committee.

3. The Role Of The Investment Committee

A209. The resolutions of USAT and UFG creating the respective Investment Committees are virtually identical. Ex. T-7587, Tab 655 (05/08/86 USAT Minutes) pp. US-3 003144-46; A-1112, Tab 1307, p. 1-3. Gross, G. Williams, Crow, B. Williams, Huebsch, Phillips and Berner were named as members of both Committees. The only significant difference between the two resolutions is that Munitz was named as Chairman of the USAT Committee, but was not on the UFG Committee, and Gross was named as Chairman of the UFG Investment Committee. Id.

A210. The USAT minutes do not list Huwitz as a member of the USAT Investment Committee. Ex. T-7587, Tab 655 (05/08/86 USAT Minutes) pp. US-3 003144-46. However, Berner, who, was the Secretary of the Investment Committee and kept the minutes, testified that “sitting in quite often was Hurwitz" (Tr. 19,282: 8-10), and it was his “recollection” that Hurwitz was a member of the Investment Committee. Tr. 19,281: 6 - 19,282: 10.[26] Munitz, the Chairman of the USAT Investment Committee, testified that Hurwitz attended the Investment Committee meetings “regularly.” Tr. 25,477: 5-10. Sandy Laurenson, USAT’s MBS portfolio manager, testified that Hurwitz, Munitz, Gross, Corw, Heubsch and B. Williams all attended the Investment Committee meetings on a “fairly regular basis” and participated in the discussion. Tr. 3,775: 12 - 3,776: 16; 3,982: 17 - 3,983: 10 (Orr).

A211. Under the USAT Board resolution, the Investment Committee was ceded authority to give “prior approval of all equity and debt security investments made on behalf of the Company.” Ex. T-7587, Tab 655 (05/08/86 USAT Minutes) p. US-3 003144. In addition, it was also the responsibility of the Investment Committee to “establish investment criteria,” to “approve the overall level of the Company’s investments,” (id.) and to “[r]eview and approve in advance all securities investments made or to be made by the Company and to continually monitor the Company’s investments.” Id. p. US-3 003145.

A212. The Investment Committee was required to “[r]eport to the Executive Committee on at least a monthly, and the full Board of Directors on at least a quarterly basis,” but there was no requirement that either the Executive Committee or the Board ratify or approve the investment activity of the Investment Committee. Id. p. US-3 003146.

A213. After May 1986, the Investment Committee, was authorized to make all USAT investment decisions without any Board approval or ratification. Id. p. US-3 003146.

4. The USAT And UFG Investment Committees Acted Jointly

A214. The UFG and USAT Investment Committees acted as a single committee. The majority of the minutes of the meetings are titled “Minutes of the Investment Committee of United Financial Group, Inc. United Savings Association of Texas” and do not distinguish between UFG and USAT. See e.g. Ex. A-1396, Tab 533 (06/11/86 Minutes); A-1429, Tab 360 (02/11/87 Minutes); A-1452, Tab 1323 (07/22/87 Minutes); A-14088, Tab 1505 (12/30/87 Minutes). Munitz, the Chairman of the USAT Investment Committee, testified that the committees considered issues related to both USAT and UFG at the Investment Committee meetings and it wouldn’t surprise him if there was only one meeting for both entities. Tr. 25,476: 14 - 25,477: 4.

G. The Strategic Planning Committee

1. USAT’S Strategic Shift In 1984

A215. On October 25, 1984, G. Williams sent a memorandum to Bentley, Hurwitz, Munitz and Whatley in which he discussed a “strategic shift taking place within the company [USAT] from a predominantly consumer oriented unit to one that is intended to operate equally with a retail and wholesale orientation.” Ex. B-378, Tab 143, p. UFG2018916. The 1985 UFG Annual Report described USAT’s strategic shift as follows:

Major steps were taken this past year to transform United from predominantly a savings and loan oriented company with a traditional emphasis on mortgage lending and deposit gathering, to one that also operates as a merchant bank for its wholesale customers. This redirection will allow United to expand its real estate development activities in addition to participating in profitable new areas of business.

Ex. A-3004, Tab 717, p.OW027559.

A216. The day before G. Williams wrote his memorandum Salomon Bros. had made a presentation to USAT and submitted a lengthy report discussing a potential USAT “Strategic Plan.” Ex. B-377, Tab 242 (10/24/84 Salomon Strategic Plan); Tr. 6,246: 11 - 6,248: 7 (G. Williams); Tr. 25,479: 11 - 17; Tr. 25,481: 1-19 (Munitz). The Salomon Strategic Plan proposed that USAT adopt a “Growth Strategy” and generate profits from “Arbitrage Spreads,” “High-Yield Investments,” and “New Businesses.” Id. p. CN253023. It also contemplated purchasing a variety of assets, including “Mortgage Securities” and “High Yield Bonds” financed through a variety of financing mechanisms, including “Reverse Repurchase” agreements, “CMO’s,” “Dollar Rolls,” and “FHLB Advances.” Id. The Strategic Plan proposed that USAT acquire
over $1 billion in mortgage securities, financed in large part by reverse repurchase agreements and hedged with fixed rate swaps. Id. p. CN253028-30. The Salomon proposal included a lengthy Salomon publication entitled “Risk-Controlled Arbitrage for Thrift Institution.” Id. p. CN253058-77.

A217. Following the Salomon Bros. presentation, USAT began to invest in a MBSs RCA portfolio. Tr. 2,228: 8-18; Tr. 2,236: 3-17; Tr. 2,237: 5 - 2,238: 11 (G. Williams). The MBS and high-yield bond portfolios grew “substantial[ly]” in 1985. Tr. 13,672: 5-17 (Huebsch).

2. The Creation Of The Strategic Planning Committee

A218. Six months after the Salomon Bros. presentation, Bain & Co. made a similar presentation to USAT’s management at a “Strategic Planning Retreat Weekend” on April 26, 1985, in Austin, Texas. Ex. A-10560, Tab 174 (05/01/85 Crow memo) p. US 0000384; A-10561, Tab 175 (05/16/85 USAT Board) p. CN057150. At the meeting David Nierenburg, a consultant hired by Munitz, made a presentation on USAT’s “strategic direction.” Tr. 15,270: 2-21 (Crow). Hurwitz attended, even though he was not an officer or director of USAT. Munitz, Gross, G. Williams and Crow also attended the Retreat. Tr. 15,268: 19 - 15,269: 22 (Crow). Bentley, the Senior Chairman of the Board of USAT, was not asked to attend. Tr. 1,982: 22 - 1,983: 18 (Bentley).

A219. After the Strategic Planning Retreat Weekend, USAT and UFG’s management continued to meet regularly over the course of the next three years as what was termed the “Strategic Planning Committee” (hereinafter the “SPC” or the “Strategic Planning Committee”). Tr. 2,268: 4-20 (G. Williams); Tr. 15,544: 13 - 15,545: 11 (Crow); Tr. 20,897: 19 - 20,898: 21 (Gross); Tr. 25,474: 18 - 25,476: 1 (Munitz).

A220. The SPC was never officially established or authorized by the Board of USAT. Tr. 26,127: 1-7 (Hurwitz); Tr. 19,326: 6-10 (Berner). According to Munitz, “it was an informal group. It wasn’t a line operating committee designated by the board.” Tr. 25,473: 10-12 (Munitz). Frequently, however, the committee had a written agenda (Ex. A-1590, Tab 1295 (11/17/85 Strategic Planning Meeting); A-10627, Tab 1201 (04/21/86 Agenda); T-5122, Tab 299 (03/02/87 Agenda); A-1598, Tab 2317 (05/04/87 Agenda); A-1604, Tab 2319 (12/04/87)), and for part of its existence, “notes” of what occurred at the meetings were taken by Doug Hansen and distributed to the members. Tr. 12,590: 20 - 12,591: 7 (Hansen). Hansen, who had a background in finance and strategic management consulting (Tr. 12,480: 20 - 12,482: 19 (Hansen)), had been hired by Munitz and Hurwitz to assist Gross with his duties as the Chairman of the Board of USAT. Tr. 12,487: 7 - 12,490: 6 (Hansen).

A221. The membership of the SPC always included Hurwitz, Munitz, Gross and Crow. Tr. 2,268: 5-20 (G. Williams); Tr. 15,544: 13 - 15,545: 11 (Crow); Tr. 20,897: 19 - 20,898: 21 (Gross); Tr. 25,474: 18 - 25,476: 1 (Munitz). “Essentially the SPC was the Executive Committee” (Tr. 2,266: 16 - 2,268: 19 (G. Williams)), except it did not include Whatley, the sole outside director on the Executive Committee. Tr. 26,361: 2-17 (Hurwitz). Even after Hurwitz resigned as a member of UFG’s Board in February 1988, he attended at least one meeting of the Strategic Planning Committee on June 9, 1988. Ex. T-9009, Tab 1804; Tr. 26,367: 16-20; Tr. 26,381: 15 - 26,382: 11 (Hurwitz).

A222. The functions of the SPC were to “lay out the general direction of the – the overall direction of the institution [USAT]” (Tr. 20,897: 22 - 20,898: 4 (Gross)); to reach a consensus on the “business plan and the action plans” of USAT (Tr. 12,612: 13-18 (B. Williams)); to plan for the institution’s “long term policies” and “determine the direction the institution should go” (Tr. 21,283: 16 - 21,284: 12 (Gross)), and to “come up with a strategic plan for the association and the holding company…to be profitable.” Tr. 26,131: 1-4 (Hurwitz).

Bruce Williams described the activities of the SPC as follows:

Generally, it was reviewing the overall position of the S&L, the industry, where the association's earnings were being generated from in terms of different portfolios. We attempted --I think we talked previously about shredding the balance sheet and looking at the different components of the balance sheet and looking at alternatives in the market in items of what could be added to the association or how could the association's asset/liability mix be revised or changed to improve the financial outlook, how should we allocate resources in terms of incremental growth, those types of conditions.

Tr. 13,205: 8-20.

3. The Strategic Planning Committee Meetings

A223. A Strategic Planning Meeting was held on November 14, 1985. The agenda for the meeting indicates that a wide variety of topics were to be considered, including Growth of USAT for the remainder of 1985 and 1986; asset growth constraints, and USAT’s funding alternatives. Ex. A-1590, Tab 1295 (11/17/85 Strategic Planning Meeting Agenda). According to Bruce Williams’ notes of the meeting, among the issues considered at the meeting were: (1) whether USAT should make additional investments in junk bonds (id. p. US-3 008032; Tr. 13,232: 12-18 (B.Williams)); (2) a discussion of USAT’s growth in which Hurwitz’ made reference to $100 to $200 million in junk bonds and a total USAT equity arbitrage portfolio of $200 to $250 million (id. p. US-3 008034; Tr. 13,235: 8-18 (B. Williams)); (3) what a “realistic net income figure” would be for USAT (id. at US-3 008032; Tr. 13,380: 12 - 17 (B. Williams); and (4) how USAT should time the booking of gains to “smooth out” the earnings of USAT and its publicly traded parent, UFG. Id.; Tr. 13,232: 19 - 13,234: 7 (B. Williams). At the meeting it was agreed that USAT should maintain 4% capital and “[r]eport a gradual stable earnings record throughout the year [1986].” Ex. B-665, Tab 1392 (11/29/85 B.Williams memo) p. OW003550.

A224. Hansen’s notes of the SPC meetings in 1986 indicate that the Committee continued to consider a wide range of issues pertaining to the operations of USAT. For example, Hansen’s April 17, 1986, memorandum to Hurwitz, Munitz, G. Willliams, Crow, Berner, and B. Williams reviews the issues considered by the Strategic Planning Committee during a retreat to Mustang Island. Ex. A-10623, Tab 863; Tr. 8,396: 19 - 8,397: 2 (G. Williams). Among the issues taken up by the committee were the placement of $4 billion in assets in a “Service Corporation CMO” referred to as the “Berner/Posen Black Magic Hole” (id. p. item 2, US 0000084); “Profit Targets” (id.); “Timing of Gains” (id. p. item 4, US 0000084); a “Growth Philosophy” “through service corporations” (id. p. item 10, US 0000085); whether to become involved in “Corporate Merchant Banking” (id. p. item 34, US 0000087); “Junk Bond Risks” and the fact that “there is a chance the junk bond market will fall apart” (id. p. item 36); and the issuance of “Capital Notes” through “DBL” (id. p. item 38, US 0000088).

i. The Strategic Planning Committee Considered Taking Portfolio Gains To Meet Capital At The End Of 1986

A225. On September 8, 1986, Hansen wrote a memorandum to the members of the Strategic Planning Committee, including Hurwitz, Gross and Munitz, questioning whether number of questions,” and suggested that “we should meet soon to discuss these thoughts and observations as a group.” “We have enough capital to avoid a supervisory letter?” “Can we get the ‘maturity matching credit’ in 1987?”; and “Should we issue the capital notes?” Ex. T-4246, Tab 335, p. 1; Tr. 12,582: 19 - 12,583: 6 (Hansen).

A226. At the next recorded meeting of the Strategic Planning Committee on September 22, 1986, the committee took up the issue of “Earnings and Growth Strategy” and considered actions that might be taken to meet USAT’s capital requirement. Ex. T-4250, Tab 871, Item 31 p. US0002072. Hansen’s notes in part state:

—Prospects for positive GAAP and RAP earnings are poor in 86/87.

—Our actual net worth will be the same or below required net worth at the end of the third and fourth quarters unless action is taken.

—We need earnings and good net worth in the third quarter as we will be bargaining with examiners and looking for a capital note issue.

—There is a strong case for taking portfolio gains in the third quarter in order to shore up reserves and capital position.

* * *

—Quarter end actions will be considered next Monday. We should take all MBS and liquidity portfolio gains, monitor equity arbitrage results, alert Joe as to the possibility of taking junk bond gains, and track the profit and capital positions closely.

Id. Item 31, p. US 0002073.

A227. The memorandum concluded with Hansen suggesting the following actions: “Take $10 MM securities gains in junk, MBS, and liquidity portfolios” (id. p. OWO 10037); “Monitor GAP for maturity matching credit;” and “Take securities gains, if any.” Id. p. OWO 10037.

A228. Hansen’s notes of the December 17, 1986, meeting of the Strategic Planning Committee, reflect that the “spread” in both the MBS and the High Yield Bond Portfolios had
been reduced as a result of “profit taking” to generate gains for USAT in 1986. Ex. T-4320, Tab 659; Tr. 12,592: 9 - 12,594: 3 (Hansen).

ii. The Strategic Planning Committee Meetings In 1987

A229. Throughout 1987 the Strategic Planning Committee continued to address a wide variety of questions pertaining to the operation of USAT. The Agenda for the Strategic Planning Committee for March 2, 1987, listed as items for discussion the following: “1) Mortgage Backed Securities,” “2) Corporate Securities Growth Charts,” and “3) Maintaining Maturity matching Credit.” Ex. T-5122, Tab 299.

A230. In a memorandum to the Strategic Planning Committee dated May 22, 1987, Crow outlined how the decision had been made in 1984 to sell USAT’s branches and advised the member of the committee “I believe it is prudent to re-examine this direction.” Ex. B-1636, Tab 2321.

A231. Likewise, Gross, in a memorandum to the members of the Strategic Planning Committee dated April 27, 1987, urged the committee to establish a “unified strategic plan or policy with regard to interest rates” to assist in making investment decisions on whether to buy or sell assets. Ex. T-4366, Tab 1660.

iii. The Strategic Planning Committee Set Portfolio Size Limits

A232. In a memorandum dated July 13, 1987, regarding “Investment Committee Policies” for MBS and high yield bonds, Gross discusses the importance of the committee knowing “exactly what the limits are in each area of activity and what the total of current investment in that activity is so they can quickly determine if a transaction will exceed our limits.” Ex. B-1702, Tab 1658. Gross states that “[w]e need to allude to the Strategic Planning Committee setting limits on each group” of investments. Id.

A233. “Portfolio limit sizes” was one of the subjects that was “discussed” by the Strategic Planning Committee. Tr. 21,330: 21 - 21,331: 10 (Gross).

A234. The minutes of the November 6, 1987, meeting of the Strategic Planning and Management Committees clearly reflect this. They state:

Mortgage-Backed Securities - as rates decline to reach a break even point, the Association will eliminate certain mortgage-backed securities position. As break even is achieved on an MBS pool, the Association will attempt to get out of that pool.

High-Yield Bonds - Will attempt to increase and upgrade quality even if we have to sacrifice yield.

Equity Arbitrage - Will only do the best deals; will attempt to get out of margin; and only do ‘announced’ deals for which there is a high degree of confidence that the deal will be completed. Will limit the equity arbitrage to $150 million at the UFC level and approximately $30 million at the UFGI level.

Ex. A-1601, Tab 1656.

A235. Following the November 9, 1987, meeting Crow wrote the following in a memorandum to Heubsch:

At the Strategic Planning Committee meeting this morning Charles [Hurwitz] and Jenard [Gross] agreed upon revised limits on equity arbitrage activities. The new limits are a total of $180 million with $150 million in UFC [an investment subsidiary of USAT] and $30 million at the UFG level. Please aim the portfolios toward these new targets.

Ex. T-9015, Tab 1808.

iv. The Strategic Planning Committee Considered The Association’s Future Direction.

A236. In December of 1987, as the financial condition of USAT continued to deteriorate, the Strategic Planning Committee met on at least two occasions to discuss the “results of United’s restructuring program during the last four years” and “the direction of United’s future activities.” Ex. T-4422, Tab 886 (12/10/87 Crow memo to the Strategic Planning Committee); B-1879, Tab 1803 (12/04/97 Committee Agenda). Among the issues considered were the sale of additional branches, USAT acquiring other “sick” thrifts, a capital forbearance plan (Ex. B-1879, Tab 1803) and the performance of each of the new investment activities embarked upon under the Wholesale Strategy. Ex. T-4422, Tab 886.

A237. The final record of a Strategic Planning Committee meeting was on June 9, 1988. Ex. T-9009, Tab 1804. Although Hurwitz had resigned from the Board of UFG in February 1988, he attended the meeting. Id.; Tr. 26,367: 16-20; Tr. 26,381: 15-11 (Hurwitz).

v. Hurwitz Participated In The Strategic Planning Committee

A238. Throughout the period of its existence, the Strategic Planning Committee considered virtually every major issue pertaining to the operation of USAT, including the following: (1) increasing the size of the junk bond and equity arbitrage portfolios; (2) smoothing out USAT earning to report a gradual stable earnings record (Ex. A-1590, Tab 1295 (11//17/85 Agenda) p. US-3008032-33); B-665, Tab 1392 (11/29/85 B. Williams memo); (3) the creation of service corporations by USAT; (4) profit targets at USAT; (5) a growth philosophy for USAT; (6) the timing of gains (Ex. A-10623, Tab 863 (04/17/86 Hansen notes)); (7) USAT’s capital adequacy; (8) possible supervisory intervention; (9) utilizing maturity matching credits; (10) issuing capital notes (Ex. T-4246, Tab 335 (08/08/86 Hansen memo)); (11) USAT’s net worth compliance; (12) taking gains from USAT’s investment portfolios to meet capital requirements (Ex. T-4250, Tab 871 (08/22/86 Hansen notes)); (13) reduced spreads in the arbitrage portfolios; (14) increasing the size of the arbitrage portfolios (Ex. T-4320, Tab 659 (12/17/86 Hansen notes)); (15) the sales of USAT branches (Ex. B-1636, Tab 2321(05/22/87 Crow memo)); (16) setting a unified interest rate policy for USAT (Ex. T-4366, Tab 1660 (04/27/87 Gross memo)); (17) setting USAT portfolio size limits (Ex. B-1702, Tab 1658 (11/13/87 Gross memo); A-1601, Tab 1656 (11/06/87 Crow memo)); (18) acquiring a sick thrift; and (19) filing an application for capital forbearance. Ex. B-1879, Tab1803 (12/04/97 Committee Agenda). The notes of the SPC indicate that Munitz and Hurwitz as members of the Strategic Planning Committee, participated in the consideration of each of these issues.

H. The USAT Management Committee

A239. In addition to the Strategic Planning Committee, USAT also had an “informal” Management Committee. Tr. 19,318: 19-22 (Berner). The group, which was composed of Hurwitz, Munitz, Gross, Crow, Berner, and G. Williams, met every Monday morning. Tr. 19,318: 8-13 (Berner). The purpose of the group “was to just kind of talk about what was going on at United and what was going on outside United, just kind of bring everyone up to speed at the beginning of the week." Tr. 19,318: 15-18.

III. Initiation Of A Non-Traditional Investment Strategy In 1984 By USAT

A240. Among the first steps taken to implement the “strategic shift” described in G. Williams’ October 25, 1984, memorandum to Hurwitz, Bentley, Munitz and Whatley, was for USAT to become involved in various investments referred to in the 1984 UFG Annual Report as “Merchant Banking.” Ex. A-3004, Tab 717, p. OW027559. In addition, USAT also began making “investments in marketable securities.” Ex. A-1188, Tab 121 (12/05/83 USAT/UFG Executive Committee Minutes). The first of these non-traditional investments by USAT was the purchase of stock in Castle & Cook, Inc., a Hawaiian company. Ex. A-3020, Tab.716 (1984 UFG 10-K) p. OFD 13078. As discussed below, although Hurwitz had no formal position with USAT or any of its subsidiaries as a director, officer or an employee, he was a direct participant in each of these new non-traditional investments.

A. USAT’s Investment In Castle & Cook (12/83)

1. UFG’s Acquisition Of Shares Of Castle & Cook Along With MCO

A241. In December 1983 USAT obtained permission from the Texas Savings and Loan Commissioner to invest in marketable securities through United Financial Corporation (“UFC”) a service corporation of USAT. Ex. A-1188, Tab 121 (12/05/83 USAT/UFG Executive Committee Minutes); Tr. 1,729: 9 - 1,730: 1 (Bentley). On December 15, 1983, UFC began purchasing stock of Castle & Cook (“C&C”) and by March 9, 1984, UFC beneficially owned 2,234,600 shares of C&C (8.0% of the outstanding shares) purchased at an aggregate price of $36,762,000. Ex. A-3020, Tab.716 (1984 UFG 10-K) p. OFD 13078.

A242. Prior to UFC acquiring and interest in C&C, MCO and Hurwitz had acquired 1,070,634 shares of C&C (3.8% of the outstanding shares), between October 14 and December 8, 1983. Id.; B-3757, Tab 169 (03/05/84 memo) p. 4. With the UFC purchases, MCO and UFC jointly owned over 11% of the outstanding shares of C&C.

A243. At the meeting of the Board of USAT on December 12, 1983, the Board was advised of UFC’s investment in C&C. The minutes state:

He [Bentley] discussed how the Company became aware of the investment opportunity and Mr. Hurwitz described the company, its financial condition and holdings. Mr. Hurwitz also mentioned that UFC, Federated and MCO Holdings had filed a joint 13-D showing investment in Castle & Cooke stock of more than 5% of its outstanding voting stock and was filing a Hart-Scott-Rodino pre-merger notification notice with the Justice Department and the FTC.

Ex. A-10538, Tab. 122 p. K 003377. There is no indication in the minutes that the USAT or UFC Boards ever approved or ratified the C&C investment by UFC (id.) although Bentley testified that normally such a ratification would have been noted in the minutes. Tr. 1,739: 9-22; Tr. 2,052: 6-15.

A244. On February 28, 1984, the UFG Board reviewed the UFC investment in C&C and unanimously recommended that USAT increase UFC’s investment in C&C “to a level that would enable UFC to incorporate Castle and Cooke’s earnings into its financial statements.” Ex. A-1092, Tab 127, p. K 003518. MCO’s Chief Financial Officer testified that in order for an acquiring company to utilize the equity method of accounting and account for the earnings of the entity being acquired on the acquiring company’s financial statement, the acquiring company usually has to own over 20% of the company it is acquiring. Tr. 2,516: 17 - 2,517: 14 (Lazard).

A245. When the General Counsel for the Federal Home Loan Bank Board, Norman Raiden (Tr. 2,076: 18-20 (Goldberg)), learned that MCO and UFC had jointly acquired over 10% of the outstanding shares of C&C, he advised Munitz and counsel for MCO, Daniel J. Goldberg, that “it was an activity that was unacceptable to the bank board.” Tr. 2083: 10-16 (Goldberg). Raiden advised Goldberg that, unless both UFC and MCO disposed of their shares of C&C (Tr. 2,096: 12-17 (Goldberg)), “he would seek divestiture of all the Castle & Cooke stock and he may also seek a divestiture of all the MCO Holdings stock held by MCO – all the United Savings Financial Group stock held by MCO.” Tr. 2,094: 19 - 2,095: 1 (Goldberg).

A246. After Raiden threatened to take action against UFG and MCO to divest them of their shares of C&C, UFC and MCO arranged to sell their shares back to C&C on April 15, 1984. UFG’s 1984 10-K states that the sale resulted in a nonrecurring gain of $7,000,000. Ex. A-3020, Tab 716, p. OFD 13078.

2. Hurwitz Involvement In UFC’s Acquisition Of C&C Stock

A247. Hurwitz was involved in every stage of the transaction from the initial decision by UFC to invest in C&C to the final disposition of the shares. At the outset Hurwitz recommended C&C as one of the investments for which it should seek approval from the TXS&L. Tr. 2,208: 8-22 (G. Williams). Hurwitz participated in the December 5, 1983, USAT Executive Committee meeting at which USAT/UFC decided to invest in marketable securities. Ex. A-1188, Tab 121. Although Hurwitz was not an officer or director of USAT or UFC and was not authorized to engage in stock transactions on behalf of either USAT or UFC, he directed Bear Stearns to acquire the shares of C&C on behalf of USAT. Tr. 1,724: 11 - 1,725: 18; Tr. 1,737: 8 - 1,738: 4 (Bentley). Hurwitz also participated in the December 19, 1983, meeting at which the investment was disclosed to the USAT Board and described the investment to the Board members. Ex. A-1089, Tab 123, p. K 003288. At the USAT Board meeting the following month, on January 25, 1984, the minutes state that Hurwitz “reiterated that he viewed the purchases of (C&C) stock by UFC as a good investment.” Ex. A-1090, Tab 125. Finally, after FHLBB expressed concern over UFC’s and MCO’s joint purchases of C&C stock, Hurwitz negotiated the sale price with C&C for the repurchase by C&C of both the UFC and MCO shares and recommended the sale be made. Tr. 2,221: 8 - 2,222: 5 (G. Williams); Tr. 1,746: 21 - 1,747: 9 (Bentley).

B. USAT Invests In Weingarten Realty And Houstonian, Inc.

A248. UFG’s 1984 Annual Report states that “United has undertaken a Merchant Banking role. In 1984 substantial investments were made in Weingarten Realty and Houstonian Inc., two companies which are located in one of United’s most important market areas.” Ex. A-3004, Tab 717, p. OW027559. As discussed below, Hurwitz was a key participant in both of these new Merchant Banking activities engaged in by USAT.

A249. The minutes of the meeting of the USAT Executive Committees dated July 23, 1984, indicate that the Executive Committee of UFG approved the purchase of “up to 122,250 shares of Weingarten Realty, Inc., a Texas Corporation, at $420 per share [a total investment of $51,345,000].” Ex. A-1196, Tab 2140.

A250. At the August 29, 1984, meeting of the USAT Board the Directors of USAT were advised that UFC had invested in Weingarten Realty. The minutes state:

Mr. Hurwitz discussed the purchase of 36% of Weingarten Realty by United Financial Corporation. He explained that Weingarten is the largest shopping center developer in Texas and the shares were purchased at $420 per share. UFC will account for the investment on the equity basis. A copy of the Weingarten Realty Annual Report was distributed to each director.

Ex. A-1098, Tab 792, p. US-3 003045. The minutes do not state whether the Board approved or ratified the investment after the fact. Id.

A251. USAT ultimately sold its shares of Weingarten Realty and the institution made a profit on the transaction. Tr. 6,408: 2-16; Tr. 6,438: 19 - 6,439: 7 (G. Williams); Tr. 26,170: 1-4 (Hurwitz).

A252. As in the case of the C&C investment, Hurwitz was involved in every aspect of the Weingarten Realty transaction. At the outset he recommended Weingarten Realty to USAT’s management as an investment that they might be interested in pursuing. Tr. 2,038: 21 - 2,039: 7 (Bentley). G. Williams explained that he viewed Hurwitz as a source of information regarding investments that might do well for USAT (Tr. 6,408: 2-3), and, in the case of Weingarten Realty, had sought the advice of Hurwitz on whether Hurwitz was aware of any potential investments that might be suitable for USAT. Tr. 2,053: 16-21 (Bentley). Hurwitz testified that he had “looked at” the Weingarten Realty investment, concluded that it was a “very attractive” investment, “presented the opportunity” to UFC, and helped negotiate the price. Tr. 26,299; 20 - 26,300: 16. After UFC acquired a 36% interest in Weingarten Realty, Gross and Hurwitz were placed upon the Board of Weingarten Realty. Tr. 21,624: 19 - 21,625: 19 (Gross). Finally, in 1986 Hurwitz was paid a substantial bonus for the “investment leadership” he provided to USAT in connection with Weingarten Realty and several other investments. Ex. T-8034, Tab 479, pp. 4 and 6; Tr. 26,168: 12 - 26,170: 5 (Hurwitz).

A253. The Houstonian, a hotel in Houston (Tr. 15, 273: 13-17 (Crow)), was another merchant banking investment that was seen as an “opportunity to generate earnings” for USAT. Ex. B-378, Tab 143 (G Williams memo) p. UFG2018919. According to Bentley, the Houstonian investment, like Weingarten Realty, had been recommended to USAT by Hurwitz. Tr. 2,038: 21 - 2,039: 10.

A254. According to Hurwitz, USAT paid him a bonus in 1985 of $200,000 and a bonus in 1986 of $230,000 for the investment services he provided to USAT in connection with the C&C and Weingarten realty investments. Tr. 26,167: 4 - 16,170: 10 (Hurwitz).

C. Hurwitz Creates A USAT Investment Facility

A255. While Hurwitz was assisting USAT with the acquisition of new non-traditional investments, such as C&C and Weingarten Realty, Ron Huebsch, at the direction of Hurwitz was setting up a new USAT trading facility for securities investments at the offices of MCO.

1. Huebsch Sets Up A Trading Floor At Hurwitz’ Direction

A256. In March 1984, Huebsch, who at the time was a portfolio manager employed by FDC (Tr: 13,403: 1-6; Tr. 13,407: 5-9; Tr. 13,420: 10- 13,421: 9 (Huebsch)), wrote a memorandum to G. Williams, the President of USAT, in which Huebsch proposed the creation of a USAT trading facility. Ex. T-4061, Tab 173. Huebsch advised Williams that interest rates had become “more volatile” and “new techniques for trading and investing in capital markets continue to accelerate.” Id. p. 1. Huebsch proposed that “United establish a centralized trading and investment facility staffed with full-time professionals” and then provided “specific and general recommendations for setting up a department as well as how it might function.” Id.

A257. Huebsch concluded his memorandum to Williams stating: “Within bounds of a predetermined interest rate scenario, the investment department would actively trade, using the many new products available for hedging and arbitrage…” (emphasis added) Id. p. 3.

A258. Hurwitz and Williams requested that Huebsch began making plans for the creation of a trading facility. Tr. 13,420: 3-5; Tr. 13,422: 21 - 13,423: 1; Tr. 13,425: 1-5 (Huebsch). Among the first actions taken by Huebsch was the creation of a USAT high-yield bond portfolio. Tr. 13,421: 16 - 13,422: 3 (Huebsch). At the direction of Hurwitz, Huebsch began purchasing high yield bonds on behalf of USAT. Tr. 13,423: 5 - 13,424: 10 (Huebsch). Huebsch, at Hurwitz direction, also searched out and hired Joe Philips to serve as the manager of the USAT high yield bond portfolio. Tr. 13,421: 16 - 22 (Huebsch).

A259. In the latter half of 1984 Huebsch, at the direction of Hurwitz, also began “planning” and doing the “background work” for the creation of a MBSs portfolio and an equity arbitrage portfolio for USAT. Tr. 13,422: 15- 13,423: 1; Tr. 13,424: 11 - 13,425: 1 (Huebsch).

A260. By 1985 the USAT investment facility, which was also referred to as the “trading floor” or the “investment group,” was in operation (Tr. 2,250: 16 - 2,251: 7 (G. Williams)) coordinating “a brokered CD program and the investment of these funds incorporate and mortgage-backed securities.” Ex. A-10566, Tab 176 (07/12/85 Williams letter) p. CN052883. The April 26, 1985, Crow memorandum on the Strategic Planning Retreat Weekend states the following regarding the new USAT Investment facility:

XI. The investment department is working effectively at the present time….It was discussed that Mr. Hurwitz was the only truly qualified individual to determine the quality of some of the investments.

Ex. A-10560, Tab 174, p. US 0000385, emphasis added.

2. The USAT Investment Facility Is Located At The Offices Of MCO

A261. The USAT Investment Department, which was making investments on behalf of USAT was not located at the headquarters of USAT. Tr. 2,250:12 - 2,252: 2 (G. Williams). Huebsch with the assistance of James Paulin, Huriwtz’ assistant (Ex. B-391, Tab 576 (11/30/84 Paulin memo); Tr. 14,237: 11-13 (Huebsch)), set up the USAT Investment Department at an existing trading floor maintained on the 22^nd Floor of the MCO building, adjacent to the offices of Hurwitz, Huebsch and Munitz. Tr. 2,251: 8 - 2,252: 2 (G. Williams); Tr. 26,102: 19 - 26; Tr. 103: 22 (Hurwitz); Tr. 25,306: 21 - 25,307: 1 (Munitz). According to Hurwitz, the USAT Investment Department was placed at the existing trading floor adjacent to Hurwitz’s office in MCO Building because it was “cheaper and a lot more convenient.” Tr. 26,290: 14 - 26,291: 4 (Hurwitz). Hurwitz would “hang around” the trading floor and see what was going on with junk bonds and equity arbitrage. Tr. 3,982: 17 - 3,983: 10 (Orr).

A262. A year after the Investment Department was set up in the MCO Building, USAT moved its corporate headquarters to the same building. Tr. 2,252: 7-17 (G. Williams). Gross, Williams and Crow had offices on the fifth and sixth floors, but did not occupy offices in the same location as the USAT Investment Department. Tr. 26,103: 10 - 26, 104: 15 (Hurwitz).

A263. The Minutes of the February 14, 1985, UFG Board Meeting contains the following resolutions:

1. RESOLVED: That United Financial Group, Inc. is hereby authorized to pay to Federated Development Company the sum of $300,00 for special consultation and advisory services provided to support major accomplishments during 1984.

2. RESOLVED: That United Financial Group, Inc. is hereby authorized to pay to Federated Development Company the aggregate of $50,000 per year for rental of office space, use of facilities, personnel support, and local business expenses incurred in the ordinary course of business as related to United matters.

Ex. A-1105A, Tab 2100, p. K 003965.

D. Hurwitz Participates In The Hiring Of USAT Investment Managers

A264. After the Investment Department was created by Huebsch, a number of investment managers were hired between 1984 and 1988 to manage USAT’s MBSs, high-yield bond and equity arbitrage portfolios. As discussed below, Hurwitz was directly involved in the process of hiring each of the investment managers retained by USAT to manage all three portfolios.

1. USAT’s Investment Managers

A265. Initially in 1984 USAT’s only investment manager was Huebsch, an employee of FDC, who set up the Investment Department and started USAT high-yield bond portfolio. Tr. 13,422: 15 - 13,425: 1 (Huebsch). In the latter part of 1984 Huebsch recruited Joe Phillips to take over the management of both USAT’s high-yield bond portfolio and its planned mortgage-backed securities portfolio. Tr. 5,324: 19 - 21 (Phillips); Tr. 13,421: 13 - 13,424: 11 (Huebsch). Huebsch, however, remained on as an Investment Manager for USAT and in February 1985 became an Executive Vice-President of USAT and a paid USAT Investment Manager. Ex. A-10663, Tab 184 (1986 Business Plan) p. OW150620. Until USAT was placed in receivership, Huebsch’s principal duties were the management of equity arbitrage portfolios for USAT as well as MCO. Tr. 13,900: 3 - 13,901: 6 (Huebsch).

A266. After Joe Phillips was hired to manage the high-yield bond portfolio he also became responsible for managing USAT’s MBSs portfolio. Tr. 5,018: 20 - 5,019: 1-7 (Phillips); Tr. 5,177: 19 - 5,178: 1 (Phillips). Joe Phillips left USAT in the latter part of 1986. Tr. 5,218: 1-3 (Phillips).

A267. After Phillips left USAT in late 1986, Sandra Laurenson was hired as an Investment Manager for the MBSs portfolios and Eugene Stodart was hired as Investment Manager for the high-yield bond portfolio. Tr. 14,290: 10-15 (Huebsch); Tr. 16,031: 4-10 (Crow); A-1124, Tab 1306, Tr. 25,650: 16-19 (Stodart).

A268. At end of 1987, Laurenson left USAT and Bruno was hired to replace her as manager of the mortgage backed securities portfolio. Tr. 12,770: 10 - 12,771: 1-9 (Bruno). Tr. 25,761: 11-16 (Stodart); Tr. 12,962: 10-13 (Bruno).

2. Hurwitz’s Involvement In The Hiring Of USAT’s Investment Managers

A269. As discussed previously, Munitz was hired directly by Hurwitz for, “the express purpose of dealing with people-type issues.” Tr. 25,167: 18-20 (Munitz). In that capacity Munitz retained search firms to assist in locating qualified candidates and participated in the recruitment and hiring of qualified investment managers. Tr. 25,280: 15 - 25,281: 9; Tr. 25,289: 4-21; Tr. 25,482: 20 - 25,482: 15 (Munitz). Among the investment managers Munitz helped recruit and hire were Laurenson, Stodard, and Bruno. Id.

A270. Hurwitz also participated in USAT’s hiring decisions (Tr. 25,168: 18 - 25,169: 10 (Munitz)); if he opposed the hiring of a particular individual because he felt that they weren’t qualified in a particular area that he was knowledgeable about, it was “less likely” that they would be hired. Tr. 25,169: 22 - 25,170: 6 (Munitz). Hurwitz, who had prior experience with and was particularly knowledgeable about high-yield bond and equity arbitrage investments, was acknowledged by USAT’s management team at the April 26, 1985, Strategic Planning Committee meeting as “... the only truly qualified individual to determine the quality of some of the investments.” Ex. A-10560, Tab 174, p. US 0000385. As a consequence, Hurwitz frequently interviewed potential candidates that were under consideration by USAT as investment managers. Tr. 26,100: 1-4; Tr. 26,099: 6-9; Tr. 26,101: 6-21 (Hurwitz); Tr. 25,648: 5-10 (Stodard).

A271. In additional to personally directing Huebsch to perform investment management services for USAT in 1984, Hurwitz interviewed Phillips for the position of USAT’s initial high-yield bond and MBSs portfolios. Tr. 26,099: 6-9 (Hurwitz); Tr. 5,324: 19-22 (Phillips). Two years later when Phillips departed USAT, Hurwitz was among the people who asked Munitz to undertake the recruitment that led to the hiring of Sandy Laurenson (Tr. 25,481: 20 - 25,483: 10) and Hurwitz personally interviewed Laurenson for the job of managing USAT’s MBSs portfolios. Tr. 26,100: 1-11 (Hurwitz). Likewise, Hurwitz interviewed Stodard when he replaced Phillips as USAT’s high-yield bond manager. Tr. 25,648: 5-13 (Stodard).

E. After Creating The USAT Trading Facility Hurwitz Continued To Make Investments On Behalf Of USAT

A272. After USAT’s investment activities were shifted to the trading floor established under Hurwitz directions, Hurwitz continued to be personally involved in the investment of USAT’s assets. For example, on March 27, 1987, nearly two years after the creation of the investment facility and almost a year after the USAT Investment Committee was created by the Board, Hurwitz personally committed UFC to invest $990,000 in Transcontinental Service Group (“TSG”), without the prior authorization of UFC. Ex. T-4374, Tab 1348 (05/27/87 letter to James Paulin); Tr. 19,293: 7-13; Tr. 19,298: 3-10 (Berner).

1. MAXXAM’s Purchases Of TSG

A273. In 1984 and 1985 MAXXAM acquired 12% of the outstanding shares of TSG, for an aggregate purchase price was $9.9 million. Ex. CT-1072, Tab 1347 (05/21/85 MAXXAM Prospectus) p. 9; Tr. 26,162: 3-4 (Hurwitz). TSG was a Netherlands Antilles corporation listed on the London Stock Exchange (id.); whose controlling shareholder and chairman were familiar to Hurwitz. Tr. 26,161: 10-14 (Hurwitz).

2. UFC’s Investment In TSG

A274. In December 1986, after MAXXAM had sold its interest in TSG, an opportunity again arose to purchase shares of TSG. Tr. 26,294: 14 - 26,295: 2 (Hurwitz). Hurwitz presented the investment to USAT (id.) and UFC, a subsidiary of USAT, invested approximately $5 million in TSG shares. Ex. A-1421, Tab 352 (12/04/86 Investment Committee Minutes) p. US-3 005122; Tr. 26,295: 20 - 26,296: 9 (Hurwitz).

A275. Over three months after the initial UFC investment in TSG, in March 1987, Hurwitz was contacted by phone from London and advised that a $990,000 block of TSG had again become available. Hurwitz told TSG that UFC would “take it.” Tr. 26,163: 10-15 (Hurwitz). At the time Hurwitz had no authority to commit UFC to the purchase of stock. Tr. 19,239: 7-13 (Berner).

A276. The purchase by UFC was effected by TSG and the following week on March 27, 1987, TSG sent James Paulin a letter confirming UFC’s purchase of 300,000 shares of TSG at $3.30 per share, for an aggregate price of $990,000. Ex. T-4374, Tab 1348 (05/27/87 letter to James Paulin). Paulin, as Hurwitz’ assistant, (Tr. 14,237: 11-13 (Huebsch)) had no official role with UFC (Tr. 19,298: 21 - 19,299: 5 (Berner)), informed Crow that “Charles [Hurwitz] had committed for UFC to purchase $990,000 more of TSG Holdings.” Id.

A277. After Crow received a copy of the March 27, 1987, TSG confirmation letter from Paulin, Crow distributed it to Bruce Williams and Art Berner with the following handwritten notation:

I was informed by Jim Paulin this morning that Charles had committed for UFC to purchase $990,000 more of TSG holdings.

Art - Please get in the Invest. Committ. Minutes.

Bruce - Please get this straight from a record stand or at least document that it is screwed up. I understand we don’t have all the shares from our last purchase of TSG.

Id.

A278. Later that same day, Berner arranged for a Special Meeting of the USAT Investment Committee to consider the acquisition of the additional shares of TSG, which Hurwitz had committed UFC to purchase the previous week. Tr. 19,298: 6 - 19,299: 10 (Berner). The Investment Committee minutes, which were prepared by Berner, state: “[a]fter full discussion, it was determined to acquire an additional 300,000 shares [of TSG] at a price of $3.30 per share.” Ex. A-1445, Tab 1317 (05/27/87 Special Investment Committee Minutes).

IV. The Wholesale Strategy

A279. At the end of 1984 USAT embarked upon what came to be known as the “Wholesale Strategy.” Ex. T-4422, Tab 886 (12/10/87 Crow memo) p. US 0001852; Pre-hearing Memorandum on Mortgage-Backed Securities filed by the Respondents on March 12, 1996 (the “Pre-hearing Memo”) p. 3.

A280. Under the Wholesale Strategy, USAT engaged in a growth investment strategy, growing in size from $3.9 billion in assets at its inception (Ex. T-4422, Tab 886 (12/10/87 Crow memo) p. US 0001852) to over $7 billion at the end of 1987. Ex. T-8033, Tab 402 (1987 UFG Annual Report) p. H 0658. The strategy focused upon investments in MBSs through a program of RCA, a program of equity arbitrage and a program of high-yield bonds. Ex. T-4422, Tab 886 (12/10/87 Crow memo) p. US 0001853. Pre-hearing Memo p. 4.

A281. USAT’s management advised the regulators that this growth strategy was “consistent with the principles of safety and soundness and provides a stable income with very limited interest rate risk. The decisions made in implementing these investment policies were based on the premise of reducing the Association’s interest rate exposure.” Ex. A-10566, Tab 176 (07/12/85 G. Williams letter) p. CN052880-81.

A282. The strategy failed. On December 10, 1987, Crow wrote the SPC a memorandum detailing the results of the strategy over the previous three years. Ex. T-4422, Tab 886, p. US 0001853. By Crow’s calculation, over $150 million in losses had been sustained by United in its MBSs RCA portfolios. Id. The results of the high-yield bond and equity arbitrage portfolios, which registered small gains over the three year span, were also termed “disappointing.” Id.
UFG reported in its 1987 Annual Report that by the end of December 31, 1987, United had experienced significant losses and management and the FHLB-D agreed that USAT had failed to meet its regulatory capital requirements. Ex. T-8033, Tab 402 (1987 UFG Annual Report) p. H 0681.

A. The Formulation Of The Wholesale Strategy By Hurwitz And USAT’s Senior Management

A283. Following the Strategic Planning Retreat Weekend on April 26, 1985, in Austin, Texas, with Bain & Co., Crow drafted a summary of the discussions Hurwitz, Munitz, Gross, Crow and G. Williams (Tr. 15,268: 19 - 15,269: 22 (Crow)) had on the “strategic direction” of USAT. Tr. 15,270: 17-21 (Crow). Attached to the Summary is a “Mission Statement” for UFG and USAT (id p. US 0000384) that Crow drafted as an outgrowth of the Strategic Planning Committee’s weekend retreat. Tr. 2,253: 6-9 (G. Williams). The Mission Statement reflected the input of Hurwitz, Munitz, Gross, Crow and Williams. Tr. 2,253: 13 - 2,254: 11 (G. Williams); Tr. 15,388: 2-8 (Crow).

A284. The Mission Statement stated, in part:

The Mission of United Financial Group is to create a heavily capitalized institution which has significant market value. The company will emphasize entrepreneurial activities and divest itself of transaction related activities which involve significant overhead. Activities to be retained/expanded are:

Real estate and real estate joint ventures (essentially the same function as we have today).

Merchant banking - financing activities with profit participation on the part of United.

* * * *

Marketable securities - Investment in non-hostile takeover situations that offer the potential of significant returns.

Investment in fixed and floating rate investments for a spread.

Ex. A-10560, Tab 174, p. US0000383.

A285. Crow, who drafted the Mission Statement, and other participants at the retreat testified that the reference in the Mission Statement to “[i]nvestment in fixed and floating rate investments for a spread” referred to investments in high-yield bonds and MBSs. Tr. 15,274: 12-18 (Crow); Tr. 21,264: 11 - 21,265: 4 (Gross); Tr. 26,111: 5 - 26,112: 1 (Hurwitz).

A286. The SPC members also proposed that USAT engage in investments in “marketable securities - investments in non-hostile takeover situations,” which referred to establishing an equity arbitrage portfolio. Tr. 15,673: 3-11; Tr. 15,675: 21 - 15,276: 22 (Crow); Tr. 21,264: 5-8 (Gross).

A287. Following the Strategic Planning Retreat Weekend, the levels of junk bonds, MBSs and equity arbitrage activities, as proposed in the Mission Statement by the Strategic Planning Committee, were increased at USAT. Tr. 21,262: 9 - 21,262: 10 (Gross). USAT’s increase in these investment activities proposed in the Mission Statement were part of USAT’s Wholesale Strategy. Tr. 27,516: 6 - 27,517: 17 (Wallace); Pre-hearing Memo p. 4.

B. Objectives Of The Wholesale Strategy

A288. The idea of the “Wholesale Strategy” was “to move away from exclusive reliance on retail home mortgage and consumer lending funded by consumer deposits – the duration-mismatched activity that had proved so disastrous in the period leading up to 1984 – and to move
toward a diverse group of more profitable investment strategies.” Pre-hearing Memo p. 3; Ex. A-3004, Tab 717 (1988 UFG Annual Report) p. OW027559-64.

1. Growth Of Mortgage Backed Securities And Junk Bond Portfolio

A289. One of the objectives of the USAT overall strategy was to grow USAT by “[i]ncreasing the Association’s asset base with the addition of variable-rate high yielding assets to dilute the effect of the existing long-term fixed-rate mortgage portfolio.” Ex: A-10566, Tab 176 (07/12/85 G. Williams letter) p. CN052882. The impetus for United’s growth was to be investments in “mortgage-backed and corporate securities matched with liabilities of similar maturity and duration.” Id. p. CN052885. Under this Strategy USAT’s growth on the liability side was to be comprised of the following components: “reverse repurchase agreements which will be used to purchase MBS” and “brokered deposits which will be invested in corporate securities.” Id. p. CN052887-88; Ex. A-10568, Tab 177 (USAT Growth Plan) pp. CN056092-93. Pre-Hearing Memo p. 4.

2. Reduce USAT’s Exposure to Interest Rate Risk

A290. A second objective of the strategy was “reducing United’s exposure to the volatility of interest rates through a more closely matched asset /liability structure.” Ex. A-10566, Tab 176 (07/12/85 G. Williams letter) p. CN052882. As explained in USAT’s description of its corporate strategy “[t]he relative maturities and durations of the matched liabilities and corresponding investments have been structured to minimize interest rate risk exposure.” Id. p. CN052887; Pre-Hearing Memo pp. 4-5.

3. Generate Spread Income

A291. “And, most importantly, the ultimate objective was to generate a positive ‘net interest spread’ between fixed-rate MBS assets and fixed-rate liabilities of a similar duration.” Pre-Hearing Memo p. 5; Ex. A-10566, Tab 176 (07/12/85 G. Williams letter) p. CN052891. As USAT described to the regulators in the 1985 Business Plan “[t]his asset/liability match program virtually locks in a spread between United’s asset yield and funding costs, giving significant protection against interest rate fluctuations.” Ex: A-10566, Tab 176 (07/12/85 G. Williams letter) pp. CN052891 and CN052886; A-3005, Tab 2341 (1985 UFG Annual Report) pp. OW000369-71.

A292. In its 1985 Business Plan USAT’s management stated “[t]hese strategies have produced an essentially new United…Today’s United has reduced its exposure to interest rate fluctuations and provided for a long-term and stable earnings outlook through a carefully planned program of diversification.” Ex: A-10566, Tab 176 (07/12/85 G. Williams letter) p. CN052891.

C. USAT Could Not Grow Its Junk Bond Or Equity Investment Without Increasing The Size Of Its MBS Portfolios

A293. In carrying out the Wholesale Strategy and growing the MBS, high-yield bond and equity arbitrage portfolios, USAT’s management was always aware of the Qualified Thrift Lender test (the “QTL Test”) Tr. 6,331: 21 - 6,332: 15 (G. Williams). The size of the high-yield bond and equity arbitrage portfolios were limited by the QTL Test which required that USAT invest at least 60% of its assets in home loans and other qualifying assets, such as MBSs. Tr. 15,309: 10 - 15,310: 5 (Crow).

1. The Qualified Thrift Lender Or “Thriftness” Test

A294. In order for USAT to maintain its thrift charter it had to comply with the QTL Test. Tr. 6,332: 3 - 6,333: ( (G. Williams); Tr. 5,099: 2-22 (Phillips). For public policy reasons the so-called “thriftness test” required that savings and loan associations invest 60% their assets in housing loans. Tr. 5,100: 8-16 (Phillips); Tr. 121,269: 4-14 (Gross). The requirement could be satisfied by originating single family mortgages (Tr. 5,100:19-22 (Phillips)) or through investments in MBSs. Tr. 5,098: 18 - 5,099: 16 (Phillips); Tr. 6,332: 11-15 (G. Williams). As USAT shifted from a retail to a wholesale operation it phased out mortgage loans and began to expand MBSs to grow the size of the institution. Tr. 13,740: 1-14 (Huebsch).

2. Hurwitz And USAT’s Managers Had To Satisfy The QTL In Order To Engage In High-Yield Bond And Equity Arbitrage Investments

A295. On May 16, 1986, when Hurwitz made the initial presentation to the USAT Board of the new growth strategy under the Mission Statement, Director Keltner questioned Hurwitz about “regulatory compliance” and Hurwitz assured the Board that “the Association will maintain 60 percent of its assets in mortgage or mortgage related investments which will qualify the institution as a savings and loan association.” Ex. A-10561, Tab 175 (05/16/85 USAT Minutes) p. CN057151. G. Williams, who was the President of USAT at the time the Wholesale Strategy was conceived, explained that Hurwitz and the member of USAT’s management were always concerned about the QTL Test and aware that their investments in MBS, in addition to generating a spread, would help USAT meet that test and maintain the thrift charter. Tr. 6,331: 21 - 6,333: 9 (G. Williams).

A296. Because of the QTL requirement, the size of USAT’s “non-mortgage-type assets” was always limited by the size of the MBS portfolios. 15,309: 3- 15,310: 5 (Crow). USAT couldn’t increase its investments in junk bonds or equities unless it also increased the size of its MBS holdings. Id. For example, during the first six months of 1985, when the junk-bond portfolio grew by $189 million, the MBSs portfolio also grew by $488 million. Ex. A-10566, Tab 176 (07/12/85 G. Williams letter) p. CN052886. Similarly, the QTL regulation also restricted how much USAT could invest in its equity arbitrage portfolio. Tr. 13,891; 5- 13,893: 13 (Huebsch).

A297. For example, at the end of the 1986 when the SPC considered $500 million in growth in 1987 it was proposed that USAT “put $300 mm into MBS to maintain the thrift test:” Ex. T-4304, Tab 873 (11/17/86 Hansen memo) ¶ 16 p. US 0000752.

A298. Conversely, when the Strategic Planning Committee considered shrinking USAT by selling off MBSs, it couldn’t do so and still meet the QTL test unless it also made a corresponding reduction in its non-mortgage assets. For example, on September 8, 1986, Doug Hansen informed the Strategic Planning Committee that it would be difficult for USAT to shrink below $4 billion. Although, United could sell off MBSs, Hansen advised management that “United’s limitation in shrinking is the non-thrift assets” which totalled $1.62 billion. Hansen explained, that “to reduce [real estate, preferred stock, high-yield bonds, equity arbitrage and good will] below $1.62 billion level will be difficult or expensive, if it cannot be reduced the minimum size of United is $4.1 billion.” Ex. T-4246, Tab 335 at ¶ D.2 p. OW006599.[27]

D. Representations To The Regulators

A299. The Wholesale Strategy was described in a number of submissions during 1985 and 1986 from USAT’s managers to representatives of the FHLB-D. The submissions included the July 12, 1985, letter from G. Williams to Robert Bonchak regarding USAT’s violation of the liability growth regulations (Ex. A-10566, Tab 176); USAT’s 1985 Business Plan (id. p. CN052890); USAT’s application to increase its direct investment limit dated August 20, 1985, (Ex. A-11057, Tab 1870A); the United Savings Association of Texas Growth Plan dated September 19, 1985 (Ex. A-10568, Tab 177); USAT’s Application For Approval To Issue Subordinated Debt Securities (Ex. B-954, Tab 89); a letter from Berner to James Halverson dated May 9, 1986 (Ex. A-10634, Tab 180); and the USAT 1986 Business Plan dated August 29, 1986 (Ex. A-10663, Tab184).

A300. In each of these submissions, USAT’s management represented that its RCA investments in MBSs funded by reverse repurchase agreements and its high-yield bond investments matched to certificates of deposits were undertaken for the purposes of : (1) generating a “spread” income (Ex. A-10566, Tab 176, p. CN052880, 86, 88, 91; A-11057, Tab 1870A, p. OW089984; A-10568, Tab177, p. CN056089; B-954, Tab 89, p. CN152324-25; A-10634, Tab 180, p. OW152652-53; and A-10663, Tab184, p. OW151612 and 14); and (2) had the effect of reducing USAT’s exposure to the volatility of interest rate risk. Ex. A-10566, Tab 176, p. CN052881, 85, 88, 91; A-11057, Tab 1870A, p. OW089985; A-10568, Tab 177, p. CN056092; B-954, Tab 89, p. CN152330; A-10634, Tab 180, p. OW152654-55; and A-10663, Tab 184, p. OW151613-14.

A301. For example, in a letter to Supervisory Agent James Halverson dated May 6, 1986, Berner described USAT’s MBS RCA program as follows:

In order to assure itself that it would no longer be subject to the mismatch of assets and liabilities, (generally called a GAP) USAT has instituted a program of GNMA, FNMA, and FHLMC securities to match its assets and liabilities in a sophisticated government securities matched investment program.

These matching techniques eventually result in long-term assets and liabilities being duration-matched with a built-in spread such that the Association has significantly reduced the risk of interest rate fluctuations….through the use of these devices the Association has significantly improved the GAP position between its assets and liabilities and is constantly striving to further close the GAP position.

* * *

While utilization of these techniques has resulted in the Association not taking full advantage of the recent dramatic decline in interest rates, USAT’s management believes that USAT should not be in the interest rate speculation business. Rather management believes we should protect our interest rate spread and reduce our GAP to the fullest extent possible in all interest rate environments.

Ex. A-10634, Tab 180, p. OW152654-5, emphasis added.

A302. In the same letter to the regulators Berner also described USAT’s high-yield bond portfolio as follows:

The Association has implemented its program of investing in corporate bonds in order to maintain an interest rate spread between the high yield corporate bonds and duration matched long-term certificates of deposit. By building in this matched spread, the Association has been able to increase its capital and profitability through what we believe to be a balanced portfolio of corporate debt.

Id. p. OW152652.

E. With The Exception Of Hurwitz And Huebsch, None Of USAT’s

Management Had Any Experience In The Arbitrage Investments That Were The Heart Of USAT Wholesale Strategy

A303. UFG’s 1985 Annual Report indicated that by the end of 1985, pursuant to the Wholesale Strategy, USAT had a $2.2 billion investment portfolio the “bulk” of which was invested in MBS ($1.4 billion) as part of a RCA program and a fixed rate corporate bond arbitrage portfolio. Ex. A-3005, Tab 2341, p. OW0000367. As discussed below, although USAT’s investments in these matching programs was described in the 1985 Annual Report as the “heart of its investment strategy,” (id.) none of USAT’s senior management, other than Hurwitz and Huebsch, had any prior experience managing these kinds of investment portfolios.

1. No One At USAT Had Any Prior Experience With The Management

Of A MBS Risk-Controlled Arbitrage Portfolio

A304. Gross, who was the CEO of USAT during the period when USAT’s MBSs RCA portfolios were established, had developed and managed apartment buildings since 1954. Tr. 20,059: 3 - 20,061: 19 (Gross). Gross had little experience in non-real estate matter in general (Tr. 12,696: 12-15 (Hansen) and had no prior experience with MBSs. Tr. 21,518: 13-18 (Gross). Gross acknowledged:

My experience [with MBS], as I've said from day one, was very limited. And that's the reason I wrote all the memos and asked all the questions, because I tried to learn and understand it.

Tr. 21,518: 15-18. In light of Gross’ limited experience with respect to non-real estate matters, Doug Hansen, who had a background in finance (Tr. 12,480: 20 - 12,482; 19 (Hansen)), was hired by Munitz to serve as Gross’ assistant (Gross). Tr. 12,488: 14 - 12,490: 6; Tr. 12,698: 4-7 (Hansen).

A305. G. Williams, the President of USAT in 1985 and 1986 when the MBSs portfolios were created, also testified that he had no experience supervising anyone managing a MBSs RCA portfolio. Tr. 6,337: 3-6 (G. Williams); Tr. 15,279: 8-13 (Crow).

A306. Similarly, Crow, the Chief Financial Officer of USAT and the member of the Investment Committee that Berner considered most knowledgeable about MBSs (Tr. 15,588: 16-17; Tr. 15,583: 5 (Berner)), also testified that he had no experience in overseeing the management of an MBSs portfolios. Tr. 15,279: 15-22. Crow added that in the 12 years he had worked with Williams prior to taking a position with USAT, to his knowledge, Williams had not had any prior experience overseeing the management of an MBS portfolio either. Tr. 15,280: 1-8.

A307. Likewise, Munitz, whose experience was on the “people and processing side” as opposed to the “financial and deal making side” (Tr. 25,067: 2-7), testified that MBSs were not his area of expertise. Tr. 25,477: 16-20.

A308. Berner, who was also a member of the Investment Committee (Ex. T-7587, Tab 655 p. US-3 003144-46), testified that he too had no experience or knowledge regarding MBS. According to Berner, he and Gross were the least knowledgeable persons on the USAT Investment Committee regarding MBSs. Tr. 18,589: 14-21.

A309. In fact, none of the persons who testified in this proceeding could identify any member of USAT’s management who had any prior experience with an MBS RCA activities at the time USAT embarked upon its MBS program in late 1984 and early 1985. For example, Huebsch who was responsible for setting up USAT Investment Facility (Tr. 13,420: 3 - 13,425: 1 (Huebsch)), served on the USAT Investment Committee (Ex. T-7587, Tab 655, p. US-3 003144-46), and managed its equity arbitrage portfolio (Tr. 13,900: 3 - 13,901: 6 (Huebsch)), testified that he did not know whether any of the members of USAT’s senior management, including, G. Williams, Munitz, Crow and Gross, had any experience with MBSs. Tr. 13,740: 19 - 13,741: 18; Tr. 13,879: 15-20.

A310. Doug Hansen, who assisted Gross and was a regular participant at the Strategic Planning Committee meetings where USAT investment strategy was discussed, likewise was unaware whether any of the members of USAT’s senior management, including Gross, G. Williams, Munitz and Crow, had any experience with MBSs. Tr. 12,702: 22 - 12,703: 22.

A311. Even Joe Phillips, who was initially hired by USAT to manage USAT’s high yield bond portfolio (Tr. 5,019: 2-21 (Phillips)), had little prior experience managing an MBSs RCA portfolio before assuming that responsibility at USAT. Tr. 5,018: 20 - 5,019: 7; Tr. 5,184: 20 - 5,185: 9 (Phillips). According to Phillips, his only prior exposure to MBSs was at American General Insurance Company, an insurance holding company (Tr. 5,318: 20 - 5,319: 7 (Phillips)) where he served for about year on an investment policy committee that had studied whether “mortgage-backed securities would be suitable for one or more of our [American General’s] investment activities.” Tr. 5,320: 3-16 (Phillips). At Southmark, where he was employed immediately prior to coming to USAT, Phillips stated that his duties involved high-yield bonds and Treasury Bonds (Tr. 5,015: 1-10) but did not involve MBSs. Tr. 5,322: 13-18. Huebsch, who recruited Phillips to work as an investment manager at USAT, testified “I doubt whether he managed a hedged portfolio.” Tr. 13,887: 18-20.

2. Other Than Hurwitz And Huebsch, None Of USAT’s Senior

Management Had Any Experience With Junk Bonds and Equity Arbitrage

A312. The experience of USAT’s senior management with respect to high-yield bond investments was as limited as their experience with MBSs. Gross testified that in May 1985, by which time USAT had invested over one-quarter of a billion dollars in high-yield bonds (Ex. B-515, Tab 601 (05/31/85 Phillips letter) p. CN 151025), he had no experience in high-yield bond investments. Tr. 21,251: 7-11.

A313. USAT’s President G. Williams, when asked whether he had any experience with high-yield bonds that would have qualified him to supervise Joe Phillips and the high-yield bond activities at USAT, testified: “No, not at all.” Tr. 6,324: 10.

A314. Likewise, Crow testified that neither he nor G. Williams had any prior experience overseeing the management of a high-yield bond portfolio. Tr. 15,279: 8-13.

A315. The only persons at USAT who had any experience with high-yield bonds at the time the high-yield bond portfolio was created were Huebsch, who made the initial bond purchases (Tr. 13,421: 16 - 13,422: 3 (Huebsch)) at Hurwitz’s direction (Tr. 13,423: 5 - 13,424: 10 (Huebsch)), and Hurwitz himself. According to Huebsch, Hurwitz was experienced with high-yield bonds before USAT began to purchase them. Tr. 13,504: 1-7.

A316. Huebsch and Hurwitz were also the only members of the senior management of USAT with prior experience with equity arbitrage investments. After doing the “background work” for the creation of an equity arbitrage portfolio (Tr. 13,422: 15-20 (Huebsch)) at the request of Hurwitz (Tr. 13,424: 20 - 13,425: 1 (Huebsch)), Huebsch’s principal duty at USAT after 1985 was the management of the equity arbitrage portfolio of USAT, which he managed in conjunction with a similar portfolio of MCO. Tr. 13,900: 3 - 13,901: 6 (Heubsch).

A317. According to Williams, when the equity arbitrage portfolio was created, none of USAT’s senior management, including himself, Gross and Crow, had any knowledge of equity arbitrage investment. Tr. 6,324: 19 - 6,324: 7 (G. Williams); Tr. 13,504: 8 - 13,505: 7 (Huebsch). The only other persons in USAT’s upper management who had any experience with equity arbitrage investments were Hurwitz and Huebsch. Tr. 6,325: 8-11 (Williams); Tr. 13,503: 6-7 (Huebsch).

A318. Consistent with senior management’s lack of investment expertise in any of the securities investment strategies that formed the “heart” of the Wholesale Strategy, Crow’s notes of the April 26, 1985, Strategic Planning Retreat Weekend state:

XI. The investment department is working effectively at the present time but the group agreed that a monitoring process needs to follow. It was discussed that Mr. Hurwitz was the only truly qualified individual to determine the quality of some of the investments.

Ex. A-10560, Tab 174 (05/01/85 Crow memo) p. US0000385, emphasis added..

F. Results Of The Wholesale Strategy

1. Crow’s Report To The Strategic Planning Committee

A319. Three years after the initiation of the Wholesale Strategy Crow stated in his memorandum to the members of Strategic Planning Committee dated December 10, 1987, “[t]he results of the wholesale strategy have not been good . . . one cannot escape the fact that irrespective of the market created asset quality problems, many of the major activities as part of the wholesale strategy have been disappointing.” Ex. T-4422, Tab 886, pp. US 0001852-53.

A320. Crow summarized for the Strategic Planning Committee the results of the investments that had been undertaken as part of the strategy. Ex. T-4422, Tab 886 (12/10/88 Crow memo) pp. US 0001852-53. The MBSs RCA portfolios had sustained enormous losses. According to Crow’s Memorandum, United’s “original mortgage-backed arbitrage program” which “averaged approximately $672 million” had “lost $57 million producing an annualized return on assets of -2.67%.” Id. p. US 0001853. United MBS Corporation, which also engaged in a RCA program with MBSs and had assets averaging $1.5 billion “lost $96 million for a negative return of -5.99%.” Id.

A321. Crow also reported that USAT’s junk bonds portfolio, which averaged $418 over the three-year period had “profits of $20 million,” for which the “[n]et annualized rate of return on assets was 1.98%.” Ex. T-4422, Tab 886, p. US 0001852-53.

A322. USAT’s equity arbitrage activities “produced net profits of $4.1 million on average asset balance of approximately $188 million” an annualized return on assets of .34%. Ex. T-4422, Tab 886 (12/10/87 Crow memo) p. US 0001853.

A323. By the end of December 1987 UFG reported in its 1987 Annual Report that USAT had failed its regulatory capital requirement and, as discussed in detail later, in February 1988, USAT’s management submitted a request for capital forbearance to the Principal Supervisory Agent at the FHLB-D. Ex. T-8033, Tab 402 (1987 UFG Annual Report) pp. H 0681-82.

2. The Change In USAT’s Financial Condition Between The End Of 1984 And The End Of 1987

A324. During the time frame covered by Crow’s report the financial profile of USAT had been dramatically altered. At the end of 1984, when the Wholesale Strategy was conceived, USAT had $3.663 million in assets. Ex. A-5001, Tab. 548 (12/31/84 Performance Report) pp. AA. In addition, USAT reported net worth of $209 million, which exceeded its minimum regulatory requirement by $112 million. Ex. A-1102, Tab 128 (02/14/85 USAT Minutes) p. US-3 003063; A-4006, Tab 1027 (12/31/84 TFR) p. 2.

A325. “Most of [USAT’s] assets consisted of single-family consumer loans totaling $450 million. The investment activities had been confined to a modest mortgage-backed securities portfolio and Treasury issues. The liability structure was conservative with virtually no brokered deposits, branch deposits of $2.3 billion and reverse repos totaling only $59 million.” Ex. T-4422, Tab 886 (12/10/88 Crow memo) p. US 0001852.

A326. At the end of 1987, after pursuing the Wholesale Strategy for three years, USAT had grown to $7.13 billion in assets. Ex. A-5028, Tab 883 (12/31/87 Performance Report) pp. AA. Although, USAT computed its net worth at $197 million, $54 million below the minimum regulatory capital requirement, Examiner Carlton calculated USAT’s net worth at $138 million or $112 million below the minimum regulatory net worth requirement. Ex. T-8010, Tab 405 (03/30/88 USAT Minutes) p. OW054327. These calculations did not include the mark-to-market losses in the investment portfolios which totaled $284 million. The mark-to-market losses for the high-yield bond and MBS portfolios were $61.2 million[28] and $223 million,[29] respectively, at the end of December 1987. Ex.B-1906, Tab 274 (12/22/87 Stodart letter) p. CN159164; A-11012, Tab 244 (Duffie Report) at Charts 8.1 and 9.1.

A327. By the end of 1987 most of USAT’s assets consisted of MBSs ($3.7 billion including CMO MBS), high-yield bonds ($664 million) and equity arbitrage securities. ($133 million). Ex. A-5028, Tab 883 (12/31/87 Performance Report) p. AA; Ex. B-1906, Tab 274 (12/22/87 Stodart letter) p. CN159164. The liability structure included over a billion in brokered deposits (Ex. A-3023, Tab 79 (12/88/87 UFG 10-K) p. CN158946), $2.2 billion in branch deposits (id.) and $2.1 billion in reverse repurchase agreements. Id. p. CN158936.

3. The Wholesale Strategy Dramatically Increased USAT’s Exposure To Interest Rate Risk

A328. Over the three years, between December 1984 and December 1987, USAT’s management, rather than decreasing the interest rate risk of the institution, as management had represented was the purpose of the Wholesale Strategy, dramatically increased USAT’s interest rate risk exposure. Darryl Duffie, an expert called to testify by the OTS, calculated the interest rate risk of USAT utilizing the same methodology for computing interest rate risk that the institution used. Tr. 3,039: 2 - 3,040: 5. Duffie calculated the sensitivity of the entire institution to a 100 basis point parallel shift in the yield curve. Tr. 3,039: 22 - 3,041: 16 (Duffie). As of
December 31, 1984, it was estimated that USAT had an interest rate risk exposure of a $41 million loss in the event of a 100 shift in interest rates. Ex. A-11012, Tab 244 (Duffie Report) p. 21: Tr. 3,045: 20 - 3,046: 19 (Duffie). Thus, in December 1984, if interest rates interest rates had risen one percentage point or 100 basis points USAT would have lost approximately 20% of its $209 million net worth.

A329. According to the computations of Mr. Duffie the interest rate risk exposure of the institution increased four fold between December 1984 and December 1987. By the end of 1987 the loss associated with a 100 basis point change in interest rates had increased to $161.8 million (Ex. A-11012, Tab 244 (Duffie Report) p. 21) an amount $23 million greater than USAT’s total net worth ($138 million) as calculated by Examiner Carlton. Ex. T-8010, Tab 405 (03/30/88 USAT Minutes) p. OW054327. Thus, by the end of 1987, if interest rates had risen one percentage point USAT would have lost approximately 116% of its $138 million net worth and have had all of its capital wiped out.

A330. Duffie explained that by the end of 1987, even counting goodwill in calculating USAT’s capital (which Duffie felt was not a prudent thing to do in analyzing the sufficiency of USAT’s capital since goodwill was not available to cushion USAT against losses (Tr. 3,085: 6-9; Tr. 3,082: 1-6)), USAT had insufficient capital to absorb even a one percent shift in interest rates. Tr. 3,083: 15 - 3,086: 15 (Duffie). The losses in the MBSs portfolios associated with a 100 basis point shift in interest rates, a shift which had historically occurred “not infrequently” (Tr. 3,076: 3-20; Tr. 3,086: 5-10; Ex. A-11012, Tab 244 (Duffie Report) p. Chart 4.3.1), would have been greater than USAT’s book net worth, including goodwill. Ex. A-11012, Tab 244 (Duffie Report) ¶ 95 p. 20; Tr. 3,083: 15 - 3,086: 15 (Duffie). Duffie concluded:

Considering the small level of USAT’s capital a major increase in interest rates of a kind that had been seen several times already during the preceding decade would have been fatal for USAT.

Id. at ¶ 93, p. 20. In opinion of Mr. Duffie, given the level of USAT’s capital, USAT was being operated in a fashion that created an “extreme level of risk” to the institution in the event of even a modest shift in interest rates. Tr. 3,077: 4 - 3,079: 3; Tr. 3,083: 6-12; Tr. 3,077: 18-22 (Duffie).

G. Most Of The Major Decisions Taken With Respect To The Wholesale Strategy Were Made By Committees Made Up Of Persons Selected By Hurwitz And Were Never Thoroughly Reviewed, Approved Or Ratified By The Board Of USAT

A331. The strategy reflected in the Mission Statement and the 1985 Business Plan, which came to be referred to generally as the “Wholesale Strategy” (compare the Mission Statement (Ex. A-10566, Tab 174 p. US 0000383) and the 1985 Business Plan (Ex. A-10566, Tab 176 p. CN052890) to Crow’s December 10, 1987, memorandum to the Strategic Planning Committee on the results of the Wholesale Strategy (Ex. T-4422, Tab 886 p. US 0001952-54)), was never expressly considered or approved by the USAT Board. Rather, the decisions to undertake this strategy and engage in the corresponding operations and activities were made by the Strategic Planning Committee and the USAT Executive Committee, which as discussed at A218 - A222 and A189 - A196 were composed almost exclusively of the members of the management team assembled by Munitz at the direction of Hurwitz. See A197 - A201, A215 - A238.

A332. Many of the proposed new activities undertaken taken by USAT’s management to implement the wholesale strategy were either never presented to the Board, or when presented to
the Board, there is no evidence that such new activities were “thoroughly reviewed” by the Board or that the Board actually approved or ratified the activity in question.

A333. The decisions regarding the operations of USAT were made and implemented by members of the Strategic Planning Committee and the Executive Committee, frequently without any involvement of Whatley, the only outside director on either Committee. Hansen, who was Gross’ assistant and took the notes of the Strategic Planning Committee meetings, described the involvement of USAT’s Board as follows:

Q. [By J.C. Nickens] Now, I want to ask you some questions

about who -- your perception of who ran USAT.

I'll ask you: Who ran USAT from your perspective?

A. Jenard.

Q. And under him, who was running the

institution?

A. Jerry Williams, to some degree. But it

was really kind of a group sort of situation

really.

Q. What was the role of the board of

directors of USAT from your perspective?

A. Not much.

Q. What was your perspective of the board

as far as their interest and competence?

A. They had regular board meetings. They

wanted -- there were various requests for

information that would come down from time to

time. And although I can't remember who, there

were some board members that seemed to take some

interest.

Tr. 12,636:9 - 12,637: 6 (Hansen), emphasis added.

A334. Vivian Carlton, the Examiner who conducted the May 27, 1986, Examination of USAT, reached a similar conclusion. The third question on the Privileged Information Section of the examination asked: “Are the directors [of USAT] persons of independent judgment who take an active role in the guidance of the association affairs? If Not Comment.” Ex. A-14047, Tab 1462 p. OW122310. Examiner Carlton responded as follows:

No. The three Directors, Mr. Gross, Mr. Williams, and Mr. Munitz, who are officers of the association do take an active role in the guidance of the Association’s affairs, The Board of Directors meetings are held quarterly and the minutes reflect general meetings.

Id. Ms. Carlton elaborated:

A. ….from what we could read from the minutes and our observation, we did not feel that the persons were of independent judgment as far as operating the institution.

Q. What about the other directors? Were they persons of independent judgment?

A. The -- from what we could see, we felt that you had outside influence taking place within the institution.

Q. Did you have an observation about any particular board members being dominant?

A. We had felt -- we had shown that Mr. Hurwitz was one individual that was attending the meeting and making comments or approvals in the board meeting as was reflected in the minutes.

Tr. 16,989: 17 - 16,990: 9 (Carlton), emphasis added.

1. USAT’s Business And Ethics Conflicts Of Interest Policy

A335. On May 8, 1985, the FHLBB promulgated Memorandum R 62 entitled “Directors’ Responsibilities: FLHBB Guidelines: Procedures For Obtaining Information To
Support Directors’ Decisions.” A copy of Memorandum R 62 was attached as part of Appendix A to the UNITED SAVINGS ASSOCIATION OF TEXAS BUSINESS ETHICS AND CONFILICTS OF INTEREST POLICY (the “USAT Ethics Policy”) (Ex. T-8012, Tab 393 p. UFG-C 0406-08), which was adopted by the USAT Board on January 8, 1987. Id. p. FG-C 0414. Specific reference was also made to Memorandum R 62 at ¶ 3.1(a) of the USAT Ethics Policy (Id. p. UFG-C 0388), which was distributed to all members of USAT’s Board and Management. Id. p. UFG-C 0387.

Memorandum R 62 in part provides as follows:

1. General: ….The Directors have a primary responsibility to assure that the institution is operated prudently and in a safe and sound manner so that these borrowed funds will be adequately protected.

* * * * *

3. Fiscal Operations: ….Directors are responsible for the establishment of a business plan which documents major financial policies, including asset/liability management, investments, and interest rate risk management. While such policies may actually be developed by management at the direction of the board, the directors must thoroughly review and give final approval to each contemplated action.

* * * * *

6. Personnel: …. The deregulated business environment places additional responsibilities on board members. It is incumbent upon the board of directors to thoroughly review any proposed new activity to assure themselves that the venture is pursued in a safe and sound manner and the risks assumed are reasonable ones for the institution to take under the circumstances.

Ex. T-8012, Tab 393 p. UFG-C 0406-08, emphasis added.

2. The Wholesale Strategy Outlined In The Mission Statement Was Implemented By USAT’s Management Without The Approval Of The USAT Board

A336. The USAT Board of Directors considered the Mission Statement proposed by the Strategic Planning Committee at the May 16, 1985, meeting of the Board. The minutes of the Board meeting state as follows:

Mr. Hurwitz briefed the Board on the recent planning meeting with Bain & Co. regarding the profitability of the Association. The meeting was held in Austin and focused on the need to become operationally profitable. Bain & Co. was engaged to study the Associations operations and the result of the session was that major changes to operations will be required in order to restore profitability. According to the analysis, loan servicing costs the Association approximately $50 per transaction in contrast to a cost of $10 for General Motors and $12 for Lomas Nettleton. The Company does have several profitable activities such as joint ventures and real estate programs but the Company is not cost efficient in its transaction-oriented activities. The investment department which was initiated a few months ago is earning approximately $10 million per year and the preferred stock to be issued by our finance subsidiary should earn approximately $1 million per year. Mr. Hurwitz said that one way to reduce the Association’s transaction costs would be to reduce the number of branches. The conclusion of the Bain meeting was that the optimal structure of the Association would be to have a major money center branch in Ft. Worth, Austin, San Antonio, and Dallas and several such branch operations in the Houston area. The sale of branches in these areas would raise capital and permit the Association to clean up its portfolio of low yielding loans and the operational costs of the Association would drop dramatically.

Ex. A-10561, Tab 175 (05/16/85 USAT minutes) p. CN057150.

A337. Following Hurwitz’s presentation to the USAT Board of the conclusions reached at the “planning meeting with Bain & Co.,” the minutes state that:

Mr. Crow also displayed a proposed mission statement for the Association which reflected the conclusions reached in the Austin meeting. Under this mission statement the Association would divest itself of most of its transaction-related business and concentrate on real estate and joint ventures, residential mortgage origination to be sold in the secondary market, commercial construction lending, other types of merchant banking activities, real estate syndications for special situations, venture capital investments, and the creation of investable funds from deposit gathering activities and other financial techniques.

Id.

A338. A discussion then ensued regarding various issues, including USAT’s future investment activities, selling loan servicing, reducing USAT’s branch network, and USAT’s future dependence upon brokered CD’s and jumbo certificates. Ex. A-10561, Tab 175, p. CN057151.

A339. The minutes then state as follows: “Dr. Kozmetsky recommended and the Board agreed that no action should be taken until a more definitive plan of operation is established detailing the method of attracting deposits and investments [sic] plans and until such plan is presented to and approved by the Board.” Ex. A-10561, Tab 175, p. CN057151, emphasis added.

A340. There is no indication anywhere in the May 16, 1985, USAT Board Minutes or any subsequent Board minutes that the Board specifically approved or ratified the Mission Statement or any of the investment strategies with respect to junk bonds, MBSs and equity arbitrage that were included in the Mission Statement. Ex. A-10561, Tab 175; A-1106, Tab 2046 (08/15/85 USAT Minutes).

3. USAT’s Management Initiated The Increases In USAT’s Mortgage

Backed Securities, High Yield Bonds And Equity Arbitrage Portfolios

In 1985 Without Board Approval

A341. Despite the fact that the USAT Board expressly agree that “no action should be taken” and did not approve the proposed Mission Statement or any of the investment strategies outlined in the statement, as discussed below, by July 1985 the USAT management team put in place by Hurwitz and Munitz had established arbitrage portfolios with respect to MBSs, high yield bonds, and equity securities and made substantial investments in those portfolios.

i. The Mortgage-Backed Securities Risk-Controlled Arbitrage

Portfolio Was Established By USAT’s Management Without The Approval Of The USAT Board

A342. On July 12, 1985, G. Williams wrote a letter to Robert Bonchak of the FHLB-D seeking approval to exceed the liability growth limitation placed upon USAT by federal regulations. Ex. A-10566, Tab 176. G. Williams explained that USAT had exceeded its liability growth limitations because USAT’s arbitrage investments in high-yield corporate securities and MBSs had grown substantially in the first half of 1985. Id. p. CN052880.

A343. USAT’s management included in the letter as Exhibit B “UNITED SAVINGS ASSOCIATION OF TEXAS Business Plan.” Ex. A-10566, Tab 176, p. CN052890. The 1985 Business Plan stated the following:

Investment/Mortgage-Backed Securities. United has established an Investment Department to coordinate an investment program in corporate and mortgage-backed securities. Under the investment program that has been established, investments in mortgage-backed and corporate securities are matched with liabilities of similar maturity and duration. This asset/liability match program virtually locks in a spread between United’s asset yield and funding cost, giving significant protection against interest rate fluctuations.

Ex. A-10566, Tab 176, p. CN052891.

A344. During the first six months of 1985, USAT’s investments in MBSs had increased from zero on 12/31/84 to $489 million on 06/30/85. Id. p. CN052886. During that same time frame the reverse repurchase agreements (hedged with Interest Rate Swaps) USAT used to fund its MBS purchases increased from zero to $465 million. Ex. A-10566, Tab 176, p. CN052886.

A345. There is no mention in the minutes of the meetings of the USAT Board held prior to July 1985 that the Board of USAT ever “thoroughly review[ed]” this “proposed new activity to assure themselves that the venture [was to be] pursued in a safe and sound manner and the risks assumed [were] reasonable ones for the institution to take under the circumstances” (Ex. T-8012, Tab 393 (R-62, Directors’ Responsibilities) p. UFG-C 0407) or that the USAT Board gave “final approval to [the] contemplated action.” Id. p. UFG-C 0408; Ex. A-1100, Tab 155 (11/13/84 USAT Minutes); A-1102, Tab 128 (02/14/85 USAT Minutes); A-1104, Tab 130 (05/16/85 USAT Minutes).

A346. On August 15, 1985, at the next meeting following Hurwitz’ and Crow’s presentation of the Mission Statement to the USAT Board, USAT’s management did not present a “more definitive plan of operation…detailing the method of attracting deposits and investment plans” as Kozmetsky had recommended at the May 16, 1985, Board meeting. Ex. A-10561, Tab 175 (05/16/85 USAT Minutes) p. US-3 003097; A-1106, Tab 2046 (08/15/85 USAT Minutes).

A347. The minutes of the August 15, 1985, state that “Mr. Williams discussed the Association’s brokered CD program which gathers long term CD’s and invests these funds in mortgage-backed and corporate securities.” Ex. A-1106, Tab 2046 p. US-3 003099. There was no further discussion or consideration by the USAT Board in the minutes of the August 15, 1985, meeting of USAT’s creation of the MBSs RCA portfolio and the minutes do not indicate that the Board either approved or ratified management’s action in creating the portfolio. Id.

ii. Hurwitz And Huebsch Created The High Yield Bond Portfolio And It Was Expanded To $300 Million Without The Approval Of The USAT Board

A348. A similar increase occurred in USAT’s high-yield bond arbitrage portfolio. Prior to September 24, 1984, Huebsch, at Hurwitz’ direction, had purchased $50 million in high yield bonds on behalf of USAT. Ex. B-371, Tab 163 (07/24/84 Phillips memo) p. US0000094; Tr. 13,423: 5 - 13,424: 10 (Huebsch). After Huebsch recruited Joe Phillips to manage USAT’s high-yield bond portfolio (Tr. 13,421: 16 - 22 (Huebsch)), the portfolio continued to grow in size and by December 6, 1984, USAT reported to the TXS&L that it held over $108 million in fixed and floating rate corporate securities. Ex. B-398, Tab 164 (12/06/84 letter to TXS&L) p. CN156422.

A349. By June 30, 1985, the size of USAT’s high-yield bond portfolio had increased to $288 million, while the “Retail Brokered CD’s” that were matched to such bonds increased to $295 million. Ex. A-10566, Tab 176, p. CN052886.

A350. During this period in which the USAT high-yield bond portfolio grew to $288 million in size, there is only one reference in the minutes of the USAT Board meetings regarding the creation of the high-yield bond portfolio. The minutes of the November 13, 1984, meeting of the USAT Board state as follows:

Mr. Bentley reported that the Executive Committee acted prior to this meeting to increase the Association’s investment in high yield floating rate corporate debt securities from $100 million to $200 million. He also stated that the Association has received approval for this increase from the Texas S&L Commissioner.

Ex. A-1100, Tab 155 p. US-3 003060.

A351. There is no indication in the minutes of the November 13, 1984, meeting of the USAT Board that the Board thoroughly reviewed the decision for USAT to create a high-yield bond arbitrage portfolio or that the decision was approved or ratified by the Board. Ex. A-1100, Tab 155.

A352. At the joint USAT/UFG Executive Committee meeting on February 11, 1985, on the motion of Munitz, a resolution was unanimously approved by the USAT Executive Committee to again “increase its investment in high yield corporate debt securities to $300 million.” Ex. A-1204, Tab 2145. At the USAT Board meeting three days later on February 14 1985, there is no indication that the increase in the size of the USAT high-yield bond portfolio was even brought to the attention of the Board and the Board did not approve or ratify the actions of the Executive Committee taken on February 11, 1985. Ex. A-1110, Tab 133 (02/13/85 USAT Minutes) p. US-3 003089.

A353. Two months later, at the May 16, 1985, meeting of the Board, at which Crow presented the Mission Statement to the USAT Board, there was no discussion or thorough review of the high-yield bond arbitrage portfolio by the Board. Ex. A-10561, Tab 175. Instead, the Board agreed not to take any action on any of the proposed new activities included in the Mission Statement, which included investing in corporate bonds for a spread (Tr. 15,274: 12-18 (Crow); Tr. 21,264: 11 - 21,265: 4 (Gross); 26,111: 5 -26,112: 1 (Hurwitz)), until “a more definitive plan of operation is established detailing the method of attracting deposits and investment plans and until such plan is presented to and approved by the Board.” Id. p. CN057151.

A354. At the following meeting of the USAT Board on August 15, 1985, the minutes state that management discussed USAT’s program “which gathers long term CD’s and invests these funds in …corporate securities.” Ex. A-1106, Tab 2046, p. US-3 003099. There was no further discussion or consideration by the USAT Board of the high-yield bond portfolio. Id.

iii. Huebsch And Hurwitz Created The Equity Arbitrage Portfolio Without The Approval Of The USAT Board

A355. Although the USAT Board did not approve the creation of an equity arbitrage portfolio at the May 16, 1985, Board meeting at which it was presented as part of the Wholesale Strategy (Ex. A-10561, Tab 175), by the middle of 1985 Huebsch began structuring an equity arbitrage portfolio. Tr. 14,214: 7-10; Tr. 13,890: 10-15 (Huebsch).

A356. In a letter to the TXS&L dated August 28, 1985, USAT reported that by the end of July 1985 it had purchased marketable equity securities with a total value of over $30 million. Ex. B-577, Tab 607 (08/29/85 Phillips letter to TXS&L) p. CN151911. By the end of 1985 USAT’s trading account in marketable equity securities had grown to $229.5 million an represented 4.6% of the assets of the association. Ex. B-954, Tab 89 (USAT Sub-debt Application) p. CN152324.

A357. At the USAT Board meeting on August 15, 1985, a month after the equity arbitrage portfolio was established by Huebsch, there was no consideration by the Board of the equity arbitrage portfolio or management’s decision to trade marketable equity securities. Ex. A-1106, Tab 2046 (08/15/85 USAT Minutes). Management did report to the Board that there were “gains on the sale of securities of $3.9 million,” but the gains were during the second quarter, prior to the establishment of the equity arbitrage portfolio, in July 1985. Id. p. US-3 003099.

4. The 1985 USAT Business Plan Was Formulated By USAT’s Management And Presented To The FHLB-D Without The Approval Of The USAT Board

A358. On July 12, 1985, USAT’s management sent to the FHLB-D a copy of the 1985 USAT Business Plan (A-10566, Tab 176, p. CN052890), which outlined USAT’s “specific strategies for each of United’s major business groups,” including its arbitrage investment programs in MBSs and high-yield bonds. Id. p. CN052891.

A359. As previously discussed, by the time the 1985 Business Plan was submitted to the regulators, the MBS and high-yield bond strategies described in the plan had been implemented by management. Ex. A-10566, Tab 176 (07/12/85 G. Williams letter).

A360. Although the Board was responsible under Memorandum R 62 for the “establishment of a business plan which documents major financial policies, including asset/liability management, investments, and interest rate risk management” (Ex. T-8012, Tab 393, p. UFG-C 0407), there is no indication in the USAT Board minutes that the 1985 Business Plan was ever specifically considered and approved by the Board prior to the implementation of the plan by USAT management and its submission to the FHLB-D. See Ex. A-1100, Tab 155 (11/13/84 USAT Minutes); A-1102, Tab 128 (02/11/85 USAT Minutes); A-1104, Tab 140 (05/16/85 USAT Minutes).

5. The USAT Board Did Not Thoroughly Review The Creation Of The

USAT Mortgage Finance And The United MBS Mortgage-Backed

Securities Risk-Controlled Arbitrage Portfolios

i. The Creation And The Collapse Of USAT Mortgage Finance

At The End Of 1985

A361. At the end of 1985 USAT created a second MBSs RCA portfolio containing $500 million in securities, in a subsidiary named USAT Mortgage Finance. Ex. A-1622, Tab 504 (11/20/85 Asset/Liability Committee Minutes) at item 3.

A362. USAT’s Asset Liability Committee, composed of Crow, Phillips, Huebsch and Jim Jackson, agreed on October 25, 1985, to move ahead with the creation of USAT Mortgage Finance, a finance subsidiary of USAT. The new finance subsidiary was to purchase, through USAT, $500 million in MBSs “funded with reverse repos and hedged with swaps, caps and /or collars.” Ex. A-1619, Tab 501 (10/25/85 Asset/Liability Committee Minutes).

A363. On November 7, 1985, the USAT Executive Committee approved the creation of a new finance subsidiary of the Association, USAT Mortgage Finance, and the transfer of $500 million in MBSs to the subsidiary. Ex. A-1216, Tab 1388 (11/07/85 USAT Executive Committee Minutes).

A364. At the next USAT Board meeting on November 14, 1985, the Directors approved the creation of the new finance subsidiary. Ex. A-1108, Tab 131 (11/14/85 USAT Minutes) pp. US-3 003107-09. The Board also approved a $6 million investment by USAT in USAT Mortgage Finance, but there was no discussion in the minutes of acquiring $500 million in MBSs through the subsidiary. Id.

A365. By the end of November 1985, USAT’s management created a new $500 million MBSs RCA portfolio in USAT Mortgage Finance. Ex. A-1622, Tab 504 (11/20/85 Asset/Liability Committee Minutes) at item 3.

A366. Within three weeks of creating the portfolio, USAT’s Executive Committee considered whether to “sell the MBS for a gain of about $15 million.” Ex. A-1220, Tab 1390 (12/12/85 Executive Committee Agenda). However, no action was taken by the Executive Committee on that date. Ex. A-1219, Tab 1438 (12/12/85 Executive Committee Minutes).

A367. On December 17, 1985, Gross sent a memorandum to Crow, Huebsch, Hurwitz, Munitz, Phillips and G. Williams, advising them that USAT had “wound up on this $500 million sub” by retaining $150 million of the MBS and “liquidating the remaining assets which are going to generate an income of about $11,000,000 this year.” Ex. B-697, Tab 1310 (12/17/85 Gross memo).

A368. The sale of the MBSs ultimately resulted in a $12.4 million gain (Ex. B-819, Tab 586 (01/10/86 Phillips memo) p. 6) permitting USAT to show a modest $1.8 million profit for the last quarter of 1985. Ex. A-5010, Tab 557 (02/07/86 Performance Report) pp. US 0001113 and 0001115; B-697, Tab 1310 (12/17/85 Gross memo). Instead of selling the swaps which hedged the liquidated MBSs and incurring a loss in 1985 (Ex. B-697, Tab 1310 (12/17/85 Gross memo), “a ‘mirror’ swap was put in place” and the loss on the swaps was deferred. Ex. B-819, Tab 586 (01/10/86 Phillips memo) p 6.

A369. Apart from the November 14, 1985, resolution of the USAT Board approving the creation of a new finance subsidiary and an investment in the subsidiary of $6,000,000, there is no indication in the minutes of the USAT’s Board meetings that the Board ever considered or approved the creation of the $500 million arbitrage portfolio, its subsequent collapse or the various options available to USAT for dealing with losses associated with the swaps. Ex A- Ex. A-1108, Tab 131 (11/14/85 USAT Minutes) p. US-3 003107-09; A-1110, Tab 133 (02/13/86 USAT Board).

ii. USAT’s Management Created United MBS In August 1986 Without Any Approval By The USAT Board

A370. In August 1986, after management were advised that USAT had sustained a large mark-to-market loss in its first MBSs RCA portfolio, which was established in the first half of 1985, USAT created a third MBSs RCA portfolio. Rehearing Memo p. 16; Ex. A-10558, Tab 128 (08/07/86 TXS&L letter); T-7595, Tab 656 (08/11/86 USAT Minutes) p. US-3 003153.
This new portfolio was established in a newly formed USAT subsidiary, United MBS, and was to have an initial size of $500 million. Ex. A-10558, Tab 128 (08/07/86 TXS&L letter). As in the case of the other USAT MBSs RCA portfolios, there is no indication in the minutes that the USAT Board thoroughly reviewed the strategy before management embarked on this new area of investment activity. Ex. T-7595, Tab 656 (08/11/86 USAT Minutes) p. US-3 003153.

A371. On August 7, 1986, the Executive Committee of USAT approved the creation of United MBS, a wholly owned subsidiary of USAT, “to operate as a service corporation to engage in the acquisition of mortgage-backed securities.” Ex. A-1245, Tab 2176 (08/07/86 USAT Executive Committee Minutes) pp. OW033344-45. Munitz, Gross, and G. Williams (all of the members of the USAT Executive Committee, but not Whatley) participated in the meeting. Id. p. OW033344; Ex. A-1110, Tab 133 (02/13/86 USAT Minutes) p. US-3 003117. There was no discussion by the Executive Committee as to the of the size of the MBS portfolio United MBS might acquire in the future. Id.

A372. The same day as the Executive Committee meeting, Berner wrote the TXS&L seeking approval for the establishment of the new service corporation, United MBS. Ex. A-10558, Tab 128 (08/07/86 TXS&L letter). In the letter Berner stated:

It is currently contemplated that such subsidiary would acquire approximately $500,000,000 in mortgage backed securities (although this figure may change as the circumstances dictate). Assuming such acquisitions, the Association would invest $25,000,000 in such new subsidiary so that the debt/equity ratio would be 20:1. The Association would maintain at all times a debt/equity ration of 20:1 or less.

The service corporation subsidiary will acquire the mortgage backed securities through reverse repurchase transactions. As a result, the subsidiary expects to earn a spread between the rate received on the mortgage backed securities and the rate paid on the reverse-repurchase transactions.

* * * * *

The subsidiary should be profitable immediately and should continue to earn the spread described above. Id.

A373. On June 30, 1986, prior to the creation of the new United MBS portfolio, members of USAT’s management had met with Mike Giarla, of Smith Breeden & Co., a consultant retained by USAT to analyze USAT’s original MBS structured arbitrage program. Giarla reported that, as of May 30, 1986, USAT’s original structured arbitrage program had market losses, including hedges, of $58,036,000. Ex. T-4222, Tab 330 (07/03/86 Crow memo) p. US 0000264. Giarla also advised management that “we appear to lose in the overall structured arbitrage portfolio in both increasing and decreasing interest rate environments with the exception of a modest decline in rates (a decline of 100 basis points).” Ex. T-4222, Tab 330 (07/03/86 Crow memo) pp. US 0000252-53.

A374. At the meeting of the USAT Board on August 14, 1986, the actions of the Executive Committee on August 7, 1986, creating the new USAT service corporation, United MBS, were approved by the USAT Board. Ex. T-7595, Tab 656 (08/11/86 USAT Minutes) p. US-3 003153.

A375. The minutes of the August 14, 1986, USAT Board meeting pertaining to the Board’s approval state as follows:

Upon motion by Dr. Munitz and seconded by Mr. Silverman, the minutes of the Executive Committee actions of May 29, 1986, July 7, 1986 and August 7, 1986 were unanimously approved. Id.

A376. The Board minutes do not indicate whether the Board even discussed the creation of a new service corporation to engage in the acquisition of MBSs, the contemplated size of the new MBS arbitrage portfolio or whether such an action was advisable in light of the market losses sustained by USAT in its original structured arbitrage portfolio. Ex. T-7595, Tab 656 (08/11/86 USAT Minutes) p. US-3 003153.

A377. Moreover, the Board package provided to the USAT Directors prior to the August 14, 1986, meeting did not mention that the contemplated size of the new MBS arbitrage portfolio was $500 million or summarize the performance results of USAT’s original structured arbitrage portfolio. Ex. A-116, Tab 718 (08/14/86 USAT Board Report) K 004886-87, K 004971, K 004981.

A378. In the deregulated business environment in August 1986, the Board failed to assure themselves that the establishment of a $500 million MBSs RCA portfolio in United MBS was being “pursued in a safe and sound manner and the risks assumed [were] reasonable ones for the institution to take under the circumstances.” Ex. T-8012, Tab 393 (Memorandum R 62) p. UFG-C 0408. That decision was arrogated to Hurwitz and USAT’s management without any input from the Board

6. The USAT Board Did Not Consider Or Approve USAT’s Efforts To

Issue $50 Million In Senior Subordinated Debt

A379. As discussed in detail later at S33 - S36, in the Spring of 1986 a decision was made by USAT’s management to issue $50 million in subordinated debt securities as part of a proposal made by MCO to the FHLBB to limit its liability under the net worth condition imposed by FHLBB Resolution No. 84-712. Ex. B-954, Tab 89 (04/29/86 USAT Subordinated Debt Application) p. CN152393. Ultimately, after seven months of discussions, in January 1987, USAT withdrew its application to the FHLB-D to issue the subordinated debt securities. Ex. B-1451, Tab 1647 (01/28/87 Berner letter). There is no indication in the USAT Board minutes that
the full Board ever discussed and approved the issuance of subordinated debt by USAT at the time the application was submitted to the FHLB-D. Ex. A-1110, Tab 133 (02/13/86 USAT Minutes); A-1113, Tab 655 (05/08/86 USAT Minutes).

A380. In January 1986, Hurwitz asked a representative of (“DBL”) to contact Gross to review with USAT the “feasibility of a capital note issue.” T-9020, Tab 1948 (01/22/86 Gross memo).

A381. On April 17, 1986, Berner advised Hurwitz and members of USAT’s management that he had had “a series of meetings with Drexel and their counsel in finalizing the offering circular for the public capital notes” and expected to file an application with the FHLB-D to obtain approval for the issuance of the subordinated debt securities within a week. Ex. B-938, Tab 1949 (04/17/86 Berner memo) p. 2.

A382. On April 29, 1986, Berner filed USAT’s application with the FHLB-D for approval to issue $50 million in subordinated debt securities. Ex. B-953, Tab 90 (04/29/86 Berner letter). The letter accompanying the application explained that:

United will proceed with the issuance of these subordinated debt securities only if one of United Financial Group, Inc.’s principal shareholders – MCO Holdings Inc. (MCO) -- acquires at least $10 million of the issuance. MCO has advised United that it will not make this acquisition unless the FHLBB approves MCO’s pending requests for modification of a net-worth maintenance agreement dated December 6, 1984.

Ex. B-953, Tab 90 (04/29/86 Berner letter).

A383. The day before the submission of the subordinated debt application to the FHLB-D, on April 28, 1986, the Executive Committee of USAT met and approved the issuance of the subordinated notes. Ex. A-1236, Tab 1951 (04/28/86 USAT Executive Committee Minutes). Again, Whatley did not attend the meeting and the application was unanimously approved by Gross, G. Williams and Munitz, the remaining members of USAT’s Executive Committee. Id; Ex. A-1110, Tab 133 (02/13/86 USAT Minutes) p. US-3 003117.

A384. The minutes of the next meeting of the USAT Board on May 8, 1986, state as follows:

Upon motion of Dr. Munitz and second by Mr. Borman, the Minutes of the Executive Committee actions of February 13, February 18, February 24, March 18, March 31, April 7, April 24, and April 28 were unanimously approved.

Ex. T-7587, Tab 655 (05/08/86 USAT Board Minutes) p. US-3 003147.

A385. There is no indication in the May 8, 1986, minutes whether the USAT Board was even aware that by approving the actions taken by the Executive Committee on April 28, 1986 they were approving the application to issue $50 million in subordinated debt or whether the Board conducted a “thorough review” and gave “final approval to [the] contemplated action.” Ex. T-7587, Tab 655 (05/08/86 USAT Board Minutes) p. US-3 003147.

A386. On June 23, 1986, after raising the issue with Hurwitz and USAT’s Senior Management (Ex. T-9021, Tab 1950 (06/17/86) Berner memo)), Berner sought a modification of USAT’s request to issue subordinated debt and requested that “the notes to be offered through Drexel Burnham Lambert, Inc. and others be increased from $50,000,000 to $75,000,000.” Ex. B-1084, Tab 1645 (07/01/86 Twomey letter).

A387. At the meeting of the USAT Board on August 14, 1986, G. Williams stated that “the Company was preparing a Business Plan which would be submitted to the Board of Directors in connection with the Company’s offering of capital notes.” Ex. T-7595, Tab 656 (08/14/86 USAT Minutes) p. US-3 003153. There is no indication in the minutes that the Board ever reviewed and approved either the initial $50 million note offering or the subsequent request to increase the offering to $75 million. Id.

7. USAT’s Management Formulated And Submitted The 1986 Business Plan To The FHLB-D Without The Board Considering Or Approving The Business Plan

A388. On July 1, 1986, in response to USAT’s request to increase the amount of the note offering, the FHLB-D requested that USAT “prepare a comprehensive Business Plan for the Supervisory Agent’s review and approval.” Ex. B-1084, Tab 1645 (07/01/86 Twomey letter).

A389. On August 29, 1986, USAT sent FHLB-D Supervisory Agent the “UNITED SAVINGS ASSOCIATION OF TEXAS Business Plan AUGUST 29, 1986.” Ex. Twomey 21, Tab 91.

A390. Although G. Williams had advised the USAT Board at the August 14, 1986, Board meeting that the Business Plan would be submitted to the Board of Directors, there is no indication in the minutes of either the October 14, 1986, or the November 13, 1986, USAT Board meetings whether management provided a copy of the 1986 Business Plan to the Board or whether the Board undertook a “thorough review” of the 1986 Business Plan and gave “final approval to each contemplated action” under the Plan. Ex. A-1117, Tab 1447 (10/14/86 USAT Minutes); A-1120, Tab 2104 (11/13/86 USAT Minutes).

8. The Testimony Of The Respondents’ Expert, Rosemary Stewart, On The Exercise of Controlling Influence Over A Savings And Loan Association

A391. At the hearing in this proceeding a number of questions were propounded to Rosemary Stewart, a witness called by the Respondents to testify regarding the regulation of Savings and Loan Associations. Among other things, Ms. Stewart gave the following testimony on the subject of whether Hurwitz exercised a controlling influence over USAT:

Q. (BY MR. STEARNS) If the record were to show, Ms. Stewart, that most major decisions on the operations and activities of USAT were made not by its board of directors but by committees made up of persons who were selected by Mr. Hurwitz, would that tend to demonstrate that he exercised a controlling influence over USAT?

A. It probably would. Now, it would be a controlling influence over the operations in your hypothetical that those committees supervised.

Q. And if those operations included such matters as investments and strategic planning for USAT, would that tend to indicate his controlling influence over those areas?

A. I assume you mean with the same hypothetical premise?

Q. Yes.

A. Yes, it could.

Tr. 26,747: 13 - 26,748: 8 (Stewart).

H. Following The Implementation Of The Wholesale Strategy Hurwitz Continued To Be Involved In The Operations Of The Association

A392. Hurwitz’ involvement with USAT did not end with the implementation of the Wholesale Strategy. As discussed at A148 - A176 and A264 - A271, Hurwitz continued to play a major role in selecting USAT’s senior management as well as the investment managers who managed USAT’s portfolios. Likewise, as discussed previously at A187, A191 - A192, A202, and A209 - A210, he continued to attend and participate in meetings of the USAT Board, the joint Executive Committee meetings of USAT and UFG, the meetings of the USAT/UFG Investment Committee, the USAT Senior Loan Committee and the Strategic Planning Committee. Hurwitz, also would “hang around” the USAT trading room to see what was going on with junk bonds and equity arbitrage. Tr. 3,982: 17 - 3,983: 10 (Orr).

A393. In addition, as discussed below, Hurwitz continued to consult on and participate in virtually every major decision affecting the institution until even well after his resignation from the Board of UFG in February 1988.

1. At The End Of 1985 Hurwitz’ Participated In Setting USAT’s Profit Targets, Net Worth Levels, And Portfolio Sizes And Participated In The Discussions Regarding The Collapse Of USAT Mortgage Finance

A394. At the end of 1985, as part of USAT’s overall strategic planning, Hurwitz participated in the setting of profit targets for USAT. In November 1985, Hurwitz attended a Strategic Planning Meeting at which he and USAT’s senior management considered such topics as the growth of USAT for the remainder of 1985 and 1986, asset growth constraints, and USAT’s funding alternatives. Ex. A-1590, Tab 1295 (11/17/85 Strategic Planning Meeting Agenda 11/17/85). Bruce Williams’ notes of the meeting indicate that Hurwitz was an active participant in the discussions on the subject of USAT’s “net income figure.” Id. pp. US-3 008032-33; Tr. 13,380: 12 - 13,381: 13 (B. Williams). According to Williams’ notes, Hurwitz emphasized that USAT should “…get [its] net worth target internally to 4 percent. Don’t report losing quarter. Don’t show quarter-to-quarter decline.” Id. p. US-3 008032; Tr. 13,231: 3 - 5 (B. Williams). After the initials “CH,” which Williams testified stood for Charles Hurwitz, the notes continue:

CH à need to avoid quarterly losses

à try to move gains to smooth out earnings

à goal would be not to show quarterly losses in ’86

à what is a reasonable net increase figure

try for 1.5 mill/per qtr…

Id.; Tr. 13,231: 6-13 (B. Williams). Williams explained that these notes were a reference “to try and smooth [USAT’s] earnings out quarter-to-quarter so there’s not gyrations where we have a big loss this quarter and a little gain this quarter, kind of get the quarters to level out.” According to Williams, this is a practice sometimes engaged in by publicly traded companies, such as UFG, so that their earnings projections will meet the expectations of the analysts. Tr. 13,233: 1- 13,234: 7 (B. Williams).

A395. Following the meeting USAT adopted the strategy advocated by Hurwitz. On November 29, 1985, B. Williams advised USAT’s senior management that based upon what was agreed to at the meeting USAT would:

1) Maintain a minimum capital to assets ratio of 4.0%.

2) Report a gradual stable earnings record throughout the year [1986].

Ex. B-665, Tab 1392 (11/29/85 B. Williams memo) p. OW003550.

A396. At the same meeting Hurwitz also actively participated in discussions regarding the possible growth of USAT’s junk bond and equity arbitrage portfolios. Tr. 13,232: 1- 18 (B. Williams). For example, the notes indicate that Hurwitz questioned whether the junk bond market may have reached its limit (Ex. A-1590, Tab 1295 (11/17/85 B. Williams’ notes) p. US-3 008032; Tr. 13,320: 18 - 13,231: 1 (B. Williams)), and later, when discussing “how much [USAT] can grow,” Hurwitz referenced “100 to 200 million [in junk bonds] if we can get the liability” and “total equity arbitrage 200 to 250 million.” Id. p. US-3 008034,; Tr. 13,235: 8-18 (B. Williams).

A397. At the end of 1985, even though the USAT Board was neither advised of nor approved the wind-up of the USAT Mortgage Finance MBS portfolio, Hurwitz was a party to the discussions regarding the collapse of USAT Mortgage Finance. Gross advised Hurwitz and USAT’s managers on December 17, 1985, how USAT would “end up liquidating the remaining [$350 million in MBS] which are going to generate an income of about $11,000,000 this year” and place the Association “in the situation of having about $2,000,000 or $2,500,000 profit in the 4th quarter, which is about where we would like to be.” Ex. B-697, Tab 1310 (12/17/85 Gross memo). Thus, by collapsing USAT Mortgage Finance, USAT was able to avoid reporting a loss for the year and achieved the approximate level of profits Hurwitz had advocated at the November 29, 1985, Strategic Planning Meeting discussed above.

2. Hurwitz’ Continued Involvement In 1986 In Decision Making With Respect To The Operations Of USAT

A398. At the beginning of 1986 Hurwitz was at the center of discussions by USAT’s management regarding the wisdom of taking gains out of the arbitrage portfolios, such as the USAT Mortgage Finance portfolio mentioned above, which had the effect of reducing the spread income those portfolios would generate in the future. In a memorandum to Hurwitz and other members of USAT’s management on January 24, 1986, Gross questioned the extent to which USAT had really profited from sales of MBSs and junk bonds that “choke down…our spread” and result in a lower yields in the arbitrage portfolios. Ex. A-10599, Tab 856 (01/24/86 Gross memo). The following month, on February 28, 1986, Gross again raised the question to Hurwitz and USAT’s senior management of the wisdom in selling MBSs and junk bonds for profits when such sales eroded future portfolio spreads. In a memorandum dated February 24, 1986, Gross wrote:

On the sale of securities, where we booked a $30 million gain for the year, I realize that a lot of this was selling the mortgage backed securities and junk bonds. In one case, taking the gain on the mortgage backed securities ($8 or $9) [out of the USAT Mortgage Finance portfolio] and the offsetting loss would be spread over several years. That is not truly a gain….We have really reduced our yield to the extent that we took the profit. So it really was not a profit.

Ex. A-10612, Tab 861 (02/28/86 Gross memo). (emphasis added). As discussed at A408 - A416 and J24 - J48, following these strategic discussions in which Hurwitz was a major participant, USAT continued to engage in a strategy of selling MBSs and junk bonds out of their arbitrage portfolios to generate gains to meet USAT’s minimum regulatory net worth requirements and to smooth out USAT’s quarter-to-quarter earnings.

A399. In 1986, Hurwitz also played a central role in establishing a bonus plan for the Investment Department that was created at USAT by Huebsch in 1984 at the direction of Hurwitz. Ex. A-10597, Tab 855 (01/21/86 G. Williams Memo); A-10599, Tab 856 (01/24/86 Gross memo).

A400. As discussed at S34 - S36, Hurwitz was also involved in efforts to raise capital for USAT through the issuance of subordinated debt. Hurwitz contacted DBL in January 1986, on behalf of USAT, and requested that a DBL representative advise USAT on the “feasibility of a capital note issue.” Ex. T-9020, Tab 1948, (01/22/86). In the subsequent months USAT kept Hurwitz apprised of the progress of the note issue. Ex. T-1118, Tab 1643 (03/18/86 Berner memo); B-938, Tab 1949 (04/17/86 Berner memo); T-9025, Tab 1936 (05/06/86 Gross memo); T-9021, Tab 1950 (06/17/86 Crow memo); T-4246, Tab 335 (09/08/86 Hansen memo) ¶ F p. 5.

A401. Hurwitz also participated in the oversight of USAT’s MBS RCA portfolio managed by Joe Phillips. In a memorandum dated February 19, 1986, Gross informed Hurwitz and other members of USAT’s management that he was glad that “you completed your roll down of your MBS” and asked whether Hurwitz or any members of USAT’s management could determine “where we now stand as far as a [sic] annual income stream from the mortgage backed and swaps” and “what sort of a spread do we now have compared to what we were originally shooting for?” Ex. T-4171, Tab 1313 (02/19/86 Gross memo).

A402. Later in the year, in April, 1986, Hurwitz was also a participant in an off-site “brainstorming session” of the SPC on what sorts of business USAT should be in, which was held at a place called Mustang Island. Ex. B-938, Tab 1949 (04/17/86 Berner Memo); Tr. 21,376: 2-4 (Gross); Tr. 8,396: 13 - 8,397: 5 (B. Williams); Tr. 15,634: 15-22 (Crow). Among the issues discussed at the Mustang Island retreat were USAT’s profit targets. Ex. B-938, Tab 1949 (04/17/86 Hansen memo). Once again, as Hurwitz had done at the November 1985 meeting, it was reiterated that USAT’s “goal has been to show small quarter to quarter earnings increases.” Id. p. OW005525. The group also considered “timing of gains” from the anticipated branch sales and the Weingarten realty sales in either the second or third quarter of 1986. Id. p. OW005526. In all, the group discussed a list of 64 different items relating to USAT’s operations (id. p. OW005530), including how to deal with the “excess of long term swaps which are unmatched and expensive” as a result of the prepayment of MBS. Id. p. OW005525.

A403. In May 1986, Hurwitz participated in discussions with USAT’s senior managers on the alternative uses USAT might make of gains the association had realized as a result of the disposition of certain assets. Ex. 10637, Tab 865 (05/27/86 Crow memo).

A404. In May 1986, when the regulators raised questions about USAT’s arbitrage investment portfolios, Gross suggested that Hurwitz, who was considered by USAT’s management to be the only person “truly qualified to determine the quality of [USAT’s] investments” (Ex. A-10560, Tab 174 (05/01/85 Crow memo) p. US 00000385), should meet with PSA. Green of the FHLB-D to “get everything off dead center.” Ex. T-9025, Tab 1936 (05/06/86 Gross memo) p. CN 249762.

A405. In June 1986, Hurwitz also participated in discussions with members of USAT’s senior management at a so-called “Earnings Power Meeting” regarding USAT’s earnings and the fact that under USAT’s “present operating structure, operating earnings are significantly negative without an extraordinary boost on a monthly basis.” Ex. T-4219, Tab 868 (06/26/86 Crow memo). A Summary Income Analysis distributed by Crow to Hurwitz and others showed that for the first five months of 1986 this “boost” had been provided by securities sales, equity arbitrage and merchant banking (id. p. US 0000424) all of which were investment strategies included as part of the Wholesale Strategy developed by Hurwitz and other members of USAT’s senior management. Ex. A-10560, Tab 174 (04/26/85 Mission Statement) p. US 0000383; Tr. 2,253: 13 - 2,254: 11 (G. Williams); Tr. 15,388: 2-8 (Crow).

A406. Hurwitz was also a predominant voice at USAT with respect to its real estate activities Tr. 5,716:1-19 (Graham) and, as a participant at the meetings of the Senior Loan Committee, played an active role in USAT’s real estate lending in 1986. Ex. B-4167, Tab 1039; A-1646, Tab 1040; T-7585, Tab 1363; B-4168, Tab 1042; Tr. 5716: 1-19 (Graham). For example, Hurwitz was involved in negotiating USAT’s largest loan, Park 410, which closed in April 1986. Ex. T-7147, Tab 947 (R105); T-7065, Tab 651 (R106); Tr. 5,859: 15 - 5,860: 2; Tr. 20,566 :4-8 (Graham) (R108); Tr. 9,620: 11 - 9,622: 7 (Gindy) (R109); Tr. 5,702: 1-3 (Graham) (R220); Ex.A-10298, Tab 775 (R209); T-7668, Tab 652 (R110); Tr. 5,864: 1 - 5,865: 3 (R111). He also negotiated the details of the $39.4 million Norwood transaction (Ex. T-7582, Tab 672; Tr. 6,494: 8-16 (Minch) (R370)), which closed in July 1986. Ex. T-7538, Tab 700; Tr. 6,582: 11-20 (Minch) (R348).

A407. In June 1986, USAT sought the assistance of Smith Breeden, a consulting and investment management firm (Tr. 3,021: 18 - 3,022: 4 (Smith)), to help manage USAT’s “interest rate risk exposure” and advise the institution on “investment earning opportunities.” Tr. 8,445: 6 - 8,446: 13 (G. Williams); Ex. T-4222, Tab 330 ( 07/03/86 Crow memo); Tr. 11,747: 2 - 11,748: 6 (Giarla). Smith Breeden came to USAT’s attention because Hurwitz’ son had taken several courses at the University of North Carolina from Doug Breeden, one of the principals of Smith Breeden, and thought he was really bright. Tr. 3,962: 21 - 3,963: 16 (Orr). After USAT retained Smith Breeden as a consultant, Hurwitz reviewed Smith Breeden’s analysis of USAT’s MBS portfolio and received materials from Smith Breeden regarding the hedging of that portfolio. Initially Smith Breeden reported to USAT on June 30, 1986, that its MBS/RCA portfolio had a mark-to-market loss of $58 million (Tr. 11,820: 9 - 20 (Giarla)) and that the MBS arbitrage protfolio would suffer additional losses in increasing and decreasing interest rate environments. Ex. A-10649, Tab 187 (07/03/86 Crow memo) pp. US-3007261 and US-3007274. Smith Breeden provided a report (Ex. A-10666, Tab. 870 (09/15/86 Strategy Meeting Report)) and made a lengthy presentation to Hurwitz and USAT’s senior management on September 15, 1986, regarding the USAT MBS portfolio. Ex. T-4246, Tab 335 (09/08/86 Hansen memo) at ¶ G p. 6; Tr. 11,751: 4-12 (Giarla). In addition, on October 13, 1986, Smith Breeden sent a number of materials and articles to USAT, Hurwitz, and Doug Hansen pertaining to the hedging of USAT’s MBS. Ex. B-1258, Tab 372 (10/13/86 Smith Breeden letter). On October 30, 1986, Crow submitted a memorandum to members of the Investment Committee, including Hurwitz, advising them that the relationship with Smith Breeden was not working satisfactorily. The Smith Breeden consulting arrangement with USAT was thereafter terminated. Ex. A-1416, Tab 347 (10/30/86 Crow memo) p. US-3 005032; Tr. 4,026: 12 - 4,028: 9 (Orr).

A408. Hurwitz was also directly involved in the decision by USAT in the third quarter of 1986 to take gains out of its investment portfolios to shore up its net worth. One of the “Immediate Strategies” recommended by Smith Breeden at the September 15, 1986, presentation attended by Hurwitz was to “[t]ake gains on [the MBS] portfolio to offset operating losses.” Ex. A-10666, Tab 870 (09/15/86 Strategy Meeting Report) p. US 0002061. After attending the presentation, Hurwitz met with the members of the Investment Committee on September 18, 1986, and discussed among other things the matters they discussed was the impact the sale of MBS has “when a trade is made which improves the Association from an economic perspective and allows a book gain, but lowers on-going book spread income.” Ex. A-1409, Tab 380A (09/18/86) p. US-3 004884. Four days later, on September 22, 1986, Hurwitz and the members of the Strategic Planning Committee met to consider, among other things, USAT’s “Earnings and Growth Strategy” and “taking portfolio gains in the third quarter to shore up reserves and [USAT’s] capital position.” Ex. T-4250, Tab 871 (09/22/86 Hansen memo) at 31, p. OW012018. Hansen suggested in his memorandum to Hurwitz and the other members of the Committee that “[w]e should take MBS and liquidity gains …alert Joe (Phillips) as to the possibility of taking junk bond gains, and track the profit and capital positions carefully.” Id. p. OW012019. At the conclusion of his memorandum, Hansen recommended that in the third quarter of 1986 USAT “Take $10 MM securities gains in junk, MBS, and liquidity portfolios.” Id. p. OW012020.

A409. One day after the September 22, 1986, Strategic Planning Committee meeting, Crow sent a memorandum to Gross and G. Williams with an “estimate of gains that will be needed for quarterly earnings” and advising them that “[w]e are proceeding with these gains.” Ex. T-4251, Tab 567 (09/23/86 Crow memo). The attachment to Crow’s memo states that USAT was going to take a total of $11.4 million in “Gains - To Alleviate Deficit” from the sale of junk bonds, MBS and liquidity portfolios. Id. p. OW011295. Consistent with the discussions at the September 22, 1986, Strategic Planning Committee meeting, which Hurwitz participated in, USAT sold $636 million in investment securities in September 1986 ($395 million in MBS and $241 million in junk bonds), and recorded total gains for the month from the sale of investment securities of $14,504,000.[30] Ex.A-5015, Tab 562 (09/00/86 Performance Report) p. DJ. This amount was over 14 times the reported gains from sales of investment securities in the two prior months of the quarter, July and August 1986. Id.

A410. Hurwitz was also directly involved in the decision by USAT to sell an additional $1.6 billion in investment securities during the fourth quarter of 1986 to improve the earnings picture of USAT. At the September 22, 1986, meeting of the Strategic Planning Committee, Hansen also recommended that USAT “[t]ake securities gains, if any” in the fourth quarter of 1986. Ex. T-4250, Tab 871 (09/22/86 Hansen memo) at 12 p. OW012020. On November 13,
1986, Crow advised Bruce Williams that the Investment Committee, at the meeting which was held the previous day, had a discussion “on selling junk bonds for purposes of quarterly earnings” and that Ron Huebsch had made “an impassioned plea to get the word out now if we are going to need a lot of profits because the market is favorable right now to getting out of some bonds taking a profit…” In response G. Williams and Crow both “stated that we would need ‘major amounts of profits.’”[31] Ex. T-4302, Tab 566 (11/13/86 Crow Memo). After being told this at the Investment Committee meeting, Crow reported that “Charles [Hurwitz] asked to see some projections on the quarter prior to making a definitive decision.” Id. Ten days later, on November 24, 1986, Crow reported to Hurwitz, Gross and Munitz that USAT’s operating results had resulted in a $7.2 million loss in October 1986 and that “the Association’s ‘base operation’ is losing at a rate of $77 million a year, up from $40 million in $1985”. Ex. T-4311, Tab 189 (11/24/86 Crow memo). Thereafter, in the last two months of 1986, USAT sold over $1.62 billion in investment securities ($ 634 million in November and $988 million in December).[32] Ex. 5016, Tab 563 (11/00/86 Performance Report) at DJ; A-5017, Tab 564 (12/00/86 Performance Report) at DJ. As a result of these sales, USAT recorded earnings for the months of November and December on securities sales of $8,860, 000 and $14,498,000, respectively, and a total gain from securities sales in the last two months of the year of $23,358,000. Id.

A411. USAT calculated its net worth at $249 million at the end of 1986: $20 million in excess of the minimum regulatory requirement. Ex. A-5017, Tab 564 (12/00/86 Performance Report) p. 5. Without the $23 million in non-operating gains from the sales of junk bonds and MBSs in November and December, which Hurwitz made the “definitive decision” to take (Ex. T-4302, Tab 566 (11/13/86 Crow Memo)), USAT would have failed its regulatory net worth requirement at the end of 1986. Ex. A-5017, Tab 564 (12/00/86 Performance Report) p. 5.

A412. In fact, during 1986 USAT, with Hurwitz’ approval, consistently took large gains each quarter and at year-end as a result of securities sales from its arbitrage portfolios. For example, USAT reported either a small gain or a loss with respect to sales on investment securities during the months of January, February, April, May, July, August, and October. Ex. A-5017, Tab 564 (12/00/86 Performance Report) at DJ. However, in the months of March, June, September, November and December, prior to the end of each quarter and the full year, USAT reported a total of $78.8 million in gains from the sale of investment securities or 95% of the total gains reported from the sale of investment securities for the entire year. The December 1986 Performance Report contains the following chart reporting USAT’s gains in thousands on sales of investment securities in the 1986:

January	$ (497)
February	2,752
March	31,637
April	1,347
May	(924)
June	9,302
July	(293)
August	1,261
September	14,504
October	225
November	8,860
December	14,498
	$ 86,672

Id. (emphasis added).

A413. At the end of 1986, Hansen reported to Hurwitz and the members of the Strategic Planning Committee that, as a result of the gains taken out of the junk bond portfolio with Hurwitz’ approval; Ex. T-4302, Tab 566 (11/13/86 Crow Memo), the “Economic spread” in the portfolio had been reduced from 360 basis points to 220 basis points. An even more dramatic erosion of the spread had occurred with respect to the MBS portfolio. “Due to profit taking” Hansen reported a negative spread of 108 basis points. Ex. T-4320, Tab 569 (12/17/86 Hansen memo) ¶¶ 8 and 9. This reduction in the spread generated by the arbitrage portfolios as a consequence of sales of MBSs and junk bonds to generate portfolio gains, was precisely the result Gross had questioned at the outset of the year when he observed to Hurwitz and USAT’s management: “We have really reduced our yield to the extent that we took the profit. So it really was not a profit.” Ex. A-10612, Tab 861 (02/28/86 Gross memo).

3. Hurwitz’ Continued Involvement In 1987 And 1988

A414. Hurwitz’ close involvement in the activities of USAT continued during 1987 as well. For example, during 1987 Hurwitz continued to play an active roll in the oversight of the high-yield bond portfolio which he initiated at USAT in 1984. At the beginning of the year
Gross discussed with Hurwitz, Munitz and Crow his “concern about getting a competent bond man” so that the mismatch of the CD and bond maturities that occurred when “we really rushed into our existing portfolio” didn’t occur again. Ex. T-4333, Tab 329 (01/22/87 Gross memo) p. OW012143. As discussed previously, Hurwitz thereafter participated in the hiring of Eugene Stodard the new bond man retained by USAT. Tr. 25,648: 5-13 (Stoddard); Tr. 25,280:15 - 25,281: 9 (Munitz). Likewise, in February 1987, when the regulators raised questions about the safety and liquidity of the USAT high-yield bond portfolio it was Hurwitz who offered to meet with the regulators “to discuss his insights into the liquidity of high-yield bonds.” Ex. A-12169, Tab 1876 (02/11/87 Berner letter) p. OW 151992.

A415. As a member of the UFG/USAT Investment Committees, Hurwitz was provided with a copy of USAT/UFG Investment Committee Policies on February 20, 1987, for his review and comments. Ex. 1432A, Tab 383 (02/20/87 Jacobsen memo). Other than Gross and Munitz, who were also officers of both USAT and UFG, Hurwitz was the only Director of either USAT or UFG whose review and comments were sought regarding USAT’s investment policies. Id. p. W 100896.

A416. During the first half of 1987, as a member of the Strategic Planning Committee, Hurwitz, also participated in the decision by USAT to transfer $320 million of variable rate MBSs and $710 million of interest rate caps from United MBS to USAT in order to maximize USAT’s maturity matching credit to reduce USAT’s net worth requirement. Ex. T-5125, Tab 302 (06/17/87 B. Williams memo); T-5120, Tab 287 (02/18/87 B. Williams memo). As early as September 8, 1986, Hansen proposed to Hurwitz and the other member of the Strategic Planning Committee that USAT take advantage of the maturity matching credit as part of USAT’s Growth and Capital Strategy. Ex. T-4246, Tab 335, (09/08/86 Hansen memo) ¶ C, pp. 2-3. The Strategic Planning Committee again considered the maturity matching issue at the March 2, 1987, (Ex. T-5122, Tab 299 (03/02/87 Agenda) and May 4, 1987, meeting (Ex. A-1598, Tab 2317) after which, “by management approval,” United MBSs transferred to USAT the MBS and caps, which in B. Williams words “maximized [USAT’s] maturity matching credit using ‘mirrors’.” Ex. T-5125, Tab 302 (06/17/87 B. Williams memo).

A417. After interest rates turned against USAT in the Spring of 1987 and the Association’s MBS portfolio suffered a precipitous mark-to-market decline in the value, Hurwitz also participated in discussions regarding USAT’s future interest rate policy. At the Investment Committee meeting on April 22, 1987, Laurenson informed the Committee that as a result of interest rate movements the MBS portfolio had a “distinct mark-to-market decline” (Ex. A-1439, Tab 366, p. US-3 005631), and had a liquidation value along with the associated hedges of negative $197,161,000. Id. p. US-3 005655. Berner immediately wrote Hurwitz, Munitz, Gross and Crow and proposed that USAT’s “top management,” rather than Sandy Laurenson, should make a “corporate decision on where we believe interest rates will move.” Ex. B-1580, Tab 1659 (04/22/87 Berner memo). On April 27, 1987, Gross also proposed to Hurwitz and the members of the Strategic Planning Committee that USAT take steps to establish a “unified strategic plan or policy with regard to interest rates.” Ex. T-4366, Tab 1660 (04/27/87 Gross memo).

A418. In addition, Hurwitz also participated in decisions to set USAT’s portfolio size limits. One of the subjects that was frequently addressed by the Strategic Planning Committee was the portfolio size limits for the junk bond, MBSs and equity arbitrage portfolios, which were set by the Committee. Ex. 4304, Tab 873 (11/17/86 Hansen memo) ¶¶ 6 and 16 p. US 0000751; T-4320, Tab 569 (12/17/86 Strategic Planning Meeting Notes) at 8 and 9 p. US 0001257; A-1597, Tab 2316 (04/20/87 Agenda); A-1598, Tab 2317 (05/04/87 Agenda item references “expansion of MBS and high-yield portfolios”); Ex. B-1702, Tab 1658 (07/13/87 Gross memo); Tr. 21,330: 21 - 21,331: 10(Gross). Hurwitz played a prominent role in establishing those limits. For example, at the end of 1986 Hurwitz was involved in USAT’s deliberations on maximizing the size of the equity arbitrage portfolio. Ex. T-9026, Tab 1955 (11/04/86 B. Williams memo). Likewise, when the Strategic Planning Committee agreed to portfolio limits for the USAT equity arbitrage portfolio on November 6, 1987, Crow noted in a memorandum to Huebsch that “Charles [Hurwitz] and Jenard [Gross] agreed upon revised limits on equity arbitrage limits.” Ex. T-9015, Tab 1808 (11/06/87 Crow memo).[33] Similarly, in April 1987, when Crow raised the issue of whether USAT should expand its investments in MBSs, it was Hurwitz and Gross to whom he directed his inquiry. Ex. A-0624, Tab 876 (04/21/87 Crow memo).

A419. Likewise, at the end of 1987 when USAT considered selling additional branches to raise capital, Hurwitz was a participant in the discussions, just as he had been when USAT sold branches at the end of 1984 and 1985. One of the first steps taken by USAT’s at the outset of the Wholesale Strategy was a sale of USAT’s branches to generate capital. Ex. T-4422, Tab 886 (12/10/87 Crow memo) p. OW045511; B-378, Tab 143 (10/25/84 G. Williams memo) p. UFG2018917; A-1100, Tab 155 (11/13/84 USAT Minutes) p. US-3 003060. Hurwitz was a leading proponent of “a no-branch system configuration or a minimal branch system
configuration” as part of the USAT Mission Statement. Ex. A-10560, Tab 174 (05/01/85 Crow memo) ¶ I, p. OW004595. In May 1985, at the USAT Board meeting at which the Mission Statement was presented, Hurwitz strongly advocated additional branch sales (Ex. A-10561, Tab 175 (05/16/85 USAT Minutes) pp. CN057150-51), and by the end of 1985 they had been successfully concluded. Ex. A-31021, Tab 1161 (12/31/85 UFG 10-K) p. UFG-J 2006. Thereafter, further branch sales was a continuing topic of discussion by Hurwitz and the members of Strategic Planning Committee (Ex. B-1635, Tab 2321 (5/22/87 Crow memo); B-1706, Tab 1679 (07/20/87 Berner memo) p. UFG 13562; A-11079, Tab 1680 (08/10/87 Berner memo) p. OW05757; and in the latter part of 1987 USAT unsuccessfully sought the approval of the FHLB-D to engage in further sales. Ex. B-1846, Tab 1766 (11/13/87 Berner memo) p. CN057184-85; B-1855, Tab 1682 (11/18/87 Berner memo) p. OW045476; B-1879, Tab 1803 (12/04/87 Munitz memo) at III. a, pp. OW045505 and OW045407. Hurwitz was an active and vocal participant in all of these efforts to raise additional capital for USAT through the sale of its branches, and was regularly updated on the progress of such efforts. Id. Ex. A-10561, Tab 175 (05/16/85 USAT Minutes) pp. CN057150-51; B-1635, Tab 2321 (05/22/87 Crow memo); B-1706, Tab 1679 (07/20/87 Berner memo) p. UFG 13562; A-11079, Tab 1680 (08/10/87 Berner memo) p. OW05757).

A420. At the end of 1987, as USAT’s financial condition continued to deteriorate and USAT approached a net worth failure, Hurwitz was the only outside director of either USAT or UFG who participated in the strategic discussions regarding USAT’s future strategy. For example, as a member of the Strategic Planning Committee, Hurwitz was the only outside director to be informed by B. Williams on October 17,1987, of the magnitude of the mark-to-market losses in the MBS and investment portfolios. Ex. T-4403, Tab 885 (10/17/87 B. Williams memo) p. US 000200. Likewise, Hurwitz was copied with Berner’s October 29, 1987, memorandum warning of USAT’s imminent net worth failure. Ex. T-8022, Tab 396 (10/19/87 Berner memo). Finally, Hurwitz was the only outside director who participated in the discussions by USAT’s management on December 10, 1988, “concerning the direction of United’s future activities.” Ex. T-4422, Tab 886 (12/10/87 Crow memo) p. OW045510.

A421. Hurwitz was also the only outside director of either UFG or USAT who participated in the discussions regarding the forbearance application prior to presenting the proposal to the USAT Board on February 11, 1988. Ex. A-1141, Tab 99 (02/11/88 USAT Minutes) p. US-3 002786. After Berner advised Hurwitz and other members of USAT’s management team at the end of October that USAT was about to fail its net worth requirements (Ex. T-8022, Tab 396 (10/19/87 Berner memo)), Hurwitz, Munitz, Gross, Berner and Crow discussed filing a forbearance application with the FHLB-D. Ex. B-1846, Tab 1766 (11/13/87 Berner Memo); B-1879, Tab 1803 (12/04/87 Munitz Memo) at III.e, pp. US 0001948 and 1947. Hurwitz was kept apprised by Berner of the regulators’ reaction to the proposed application (Ex. B-1855, Tab 1682 (11/18/87 Berner memo) ¶ 3, but resigned as a director of UFG the same day the forbearance application was presented to the USAT Board. Ex. A-1140, Tab 1407 (02/11/88 UFG Minutes). The forbearance application was approved, however, by a USAT Board, which was composed of a majority of directors (Gross, Berner, Schwartz and Munitz) appointed or controlled by Hurwitz and MCO. Ex. A-1141, Tab 99, (02/11/88 USAT Minutes) p. US-3 002786.

A422. Prior to Hurwitz’ resignation as a director of UFG in February 1988, he was regularly advised by USAT’s senior management regarding communications between USAT and representatives of the FHLB-D on all aspects of USAT’s operations. For example, when USAT’s management first met with the regulators in May 1986, regarding USAT’s investment activities, Gross immediately provided Hurwitz and other USAT senior managers with a memorandum detailing the substance of the discussions. Ex. T-9025, Tab 1936 (05/06/86 Gross memo). Likewise, Berner, who frequently was in contact with Supervisory Agent Twomey, had the practice of keeping Hurwitz and the other members of USAT’s senior management currently informed by memorandum of the substance of his conversations with Twomey. The record of these proceedings contains numerous such memoranda. See, e.g., Ex. T-1118, Tab 1643 (3/20/86 Berner memo regarding a conversation with Twomey on the issuance of subordinated debt); B-1589, Tab 1673 (04/30/87 Berner memo regarding a conversation with Twomey on the results of the 1986 Examination); B-1656, Tab 2354 (06/11/87 Berner memo regarding Twomey’s visit to USAT and Berner’s discussion with Twomey regarding direct investments and the Couch mortgage swap); B-1706, Tab 1679 (07/20/87 Berner memo regarding discussions with Twomey on USAT’s net worth failure, the pending sale of branches, USAT’s direct investment limitations, utilizing USAT’s securities traders to manage the assets of other S&L’s, and the third party review of USAT’s books and records and high-yield bond portfolio); A-11079, Tab 1680 (08/10/87 Berner memo regarding conversation with Twomey regarding a comfort letter for USAT, the branch sale, USAT’s acquisition of failed S&L’s; and the high-yield bond review by a third party); B-1810, Tab 1761 (10/23/87 Berner memo regarding USAT’s equity arbitrage portfolio and USAT’s acquisition of failed S&L’s); B-1846, Tab 1766 (11/13/87 Berner memo regarding discussions with the regulators about branch sales, the direct investment application and regulatory forbearance); B-1855, Tab 1682 (11/18/87 Berner memo regarding conversation with Twomey on USAT participation in the Southwest Plan, the proposed branch sale, USAT’s possible forbearance application, denial of the USAT Direct Investment Application, and keeping lines of communication open with USAT); and B-1885, Tab 1796 (12/09/87 Berner memo regarding “enhancing [USAT’s] contacts with the major executive personnel at the Federal Home Loan Bank Board”).

A423. It is noteworthy that, even though Hurwitz had no position with USAT and served only as a director of its parent, UFG, he was the only outside director of either UFG or USAT who ever received any of the memoranda described above dealing with the day to day operational decisions affecting USAT. In fact, not even James Whatley, the sole outside director on USAT’s Executive Committee, was provided with any of these internal USAT management memoranda.

A424. Following Hurwitz’ resignation as a director of UFG, when Hurwitz no longer had any official position with either USAT or UFG, he continued to attend meetings of the UFG Executive Committee and the Strategic Planning Committee. See, e.g. Ex. B-3722, Tab 1769 (03/16/88 Berner memo referencing Hurwitz participation in an Executive Committee meeting); T-9009A, Tab 1805 (06/09/88 Berner memo referencing Hurwitz’ participation in a SPC meeting).

A425. In addition, long after Hurwitz’ departure from the UFG Board, the management of USAT and UFG continued to consult with Hurwitz and to provide him with internal memoranda regarding USAT’s daily operations as well as management’s communications with officials at the FHLB-D. For example, on February 16, 1988, Gross included Hurwitz among the persons to whom he circulated his comments on USAT’s Performance Report for December 1987. Ex. B-2019, Tab 1798 (02/16/88 Gross memo).[34] Likewise, Berner continued to keep provide Hurwitz with copies of the memorandum he prepared for USAT’s senior management. See, e.g. B-2091, Tab 1688 (03/23/88 Berner memo concerning his discussion with S.A. Twomey regarding capital forbearance, the Southwest Plan, the 1987 Examination, and Hurwitz’ alleged lack of involvement in the operations of USAT’s); B-2224, Tab 1695 (06/03/88 Berner memo of a conversation with S.A. Twomey on a broad range of topics including capital forbearance, the 1987 Examination report, USAT’s executive search, the Southwest Plan, and UFG’s obligation to infuse capital into USAT); T-9009A, Tab 1805 (06/09/88 Berner memo discussing a broad range of matters considered at the SPC); B-2240, Tab 1774 (06/16/88 Berner memo regarding his discussions with Twomey pertaining to the 1987 Examination, UFG’s obligation to infuse capital, and brokered CD’s); B-2249, Tab 1862 (06/21/88 memo discussing Berner’s and Gross’ meeting with representatives of the FSLIC and the FHLBB regarding USAT’s participation in the Southwest Plan); T-8081, Tab 1377 (06/30/88 Berner memo on telephone conversation with Twomey regarding the hiring of Larry Connell and USAT’s possible involvement in the Southwest Plan); T-8089, Tab 1380 (07/06/88 Berner memo regarding management’s meeting with representatives of the FHLB-D regarding a broad range of regulatory issues), and B-2320, Tab 1702 (07/20/88 Berner memo regarding a meeting with the FHLB-D on USAT’s participation in the Southwest Plan).

A426. Once again, none of the memoranda sent to Hurwitz after he resigned from the UFG Board were ever given to Whatley, the sole remaining outside director on either the USAT or the UFG Board.

A427. Berner’s memo to Hurwitz, Munitz and Gross March 23, 1988, shortly after Hurwitz’ resignation, summarized the degree to which Hurwitz influenced the operating of USAT, both before and after his departure. Berner wrote in his memo that when “Twomey asked what Hurwitz’ current role in United was” he responded:

While I would not deny to Neil [Twomey] that if Charles wanted something done it would probably be done, I stressed that, in fact, Charles was out doing other deals and was not imposing his will upon United or United’s management.

Ex. B-2091, Tab 1688 (03/23/88 Berner memo) p. W 104571. emphasis added.

I. Hurwitz Was Compensated For His Investment Leadership At USAT

A428. As discussed previously at A145, Hurwitz never became a member of USAT’s Board of Directors and was not formally named as a member of any of USAT’s governing committees whose meetings he regularly attended, including the Executive Committee, the Investment Committee and the Senior Loan Committee. Nevertheless, Hurwitz was periodically paid bonuses for the services he performed with respect to USAT’s investment activities. Ex. A-3013, Tab 88 (03/31/86 UFG Proxy) p. UFG 06352; Tr. 26,167: 4 - 26,170: 10 (Hurwitz). For example, in 1985, Hurwitz was paid a $200,000 bonus. Although he received no salary from USAT or UFG, Hurwitz was paid enoough in bonuses to make him the fourth highest compensated person at UFG and USAT in 1985. Id. p. UFG 06346. Only USAT’s Chairman, Gross, USAT’s President, G. Williams, and C.E. Bentley, the Senior Chairman of USAT, received more compensation than Hurwitz in 1985. Id.

A429. Similarly, in 1986 Hurwitz also received a bonus of $230,000 for “Investment Leadership” p. USAT. Ex. T-8034, Tab 479 (08/18/97 Villa letter) p. C0000004 and 06; Tr. 26,168: 15 - 26,169: 1 (Hurwitz). The check was listed on USAT’s payroll account. T-8035, Tab 1806 (Hurwitz Check’s) p. CN 038985.

A430. On November 9, 1987, shortly before Hurwitz’ resignation from the UFG Board, James Whatley the Chairman of the UFG/USAT Compensation Committee recommended that Hurwitz receive an additional $200,000 bonus for 1987. Ex. T-8026, Tab 410.(1987 Bonus list). The bonus was a part of a list of bonuses for employees that totaled $1.9 million. Id. On November 10, 1987, the Board of Directors of USAT approved the 1987 bonuses of “less that $2 million” for key executives that were recommended by the Compensation Committee. Ex. T-8028, Tab 397 (11/10/87 USAT Minutes) p. UFG-H 0229.

A431. In addition to the fees for Investment Leadership, Hurwitz also was regularly paid a Director’s fee by UFG for attending board meetings. Ex. T-8035, Tab 1806 (Hurwitz checks) pp. CN 038959-69 (these checks were endorsed over the FDC by Hurwitz).

[1] OTS’s Proposed Findings of Fact are divided into six sections, by general subject area, and are numbered by section:

Section No. Abbreviation Subject Volume

One I Introduction and Parties 1

Two A Acquisition of Control 1

Three M Mortgage-Backed Securities 2

Four J Junk Bonds 3

Five R Real Estate Transactions 3

Six S Supervision 4

OTS’s Proposed Conclusions are Law are contained in Volume 5.

[2] Citations to various documents are as follows: “Tr.” refers to the hearing transcript; “FOF” refers to OTS Proposed Findings of Fact; “COL” refers to OTS Proposed Conclusions of Law; and exhibits admitted into the record are referred to by exhibit and tab number.

[3] Dr. Kozmetsky was no stranger to stockholder groups, Schedule 13D filings, and the disclaiming of beneficial ownership of securities. He was also a member, with FDC, FedRe, Hurwitz, and the RGK Foundation (his family foundation, see Tr. 2,452: 3-13), of a stockholder group with respect to MCO . As of March 15, 1982, Dr. Kozmetsky beneficially owned 2.9% of the common stock and 1.9% of the preferred stock MCO and 5% of the shares of FDC. Dr. Kozmetsky disclaimed beneficial ownership of all of those shares. Ex. Lazard 14, Tab 195, pp.35-37 (MCO Form 10-K 12/31/81). As of March 1, 1984, Dr. Kozmetsky owned some 5.4% of the outstanding shares of FDC and controlled 3.5% of the outstanding shares of MCO through his chairmanship of the RGK Foundation. Ex. T-3011, Tab 715, p. 2 nn.2&3;. Dr. Kozmetsky’s interest in FDC remained constant through at least March 19, 1987. See Ex. A-3012, Tab 194, p.2 n.2 (UFG 1985 Proxy Statement); Ex. A-3013, Tab 88, p.2 n.2 (UFG 1986 Proxy Statement); Ex. 3014, Tab 88, p. 2 n.2 (UFG 1987 Proxy Statement). The RGK Foundation’s holdings of MCO stock rose slightly over time as MCO’s share buy-in (see A43) program took effect. See Ex. A-3012, Tab 194, p. 3 n. 4 (3.6%) (UFG 1985 Proxy Statement); Ex. A-3013, Tab 88, p.3 n.4 (3.9%) (UFG 1986 Proxy Statement); Ex. A-3014, Tab 92, p. 3 n. 5 (4.0%) (UFG 1987 Proxy Statement).

[4] MCO and FDC attempted to recharacterize their proposal in a letter to Jearlene Miller of the Federal Home Loan Bank of Dallas, Ex. T-1044, Tab 14, in which they objected to the part of the net worth maintenance condition relating to holdings in excess of 50%, because “MCO and [FDC] are currently proposing to acquire only up to 35% of the outstanding Shares.” Id. p. 2. However, there is no evidence that MCO and FDC ever sought to amend their holding company application to reflect such a limitation.

[5] See Tr. 821-22 (Deremer) (identifying the “42 Account”); Tr. 1,041-42 (Deignan) (identifying Account 06-12942 as a “firm” account, that is an account owned by DBL in its own right, as opposed to an account held for the benefit of a customer.)

[6] This trade corresponds in date and number of shares to a trade reported by FedRe in its Amendment 2 to Schedule 13D, Ex. A-2063, Tab 37, p. MX 007149.

[7] At the time of his testimony, Mr. Oliver was a senior investigator in the Dallas, TX office of the OTS. Mr. Oliver is a commissioned national bank examiner, having worked as an examiner and assistant examiner for the Office of the Comptroller of the Currency for some eleven years beginning in 1976. Mr. Oliver also worked as both a supervisory analyst and a corporate activities analyst for the Federal Home Loan Bank of Dallas prior to joining the OTS as a senior investigator in 1991. Mr. Oliver has extensive experience in the compilation, summarization, reconciliation, and analysis of financial data through the use of spreadsheets and other computerized tools. Tr. 2,596: 13 - 2,602: 7.

[8] At the time of her testimony, Ms. Suder was a Senior Managing Consultant with LECG, Inc. (formerly known as Law and Economics Consulting Group) and the director of LECG’s Sacramento California office. Ms. Suder is a certified public accountant. She formerly worked for the predecessor to KPMG Peat Marwick and has also served as the chief financial officer of two savings associations and a manufacturing company. Ms. Suder joined LECG in 1991 as a staff consultant working in the area of savings and loan associations. In the course of her work, Ms. Suder managed the creation of a database relating to investments by savings and loan associations in junk bonds underwritten by DBL and others. In her testimony, Ms. Suder described the sources of the data included in the database and explained the procedures by which it was compiled and verified. Sources of data included DBL, savings institution records, and the accounting firm of Kenneth Leventhal, as well as publicly available information concerning various bond issues. The process of compiling and verifying the information in the database involved the efforts of a team of fifteen people over a period of some 15 or 16 months under Ms. Suder’s supervision. With respect to USAT, Ms. Suder testified that LECG had access to USAT’s securities trade tickets as a means of verifying the information in the DBL records. Tr. 14,318:18 - 14,330: 10. Ms. Suder was certified as an expert with respect to the contents and structure of the databases as to which she testified. Tr. 14,330: 11-18. Based upon her description of the sources of information and the manner in which it was verified, the Court finds that the database upon which Ms. Suder based her report is the best available compilation of information concerning purchases of DBL-underwritten junk bonds by USAT.

[9] The UFG Board minutes for October 28, 1982, reported the following:

At this time, Mr. David E. Barrett, Treasurer of UFG, entered the room. Mr. Coles distributed an outline of the debt service requirements for UFG from 1983 through 1987 after the merger with First American Financial. Mr. Barrett discussed the nature of each of the debt obligations involved and explained that the data contemplates a dividend from United Savings equal to $2 million and a conversion of $3 million in PennCorp Debt into UFG common stock. Mr. Barrett stated that income projections following the merger exceed $20 million for 1983. At this time Mr. Barrett left the room.

Mr. Coles discussed the projections for short term rates and the announcement of the sale of PennCorp to American Can, and suggested that it might be advisable to consider elimination of the PennCorp option to convert its UFG Preferred Stock into UFG Common Stock at $6.00. [(Throughout 1982, UFG common stock traded in the range of approximately $2 to slightly over $5 per share. During October 1982, it traded between $3-3/4 and $4-5/8. Ex. T-1194, Tab 218.)] He stated that several discussions have taken place since the last UFG Board when the idea was initially discussed. Mr. Coles stated that the discussions have involved the following: PennCorp would give up their option to convert the Preferred Stock to Common Stock in exchange for UFG giving up its right to convert the PennCorp Debt and Preferred Stock into UFG Common Stock.

Mr. Coles said he believed that … UFG would hold adequate funds to meet its debt service through 1985, and he expects dividends to be available from United Savings. He recommended that the option be adjusted to convert the Preferred Stock into a debt instrument with an accelerated payment schedule, and carrying a floating rate of ½% over the 6 month Treasury bill rate.

Dr. Munitz strongly supports this concept. Mr. Coles proposed an earlier repayment of principal beginning in 1988 and an offer to repay $1 million per year. It was suggested that A.G. Becker should be contacted to determine whether this plan would be feasible and not impair their fairness letter. On motion by Mr. Duckett and seconded by Dr. Munitz, the Board unanimously approved the suggestion that a plan of this nature be proposed to PennCorp as an amendment to the definitive agreements.

Ex, A-1064, Tab 111, p. 002208 (emphasis added). The minutes of the next UFG Board meeting reflect that the proposal to amend the PennCorp agreements had been found acceptable by PennCorp:

Mr. Coles distributed his letter dated November 23, 1982, to Mr. Burton Borman, President of PennCorp, describing their agreement as to the amendment of the definitive agreements. These amendments involve a change in the rights to convert the PennCorp Debt and UFG preferred stock into UFG common stock. Under the amendments described, UFG would relinquish its rights to convert the PennCorp Debt and the preferred stock into UFG common and PennCorp would:

(1) relinquish its right to convert the preferred stock into common stock;

(2) be given the option to convert the preferred stock, at any time, for five years following the closing into a Senior UFG Note …

* * *

On motion of Dr. Munitz and seconded by Mr. Keltner, the Board unanimously approved the terms of the amendments described in the letter of November 23, 1982, a copy of which was attached, and authorized this management to amend the definitive agreements to effect such amendments.

Ex. 1065, Tab 112, p. 002204 (emphasis added).

[10] As of December 31, 1984, DBL reported ownership of 585,371 shares (7.1%) of UFG common stock on Schedule 13G (filed on February 13, 1985). Ex. T-1063, Tab 42 & Ex A-3075, Tab 50, p.2. This is precisely the number reflected in the Stock Record Weekly for all weeks from June 8, 1984 through March 22, 1985. Ex. T-1193, Tab 64. The DBL “Trade Runs” show no activity in the “42 Account” between May 29, 1984 and March 20, 1985, except for one sale of 47,702 shares to FDC on January 21, 1985, which was canceled the same day. Ex. T-1206, Tab 216, pp. 38-39; see also Ex. T-1213, Tab 224, p. 7. As of December 31, 1985, DBL reported ownership of 488,931 shares (6.0%) of UFG common stock on Schedule 13G (filed February 13, 1986). Ex. T-1116, Tab 51, p.2. The stock record indicates ownership of 788,931 shares on that date, however, the discrepancy of 300,000 is clearly the result of DBL’s subtracting the number of shares subject to the put/call option discussed below at A93 - A95 from the number held of record in the account. The Schedule 13G filed on February 13, 1987, reflects ownership of 789,853 shares (9.7%) of UFG common stock. Ex. T-1129, Tab 48, p.2. This is 250 shares less than shown in the stock record weekly for the closest following date, January 2, 1987, but matches precisely the number of shares shown as of January 9, 1987. Ex. T-1213, Tab 224, p. 16.

[11] Mr. Schwartz is currently the executive vice president and chief financial officer of MAXXAM, the successor of MCO. Tr. 904: 21-22. He has worked for MAXXAM or its predecessors or subsidiaries since 1980. Tr. 905: 9-11. In 1983, Mr. Schwartz worked for MCO in Los Angeles, reporting to Dr. William Leone, the President of MCO. Tr. 911: 18 - 914: 10. Mr. Leone reported to Hurwitz, the chairman of the board. Tr. 912: 16-22.

[12] Mr. Marlin testified that he had no recollection of the document, Ms. Fischer, or any discussions with Mr. Schwartz of potential structures for the acquisition of additional shares of UFG on or about June 29, 1983. Mr. Marlin also testified that he had not expressed any legal opinion on such a proposed structure. Tr. 379: 17 - 382: 11.

[13] When asked why he had sent the EXCO scenarios to Mr. Deremer, Mr. Schwartz testified: “I sent this to Mr. Deremer for his comments, his thoughts, would he be interested, his firm be interested.” Tr. 962: 18 -19.

[14] This number of preferred shares matches nearly precisely the number of preferred shares (47,702) purchased by FDC pursuant to the UFG rights offering. FDC and MCO ‘s purchases of convertible preferred stock are discussed above at A56.

[15] MCO and FDC were no strangers to the put/call device. Indeed, Dr. Kozmetsky, a member of the board of each of them testified that he “probably invented the put call,” Tr. 2,416: 8-9, in connection with the founding of his own company, Teledyne. Dr. Kozmetsky described a put/call arrangement as a financing technique undertaken for accounting purposes and agreed that it was a substitute for a purchase subject to a debt. Tr. 2,416: 6 – 2,420: 6. In addition, in August and September 1985, while negotiations for the DBL option were underway, Hurwitz was also attempting to negotiate a put/call arrangement with Jeffries & Co. with respect to stock in Pacific Lumber. Ex. A-14117, Tab 1953, p.25.

[16] As discussed below at A 81, MCO began to negotiate with DBL directly for the put/call option at least as early as February 11, 1985. See Ex. T-1062, Tab 16. There would be no reason to telecopy the EF Hutton letter to Hurwitz after that date, since the proposed transaction had been abandoned. This directly contradicts Hurwitz’ sworn testimony before Congress that he had first heard of the put/call option technique in May or June 1985 in connection with another transaction, in which MAXXAM was the unsuccessful bidder. See Ex. A-14117, Tab 1953, pp. 24-25

[17] Q. Okay. Now, I notice that the E.F. Hutton letter which is dated -- which is T1061 at the top and is

dated January 16th, 1985, is telecopied the next day to Mr. Charles Hurwitz from Paul Schwartz. Do you see that?

A. Yes, sir.

Q. Do you recall having any discussions with Mr. Hurwitz regarding the E.F. Hutton proposal?

A. I don't recall any specific discussions.

Q. Do you know whether Mr. Hurwitz participated in the decision along with Mr. Munitz not to go

along with the E.F. Hutton proposal?

A. I don't know. You would have to ask one of them.

Q. But you didn't participate in any discussions with Mr. Hurwitz on that subject?

A. I think I testified earlier that Mr. Hurwitz would call from time to time on items he was interested

in.

Q. Do you recall him phoning on this particular item?

A. But I have no specific recollection of any particular phone call with him on either the E.F. Hutton

letter in particular or, for that matter, on the option in general.

Q. And when you say you have no specific recollection of a specific phone call, do you have a

general recollection that from time to time, you spoke to him about the general subject of the option agreement?

A. It's possible, yes.

Q. Well, it's possible that you have a recollection or it's possible that you spoke with him?

A. It's possible I spoke with him, yes.

Q. But as you sit here, you don't have a recollection of any general conversation with him at which

the option arrangement was discussed?

A. No.

Tr. 995: 4 - 997: 1

[18] The Kramer Levin firm gave an opinion of counsel in connection with the execution of the Stock Option Agreement. See Ex. A-10124, Tab 2349. The opinion of counsel stated that the execution of the Stock Option Agreement was duly authorized and that it would violate no law, order, regulation, judgment, agreement, etc., but did not address issues such as ownership or control of the shares or the consequences for MCO under the net worth condition of the resolution approving the H(e)-1 Application of its entering into the Stock Option Agreement.

[19] Munitz testified that when he learned of DBL’s ownership of UFG stock in approximately March of 1985, he inquired of his colleagues, “probably” including Hurwitz and Schwartz, as to whether that would have any effect on MCO and FDC’s position vis-a-vis the net worth maintenance condition. Tr. 25,182: 20 - 25,190: 5. Munitz stated: “[M]y focus would have been, ‘We've got an application pending. We've got to be very careful about whether or not we're a savings and loan holding company.’ Basically, that would have been my question.” He also testified: “My concern would have been ‘Are you watching carefully the guidelines, the regulatory expectations so that we don't move into an area we don't want to be in?’ ” Certainly, by July of 1985, Munitz was directly involved in the matter, as shown by Mr. Marlin’s letter.

[20] The evidence shows that Salomon Brothers, Inc. provided services to USAT in conjunction with the reverse repurchase agreements by which USAT and its subsidiaries purchased mortgage-backed securities as well the purchase of some hedging instruments. See M6, M30, M32, M50 - M53, M62 - M65, M75, M283, M291 and M400 below. There is no evidence in the record that would demonstrate any investment banking relationship between MCO and FDC on one hand and Salomon Brothers, Inc. on the other. FDC and MCO’s investment banker, in fact, was DBL, as can be ascertained from Exhibit Lazard 19, Tab 69, which lists no fewer than eleven public offerings and private placements of securities underwritten by DBL for MCO and its affiliates from 1985 through 1989 aggregating $3,070,472,000. See also Tr. 802: 1 - 805: 14 (Mr. Deremer’s oral identification of each transaction listed on Ex. Lazard 19, Tab 69, as a transaction underwritten by DBL). Four of those offerings took place in 1985, and two of the 1985 offerings (totaling $350 million) took place the day before the date of Mr. Eckland’s letter. Ex. Lazard 19, Tab 69. There is no evidence in the record that would indicate that any firm other than DBL acted as MCO’s or FDC’s investment banker during the relevant period. Indeed, Mr. Schwartz testified that in the mid-1980’s it was not MCO’s practice to contact investment bankers other than DBL to discuss issuance of junk bonds by MCO or its related entities, although that practice later changed. Tr. 918: 22 - 920: 20 (discussing $150 million and $35 million transactions in 1985); see also Ex. Lazard 19, Tab 69 (dates of 1985 issuances of high yield debt).

[21] Neither Mr. Marlin nor Mr. Madigan could recall how it came about that the number of shares subject to the agreement grew from 585,000 to 790,459. Tr. 440: 4-13;Tr. 754: 10-22.

[22] Combined Milken-DBL holdings of 346,600 shares as of December 31, 1987 divided by 5,605,869 net shares outstanding as of December 31, 1987 equals 0.06183004444235, or 6.18%.

[23] Although Hurwitz also claimed that the transaction was “overlawyered” to avoid violation of the applicable regulations, Tr. 26,032: 12-17, there is no evidence in the record that indicates that any lawyer was consulted in advance of the transaction for an opinion as to whether the Stock Option Agreement would constitute ownership of the underlying shares for purposes of the Savings and Loan Holding Company Act.

[24] The transcript indicates that Crow testified he purchased only 10,000 shares of UFG common stock, Tr. 14,987: 11-14, however, that simply does not square with the amount of his loan ($250,006) and the reported purchase price of $7.25 per share. Either Crow purchased more than 10,000 shares or he paid $25 per share. The Court finds that it is more likely that he purchased the larger number of shares than that he paid a purchase price more than triple that paid by the other executives.

[25] Gross testified that he believed that UFG might have purchased the stock and resold it to the officers. Tr. 21,630: 9-16. Exhibit T-8175, Tab 1799, shows, however, that he purchased the stock through a broker. See id. p. 002330 (confirmation slip from Texas First Brokerage Services, Inc.). In any event, it would have been even more suspicious if that were the case, because, as a director and member of the executive committee, Mr. Gross would be expected to be aware of a $2.2 million stock repurchase by UFG.

[26] Hurwitz was frequently listed as present at the joint USAT/UFG Investment Committee meetings. Ex. A-1409, Tab 380A (09/18/86 Investment Committee Minutes). In addition on several occasions the Investment Committee minutes identify Hurwitz as an absent member of the Committee. Ex. A-1419, Tab 350 (11/25/86 Minutes); A-1428, Tab 359 (02/04/87 Minutes).

[27] Similarly, in the latter part of 1988, when USAT considered selling MBSs, to position itself for participation in the Southwest Plan, such sales presented a problem because they reduced the amount of USAT’s qualifying assets for purposes of the QTL Test. Ex. B-2421, Tab 288 (09/29/88 Twomey memo); B-2610, Tab 1283 (12/19/88 Berner memo) p. CN140611.

[28] USAT reported to the Texas Savings and Loan Commissioner on December 22, 1987, that the high-yield bond portfolio had mark-to-market losses of $61.2 million as of December 21, 1987. Ex. B-1906, Tab 274 (12/22/87 Stodart letter) p. CN159164.

[29] Chart 8.1 to Ex. A-11012, Tab 244 (Duffie Report) calculates the interest rate sensitivity of the United MBS portfolio in 1987 and 1988. According to the chart, as of December 16, 1988, if there was no change in interest rates the mark-to-market losses in the United MBS portfolio were $118 million. Chart 9.1 indicates that on that same date the losses in USAT’s original MBS portfolio run by Joe Phillips were $105 million. Thus, the total losses in both portfolios on that date, had they been marked-to-market, was $223 million.

[30] Of the 28 sales of junk bonds reported in the September 1986 Performance Report, 27 resulted in profits to the institution. Ex.A-5015, Tab 562 (09/00/86 Performance Report) at DJ.

[31] Curiously, there is no discussion in the November 12, 1986, Investment Committee minutes prepared by Berner about the subject of “selling junk bonds for purposes of quarterly earnings,” Huebsch’s “impassioned plea” or Crow’s and Williams’ statements that USAT would need major amounts of profits. Likewise, the minutes do not even reflect Hurwitz’ presence at the meeting or any of the comments attributed to Hurwitz in Crow’s September 13, 1986, memo. Ex. A-1418, Tab 349. On the contrary the November 12, 1986, Investment Committee minutes indicate that the committee adopted a new policy of the association for the acquisition of corporate debt securities which stated in part:

The corporate bond portfolio is not a trading account, and should not be managed as a trading vehicle.

Id. p. US-3010843-44. Thus, on the very day Hurwitz and the Investment Committee were discussing selling junk bonds out of USAT’s investment portfolio to generate quarterly gains, the investment Committee adopted a policy declaring that the junk bond portfolio was not a trading portfolio.

[32] Of the 30 junk bond sales in November and December 1986, only four were sold at a loss while the remaining 26 sales resulted in gains. Ex. A 5016, Tab 563 (11/00/86 Performance Report) at DJ; A-5017, Tab 564 (12/00/86 Performance Report) at DJ.

[33] The minutes of the Investment Committee meeting for November 13, 1987, reflect that, after Hurwitz and Gross agreed upon the investment limits for the equity arbitrage portfolio, those limits were adopted by the Investment Committee. Ex. A-1476, Tab 2328 (11/13/87 Investment Committee minutes) p. US-3 006726.

[34] Respondents expert testified that Hurwitz would have had a continuing interest and involvement in UFG because MCO and FDC, “companies in which he had an interest were still 24 percent plus shareholders of UFG.” Tr. 26,756: 5-16 (Stewart)

Changes in COB and Officers of UFG Between December 31, 1982 and December 31, 1985

UFG December 31, 1982
	Position		Officer	Source
	Chairman of the Board		C.E. Bentley	Ex. A-3018, Tab 140 (12/31/82 UFG 10-K) at OFD 1289
	CEO		James A. Coles	"
	President		James A. Coles	"
	General Counsel and Secretary		James L. Pledger	Ex. A-3017, Tab 139 (12/31/81 UFG 10-K) at UFG 02389
	Executive Committee		Chairman C.E. Bentley James A. Coles	Ex. A-3018, Tab 140 (12/31/82 UFG 10-K) at OFD 1289

UFG December 31, 1985
	Position	Officer (date of appointment if available)			Source
	Chairman of the Board	Charles Hurwitz (11/85)			Ex. A-10583, Tab 134 (11/14/85 UFG Minutes) p. OW06634
	CEO	Charles Hurwitz (08/84) Jenard Gross (11/85)			Ex. A-10583, Tab 134(11/14/85 UFG Minutes) p. OW06634; Ex. A-1097, Tab 126 08/29/84 UFG Minutes) p. K 003675
	President	Charles Hurwitz (08/84) Jenard Gross (11/85)			Ex. A-10583, Tab 134(11/14/85 UFG Minutes) p. OW06634; Ex. A-1097, Tab 126 08/29/84 UFG Minutes) p. K 003675
	General Counsel and Secretary	Arthur Berner (09/85)			Tr. 18,496: 15-21 (Berner)
	Executive Committee	Chairman Barry Munitz (05/83) Charles Hurwitz (05/83) Jenard Gross (1985) Gerald Williams James Whatley (1983)			Ex. A-3013, Tab 88 (03/31/86 UFG Proxy) p. UFG 06345; Ex. A-1078, Tab 190 (05/26/83 UFG Minutes) p. 1.

Position	Officer (date of appointment if available)	Source
Chairman of the Board	C.E. Bentley	Ex. A-3018, Tab 140 (12/31/82 UFG 10-K) p. OFD 1289
CEO	James A. Coles	"
President	James A. Coles	"
General Counsel and Secretary	James L. Pledger	Ex. A-3017, Tab 139 (12/31/81 UFG 10-K) p. UFG 02389
Executive Committee	Chairman C.E. Bentley James A. Coles James Whatley	Ex. A-1067, Tab 152 (01/25/83 USAT Minutes) p. W100382

Position	Officer (date of appointment if available)	Source
Chairman of the Board	Jenard Gross (02/85) *	Ex. A-1102, Tab 128 (02/14/85 USAT Minutes ) at 4
CEO	Jenard Gross (02/85)	"
President	Gerald Williams (08/93) **	Tr. 2,193: 9 - 2,195: 17 (G. Williams)
General Counsel and Secretary	James L. Pledger ***	Ex. A-3012, Tab 194 (04/30/85 UFG Proxy0 p. UFG 08762
Executive Committee	Chairman Barry Munitz (01/84) Jenard Gross (02/85) Gerald Williams (01/84) James Whatley (before 1983)	Ex. A-1110, Tab 133 (02/13/86 USAT Minutes ) p. US-3 003117