Free Response to Motion - District Court of Federal Claims - federal

Case 1:92-cv-00550-MCW

Document 133

Filed 10/19/2006

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS __________________________________________ ) NORTHEAST SAVINGS, F.A. ) ) Plaintiff, ) ) v. ) Civil Action No. 92-550C ) Judge Williams UNITED STATES OF AMERICA, ) ) Defendant. ) __________________________________________) PLAINTIFF'S RESPONSE TO DEFENDANT'S NOTICE OF DEPOSITION TESTIMONY COUNTER- AND CROSS-DESIGNATIONS OF MESSRS. BEESLEY, ELLIOTT, GRIDLEY, AND PECKHAM

Pursuant to the Court's ruling from the bench during the October 17 pre-trial conference, Plaintiff Northeast Savings, F.A. ("Northeast") hereby respectfully responds to Defendant's Notice of Deposition Testimony Counter- and Cross-Designations of Messrs. Beesley, Elliott, Gridley, and Peckham ("Defendant's Notice"). Northeast has reviewed the Government's counterdesignations and cross-designations of the deposition testimony given by Messrs. Beesley, Elliott, Gridley, and Peckham. While Northeast believes that some of the Government's designations address subject matters that are different from the subject matters addressed in Northeast's original designations, and that therefore such designations by the Government are not needed to place Northeast's designations into context, Northeast does not object to the Government's designations. Northeast does respectfully submit, however, that if the Court does admit the testimony designated by the Government, it should also admit a few additional excerpts from the Beesley, Elliott, and Gridley depositions that are needed to place the testimony designated by the Government into context. In particular, Northeast has identified the following testimony "which

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Case 1:92-cv-00550-MCW

Document 133

Filed 10/19/2006

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ought in fairness . . . be considered," RCFC 32(a)(4), with the testimony designated by the Government: Brent Beesley 43:1 - 44:6; 45:7 - 45:9 (excerpts attached at Tab 1 of Defendant's Notice) Raymond Elliott Ralph Gridley 12:19 - 13:1(excerpt attached at Tab 2 of Defendant's Notice) 33:4 - 34:23; 44:13 - 45:9 (excerpts attached hereto at Tab 1)

Respectfully submitted,

s/Charles J. Cooper Charles J. Cooper COOPER & KIRK, PLLC 555 Eleventh Street, N.W., Suite 750 Washington, D.C. 20004 (202) 220-9600 (202) 220-9601 (fax) Counsel of Record Of Counsel: Michael W. Kirk Vincent J. Colatriano David H. Thompson David Lehn COOPER & KIRK, PLLC 555 Eleventh Street, N.W., Suite 750 Washington, D.C. 20004 (202) 220-9600 (202) 220-9601 (fax) Dated: October 19, 2006

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Case 1:92-cv-00550-MCW

Document 133

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CERTIFICATE OF SERVICE I hereby certify that on this 19th day of October, 2006, copies of the foregoing Plaintiff's Response to Defendant's Notice of Deposition Testimony Counter- and Cross-designations of Messrs. Beesley, Elliot, Gridley and Peckham were filed electronically. Notice of this filing will be sent by operation of the Court's electronic filing system to all parties indicated on the electronic filing receipt. Parties may access this through the Court's system.

/s/ Charles J. Cooper _____________________________ Charles J. Cooper COOPER & KIRK, PLLC 555 Eleventh Street NW Suite 750 Washington, DC 20004 (202) 220-9600 (202) 220-9601 (fax) [email protected]

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Case 1:92-cv-00550-MCW

Document 133-2

Filed 10/19/2006

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Plaintiff's Response to Defendant's Notice of Deposition Testimony Counter- and Cross-designations of Messrs. Beesley, Elliot, Gridley and Peckham

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Case 1:92-cv-00550-MCW
Ralph R. Gridley

Document 133-2

Filed 10/19/2006

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May 14,2003

Boston, MA
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page 30 1 against - it looks like itS against OTS and 2 kWIC in the District Cowt for the Distrid of 3 Columbia Do you know ifyoube ever seen this 4 before7 5 A. (Witness viewing document.) I do 6 not recall having seen it before, but 1may well 7 have. 8 Q. Okay. If you take a look at 9 page 2, pamgraph 4, there, Mr. Rutland says 10 that, "Prior to December 7,1989 --the 11 effeciive date of the new minimum capital 12 reauiremcots mandated bv FlRREA and bv ~, implementing regulations imposed by OTS -Northeast satisfied all regulatory capital requirements." Do you see that? A. Yep. Q. Is that accurate? A Idon? know. Q. Do you have any reason to believe it's not acnuate? A. Nope. Q. If you lake a look at the next 23 paragraph, paragaph 5, Mr. Rutland says that. 24 "Solely because of rrstriait~us im~oscd bv 25 &and the OTS regulationson the inclusion

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1 paragraph 9. And in the fim sentence, there, 2 Mr. Rutland says that, "Under FIRES+ an 3 association that does not mmply with the new 4 capital requirements may be deemed to be engaged 5 in an unsafe or unsound practice." Is that 6 mrrect? Is that accurate? 7 A. 1 don't know. I'd have to review 8 the legislation to ascertain if that's accurate. 9 Q. He goes on to say that being 10 designated that way "...subjects the 11 noncomplying association to the f l array of ul 12 enforcement actions available to the regulatory 13 agencies" including, "ranging h m cease and 14 desist orden to forced merger, termination of 15 deposit insurance,or receivership and 16 liquidatloa" 17 Is that armrste? 18 A (Witness viewing document.) In the 19 broadest sense that's -- those are all 20 possibilities. 21 0. To cut through allthe 22 technicalities, the bottom line was if they 23 didn'i bring it into capital mmpliance, they 24 hced a risk that the redatnrs could seize and 25 liquidate the bank, right?

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in capital of supervisorn ~oodwill FSLIC's and cumulative pre'ferred st&," and then he says something about that violates the contract. but I b not interested in that. "Northeast will hot be able to sat~sfy minimum requirement% the establisl~d RRREA and thc OTS rcrmlations." bv Do you see that? A (Witness viewing document.) Uh-hub. Q. Do you agree that solely because of the restrictions imposed by FIRREA and the OTS regulations, Northeast would not be able to satisfy the capital requirements? Is that part accurate? A It appears to be -- in an overnight sense you're talking? Q. Well, it appears to be. Yes. A In an overnight sense, you're probably wrrect. Q. What you're saying is there were steps that they wuld take to try to fix it; is that right? A I think they did. Q. And they did. All right. Take a look at

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1 A Well, worsecase scenario, but it 2 also means that we just - w e could impose a 3 cease and desist order to get them to comply. 4 Q. Paragraph 14. 5 A. (Witness viewing document.) 6 Q. Page 8. 7 A Uh-huh. 8 Q. He says, "Such a massive 9 shrinkage," -- and I believe be's referring to 10 shrinkage of $3.4 billion from paragraph 13, 11 there, -- "would also necessitate the 12 elimination of some banking services, resulting 13 in an estimated loss of more than half of the 14 institution's current long range earnings 15 capacity and a reduction in its staff and 16 operating expenses of 40 percent." 17 Do you agree with that? MS. S m Objection. Lack of 18 19 foundation. You can answer. 20 THE WITNESS: Excuse me? MS. SMTIH: Objection. Lack of 21 22 foundation, but you can answer. 23 THE WITNESS: I don't know whether 24 that's accumte or not. 25 Q. (By Mr. Kirk) Do you have any

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Alderson Reporting Company, Inc. 1111 14th Street, N.W. Suite 400 1-800-FOR-DEPO Washington, DC 20005

Case 1:92-cv-00550-MCW
Ralph R. Gridley

Document 133-2

Filed 10/19/2006

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May 14,UX)3

Boston, MA

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1 reason to say that he was wrong? 2 A. I have no reason to say that it's 3 right. 4 Q. I understand that. Do you have any 5 reason to say that he was wrong? 6 A. 1have no reason to say that it's right. Q. Okay. I accept that. Do you have any reason to say that he was wrong? A. Idon'tknow. Q. Okay. He goes on to say, "The reduction in earnings capacity is equivalent to a loss of approximately $90 million in potentially realizable value to the shareholders of the company." A. Uh-huh. Q. Do you have any reason to agree or disagree with that statement? MS. SMITH: Objection. Lack of foundation. You can answer. THE WlTNlSS: Without knowing the source documents that he's referring to, I'm not -- I'm not qualified to answer. MR. KIIU(: Okay. Let's take a look at another document.

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didn'f why they didn't. Q. Did Mr. Peckham do a good job? A. He was outstanding. Q. Was he generally accurate in describing whatever he was describing in the course of his duties? A. Yes. Q. Do you recall him ever being inaccurate? A. Only with regard to conclusions. Q. What do you mean by that? A. Just what I said. He was accurate in his analysis. I didn't always agree with hi conclusion. Q. What kind of conclusions would he come to that you didn't always agree with? A. Well, he would come to a conclusion that, "Yeah, we should approve it." Q. He would make recommendations on applications and whatnot? A. Yes. Q. And sometimes, you wouldn't agree with him? A. That's correct. Not because the facts weren't presented, but because he did not

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(Exhibit 3, Memorandum dated 11/27/89, marked for identification)
Q. (By Mr. Kirk) Exhibit 3 is a memorandum from Ford Peckham to you dated November 27,1989. A (Witness viewing document.) Uh-huh. Q. Do you know who Mr. Peckham was7 A. Ido. Q. And who was he? A He was on my staff. He was my chief analyst. Q. What does the chief analyst do? A. That's my description of what he did. He digested all of the data that came in from institutions, such as business plans, reviewed them. Compared them to the most recent examination results. Compared them to themselves, in terms of where they were and where they proposed to go. And he advised me as to whether or not -- whether the proposals made sense. And ifthey did, why. And iftbey

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interpret the facts the way I felt they should have been interpreted. Q. Would you say that you often disagreed with his recommendations? A. No, occasionally. Q. Do you recall ever disagreeing with any recommendation made to Northeast? A. Specifically? No. Q. Take a look at the first sentence. Mr. Peckham says, "You have asked for a brief recommendation on whether or not we should extend a one-year capital exception to Northeast to allow them to comply with the new capital requirements." Do you recall asking him to do that? A. No. Q. Do you have any idea why you asked him to do that? A. Yeah. I'm sure the bank asked us to. Q. They asked you to give them an exception? A. I'm sure they did. Otherwise, I don't know why we'd do it.
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Alderson Reporting Company, Inc. 1111 14th Street, N.W. Suite 400 1-800-FOR-DEPOWashington, DC 20005

Case 1:92-cv-00550-MCW
Ralph R. Gridley

Document 133-2

Filed 10/19/2006

Page 4 of 4
May 14,2003

Boston, MA
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terms of maturity. And my guess is here, that the imperfect fund matching would either be in regards to rate or maturity on the other side of the balance sheet. Q. Well, you would want some mismatch in rate. That's the whole point, right? You want to get more on the assets than you pay on the liabilities? A. Yes. Q. That's called "a spread," right? A. That's con&. Q. And the idea is to make the spread asincome? A. Yes. That's the name of the game. Q. And, in fact, he goes on to say that the spreads were minimal? A. Yes. Q. I take it, that means that they were positive, but they were pretty small? MS. SMITH: Objection. Calls for speculation. You can answer it. THE WITNESS: Probably. Q. (By Mr. Kirk) To your knowledge, did Northeast ever have negative spreads? A. Oh, sure. Yes.

1 A. Some credit losses, yes. AU a 2 factor of rate. 3 Q. Okay. Isn't the idea behind a junk 4 bond -- they pay a pretty high rate, but that's 5 because there's a pretty high risk they might 6 not pay it off! 7 A. That's c o w . 8 Q. Do you h o w whether or not 9 Northeast's were paying? 10 A. I presume some of them were. 11 Y o u k -- spedics, I can'tgive you. I'm 12 sorry. 13 Q. T%atlsokay. Now, in this 14 paragraph here, MI. Peckham seems to be saying 15 that what they did was they got rid of a bunch 16 of wholesale liabilities and a bunch of 17 mortgage-backed securities to shrink h m 18 8.2 billion down to 6.2 billion. 19 Is that consistent with your 20 recollection as to what happened? 21 A. Yes. 22 Q. By doing thaf they were giving up 23 the spread income on that; isn't that right? 24 k I would say by doing that, they may 25 have been giving up some minimal spread..

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When? They had it on the COF'I loans. Q. This is the negative-amortization thing you were talking about? k Yes. Q. Apart from thaf did they ever have negative spreads on any of their wholesale portfolios? A. Yes. Junk bonds. Q. The junk bonds had negative spreads? A. Uh-huh. Q. You need to answer verbally. A. Yes. Q. Was that because the rate that they paid was lower than the liabilities that matched up with them? A. Not necessarily. Q. In fact, junk bonds paid pretty high rates, didn't they? A. When they performed. Q. When they performed? A. Yes. Q. So the problem with junk bonds wasn't the rates, it was credit losses?
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Q. They were giving up wbatever spread income there was, right? A Yes. Q. And presumably, one a u l d go look up, in the records, the amounts that the mortgage-backed were paying and the amounts that they were paying on the wholesale liabilities and figure out what that is; is that right7 A Yes. Q. How did giving up that income -whatever it was --help? A It relieves a great deal of pressure on the capital of the institution. Q. Did it help them in any other way? A It may have eliminated some interest rate risk, as well. Q. Am I coned in understanding that the interest rate risk is the risk that interest rates will go up or they will go down, and somehow that will mess up what you're doing? A Yes. Q. That's probably not a technical explanation, but -k That's a pretty good one. Q. Okay. Do you h o w whether they had

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Alderson Reporting Company, Inc. 1111 14th Street, N.W. Suite 400 1-800-FOR-DEPO Washington, DC 20005