Starr International Company, Inc. v. USA...

67

Starr International Company, Inc. v. USA 9/29/2014

(301) 870-8025 - www.ftrinc.net - (800) 921-5555For The Record, Inc.

1 unanimously for the credit agreement, and the document

2 is signed. No AIG director has ever said that the vote

3 on the 16th or 21st was coerced by the Government or by

4 the Fed.

5 AIG's board members acted voluntarily and in the

6 best interests the company and their stakeholders.

7 Under the credit agreement, AIG accesses 85 billion

8 taxpayer dollars, borrowed against the potential value

9 of its insurance subs, and in exchange, AIG pays

10 interest fees and agrees to issue preferred stock equal

11 to 79.9 percent common. That's AIG's equity. AIG and

12 the New York Fed carry out what they agreed to back on

13 September 16th.

14 Your Honor, I would like to take just a minute to

15 discuss what happened after the credit agreement was

16 signed. This chart reflects the total assistance AIG

17 received between 2008 and 2011. Even without the --

18 even with the $85 billion loan, AIG has enormous losses

19 that required further assistance to avoid bankruptcy.

20 This additional assistance starts weeks, weeks after the

21 agreement, and the assistance keeps rising, from $85

22 billion to $122 billion to $152 billion to $182 billion.

23 This chart answers a question that the Plaintiffs pose,

24 whether it was risky lending AIG money in September

25 2008. These are not the needs of a low-risk borrower.

Case 1:11-cv-00779-TCW Document 404-6 Filed 12/08/14 Page 1 of 57

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1 At each step, the Fed and the Treasury have a

2 choice. They can increase taxpayer assistance or they

3 can let AIG fail, perhaps losing the prior assistance.

4 Together, between September 2008 and January 2011, to

5 avoid bankruptcy, AIG obtained the largest package of

6 federal assistance in human history.

7 Now, Your Honor, there is a second class, AIG's

8 reverse stock split class, and they seek compensation

9 based on alleged taking or exaction associated with the

10 2009 reverse stock split. Now, Your Honor, that claim

11 is based on a false premise, that the Government -- that

12 the reverse stock split was adopted by the Government-

13 led effort to avoid a shareholder vote, but, in fact,

14 Your Honor, the facts represent that it was an AIG

15 initiative to deal with a very specific problem.

16 Beginning in 2008, the company faces delisting

17 from the New York Stock Exchange because its share price

18 is just too low. Responding to -- AIG proposes the

19 reverse stock split, which for every 20 shares before

20 the split, each owner will have one share after. The

21 total value of each shareholder's investment is not

22 affected. No testimony that the Fed or Treasury was

23 behind the stock split will be heard in this Court.

24 Starr admits that it itself -- it, itself -- voted for

25 the reverse stock split that it now claims was a taking


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1 or exaction, and the majority of the shareholders voted

2 for it. The reverse stock split did not violate a

3 statute or break a rule or break a promise by the United

4 States. Rather, it was a purely commercial transaction

5 from which you can conclude there was no taking or

6 exaction related to it.

7 Eventually, from September -- between September

8 2010 and 2011, the Government exchanges its preferred

9 shares for common stock, and eventually those are sold

10 on the market. The ultimate return to the United States

11 for its assistance to AIG, including interest payments

12 and sale of stock, is under 6 percent per year. That is

13 the return for a loan that no one else would touch for a

14 company on the edge of bankruptcy.

15 Now, these facts the Court will hear over the

16 next six weeks will demonstrate three dispositive

17 reasons why the plaintiffs' claims must fail. The first

18 is that the parties -- the first is that there was no

19 illegal exaction. Now, Your Honor, the parties agree

20 that whether it was legal under 13(3) to seek equity is

21 a purely legal question. That means that the testimony

22 of witnesses' views regarding 13(3) should not intrude

23 on the Court's analysis.

24 Nevertheless, the Court will hear that -- from

25 Scott Alvarez, the general counsel of the Board of


3548



1 P R O C E E D I N G S

2 - - - - -

3 (Proceeding called to order, 9:31 a.m.)

4 THE COURT: We're on the record this morning for

5 day number 16 in the trial of Starr International Company

6 versus United States.

7 Good morning, Mr. Boies.

8 MR. BOIES: Good morning, Your Honor.

9 I have two housekeeping matters to raise with the

10 Court.

11 THE COURT: Okay.

12 MR. BOIES: The first is I think welcomed.

13 Treasury has provided us with a representation

14 that Treasury has now provided all documents, broadly

15 defined, which concern the authority of the

16 Federal Reserve or Treasury to acquire or hold equity in

17 connection with a 13(3) loan and has represented that

18 Davis Polk was not asked for and did not provide any

19 advice or do any research or analysis regarding that

20 authority.

21 With those representations, we are comfortable

22 with finally putting to an end the search for the

23 memoranda and other documents referring to that issue. I

24 think we have everything that we are entitled to have,

25 and so we're comfortable with that.


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1 THE COURT: All right. Excellent.

2 MR. BOIES: The second, if I could just hand up to

3 the Court a letter that we received early yesterday

4 evening from counsel for the United States.

5 (Pause in the proceedings.)

6 THE COURT: Okay.

7 MR. BOIES: Yesterday, I accepted the Court's

8 guidance that we should permit the counsel for the

9 United States to do whatever examination they wanted of

10 witnesses that we brought. And I said at that time that

11 I would deal with that by finding out which witnesses

12 they had more than cross to do and then make a decision

13 as to whether I wanted to call them in my case or wait

14 until they called them.

15 THE COURT: By the way, this is principally, if

16 not solely, because of convenience of out-of-town

17 witnesses. I don't want people to have to come here

18 twice from some distance. If they were local in D.C., it

19 would be a different story.

20 MR. BOIES: And I understand that entirely,

21 Your Honor.

22 THE COURT: Okay.

23 MR. BOIES: And I am comfortable with having

24 witnesses that we both want called only once.

25 However, what I think is not appropriate is for


5855



1 Q. And who came up with that idea?

2 A. I think that came from -- I'm drawing a blank on

3 his name. He was working for the U.S. Treasury and the

4 New York Fed.

5 Q. When was the first time that AIG had any

6 obligation to facilitate listing the preferred in order

7 to make it marketable?

8 MR. SCARLATO: Your Honor, objection. "Obligation

9 to facilitate," that just seems unclear.

10 MR. BOIES: I accept that, Your Honor. I withdraw

11 the question.

12 THE COURT: All right. All right.

13 BY MR. BOIES:

14 Q. When was the first time that there was any

15 negotiation with AIG over a requirement that AIG

16 cooperate in listing the preferred in order to facilitate

17 its marketing?

18 A. Having the preferred covered by the registration

19 rights that were contemplated in Exhibit D to the credit

20 agreement was a term of that exhibit from the time of the

21 signing of the credit agreement. The changes to the

22 charter that were necessary to permit the listing of the

23 preferred were negotiated as part of the securities

24 purchase agreement and the third amendment to the credit

25 agreement.


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1 Q. All right. Now, the listing of the preferred was

2 something that was first reflected in writing in

3 mid-November of 2008, correct?

4 A. In writing, yes.

5 Q. And what had happened between the signing of the

6 credit agreement and mid-November of 2008 that affected

7 the ability of the Government to get the preferred into a

8 form where it could be readily marketed?

9 MR. SCARLATO: Your Honor, I'll object.

10 Foundation and vague.

11 THE COURT: Overruled. I'll let the witness

12 answer it.

13 THE WITNESS: Nothing had happened that would

14 change the ability of the New York Fed to implement the

15 second alternative.

16 BY MR. BOIES:

17 Q. Were you familiar with the Walker lawsuit, sir?

18 A. Yes.

19 Q. You were made aware of that at the time that it

20 was filed, correct?

21 A. That's right.

22 Q. And you were aware of the eventual dismissal of

23 that lawsuit, correct?

24 A. Yes.

25 Q. And you were aware of the representations that


5857



1 were made to the Delaware court in order to get the

2 lawsuit dismissed, correct?

3 A. Yes.

4 Q. And you are aware that the Walker lawsuit sought

5 an order that would have precluded the ability of the

6 Government to convert the Series C preferred stock into

7 common, correct?

8 A. That was true before the Walker lawsuit.

9 Q. You do understand that what the Walker lawsuit

10 sought, among other things, was an order that the Series

11 C preferred stock not be converted into a common stock

12 without a shareholder vote. You know that that's what

13 they sought an order for, right?

14 A. That's right, but that was true beforehand.

15 Q. Now, when you say that was true before, that's

16 your legal opinion, sir?

17 A. It's just what Delaware law provides.

18 Q. That's your legal opinion of what Delaware law

19 provides, right?

20 A. Yes.

21 Q. And was that a legal opinion that you discussed

22 with your clients?

23 A. Among others, yes.

24 MR. BOIES: Your Honor, I think he's opened the

25 door. I think there's a subject matter waiver of that


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1 and I think I'm entitled to those documents.

2 MR. SCARLATO: Your Honor --

3 MR. BOIES: And I think particularly because what

4 he said was volunteered. It was not even in response to

5 a question. My question did not call for him telling me

6 what he thought it was or was not already --

7 THE COURT: Mr. Scarlato?

8 MR. SCARLATO: Your Honor, we don't object to

9 Mr. Boies asking these questions, but we think in terms

10 of a subject matter waiver, this is not -- this is on

11 cross examination, it is not our affirmative case, and

12 Mr. Boies is asking questions such that we will not

13 object to, but if Mr. Boies is going to claim subject

14 matter waiver, we would object to them.

15 THE COURT: Well, what's the difference if he

16 can -- if you think he can answer the questions anyway, I

17 don't see what the difference might be.

18 MR. SCARLATO: Well, a subject matter waiver --

19 our concern would be whether it -- you know, Mr. Boies

20 wants to seek additional discovery or -- you know, I'm

21 not sure exactly what his intent is in seeking a subject

22 matter waiver, but in terms of asking the questions he's

23 asking this witness, we don't object.

24 MR. BOIES: Let me try to explain what the problem

25 here is, Your Honor. I asked him: "You know that the


6123



1 that "As we discussed, attached are relevant pages of an

2 internal draft of the proxy statement (you have agreed

3 that its production will not waive any privilege). As

4 you will see, it shows that a class vote of the common

5 was contemplated as early as October 2. Let's discuss

6 this once you have had a chance to review it."

7 Mr. Huebner, did you have any discussions about

8 the Walker litigation with Mr. Allerhand?

9 A. Yes.

10 Q. And what was the nature of those discussions?

11 A. So he explained the lawsuit to me generally. And

12 then one of the things that they explained to us was that

13 as part of showing the plaintiffs that they did not add

14 value or right any wrong or discover anything that,

15 you know, they then succeeded in stopping, I think it was

16 several weeks before the lawsuit was even filed, AIG had

17 already been working on a draft proxy statement that

18 expressly called for the very common stockholder-only

19 vote that the plaintiffs wrongly insinuated or stated in

20 their complaint AIG was attempting to avoid and secretly

21 didn't intend to hold.

22 It was sort of like, what are you talking about?

23 Here's our draft proxy from weeks ago. Of course we know

24 that we have to have a shareholder vote if we are ever to

25 seek to increase the number of authorized shares.


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1 It might have been par value also. I don't

2 remember whether it was one or both of the issues, but it

3 was commonly understood.

4 Q. Now, I want to draw your attention to

5 PTX 376 which has already been admitted into evidence.

6 Now, in this e-mail, Mr. Huebner, this includes an

7 additional top e-mail where you forward the chain we just

8 discussed to Tom Baxter, Sarah Dahlgren, James Hennessy

9 and Tom Roche; correct?

10 A. Yes.

11 Q. And what was the purpose of forwarding this

12 information about the Walker litigation to employees of

13 the New York Fed?

14 A. Well, I think of them as my clients. As it says

15 in my e-mail, "FYI," in other words, AIG is keeping us

16 updated on what's going on here, you know, just here's

17 the latest from AIG, you know, here's where it's going.

18 It was exactly as my e-mail had stated.

19 Q. Can you describe generally your involvement in the

20 Walker litigation.

21 A. I had only the involvement that I just described

22 to you. Mr. Allerhand called to let us know it was going

23 on. They then advised us, both with these e-mails and in

24 a phone call or two, about the developments.

25 I expressed surprise and I guess just sadness as a


6125



1 citizen that, you know, a law firm could file the suit

2 without ever calling, that had no merit, and get a large

3 attorney's fee award.

4 AIG said, you know, Thanks, but this is what

5 we're doing. And we said, Great, you know, it's your

6 ball.

7 There was no other involvement other than being

8 generally involved and asking those questions about,

9 you know, understanding how and why they were

10 proceeding.

11 Q. Did you or other Davis Polk attorneys have any

12 involvement in settling the Walker litigation?

13 A. Absolutely none.

14 Q. To your knowledge, to what extent were individuals

15 at the New York Fed or Treasury involved in the Walker

16 litigation?

17 A. I don't believe they were involved at all.

18 Q. To your knowledge, were individuals at Davis Polk

19 involved in drafting any documents filed in the Walker

20 litigation?

21 A. I do not believe so.

22 Q. To your knowledge, did employees of the

23 New York Fed or the Treasury draft any documents filed in

24 the Walker litigation?

25 A. I do not believe so.


6126



1 Q. To your knowledge, did individuals at Davis Polk

2 participate in any hearings in the Walker litigation?

3 A. No. I don't even think we attended as observers.

4 I think we got our information from AIG's attorneys.

5 Q. To your knowledge, did employees of the

6 New York Fed or the Treasury participate in any hearings

7 in the Walker litigation?

8 A. The same answer. I don't -- and I don't know who

9 was in court, but I have no knowledge or reason to

10 believe that anybody from the Fed or Treasury was in any

11 of the hearings.

12 Q. I want to draw your attention to DX 961, which is

13 in your binder.

14 Do you recognize what's been marked as DX 961?

15 A. Yes.

16 Q. And what is it?

17 A. This is a -- some e-mail exchanges on a couple of

18 topics.

19 The bottom one on the bottom of page -- there

20 really is only one page. I apologize -- on the bottom of

21 page 1 is from Stasia Kelly, AIG's general counsel, to me

22 and Mr. James, copying Paula Reynolds, who was then AIG's

23 CRO, chief restructuring officer, and Kathy Shannon,

24 her -- Ms. Kelly's aforementioned deputy.

25 Then I respond by reply all to that e-mail.


6247



1 places. What he said at his deposition, his actual

2 deposition, or, two, the documents that have already

3 been produced in discovery and submitted as evidence in

4 this case.

5 I think the one challenge the Government has

6 or -- has, for lack of a better word -- is that because

7 Mr. Boies has been able to introduce exhibits without

8 really requiring a strict sponsoring witness

9 requirement, as this Court is aware, there have been a

10 number of Marshall Huebner emails and memos and things

11 like that that have already been admitted in evidence.

12 To the extent Mr. Boies is suggesting that

13 somehow we cannot ask Mr. Huebner, the witness on the

14 stand, about exhibits that have already been admitted,

15 the sword and shield argument actually works the other

16 way. It is Plaintiffs who are trying to say, look, you

17 can -- we can put in evidence, but you can't respond to

18 it. And that's, I think, the real big issue there.

19 Beyond that, Your Honor, I would go back to what

20 I said yesterday, because I mean it. If we asked a

21 question of Mr. Huebner on the stand, I am not going to

22 stand up and object and say Mr. Boies cannot ask

23 questions about that testimony. That's not the

24 intention at all, Your Honor. But then when we get to

25 the bigger issue of subject matter waiver, I go back to


6248



1 the question that I asked yesterday. What is the

2 subject matter that he believes has been waived?

3 You know, the issue of discovery order six and

4 the issue of control is obviously at the heart of this

5 case, and those issues about the preferred shares versus

6 the warrants go to that issue, and so to the extent that

7 Mr. Boies believes that somehow that testimony is a

8 subject matter waiver, that is discovery order six, and

9 certainly, as this Court has expanded upon it in the

10 first week of trial, that testimony fits comfortably

11 within there. To the extent there's something else that

12 he believes is a subject matter waiver, I haven't heard

13 what it is that has been waived on a subject matter

14 basis.

15 So, I will obviously -- the Government will

16 respond to whatever it is that Plaintiffs file tomorrow

17 or tonight or whenever it is they file it, but at least

18 as a preliminary matter, that's the Government's

19 thoughts on this.

20 THE COURT: All right. Well, I will give you my

21 tentative observations about this, because I haven't

22 gone back to look at the draft transcript. I do recall

23 basically what happened yesterday, and I think the rules

24 changed dramatically yesterday. You know what our

25 guidelines were up until then, that is, that we had a


6249



1 subject matter waiver on the question of the

2 Government's authority under Section 13(3) of the

3 Federal Reserve Act, but yesterday there were many

4 questions of the witness about what advice did you give

5 on this subject, what legal advice did you give on that

6 subject, and as I indicated yesterday, to me, that takes

7 us beyond the identifying of discrete subject matters

8 that might have been waived as to attorney-client

9 privilege and it gets us more into a question that

10 anything relating to the subject of AIG has been waived.

11 And I think that changes things dramatically,

12 because during the discovery period, those were not the

13 guidelines that were being followed, and I don't know

14 the extent to which the Plaintiff was denied deposition

15 answers and I don't know the extent to which there may

16 be documents identified on a privilege log that should

17 now be disclosed, but I have the impression that any

18 communication involving the law firm of Davis, Polk &

19 Wardwell relating to AIG, that the privilege has been

20 waived, and all of that needs to be made available to

21 the Plaintiff.

22 And normally we separate discovery from trial,

23 and I often say that discovery is over and we're in

24 trial, but the rules of the game have changed because of

25 what happened yesterday, and the Plaintiff was denied in


6250



1 discovery documents that should now be produced as a

2 result of the waiver of the privilege.

3 Now, as we all know, it's the client who

4 normally waives the privilege, and I think, you know, we

5 had no objection -- in fact, the Government assertively

6 raised these issues yesterday, and I know that counsel

7 for the Federal Reserve Bank was in the courtroom

8 yesterday, no objection there. So, this must be

9 something that everybody's in on and there has been a

10 knowing waiver of the privilege. And so we're going to

11 correct this somehow.

12 Normally it would be problematic just to

13 interrupt trial to allow more discovery and I wouldn't

14 do that, but in this case I think we have so many

15 lawyers involved on each side, I don't think it will be

16 a problem to be able to staff it somehow. And I'm sorry

17 that we have to do this, but I think that it's essential

18 that the rules of waiver of privilege be followed here,

19 and that's what I'm thinking about doing.

20 Now, I'll be happy to hear your further views

21 about this and we'll see what the Plaintiff files, but

22 I'd be very much in favor of full production of any

23 document on a privilege log that involves Davis, Polk &

24 Wardwell. If they did not submit any privilege log of

25 their own, well, then, maybe they have a lot of work to


6251



1 do. But that's the way I see it.

2 MR. GARDNER: And, Your Honor, obviously I

3 respect the Court's judgment. I would resist the fact

4 that there may be a subject matter waiver on everything

5 related to AIG. There are obviously a vast amount of

6 topics I could have gone into with Mr. Huebner but I did

7 not. So, I really think that as an initial matter we

8 need to look at it on a subject-by-subject basis to see

9 whether there has been a waiver, and I think the easiest

10 way to do this -- because obviously I want to get

11 Mr. Huebner on and off the stand, get to our next

12 witness -- I think the easiest way to do this frankly is

13 to brief it, and I can show Your Honor, you know,

14 Mr. Huebner's deposition and show what it is that he

15 actually did testify to previously, the production that

16 had been made previously, the fact that many of those

17 exhibits are already in evidence.

18 And so rather than take the Court's time -- and

19 I understand the Court's preliminary ruling, to be

20 clear, but I think that before the Court makes any

21 definitive determination, we would appreciate the

22 opportunity to brief this issue, because I think that

23 there might be a misapprehension here that we hopefully

24 could be able to at least clarify through briefing.

25 THE COURT: Well, to me, there have been so many


6252



1 subjects that have been waived that I don't know how you

2 can do that anymore. The amount of effort that would go

3 into taking a document, for example, that identifies two

4 of your subjects that are waived and three others that

5 you think have not been waived, I think at this point

6 anything AIG has been waived involving Davis Polk.

7 And I don't want to get involved in a long,

8 drawn-out briefing process on this, we're not going to

9 adjourn the trial until January or February. Things are

10 going to keep going, and I want to do something

11 expedient.

12 MR. GARDNER: And we appreciate that, Your

13 Honor. Certainly no one has an interest, I think, in

14 stopping trial, to be sure. The other --

15 THE COURT: So, I am going to maybe cut this in

16 a way that it would be rougher than normal, but we have

17 to get on this right away, and Davis Polk's going to

18 have to snap to it and respond, as well as you all, with

19 their assistance, and we're going to get this done.

20 MR. GARDNER: And I completely hear you, Your

21 Honor. I think the other thing that we're going to need

22 to address -- and, you know, perhaps we can work it out

23 mutually amongst Mr. Boies and myself -- is a time frame

24 as well, and it does relate to subject matter. I mean,

25 to be sure, Mr. Huebner did testify extensively about


6253



1 the, you know, September 16th period to September 23rd

2 period. There was other testimony he gave, you know,

3 the discrete topics about ML III and the Walker

4 litigation that transcend that, although it's not clear

5 to me that there was any subject matter waiver related

6 to that. So, I think that as we are coming up with a

7 solution, time frame is definitely something that is

8 going to be important as well.

9 THE COURT: But I think the approach you're

10 suggesting would require hundreds of hours to figure out

11 what should be produced and what shouldn't, and I just

12 think at this point anything AIG is to be produced.

13 MR. GARDNER: I understand the Court's ruling.

14 THE COURT: That's not a final position, because

15 I want to let you all think about that, and if you

16 believe there's a way to refine the approach and yet do

17 it in a fast way, I'm happy to hear that.

18 MR. GARDNER: Understood. And we will, of

19 course, work collaboratively with Plaintiffs' counsel to

20 come up with a workable solution as well.

21 THE COURT: Sure.

22 MR. GARDNER: Thank you, Your Honor.

23 MR. BOIES: I think we're ready for our witness,

24 Your Honor.

25 THE COURT: All right.


6314



1 Q. With whom did you have those discussions?

2 A. I believe I would have discussed it with Martine

3 Beamon, who is a litigation partner, who I believe -- I

4 believe I asked to sort of look into this and let me

5 know what was going on. I think as we've all learned,

6 quite painfully, I am not a litigator, and it was not

7 within my area of expertise to analyze a complaint and

8 advise the client on kind of what it meant.

9 Q. Now, if you go back to Plaintiffs' Trial Exhibit

10 343 --

11 A. Yes.

12 Q. -- which we looked at before.

13 A. Yes.

14 Q. Who is the person that sent you this complaint

15 from Davis Polk?

16 A. The aforementioned Martine Beamon.

17 Q. Okay. And what he says is --

18 A. She. She.

19 Q. -- what she says is, "Please find attached a new

20 complaint filed last night against AIG that has some

21 potentially serious ramifications." Do you see that?

22 A. Yes, I do.

23 Q. And did you learn from Ms. Beamon what she

24 concluded the potentially serious ramifications were?

25 A. If the complaint were true, it would have had


6315



1 serious ramifications. I can't say that I -- I mean,

2 Martine, to my recollection, was not generally involved

3 in AIG previously and didn't have a context, so she just

4 wrote --

5 Q. Did you understand my question?

6 A. I'm sorry. Could you reask it?

7 Q. Did you learn from Ms. Beamon what she concluded

8 the potentially serious ramifications were?

9 A. Oh. I don't have a specific recollection of my

10 conversation with her, but I have a strong recollection

11 about what happened as we came to understand the Walker

12 litigation during that time period.

13 Q. Did Ms. Beamon ever provide you or anyone with

14 anything in writing about what the potentially serious

15 ramifications were of the Walker lawsuit?

16 A. I don't believe so. I mean, she may have sent

17 an email at some point summarizing what happened at a

18 hearing that she heard about from Weil Gotshal, but I

19 don't think there was ever a writing or a memo or an

20 analysis. I don't recall one.

21 Q. Just so the record is clear, you do not recall

22 ever learning what she believed the potentially serious

23 ramifications of the Walker lawsuit were, correct?

24 A. That's correct.

25 Q. Okay. Let me ask you to look next at


6316



1 Plaintiffs' Trial Exhibit 352, which I would offer.

2 MR. GARDNER: No objections.

3 THE COURT: Plaintiffs' Trial Exhibit 352 is

4 admitted.

5 (Plaintiffs' Exhibit Number 352 was admitted

6 into evidence.)

7 BY MR. BOIES:

8 Q. I want to direct your attention to the middle

9 email on the first page, the one from you to Stephen

10 Albrecht, copy to Sarah Dahlgren, dated November 6th,

11 2008, at 10:39. Do you see that?

12 A. Yes.

13 Q. And you write, "Ed is upset." That's referring

14 to Mr. Liddy, correct?

15 A. Yes, it is.

16 Q. "Never thought ssfi" -- and what is ssfi?

17 A. I believe it is a reference to -- and I might

18 get the acronym wrong -- systemically significant

19 financial institutions. Would you like to know more or

20 just the acronym?

21 Q. What I'm interested in is the additional part of

22 that sentence, where it says "or yet more would apply."

23 A. Yes. So, I believe the topic was restrictions

24 on compensation.

25 Q. Yes.


6653



1 and I don't purport or dying to speak to how Davis Polk

2 maintains their e-mails. I can certainly have someone

3 from Davis Polk speak to that. But what I understand

4 one of the concerns is with Mr. Boies' approach is that

5 there are dozens or tens of dozens of attorneys from

6 Davis Polk over a three-year period working on all sorts

7 of aspects of this case, some of which are not at issue

8 here.

9 There are many issues of the AIG transaction that

10 have nothing to do with plaintiffs' legal claims. I

11 think Mr. Boies would acknowledge that.

12 So the question then becomes is how do you design

13 a process by which you search hundreds of attorneys'

14 e-mails, somehow filter it out for those AIG issues that

15 are both relevant to the case and for which there has

16 been a subject-matter waiver on, over a three-year

17 period, without disclosing other attorney-client

18 communications that are for clients that have nothing to

19 do with this case, so that, I think, is the practical

20 challenge and the notion that that can be done over the

21 course of five days, while I wish it were so, I don't see

22 how that is technologically feasible.

23 So I think that's our, you know, two big concerns

24 obviously or five big concerns.

25 THE COURT: Well, here's the way I think we ought


6654



1 to proceed, and the plaintiff, Mr. Boies, can tell me if

2 he's willing to follow this approach. I'm looking at

3 this from a practical resolution of where we are now.

4 First of all, I maintain, as I stated yesterday,

5 that there's been a waiver as to anything AIG that came

6 out of Davis Polk & Wardwell. I think all of that's

7 been put in issue and it's -- it would create even more

8 work to try to parse it by subject matter because you'd

9 have to have people physically reviewing the document and

10 saying, Oh, yeah, this is waived and this isn't and we

11 have to redact it out and do all of that. I think it's a

12 broader waiver at this point because of yesterday's

13 events and that everything AIG is fair game.

14 However, if I were in the shoes of Davis

15 Polk & Wardwell, I would want to see something in

16 writing out of the Court telling them what they have to

17 do. And as a practical matter, I'm going to be away for

18 a few days and I just would not be able to do that sort

19 of thing probably before -- I mean, it might be possible,

20 but -- to give them something of extreme brevity, but I'm

21 not sure it would be feasible to do that.

22 The easy solution here and one that may meet our

23 needs would be to do a couple of things.

24 Number one, I really don't want to see any

25 redacted exhibits in the final exhibit list, unless it's


6655



1 somebody's personal information obviously or if it's just

2 something that doesn't involve the waiver that we're

3 talking about. I think 90 percent of it probably is

4 going to be unredacted at this point. But I want to see

5 the exhibits cleaned up so we don't have any redactions

6 in there anymore.

7 And number two, I think that if you work off of

8 the privilege logs that we already have and just go down

9 those documents and release them, that should be a fairly

10 straightforward thing to do.

11 My inclination would be to just leave Davis Polk

12 alone at this point and go with the documents that are on

13 the privilege log.

14 MR. BOIES: Your Honor, because of the central

15 role and because this was a Davis Polk witness, while I

16 entirely agree with the need to have a practical result,

17 I think just leaving Davis Polk alone would not be the

18 right result.

19 Let me suggest we approach it this way if the

20 Court is willing and if they are willing.

21 Let them produce what's on the privilege logs.

22 We're going to have five days. During that period of

23 time, we will look at those documents. And if we then

24 need -- if we then think we need to come back to

25 Davis Polk, I will come back with a proposal that will


6656



1 not be hundreds of lawyers, it will be no more than a

2 dozen lawyers at Davis Polk, who we want to have

3 searched, if that's an agreeable approach.

4 THE COURT: I'm agreeable to that.

5 The risk we have here now is that on the last day

6 of trial, it might not be really the last day, or perhaps

7 we could have an agreement that, if necessary, we'd have

8 to leave the record open to allow for the submittal of

9 additional exhibits possibly. I don't know. Let's not

10 get ahead of ourselves.

11 MR. BOIES: I think we may know a great deal more

12 about this a week from now.

13 THE COURT: Okay.

14 MR. BOIES: That is, if we use this time to

15 review what's on the privilege logs of the entities that

16 gave us privilege logs and maybe make some proposals to

17 them that they can consider. And if we can't work it

18 out, I will come back with, as I say, a very limited

19 focus because it's not -- it's not going to be hundreds

20 of lawyers. I understand there were hundreds of lawyers

21 working on it. The stuff that we really want are not in

22 the files of people other than about a dozen.

23 THE COURT: Just based upon what I've seen in the

24 documents, it may be a half a dozen.

25 MR. BOIES: Exactly. And it may even be less.


6657



1 And I will commit to the Court that I will look at

2 the -- we'll look at the documents that they produce,

3 you know, from the Board of Governors, Treasury, FRBNY,

4 places we have privilege logs, and then I'll come back --

5 if it's necessary and if we can't work it out, I'll come

6 back with a very focused proposal.

7 THE COURT: Now, it looks like Mr. Kiernan wants

8 to speak, and I'll give you that chance in just a

9 moment.

10 The situation with Wachtell is not all that --

11 it's a little murkier perhaps than in the case of

12 Davis Polk, but still it's the client who waives the

13 privilege.

14 MR. BOIES: Exactly, Your Honor. What has been

15 waived is not the Davis Polk privilege.

16 THE COURT: Right.

17 MR. BOIES: It's the client's privilege. And

18 when the client waives the privilege, it waives the

19 privilege for the client and for all the client's

20 lawyers.

21 THE COURT: Right.

22 Mr. Kiernan, would you like to come forward?

23 MR. KIERNAN: Sure, Your Honor. I'm just trying

24 to make sure I understand clearly what the Court is

25 directing us so that we can do it.


7228



1 interest more or less likely. As a matter of law, that

2 cannot be the case.

3 And I haven't heard plaintiffs argue otherwise.

4 And that's significant.

5 Nor can there be any dispute, Your Honor, that

6 internal communications amongst Davis Polk attorneys

7 cannot bear on the legal question of whether the

8 New York Fed under 13(3) of the Federal Reserve Act has

9 the authority to accept equity as consideration for a

10 loan.

11 Again, I haven't heard plaintiffs argue

12 otherwise.

13 THE COURT: But here's the problem, Mr. Gardner.

14 If the plaintiff had been aware during discovery that

15 the government intended to waive the privilege as to

16 Davis Polk and its clients, the plaintiff clearly would

17 have been entitled to those documents during discovery,

18 including the internal documents of Davis Polk. There's

19 no question about that.

20 MR. GARDNER: Well, Your Honor, I resist the

21 notion that the waiver that this Court has concluded is

22 as broad as the waiver as concluded, but I'm not here to

23 reargue that issue and the intentions of the government

24 to waive the privilege. But I do want to make clear for

25 the record that we don't agree with the scope of the


7229



1 waiver the Court has found.

2 But beyond that, what we're doing is we're

3 weighing two things now; right? We're weighing the

4 potential relevance of the information on the one hand,

5 which, as I've represented to the Court, is

6 extraordinarily low given what the issues are in this

7 case, with the burden on Davis Polk on the other.

8 And that's why I think Ms. Bivens needs to speak

9 to the burden issue with Davis Polk. That's an issue I

10 am not competent to speak to.

11 So at this juncture, Your Honor, given that the

12 relevance is very low, I'd ask that you hear from

13 Ms. Bivens now about what those burdens would be.

14 THE COURT: Sure. I'm happy to hear from

15 Ms. Bivens. Please come forward.

16 MS. BIVENS: Your Honor, thank you.

17 I'm here principally to address some practical

18 questions of the logistics of what this all means.

19 As Mr. Boies indicated, we were not asked to

20 collect privileged materials during the course of

21 discovery, so anything that we do now will need not just

22 collection but then review of documents.

23 And I know there's been some talk about all of the

24 fancy electronic things that we all can do with documents

25 these days. But any production that we make, we will


7230



1 have to have eyes on every page because, as you can

2 understand, all of the lawyers involved in this were also

3 working for other clients at the time, and we certainly

4 can't be in the position of producing anything that we

5 haven't reviewed to make sure that we're not revealing

6 the attorney-client privileged material from other

7 clients.

8 So they've asked for documents from seven lawyers

9 without time limitation, so it would be a three-year time

10 period as I understand the request. And --

11 THE COURT: Can we put a time limit -- a time

12 parameter on this, Mr. Boies?

13 MR. BOIES: Your Honor, we probably could put

14 some time limitations on it. The problem is that, as

15 the Court is aware, it moves through from September of

16 2008 to essentially December of 2010. Now, that's like

17 two years and a quarter, two and a quarter years. And

18 there's almost never a time when there's nothing

19 happening.

20 Now, there's times when there's going to be very

21 little documents, but the times when there are very

22 little documents, that's not much of a -- that's not much

23 of a burden.

24 I would also note to the Court that there are two

25 Web addresses or e-mail addresses that were used to


7231



1 communicate to people who were working at Davis Polk on

2 this matter, something called ACO.DPW and something

3 called Command.DPW. And the Court is familiar with those

4 from some of the documents that --

5 THE COURT: Yes. I've seen that.

6 MS. BIVENS: So I can actually -- so some help I

7 can provide here is actually to explain what those are

8 because I think that there just might be a

9 misunderstanding. There's actually not a physical

10 mailbox anywhere. There's not a repository anywhere.

11 Command.DPW is actually the client distribution

12 list, so it goes -- the people on Command, the members of

13 that, were three Treasury people and three Fed people, so

14 all of those should already be produced because

15 they're -- the -- anything that went out should have been

16 logged by the clients and produced by the clients

17 already, so I think we might be okay on Command.DPW.

18 The ACO list was an ever contracting and

19 expanding list of who was working on the matter at the

20 time.

21 And just to clarify the role that we played over

22 the three-year period, Davis Polk was initially retained,

23 as everyone knows, on the initial rescue transaction and

24 did all of the corporate essentially papering and

25 advising on that transaction, much of which has nothing


7232



1 to do with this case, and there's a lot of people

2 involved who you've never heard their names and work that

3 was done that's never been relevant to the case.

4 We were then retained by Treasury to do the TARP

5 transactions that took place in November and then again

6 in March. And there's an enormous amount of

7 transactional work again that doesn't go to the central

8 issues of this case and involved people that -- or

9 they're not on these custodian names, but in any event,

10 there was an enormous amount of work going on during that

11 time period.

12 Some of the people involved here and whose names

13 are listed here were working on things that are, again,

14 things that you guys are not interested in, don't come

15 up in the case. The volume that we're talking about if

16 we really do this whole time period is really

17 substantial.

18 And just to give the Court an understanding of

19 the burden that we're talking about in terms of time to

20 review and collect, the production that we actually did

21 in this case, in agreement with Mr. Boies' firm, was that

22 we produce from two custodians all of their

23 communications for that three-year period with AIG and

24 AIG's advisors and lawyers and things like that.

25 That production and review took 500 attorney


7233



1 hours. It took a month and a half to collect and

2 produce. And that was two custodians and a much narrower

3 segment of documents than what we would be talking about

4 here.

5 So I'm just concerned that if we are talking about

6 seven custodians over a three-year period for all

7 documents related to AIG -- you know, I think what you're

8 interested in is limited to internal communications, and

9 I think we all know the really critical time periods

10 here. I think the 16th of September to the 24th of

11 September is a very important time period that most of

12 these people that you've listed would be involved in.

13 Martine Beamon is a litigation lawyer who was

14 involved for about two weeks on the Walker lawsuit, so we

15 might be able to look at her documents for a narrow

16 period of time.

17 Bjorn Bjerke only worked on Maiden Lane III.

18 Davis Polk has already produced to the Fed who produced

19 to Congress privileged documents related to

20 Maiden Lane III, so you might be able to decide that

21 we're okay on that point.

22 I think there could be some narrowing of this that

23 might get us to a point where we wouldn't be spending the

24 next six months looking through documents to produce and

25 to satisfy the obligations here.


7234



1 THE COURT: Right. I think you may be right.

2 Maybe there's a good way to narrow this down a bit and

3 make it more manageable.

4 MR. BOIES: I think we may be able do that,

5 Your Honor.

6 The ACO.DPW, that is something that was a

7 distribution list for people working on this case.

8 MS. BIVENS: Right. And there's no place to go

9 get those documents.

10 In other words, it was just the same as writing

11 "Steve, Joe and Sarah" on an e-mail line.

12 In other words, it doesn't -- there's no physical

13 place where those kinds of documents travel to. They

14 actually just go to people's e-mail accounts.

15 MR. BOIES: But what I'm saying is that we know

16 that everything that was addressed to ACO.DPW was

17 something that relates to AIG.

18 MS. BIVENS: Only in the broadest sense.

19 MR. BOIES: In the broadest sense. I understand.

20 MS. BIVENS: So, for example, if there was tax

21 advice that was being solicited for purposes of some

22 small piece of a TARP transaction, that would be --

23 you know, it -- that would -- ACO.DPW is actually and

24 could potentially include all -- it's a way -- that

25 would be the way of including all the custodians at


8690



1 MR. BOIES: And then I offer Plaintiffs' Trial

2 Exhibit 5404, which is my three-paragraph credit

3 agreement, Your Honor.

4 THE COURT: And Plaintiffs' Trial Exhibit 5404

5 is admitted as a demonstrative exhibit.


7 into evidence.)


9 Where did Professor Zingales go? That's fine.

10 MR. DINTZER: I think he caught the first plane

11 out, Your Honor.

12 THE COURT: I just wanted to thank him for his

13 testimony again.

14 MR. BOIES: He actually, Your Honor, has a class

15 to teach this afternoon, and so he literally is running

16 for a plane.

17 THE COURT: All right. Well, it will be on the

18 record that I appreciated his testimony.

19 MR. BOIES: Your Honor, next we would offer in

20 evidence certain exhibits. One of these, Defendant's

21 Exhibit 159-U, is a document that is an unredacted

22 version of a document that was already in evidence.

23 Plaintiffs' Trial Exhibit 159 is already in evidence,

24 and we would offer Defendant's Exhibit 159-U, which is

25 the unredacted version of it that we received.


8691



1 THE COURT: It says that it's a Plaintiffs'

2 exhibit.

3 MR. BOIES: Yes.

4 THE COURT: I thought you said Defendant's.

5 MR. BOIES: I may have, and I apologize, Your

6 Honor. So, I meant Plaintiffs' Trial Exhibit 159.

7 THE COURT: Okay.

8 Let's deal with that one, maybe.

9 MR. DINTZER: I'm sorry, Your Honor. I was

10 flipping through looking for that Defendant's exhibit.

11 Just one moment.

12 No objection, Your Honor.

13 THE COURT: All right. Plaintiffs' Trial

14 Exhibit 159-U is admitted.

15 (Plaintiffs' Exhibit Number 159-U was admitted

16 into evidence.)

17 MR. BOIES: We then have a series of exhibits,

18 copies of which we have furnished to the Defendant over

19 the weekend, that are documents that we received as part

20 of the newly produced documents that we would like to

21 offer at some point. If this is a convenient time, we

22 can offer them and see if there are any objections to

23 any of them. If there are objections to any of them, we

24 will try to resolve those, but if there are no

25 objections, we can just offer them into evidence.


8692



1 THE COURT: All right, yes, let's go ahead.

2 MR. BOIES: Those would be Plaintiffs' Trial

3 Exhibits 3118, 3119, 3132, 3132-A, 3152, 3153, 3156,

4 3159, 3160, 3163 through 3167, 3212 through 3219, 3221

5 through 3227, 3229 through 3231, 3233, 3235 through

6 3239, 3241 through 3244, 3246, 3248, 3249, 3251 through

7 3256, 3259, 3260, 3263, 3264, 3265, 3267, 3271, 3272,

8 3275 through 3288, 3290, 3291, 3295, 3298, 3300, 3303,

9 3304, 3305, 3307, 3308, 3312, 3315, 3316, 3322, and

10 3324.

11 MR. DINTZER: Obviously, Your Honor, I'm not

12 prepared at this moment to speak to these. What I would

13 suggest, Your Honor, is that now that we have a proffer

14 from the Plaintiffs of their complete set that they want

15 to get in, that we would look at those over lunch and

16 then maybe we will address that after lunch.

17 MR. BOIES: I'm happy to have it addressed after

18 lunch. It is the complete set of everything we want to

19 get in that I think raises a question that we can either

20 discuss now or later. As the Court is aware, we have

21 asked the Court to consider keeping the record open for

22 a limited period of time for the purpose of allowing us

23 to go through the documents, since we have been

24 receiving documents including documents over just this

25 past weekend, so that we can offer those.


8693



1 We've tried to just give the Court some examples

2 of documents that we have received that we think are

3 quite relevant to the testimony at trial, and we think

4 that it is appropriate, under all the circumstances, to

5 keep the record open to allow a reasonable period of

6 time for those documents to be reviewed and for us to

7 offer those documents that we do think are relevant.

8 THE COURT: Mr. Dintzer, has Defendant seen this

9 motion?

10 MR. DINTZER: We just got it this morning, Your

11 Honor, and we're troubled by it. The documents that

12 Plaintiffs identify, some of them, in the language that

13 they're citing, was actually previously produced before

14 all of this. I mean, obviously, there are duplicates.

15 A lot of these documents, Your Honor, are either

16 redacted in some other fashion or copies of the

17 nonprivileged portions showed up in other documents, and

18 so -- and I could specify the specific ones, but -- but

19 what we would prefer to do, Your Honor, is to do a

20 written response.

21 And just generally what I would propose, Your

22 Honor, is this. The Plaintiffs have had obviously an

23 enormous amount of information and opportunity at trial.

24 We recommend that the trial end today, as it's supposed

25 to, and that the record close, and that they then have


8694



1 their opportunity to sift through these for whatever

2 documents they feel that they haven't had a chance for

3 that could in any way fundamentally or even in some

4 minor way affect the needle in this case, and put those

5 in a motion to reopen the record and have those

6 documents submitted into the record, give us a chance to

7 see what documents they're proposing, and explain why,

8 perhaps, they shouldn't be and why the record shouldn't

9 be reopened.

10 That's generally the way, Your Honor, that --

11 that way, if they are trying to get documents in while

12 the record's open, that they had access to the

13 information that they should have used during trial, and

14 it would give us a chance on a document-by-document

15 basis to address those. And so, Your Honor, we would

16 ask the Court not to leave the record open after today

17 but to close it as the parties anticipated.

18 THE COURT: Well, I think there are a number of

19 ways to do this, as each of you knows. I think fairness

20 would dictate that for any documents that Plaintiff has

21 not received yet, that they should have the opportunity

22 to offer them if they're relevant.

23 MR. DINTZER: Your Honor, the production has

24 been completed. So, they have received every last

25 document, I believe -- I mean, there was a trickle at


8695



1 the end of -- they received the vast majority very early

2 in this process, and there was a trickle that ended

3 Saturday -- right? -- okay, that ended Saturday. So,

4 they have everything. And the last few that they got

5 really was a -- as I understand it, a trickle.

6 And so if they see in that -- I mean, so, some

7 of this stuff they have had for -- for a while, and if

8 they see something that they feel -- so, they do have

9 it. I'm not -- I wouldn't suggest this, Your Honor, if

10 we were still producing, but if they see something that

11 they feel that they didn't get a chance to -- especially

12 if it's in that last little trickle of documents, then

13 they can put it in a motion and they can say, look, we

14 got this on Saturday, and this is the key, this solves

15 the puzzle, then obviously either we won't oppose it or

16 we will and the Court will reject our opposition, but at

17 least we would have a chance to balance when they got

18 it, its relevance, its significance, and if we, in turn,

19 because of whatever it says, feel the need to proffer a

20 document in response that addresses that, that fairness

21 would also dictate, that -- sort of an orderly process

22 as opposed to sort of leaving the door open and really

23 whatever they bring in, we will then need an

24 opportunity, in fairness, to respond to. We would ask

25 that the Court adopt that approach.


8696



1 THE COURT: Mr. Boies, is it your understanding

2 that the production has been completed?

3 MR. BOIES: I have just confirmed that with an

4 exchange of nods with counsel for Davis Polk, Your

5 Honor.

6 THE COURT: Okay.

7 MR. BOIES: Our understanding was that the

8 Federal Reserve Bank of New York, the Federal Reserve

9 Board of Governors, Treasury, and Wachtell had completed

10 their productions, and we have now confirmed that Davis

11 Polk has as well.

12 Now, I would say that we have received, by our

13 count, 30,026 documents in the last 11 days, and even

14 though we have a lot of lawyers working on this case, we

15 have not really had an opportunity to go through those

16 documents in any kind of reasonable way. Now that it's

17 over with, we think -- I might have said a week or ten

18 days, but Thanksgiving is coming up, and so I thought

19 two weeks was a reasonable period of time to allow us

20 just to go through -- go through those documents.

21 THE COURT: I think what I would like to do is

22 to follow Mr. Dintzer's approach. I would like to close

23 the record when we finish today, but then if you come

24 across some documents you haven't reviewed yet and you

25 think they really matter to the outcome of the case,


8697



1 they're really super important, that you would have

2 certainly offered them earlier if you had seen them, I

3 would certainly entertain a motion to reopen the record

4 for that limited purpose.

5 MR. BOIES: Thank you, Your Honor. We will do

6 that.

7 THE COURT: I think that's the way we should do

8 this.

9 MR. DINTZER: Thank you, Your Honor.

10 MR. BOIES: Thank you.


12 MR. BOIES: We now call as our next and final

13 witness Dr. Cragg.

14 THE COURT: All right. Please come forward,

15 sir. Hello again, Dr. Cragg.

16 THE WITNESS: Good morning.

17 THE COURT: Do you understand that you are still

18 under oath in these proceedings?

19 THE WITNESS: Yes, I do.

20 THE COURT: All right. Please be seated.

21 Whereupon --

22 MICHAEL CRAGG

23 a witness, called for examination, having previously

24 been duly sworn, was examined and testified further as

25 follows:


8698



1 DIRECT EXAMINATION

2 BY MR. BOIES:

3 Q. Good afternoon, Dr. Cragg.

4 A. Good afternoon.

5 Q. Again, since we have limited time, I want to get

6 right to the point. Were you asked to look at

7 Dr. Mordecai's analysis considering the rate charged

8 with respect to the revolving credit facility compared

9 to rates charged on AIG's unsecured debt on September

10 16, 2008?

11 A. Yes.

12 Q. And do you agree with Dr. Mordecai's analysis?

13 A. I do not, no.

14 Q. Why?

15 A. Well, for a number of reasons. It doesn't

16 follow that it would make sense to compare the terms of

17 the RCF to unsecured rates as of the 16th. The RCF is

18 secured, it's extended by the lender of last resort, and

19 on the 16th, rates in the market were basically at an

20 all-time high, and it wouldn't make sense to use that

21 day as the day to determine, as Dr. Mordecai proposes,

22 to measure credit risk as of that date.

23 Q. Let me go through each of those one by one.

24 First, you said that the revolving credit

25 facility was a secured loan. Why does that make a


8715



1 AFTERNOON SESSION

2 (1:45 p.m.)

3 THE COURT: Thank you. Please be seated.

4 Let's go ahead.

5 MR. BOIES: Thank you, Your Honor. P.

6 We have consulted amongst ourselves, and we have

7 concluded that I have about 60 minutes left and they

8 have about 80 minutes left. So, we are coming to the

9 end of our 2 1/2 hours each. So, I am going to speak a

10 little faster than I usually do.

11 THE WITNESS: All right, so I'll speak slower.

12 BY MR. BOIES:

13 Q. Let's look at Plaintiffs' Trial Exhibit 5519,

14 and I had just directed your attention to this before

15 the luncheon break. Can you explain what the

16 significance of this is to the conclusions that you were

17 articulating this morning?

18 A. Well, there are -- I had pointed to the benefits

19 that accrued to Morgan Stanley and Goldman Sachs as to

20 the benefit of becoming a bank holding company. I've

21 presented a number of other confirming viewpoints about

22 the value of becoming a bank holding company.

23 Moody's talks about that. John Mack, who's the

24 chairman and CEO of Morgan Stanley, the same. An

25 analyst from JPMorgan does that, as well as an analyst


8716



1 from William Blair & Company. And then, finally, in

2 discussing American Express, Chairman Bernanke talks

3 about the benefit of creating market confidence for the

4 firms that get bank holding company status.

5 Q. Now, let me ask you to look at Plaintiffs' Trial

6 Exhibit 5520. Is this a document that you prepared?

7 A. Yes.

8 Q. And can you explain what the significance of

9 this document is to your analysis?

10 A. Well, I'm -- in this document, I'm discussing

11 concepts that I think have been confused, which is that

12 the idea that you would take the notion of an equity

13 kicker, which comes out of essentially commercially

14 distressed lending situations, and then apply that to

15 the lender of last resort lending situation, they are

16 very different circumstances under which the two

17 different types of lending are made, as well as the

18 types of institutions that are making those loans. And

19 so in general my view is that it's incorrect to, you

20 know, try to cross-pollinate the ideas of one area to

21 another.

22 Q. What relevance does the economic theory related

23 to central bank lending have to the application of

24 equity kickers in the central bank/lender of last resort

25 lending area?


8717



1 A. Well, there's none. In general, the theory of

2 central bank lending is about being the lender of last

3 resort, about having the monopoly power, of being in a

4 position where the market is no longer providing

5 commercial loans, and then determining, you know, both

6 theoretical and practical solutions as to how, as a

7 public policy matter, to address that situation.

8 There is a very long history on lending against

9 good collateral if the borrower has it and then lending

10 at a penalty rate where the penalty rate is very, you

11 know, clearly understood in both the economics

12 profession as well as the application of the theories of

13 central banking. So, nowhere does that include the use

14 of equity kickers in the same way that is done with

15 commercial lending, you know, to distressed

16 institutions.

17 Q. Let me jump to the subject of guarantees and ask

18 you if that is an area that you have looked into.

19 A. Yes.

20 Q. And would you look at Plaintiffs' Trial Exhibit

21 5528.

22 A. Yes.

23 Q. And could you explain what the significance of

24 the information that's presented here is to your

25 analysis of guarantees?


8788



1 the deposition, and it's clear to me that there are

2 things that it would be appropriate to designate there

3 as well.

4 I take it the Court would reach the same ruling,

5 that we aren't allowed to designate under 106 and

6 32(a)(6).

7 THE COURT: Well, the reason for that simply is

8 the evidence is being admitted as an admission by a

9 party-opponent. It's not a circumstance where it's an

10 unavailable witness and each side designates the parts

11 that they want to submit. So, that's why I'm not

12 allowing --

13 MR. GARDNER: And I understand the Court's

14 ruling. My understanding of the rule of completeness is

15 it's agnostic as to availability, Your Honor; it's

16 simply a rule of fairness that says that regardless of

17 availability, if the Plaintiffs are going to designate

18 testimony, we should, in fairness, be able to

19 counter-designate those aspects that make, you know, the

20 evidence not one-sided.

21 But I understand the Court's ruling on that and

22 I understand it to be a definitive ruling. That's why

23 we wish to provide the offer of proof, just for

24 preservation purposes, because I understand you are not

25 going to -- so, may I approach, Your Honor?


8789



1 THE COURT: Sure. That's fine.

2 MR. BOIES: And the only thing I would say, just

3 so that the record is complete, is that we have a

4 definition of the rule of completeness, from this

5 afternoon, as to how narrow it is.

6 THE COURT: Thank you.

7 MR. GARDNER: You're welcome.

8 And we will file this on the docket today, Your

9 Honor, again, just for purposes of preservation. We

10 understand the Court's ruling.

11 THE COURT: All right. That's fine.

12 MR. GARDNER: And what we will end up doing,

13 Your Honor, with the Court's allowance, we will do a

14 separate offer of proof as to Mr. Hsu's testimony just

15 so we have it in the record. Again, I understand the

16 Court has made a definitive ruling on that issue.

17 THE COURT: That's fine.

18 MR. GARDNER: Thank you, Your Honor.

19 THE COURT: Now, there were some other exhibits

20 identified earlier today. Where are we on those?

21 MR. DINTZER: Your Honor, I fear I have

22 overpromised in that our team was not able to get

23 through all of them and reach an analysis. We do have

24 some problems generally, as I understand it. Some of

25 them are internal Davis Polk documents, and so they were


8790



1 not sent to -- and, again, we didn't go through them

2 all, and I didn't get a chance to see any of them, but

3 my understanding is that -- and as such, they wouldn't

4 qualify for adoptive admissions, that people in the

5 Government never saw them.

6 And as the Court under -- probably can

7 understand, internal communications between two Davis

8 Polk attorneys that never were sent to anybody in the

9 Government can't really be adopted by anybody in the

10 Government. So, with that -- and we do have objections

11 in the sense that we -- the identification of those

12 documents may make us want to identify other documents.

13 And so -- so, we'd ask, based on sort of -- we

14 understand they're being offered as a group, and that

15 the Court exclude the documents. We understand that the

16 Court may be inclined to otherwise admit them, but we

17 wanted to at least lodge an objection.

18 THE COURT: Well, I mean, I'm willing to be fair

19 about this. What procedure do you suggest we adopt?

20 MR. DINTZER: To the extent -- and, again, we --

21 we haven't had a chance to sort through them. We do

22 want the record to be closed today. We do believe that

23 it should be. What we would suggest is that to the

24 extent that any of these documents -- perhaps

25 Plaintiffs' counsel knows this -- are completely


8791



1 within -- internal communications within Davis Polk,

2 that those be withdrawn from their offer and that the

3 others be kept in their offer -- we won't object to

4 those coming in -- and that they then, for the ones that

5 are wholly internal to Davis Polk, those would be

6 subject to the procedure that we've described, where

7 they could ask for their admission, and that gives us a

8 chance to review them, offer counter-designations, and

9 to vet those properly. That would be what we would

10 propose, Your Honor.

11 MR. BOIES: I think two things. First,

12 throughout the trial, both sides have offered the

13 documents of each party's agency. I can remember when I

14 objected to some of the documents that Defendant was

15 offering because they were hearsay, and they were argued

16 by Defendant to be admissible because they were

17 documents from the agent of the party who was on the

18 stand, and certainly Davis Polk is an agent.

19 The second thing is that with respect to

20 Mr. Huebner and Mr. Brandow, several of the documents

21 that relate to those individuals seem to me to be

22 appropriate given the fact that they testified here, and

23 we did not have a chance to use the documents with them.

24 I think that what I would -- what I would propose is

25 that if they want to close the record today -- and as


8792



1 the Court knows, I'd be pleased to keep it open a little

2 while longer -- but if they would like to close the

3 record today, I think that just as we might make a

4 motion to add additional documents, they could make a

5 motion to strike, and if they feel -- if they really

6 feel there are particular documents that under the rules

7 that they have themselves used in this case are not

8 admissible, they can make a motion to strike.

9 THE COURT: I think what I'd like to do is to go

10 ahead and close the record today and so that we can have

11 one procedure that I think will apply and sort of

12 simplify what we're doing. The Plaintiff can include

13 any of these documents in a motion to supplement the

14 record. So, it would be this category of documents,

15 plus the ones that you haven't had time to review yet.

16 Just feel free to file a motion. Maybe with further

17 conversation, you can reach agreement on some of this,

18 and I'll be happy to take a look at any documents which

19 remain in dispute.

20 MR. DINTZER: We appreciate that, Your Honor,

21 and because I anticipate that the next question is going

22 to be on a briefing schedule, if we could also have a

23 schedule on this potential motion to supplement, just so

24 that it fits in the proper order of whatever the

25 briefing schedule is so that the documents aren't coming


8793



1 in while we're in the process of writing whatever we're

2 going to be writing, we would appreciate that.

3 THE COURT: Well, we can do that. We can try to

4 come to an agreement on schedule, but we're not going to

5 wait on this to start preparing briefs.

6 MR. DINTZER: Counsel had suggested that they

7 needed two weeks to go through the documents. So, what

8 I would suggest, Your Honor, if the Court may, that they

9 be given those two weeks to finalize whatever motion to

10 supplement that they might -- that the Court has just

11 spoken of and that that would give them the time that

12 they have asked for to look through and that it would

13 also -- but it wouldn't run so late that we're finding

14 ourselves looking at new documents as we're trying to do

15 briefing.

16 THE COURT: Well, I think it's going to be a

17 small number of documents in any event, relatively small

18 if you consider the whole record. So, it's not going to

19 be that much different from what the record is now.

20 MR. DINTZER: With respect to the briefing

21 schedule, Your Honor, we would propose -- I believe the

22 Court -- we touched on this just a little bit sort of at

23 the beginning of the whole thing, a -- that after the

24 certified record is completed, that the Plaintiffs be

25 given, say, 75 days to write their brief, and then we be


8797



1 that comes up. I think it will come up in some

2 circumstances. So, you can do that.

3 And it's okay with me, too, on the opening

4 briefs, if you separate into two documents. One is the

5 proposed findings of fact, and then the other is your

6 legal argument and proposed conclusions of law.

7 And then one thing I would ask, in your table of

8 authorities -- and I know that some circuit courts of

9 appeals use this as a local practice -- if you could

10 designate with an asterisk those cases that are of

11 principal importance to your case, that would be

12 terrific, not that I'm going to exclude other cases that

13 you cite, but it's helpful to know which do you think

14 are your main cases in this dispute, and so, you know,

15 which ones would you like me to read first I think would

16 be a good practice.

17 We will put out an order, a scheduling order,

18 that covers all of these points, so you'll have them in

19 writing, but I just explain them to you today in case

20 there are any questions.

21 MR. DINTZER: Thank you, Your Honor.

22 MR. BOIES: We have two document things. One,

23 there were some documents that were offered that were

24 not newly produced documents. We had offered

25 Plaintiffs' Trial Exhibits 454, 681, 683, and 2825, as


8798



1 well as Plaintiffs' Trial Exhibits 4000 to 4006 which

2 the Court has just ruled on but have not, I don't think,

3 been formally admitted.

4 In addition, while we will make the motion with

5 respect to the internal Davis Polk documents, the vast

6 majority of the documents that we offered earlier are

7 documents that are documents that are to or from the

8 Department of Treasury or the Federal Reserve Bank, and

9 so we would like to offer those now as opposed to

10 waiting to make a motion on those, which are the vast

11 majority of the documents we're offering.

12 THE COURT: Do you know at this point which ones

13 those are?

14 MR. BOIES: Yes, I can identify them.

15 THE COURT: You can identify them?

16 Are we going to have any objections from the

17 Defendant on these?

18 MR. DINTZER: We understand that the Court is

19 likely to admit them, and so -- but I hate saying "no

20 objection" without actually looking at the documents,

21 Your Honor. Are these -- he -- just so I get this

22 straight, because there's a lot of documents,

23 Plaintiffs' counsel isn't talking about PTX 681 and 683;

24 he's talking about a subset of that huge set.

25 MR. BOIES: Yes. Yes, I'm talking about the


8799



1 documents that are in the 3000 series.

2 MR. DINTZER: Right.

3 Your Honor, we would ask that they just join the

4 others as part of that submission, just because -- I

5 mean, we could spend half an hour going through the

6 documents, but --

7 THE COURT: Well, I can tell you, I'm -- as you

8 say, I'm likely to admit them.

9 MR. DINTZER: And we understand that. I just --

10 I'm not doing my job if I don't actually look at each

11 document and actually determine whether we do have an

12 objection and provide that objection.

13 THE COURT: All right. Well, let's just include

14 them in the motion, I think.

15 MR. BOIES: Okay.


17 MR. BOIES: Now, are we going to do that with

18 respect to 454, 681, and 683 and 2825?

19 THE COURT: Now, remind me which ones those are.

20 MR. BOIES: Those were documents that we had

21 offered earlier today after the other witness that we

22 had. We also have documents -- no, these are included

23 in that. I mean, 681 and 683 are simply letters that we

24 received in -- you know, from the Government or its

25 lawyers about document production. I can hand those up.


8800



1 THE COURT: Okay.

2 MR. BOIES: I can get copies of 454 and 681

3 [sic] as well.

4 THE COURT: Yes. These documents I think are

5 admissible.

6 MR. DINTZER: The letters, Your Honor?

7 THE COURT: Yes.

8 MR. DINTZER: Okay. And we do object to their

9 use, as they are hearsay and cannot be used under

10 803(10) to establish the absence of a record, but we

11 understand the Court's ruling.

12 THE COURT: All right. So, I will admit

13 Plaintiffs' Trial Exhibits 681 and 683.


15 into evidence.)


17 into evidence.)

18 MR. BOIES: And Exhibits 454 and 2825 are in the

19 binder that we handed up for Dr. Cragg.

20 THE COURT: Yes.

21 Any objection to those, Mr. Dintzer?

22 MR. DINTZER: Could we have a proffer from

23 counsel as to what these documents are?

24 MR. BOIES: 2825 is, I believe, one of the

25 Doomsday Book memoranda. It's clearly a Federal Reserve


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