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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA --------------------------------UNITED WESTERN BANK, Plaintiff, v. OFFICE OF THE COMPTROLLER OF THE CURRENCY, et al., Defendants. --------------------------------ROUGH DRAFT : : : : : : : : : : : :

Case No. 11-CV-408 November 20, 2012 Tuesday 10:02 a.m. - 12:24 p.m.

TRANSCRIPT OF MOTIONS BEFORE THE HONORABLE AMY BERMAN JACKSON, UNITED STATES DISTRICT JUDGE APPEARANCES: For the Plaintiff: SAMUEL J. BUFFONE LAWRENCE D. KAPLAN ANDREW L. SANDLER MICHAEL R. WILLIAMS LIANA R. PRIETO THEODORE J. ABARIOTES

For the Defendants: CHRISTOPHER A. STERBENZ GREGORY F. TAYLOR Court Reporter: Kellie M. Humiston, RMR, CRR Room 6720, U.S. Courthouse Washington, DC 20001 (202) 354-3187

Proceedings reported by machine shorthand, transcript produced by computer-aided transcription.

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P R O C E E D I N G S

THE CLERK: This is civil case, year 2011-408, United Western Bank versus Office of the Comptroller of the Currency, et al. This is a motions hearing. Would the parties please identify yourselves for the record, beginning with the plaintiff. MR. BUFFONE: Good afternoon, Your Honor. Samuel Buffone for plaintiff, United Western Bank. Seated with me at counsel table is Mr. Sandler, Ms. Prieto, Mr. Abariotes, Mr. Kaplan and Mr. Williams. THE COURT: All right. Good morning. MR. STERBENZ: Good morning, Your Honor. Christopher Sterbenz for the OCC. With me at counsel table is Gregory Taylor. THE COURT: All right. Good morning. We're here today on cross-motions for summary judgment. There's also a motion to strike. I don't think we need to hear any argument on the motion to strike, and I'll take that up in connection with the rulings I ultimately issue in this case or before then, but I think it's probably largely moot anyway in light of the brief that I called for that cites directly to the record. Plaintiff's brief lays out a very compelling narrative and it's clear that the bank takes great umbrage at what ultimately happened in this case. There are some places in the

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brief where the rhetoric isn't quite matched by the level of supporting detail and there's a lot that's de-emphasized or left out entirely, such as the dramatic losses beginning in 2009 and the state of the bank's capital ratios. I have read the briefs and I have looked at much of the cited material in the record, but I don't pretend to be as conversant with it yet as the parties, yet. So this means that -- you all have been in front of me several times before. This may mean that you actually get fewer questions than usual and may actually get to say what you came in here intending to say, though I did say "may." But I do want to make sure that both sides, before they leave this room, feel like you have pointed me to every fact in the record and particular record pages and documents that support your position. And I -- and I want to encourage you to be as factual and as specific as possible. I believe I have gotten a complete dose of the atmospherics and the indignation from the pleadings, and I don't think anyone needs to use the phrase "half a fortnight" this morning. The bank tells a story about a sudden and inexplicable change of heart on the part of the regulators. I can say from my review of the record so far that it's not as if the bank was getting perfect report cards every year and then suddenly the regulators say, you've got a week to fix everything. OTS began expressing concerns about the need for capitalization, the

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reliance on institutional investors, the mortgage-backed securities and liquidity well before 2011. The same issues that ultimately led to the receivership were the focus of the March 2009 examination, the MOU, the January 2010 examination and the cease and desist order. It is true, as the bank points out when it concludes its brief, that we are not talking about criminal activity, self-dealing, misfeasance or nonfeasance by the bank managers. As far as I can tell, they appear to have been doing their best to work to save the institution and to have believed in good faith in their ability to do it. But in the end, the absence of those factors isn't really the relevant question. The question I have to resolve is, was it arbitrary for the agency to decide on this record that the bank could not be saved. Given the highly deferential standard of review, that's a very high threshold to get over. We have cross-motions here, which means that if the moving party gets the last word, no one will ever go home, so I'm not necessarily going to adopt that approach. I think it makes sense, since really the party seeking to undo something that happened is the plaintiff, I'm going to let the plaintiff start. I'll give the Government as much time as they need to respond. Depending on what time it is, I may or may not entertain replies. So if there are things that they've said in their briefs that you want to respond to, make that, Mr. Buffone, part

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of your presentation. We're not going to have back and forth and back and forth all afternoon. So why don't we start with the plaintiff. MR. BUFFONE: Good morning, Your Honor. If I could, I've given Mr. Sterbenz a copy of three documents I'd like to hand up to the Court just as an aid of argument: one is Mr. Bowman's decision, the second is the principal statute at issue, and the third is a one-page document. THE COURT: All right. MR. BUFFONE: With the Court's permission, I'll hand that to your clerk. THE COURT: That will be fine. They may actually be things I brought myself, but I'm happy to have them. MR. BUFFONE: Your Honor, I appreciate your candid assessment of the pleadings, and I apologize if our rhetoric out-stepped our facts, so I'll take as my burden this morning to make the facts match the rhetoric. And we have much to discuss, and I appreciate the Court giving us the opportunity to do it, but I'd like to begin with the issues that Your Honor raised at the threshold. The first, the reference to the -- the declining capital position at the bank and what I think Your Honor referred to as the declining capital ratios and the dramatic lessening of the -- of -- I can't remember the exact language, but you referenced one of the three grounds that Mr. Bowman used to

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decide that the bank should be seized. So on the first page of the opinion that Mr. Bowman authored in order to seize the bank, he listed three grounds, and one of them was the safety and soundness of the bank. Now, all three of these grounds, Your Honor, were interrelated. The first that I'd like to address is that the savings bank is -- this is from the first page of the opinion -- is likely to be unable to pay its obligations or meet its depositors' demands in the normal course of business. This was a liquidity determination, as Your Honor knows, which was based largely upon the determination of whether or not the institutional depositors at the bank were likely to change course abruptly from what had been a multi-year history of maintaining large deposits at the bank and to withdraw those deposits quickly, creating a liquidity crisis. I'm going to come back, Your Honor, to a second point that's embedded in that, which is not only had -- was there a history of those deposits being maintained, not only had those deposits been maintained through the worst economic situation to face the country since the Great Depression, and the depositors had stuck with the bank through the worst of times and did not remove their deposits, the depositors, as pressure increased from the OTS, repeatedly made statements to the -- to the bank, which were passed on to the OTS, of their willingness to maintain their deposits there. There were amendments to deposit agreements, to

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sub-accounting agreements. There were exchanges of correspondence and discussions that were reported to the OTS about their willingness to maintain those deposits. THE COURT: But by the time -- by the time the agency acted, two of the depositors were already gone and two more had entered into agreements to stay, but weren't they highly contingent? MR. BUFFONE: Your Honor, first, two depositors hadn't left. One had. MC -- MSCS left, along with one of its customers. So we can quibble over that's one or two, but it really was a depositor with one of their customers leaving the bank. And they left because of the finding that the bank was undercapitalized, which prohibited it from maintaining ERISA deposits. Their deposits were largely ERISA, so they started a staged withdrawal of those funds. At the time of the seizure of the bank, some of the MSCS funds were already on deposit. As to the other two largest depositors, Equity Trust and Lincoln, they provided assurances to the bank that any ERISA funds that they had on deposit there, which were relatively small, were withdrawn from the bank, so that they did not face the same problem that MSCS had with the undercapitalization. Now, to -THE COURT: But hadn't -- didn't they both also enter into forbearance agreements, one lasted I think till January, the other was maybe February, and they had contingencies in them? So

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it became -- you didn't have an ironclad commitment to stay. I mean, at that point, weren't they saying, we'll only stay if the following things happen? And they were the same kinds of following things unfortunately that you were dependent on for everything, which was the bank backing off of some of its -- I mean, the agency backing off on some of the requirements that it imposed on you. But at that point, wasn't that the situation? MR. BUFFONE: Well, Your Honor, I think you've gotten exactly to the crux of the case. So let's spend a moment addressing it. Did the agency engage in reasoned and rational decision-making? Was it arbitrary and capricious for it to decide that based upon the contractual and sub-accounting agreements that these two institutional investors had with the bank, that there was a likelihood that they were going to withdraw their funds, that there was a foreseeable risk, in the words of the Kaplan decision from the DC Circuit, that there would be harm to the financial interests of the bank? Well, the first thing we know is that what the -Mr. Bowman relied on for his determination and his decision was the finding that Equity Trust had a provision in its contractual depository agreement, par- -- that it -- excuse me. I started with the wrong one. Lincoln, not Equity Trust, had a provision in its depository agreement, Section 4.3, that permitted it, did not require it, permitted it to withdraw its funds in the event that the bank was determined to be undercapitalized.

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What happened was a dialogue with Lincoln and Equity Trust about whether or not they were going to exercise various provisions of their contractual depository agreements with the bank in order to withdraw their funds. And what they reported -and I'll go back to the record in a moment, Your Honor, to give you the citations to it. What they reported was that they had no intention of withdrawing their funds. Now, Your Honor, as we -THE COURT: But -- but those discussions crystalized in forbearance agreements, didn't they, that had some contingencies in them? Yes? MR. BUFFONE: Well, the forbearance agreements, Your Honor, indicated that they were not going to exercise rights that they had at the time they had them. And what's important here is, again, the banks were not required to withdraw any deposits. They could in their discretion. And what we need to look at, Your Honor, what I would submit the Court needs to look at is the entire momentum of what was going on at the bank. There was a re-capitalization transaction with anchor investors and more investors signing up for the deal or expressing in letters of intent an interest in doing it. The bank -- excuse me. The institutional depositors were watching that. They were interested in the long-term stability of the bank and finding that it was capitalized. THE COURT: Well, that's the problem with the whole

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thing. Everything is dependent on something else. And so the question is, did -- did all that interdependence create a structure that could have worked if somebody had just let it, or did all that -- and was it a house of cards because the foundations were so weak. And one of the foundational assumptions is that the -- that the institutional -- that the investors are going to put their money in, but that was contingent; the institutional -- the institutional depositors wouldn't exercise their right to withdraw, but that was contingent. And all of it was contingent on the bank becoming capitalized, which of course was contingent upon those other things happening, but ultimately at the bottom, the contingency that everybody was looking for is is the agency going to waive the requirement that you meet and maintain certain capital ratios. And while all these other people were kind of, to be very gross about it, sort of on your side, you know, the investors, the depositors, they had good relationships with you. Let's assume they wanted to stay, they wanted to invest, they wanted to make it work. Didn't it all still depend on the agency backing off from something that it didn't just start asking for in December 2011, but had been complaining about since 2009? MR. BUFFONE: Your Honor, these were sophisticated financial transactions, both the anchor investor investment

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agreement and the relationship with the institutional depositors. In financial terms, these were very big boys. They had done deals before, they had done financial deals. These were some of the best informed depositors that a regulatory agency could imagine. THE COURT: Right. And that's why they also were smart enough to bake all kinds of contingencies into their commitments to you. They weren't commitments. They were saying, yeah, we'd like to do this under certain circumstances. MR. BUFFONE: But, Your Honor, I submit -- and I'm not backing down from that. There were contingencies in these deals. And many of those contingencies, some of them, were dependent on actions by the regulator, but I think what Your Honor needs to face is, was this reasoned decision-making? And part of reasoned decision-making is the timing of when the agency made the critical decision to seize the bank. Had the agency allowed enough time for a process that was ongoing that was being reported to the agency on a daily basis that progress was being made, faced with the agency's interest in protecting against a collapse of the bank, a loss to the deposit fund and a loss to the depositors, was it reasoned decision-making? Let's just break out a couple of pieces of that, Your Honor. Let's look at the institutional depositors, which I think is really the core of this case. Did the agency at any point ask the bank to call in the

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institutional depositors to find out what their true intention was, whether, as they now submit, that because of hypothesized past failures of the bank to meet promises, that its representations that they were going to stay was not good enough? Would it have not been reasoned decision-making to have called them in and simply asked them in the presence of the bank or through the bank, do you intend to maintain your deposits? How do you interpret your contractual depository agreements? Do you intend to exercise rights under those agreements? THE COURT: Well, when you say, "would it have not been," aren't you inviting me then to say, well, if I had been there, I might have done it this way, I might have done it that way, and we're talking about substituting my judgment for theirs, which is -- would I have done it differently, could it have been done differently better? MR. BUFFONE: Well, Your Honor, first of all, in every arbitrary or capricious AB -- APA case, and many of them have come out of this courthouse, where it is found that an agency has abused its discretion, the court is second-guessing the agency. Not all second-guessing is prohibited. It is the proper exercise of the standard of judicial review. And here Mr. Sterbenz and I, I think, largely agree. I'm willing to accept his repeated citation to the DC Circuit's case in James Madison. And what does the DC Circuit -THE COURT: Well, that's good, because I have to accept

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it. MR. BUFFONE: Well, there are other cases, Your Honor, but what does -THE COURT: Well, I'm stuck with the DC Circuit. MR. BUFFONE: What does the DC Circuit -- well, there's many DC Circuit cases, Your Honor, but what does the DC Circuit in the context of a banking case involving the seizure of a financial institution tell us what the standard of review is? And I'm going to be quoting from the case here, Your Honor, beginning at page 25 of the Lexus 1 -- 1996 U.S. App Lexus 10162 print of the case. "Generally speaking, district courts reviewing agency action under the APA's arbitrary and capricious standard do not resolve factual issues, but operate instead as an appellate court resolving legal questions." We're not asking you to second-guess them on facts. These reduce down to questions of law. Did they act reasonably, arbitrarily or capriciously? Did they apply their own standards? Did they change course without giving an adequate basis for it? The court goes on, "Like appellate courts, district courts do not duplicate agency fact finding." We're not asking you to do that. "Instead, they address predominant legal issues." Did the agency articulate a rational connection between the facts found and the choices made? Is there a nexus between what was in the record here and what the agency did?

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"District courts, however, may need to resolve factual issues regarding the process the agency used in reaching its decision." I just put before Your Honor a process question. In reaching its decision, did the agency go through the process that was rational and reasonable, given the facts that were before it? The court several pages later goes on to say, further refining what the standard of review is, "We agree that judicial review of agency action under the APA must go beyond the agency's procedures, to include the substantive reasonableness of its decisions. Reasonable procedures alone cannot absolve a court from making a thorough, probing, in depth review to determine if the agency has considered the relevant factors or committed a clear error of judgment. Our de novo review of the record here satisfies us that the agency's conclusions were not arbitrary." Your Honor has an obligation under APA review to engage in each step of that process. And so the question I just submitted to the Court, should they have gone through a different procedure, was it reasonable, was it reasoned decision-making under the contemporized standard of arbitrary and capricious adopted by the Supreme Court for this agency to have seized a viable financial institution? And, Your Honor, let's just take a little detour here for one second. At the time of the seizure, there was $426 million in liquidity at the bank. OCC-UWB, the supplemental

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filing in this case, pages 793 and 798, show that from January the 7th, when there was $394 million in liquidity, to January the 14th, when there was $404 million in liquidity, to January the 20th, the date of seizure, when there was $426 million in liquidity. This was not a run on the bank. This was not a bank that was presenting such an imminent threat to the deposit fund, that precipitous action, immediate action needed to be taken. One of the documents I handed up to Your Honor, the last one in the package of three documents, is an OCC document. It's a single page that at the top says, significant recent events. It's OCC-UWB, page 793. The second bullet -- and Your Honor will note at the bottom this was updated on January the 4th of 2011, 16 days before the bank was seized. "We notified the institution of its undercapitalized status on December 13th, 2010, and requested a capital restoration plan, CRP, under PCA guidelines. United Western Bank submitted the CRP and accompanying business plan on December 20th, 2010. We intend to deny the CRP and business plan, and are drafting a letter to do so at the time immediately before the receivership date", a receivership date that had been set by the FDIC two months before. Now, the agency has argued to Your Honor that the FDIC always does that. Of course they have to plan far ahead for a seizure, and they can't just be notified the day of, there's planning that has to go forward, but what that document

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indicates, Your Honor, is this was not reasoned decision-making. There was no effort to think about, how should we develop a factual record that will enable us to make a rational decision. This was pre-determined. THE COURT: Well, I'm not sure that that proves that it's not reasoned decision-making, because I think, as you just pretty much conceded, that you couldn't find a receivership where they weren't talking about receivership before the day of the receivership. So I don't think just because they already know what the date might be means that ultimately the acting director had made his decision. I think these -- the lower level examiners are thinking they're marching in that direction. This is pretty far down the road. They're already drafting the letter for the plan. The plan is the linchpin. So I understand why you say it's important. I don't know that -- I think whether the decision-making is reasoned or not is -- to me it's going to turn more on the other questions that you've been putting to me, which is was it really likely that these depositors were going to go. What is the evidence that shows that? They say it's possible, it's potential, but that's different than likely. I think the fact that they're thinking that this is a significant possibility at this point doesn't necessarily demonstrate that ultimately it turned out to be unreasonable.

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While I'm not rejecting this argument, I'm saying I understand that one. I don't think you need to focus on that one as much as the other issues. And my biggest concern is that you really focus on what happened in December as being sudden and unexpected, but really -- and that the liquidity crisis you say was imagined in 2011. But in the March 2009 report of investigation, in the 2010 limited examination and then in April 2010, they're all -- the agency is talking liquidity, liquidity. It didn't just up and get worried about it in December. MR. BUFFONE: But, Your Honor -THE COURT: So doesn't that point to reasoned decision-making? MR. BUFFONE: Well, Your Honor, we have to deconstruct what the agency's concern about liquidity was so that we can reach the decision that Your Honor is forced to make. This was not a concern about the overall liquidity of the bank based upon depositor run, based upon obligations that the bank had to make for payouts. It was about -THE COURT: Well, they didn't need a run. Their concern was that all of the liquidity was based on such a tiny number of huge depositors, that -MR. BUFFONE: It was based on -THE COURT: -- it wouldn't take a run. It would take a walk.

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MR. BUFFONE: It was dependent on the institutional depositors, Your Honor. THE COURT: Right. MR. BUFFONE: I think we're in agreement there. So let's take a little detour to a case, the Honeywell case from the DC Circuit. In Honeywell -- and Honeywell is cited in our brief, Your Honor. It is reported at 628 Fed 3rd 568. In Honeywell, a nuclear regulatory agency had a policy that anyone who ran a nuclear processing facility had to have ten times the net worth of the decommissioning costs in order to be licensed. So Honeywell over a two-cycle licensing period went to the Nuclear Regulatory Commission and said, not only do we have a very large net worth, but our intangible net worth in the form of our goodwill and trade name are even more valuable, so we exceed your ten-to-one ratio significantly. And on two licensing applications, the Nuclear Regulatory Agency approved of Honeywell's application, considering those intangible components of its net worth. On its third application, the Nuclear Regulatory Agency said, you know, we're going to change our policy. We don't think that your intangible net worth should be included in your net worth. THE COURT: I'm not sure that that's apposite here. You say, well, in 2007 nobody was upset by the fact that we had a substantial portion of our -- our business model was sound. We

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had these big institutional investors. They didn't tell us that bothered them. But when they come in to examine in 2009, you say they unexpectedly sounded a different tone. But when they walked in the door in 2009, the bank had lost $29 million, the capital ratios were lower than 2007. Why is it arbitrary to adopt a more aggressive approach, when the bank is now starting to lose money and, by the way, the economy is falling to pieces? MR. BUFFONE: Your Honor, if you would give me the smallest indulgence to go back to Honeywell for a second, because what was on the tip of my tongue is in Honeywell, it wasn't just the write-down of the goodwill. Honeywell was losing money and their core capital had declined so precipitously, that the agency said, you've lost so much of your tangible capital, your tangible net worth, that we're going to change our mind about considering your intangible net worth. And the DC Circuit reversed. They said this is a change in policy. If you're going to walk in and tell Honeywell that because of a decrease in their net worth, you're no longer going to consider their intangible net worth, then you have to give them a basis for doing it. You have to show why there is a change in policy, and you didn't articulate any change in policy. That's not reasoned decision-making. And the NRC was reversed. Your Honor, that's on all -THE COURT: But what happened in 2009 was they pointed out for the first time, they say, this concerns us and other

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things concern us, the capital ratio, so we want you to work to fix it. And then there's the MOU and then -- so it wasn't like they changed their mind about the institutional depositors and then they -- they shut you down then. They said under current conditions, these things are more dangerous than they used to be, the kinds of loans that you're giving are more dangerous than they used to be, the mortgage-backed securities, which everybody thought were wonderful investments, are now not. Things have changed, things did change, so this is our concern now. And they didn't take action against you then. I mean, they put -- you put your heads together: let's have an MOU. You put your heads together a little bit later: let's have a consent cease and desist. What happened in 2011 is ultimately they're saying you still haven't risen to the level of what you agreed to in the cease and desist. It's not that they suddenly in December 2011 decided that these things were important. MR. BUFFONE: Your Honor -THE COURT: I mean, why -- why -- I understand what you're saying about the Honeywell case, and I'll read it, but why don't the events, the losses point to the soundness of the bank or at least bear on the continued vitality of what might have been an acceptable business model in the past? I mean, for example, during the financial meltdown, would it have made any

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difference whatsoever if Lehman Brothers or Merrill Lynch said, well, gee, mortgage-backed securities were a great investment last year. I mean, so what? Once the real estate market fell apart, they weren't good anymore. You needed a new approach. MR. BUFFONE: Well, Your Honor -THE COURT: Aren't regulators supposed to consider your soundness in light of current circumstances, not last year's circumstances? MR. BUFFONE: Of course they are, Your Honor. Of course. We wouldn't submit anything to the opposite. But this wasn't Lehman Brothers. There wasn't a run. The securities hadn't been devalued to the point where there was an insolvency situation. This bank was not insolvent. The deposits, with the exception of the one depositor, had not left, and they had indicated their intention to stay. And, Your Honor, a cornerstone of APA review and reasoned decision-making -THE COURT: Do they need insolvency -MR. BUFFONE: No. THE COURT: -- under the statute? MR. BUFFONE: They do not. THE COURT: Okay. MR. BUFFONE: They do not. But, Your Honor, liquidity was such an important part of this. And the articulated decisions by Mr. Bowman were that the bank would not be able to

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meet the second grounds, would not be able to meet the anticipated demands of depositors and have enough money to fund its business is -- sure sounds close to insolvency to me. So the acting director did not rely on insolvency, but his emphasis on liquidity and his emphasis on capitalization was a close cousin, Your Honor. And the analysis was really about, was there going to be enough money in this bank to meet its obligations? Was it well capitalized enough to do it and was it going to be able to meet its obligations to its depositors? Your Honor, what I was about to say is of course a reasoned decision-making is no post hac rationalizations. We have to look at what Mr. Bowman did, and was that arbitrary and capricious. And for all of the things that are being cited that Your Honor's referring to about the change in financial conditions, the write-down in mortgage-backed securities, the changing capital ratios at the bank, what Mr. Bowman did in the grounds for his decision, the first document that we handed to Your Honor, beginning at page 6 -- excuse me -- a run-over from the bottom of page 5, he sets out the grounds for appointment of the receiver for the savings bank. And if I could come to unsafe or unsound last, which is on page 6, the second ground's likely to be unable to pay its obligations or meet its depositors' demands in the normal course of business. And his basis there was that there was an

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unacceptable risk, at the top of page 6, that the institutional depositors may withdraw their deposits. Second ground, the bank was undercapitalized and it failed to submit a capital restoration plan. OTA -- the denial of the capital restoration plan, which was linked to the liquidity crisis that -- and I do not back down from the term, Your Honor -- was imagined by the OTS. So what that leaves is unsafe and unsound. And if we look at page 6, numbered 6 at the bottom, page 5 of his decision, the unsafe or unsound conditions were the first sentence of the second paragraph: it had an unsafe concentration in institutional deposits, addressed in the other ground; second paragraph, it operated without adequate liquidity, the same as we've heard before. And then the next paragraph, which contains the closest reference to what Your Honor has been citing: furthermore, the savings bank is in an unsafe and unsound condition as a result of the combination of potential severe liquidity strain, an excessive amount of classified assets, continuing significant operating losses, insufficient capital, and no realistic prospect for raising capital in the short term. So it's the combination of all of those. It's the liquidity and the other two grounds, along with the factors cited by the acting director; not any of them in isolation. THE COURT: Right. And you focused, and I think I understand your argument, on why it was premature and unsupported

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for them to assume or predict that your institutional depositors with whom you'd had a historic relationship, who didn't have ERISA money there were going to walk out the door. So I understand that one. Let's talk about the bank's ability to recapitalize itself. MR. BUFFONE: Yes, Your Honor. THE COURT: Even if I would tend to agree with you that seven days is a very short turnaround time for a recapitalization plan, how did that short time frame hurt the bank in this instance? They didn't say, gee, you didn't get it in in time, too bad: receivership. They rejected it 30 days later on the merits. And really long before they asked you for the plan, the bank had been under direction through all the interactions with the agency to come up with a way to recapitalize itself. So what -- what would have been different if you'd had more time? MR. BUFFONE: Well, Your Honor, no one can tell with certainty what would have been different, but the agency was tasked with trying to have predictive behavior. And what were the bases it had to have predictive behavior here? They had seen a investment agreement, a major step in a complex transaction, which binds the parties, with conditions. They had seen the anchor investors demonstrate a willingness to change those conditions and to continue to negotiate. They saw the addition

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of additional interest in the form of letters of intent filed on January the 20th of additional investors who were willing to step forward. They saw a NASDAQ determination that the NASDAQ was willing to go to some unusual lengths in order to facilitate this recapitalization transaction so it could go forward. This was a transaction, Your Honor, that wasn't frozen and rigid, that had momentum, that had a history of changing, and a willingness of the major parties to it to try to make it work. They were still committed. They didn't back out in the face of all this regulatory action. So, again, just as with the institutional depositors, wouldn't it have been better, and Your Honor would not be second-guessing the bank to criticize its procedures for not engaging in more fact finding about whether or not the investment agreement and the recapitalization had a realistic chance of coming to fruition, rather than parsing the contract. THE COURT: Well, when they say to you the onus is on you, come up with a plan, and your plan attaches agreements from a bunch of investors that are highly contingent, and you say, well, they dismissed the investors because their agreements weren't sufficient to please them, and we don't have to meet that level of proof, but it's really not pleasing the agency or level of proof. The issue was that the agreements were nonbinding letters of intent. They were contingent. Why is it unreasonable or arbitrary to call for binding

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commitments, since you were expecting them to waive provisions of the cease and desist order also to make this work? I mean, wasn't it still -- why is it unreasonable to say, I know you're trying, but you're not there, because these people can walk away at any moment? MR. BUFFONE: Because, Your Honor, I would -- I would hope that Your Honor would focus on not at some point was the decision necessary, but was the decision necessary on January the 20th, had the agency gone through adequate procedures and processes -THE COURT: I don't have to decide necessary. Do I? Don't I have to decide reasonable? MR. BUFFONE: Yes, Your Honor. THE COURT: Okay. MR. BUFFONE: You have to decide whether there was reasoned decision-making. THE COURT: Well, isn't it reasoned decision-making to say, what you have given me are non-binding contingent letters of intent and one oral commitment that isn't in writing at all? Why is it arbitrary to say, that's not quite a capitalization plan, that's a capitalization hope? MR. BUFFONE: Well, Your Honor, it was first arbitrary to give seven days in the face of a congressionally mandated normal 45-day process that was also in their CFR regulations that normally it would be 45 days. And in the face of no liquidity

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crisis at the bank, no decline -THE COURT: Well, did you supplement the plan in the 30 days after it was submitted, which would have gotten you to whatever seven plus -- 37, which is getting a whole lot closer to 45? MR. BUFFONE: Your Honor, we would have -- there was no process for supplementing the plan and the document I referred to earlier. The agency was all set to deny it anyway. It would have been a futility. There -- there was no procedure in the agency -THE COURT: Well, this isn't written until January 4th. I mean, this is when they're in the process of denying it. It doesn't -- it's not clear they would have denied it where they read it. MR. BUFFONE: No, Your Honor, but, look, the agency gives us seven days, five working days, to come up with a recapitalization plan. We -- excuse me. A corrective action plan. We produced the recapitalization plan to the agency. They've had previously the parts of that transaction under consideration. If the agency had given us more time, there would have been time to re-negotiate, there would have been time to present additional evidence to the agency about the seriousness of the anchor investors, there would have been time to show that while there was a hundred million dollars, over a hundred million dollars committed from the anchor investors, there was a

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reasonable prospect of an additional hundred million dollars coming in with letters of intent. This wasn't just a wish and a prayer. THE COURT: But you're saying that really what's arbitrary about this is they assumed that because these things were contingent, that they would fall through. Aren't you asking me to assume that they wouldn't? MR. BUFFONE: No, Your Honor. I'm asking you to assume that the agency did not have an adequate factual record to have a rational nexus to the decision that it made, because it did not have facts before it that permitted it to rationally determine that the bank lacked liquidity in the face of the deposits that were at the bank, that the institutional depositors were going to leave or that the capital restoration plan was doomed to failure because of the contractual provisions without knowing whether or not the anchor investors were prepared to waive them. THE COURT: Well, one of the contractual provisions was that they would change their position in the cease and desist order about maintaining the capital ratios. Why is it unreasonable for them to think, we're not going to do that, so this is just not going to work? Everybody's baked that into their agreements. MR. BUFFONE: Well, what they don't know, Your Honor, is if the anchor investors won't change their position. Again, these complex deals -- and I don't pretend to be an expert on it.

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I think the Court can take notice of it based on your own personal -- your own experience as a judge, that deals of this level of complexity with these kinds of sophisticated investors change over time. There are always contingencies. And those contingencies were worked out based upon the interests of the investors. These investors didn't run for the hills. They were still prepared to proceed. THE COURT: Yeah, but they were saying we'll proceed if the agency's willing to back down, and so that -- that contingency was totally within the control of the agency. And the agency had been talking about these ratios since 2009. They put them into a cease and desist order in 2010 that you agreed to, and they're -- so why is it unreasonable to say that contingency is so fundamental, was sufficiently fundamental for it to be put into every single agreement? MR. BUFFONE: Because -THE COURT: We know we're not going to relax that? MR. BUFFONE: Because it's -THE COURT: You've never shown us how you're going to maintain that. And then -- and even if you'd gotten all of the money, the capital plan turned on also the buying of -- is it Legent, Legent? MR. BUFFONE: Legent, Your Honor. I'm not sure how to pronounce it, but I would pronounce it Legent. THE COURT: Okay. Them. So there was also that

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transaction, that once they disapproved it, then that was -- that was one of the legs that the capital plan stood on, and you knew going in that it was certainly a possible -- foreseeable that they wouldn't approve it. I mean, I -- I understand the bank's frustration, because all the contingencies ultimately were in their control, and they're saying, you didn't meet the contingencies, but they're the ones that held all the cards. MR. BUFFONE: Your Honor, it's perfectly circular logic. We're going to not weigh the capital ratios, but if the capitalization transaction had gone forward, there would have been such a large infusion of capital into the bank, the mortgage-backed securities would have been bought out of the bank and taken off of its books as part of that transaction, the bank would have been well capitalized, and the question for the agency would be at that point, do you want to maintain the provisions of the meet and maintain requirements of the cease and desist order in the face of a very well capitalized bank. The logic proceeds, then, well, this -- this transaction won't go forward, because the bank's also going to lose its capital, it's going to lose its institutional depositors. Well, it's going to lose them because the recapitalization isn't going to go forward. It's all the same set of facts facing the agency. Is there a realistic chance that this transaction is going to go forward and has the agency

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provided sufficient breathing space to allow the bank to demonstrate that the transaction in fact would have gone forward. Now, Your Honor, all of this needs to be contextualized, because it's -- this is not a hypothetical, it's not done in a vacuum. First of all, we have a statute that permits only two remedies: dismissal of our action or overturning the receivership and removing the FDIC as receiver. Your Honor doesn't have the luxury that you do in a normal APA case of saying, well, you know, I'll send it back to the agency, we'll see whether or not there's anything else in the record about whether or not they considered this in a different fashion, whether or not they ever did in fact talk to the anchor investors, whether they had more than their citations to the terms of the contract without understanding the terms of the negotiation. Your Honor can't do that here. There is no way to send it back to the agency for a failure to engage in adequate fact finding for additional determinations of the basis for its decision. We have to do it on this record. And what's the factual context of this record at the time this is all going on? Again, this is not in a vacuum. We're in the middle of a financial crisis. Banks are failing across the country. There is real risk to the deposit insurance fund. Is this bank presenting that type of risk or would the fund have been better if it had continued. This is a bank that

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remained healthy. I stated the liquidity levels to Your Honor and how they were raising during the month of January earlier in my argument. Institutional depositors who easily could have fled and gone to another institution did not. Anchor investors who could have bailed out of their investment agreement did not. In the face of all of this, how did the agency react? The agency turned its back on the bank. The agency decided there was going to be a liquidity crisis, because they weren't going to look at any of their decisions. They were going to make a determination that this bank didn't have enough money to meet its obligations and that the business plan that it had proved in the past, this business plan of running a community bank with front range branches, Denver branches, doing community investing, at the same time that deposits are going to come from institutional investors, it turned its back on, just as the Nuclear Regulatory Agency did in Honeywell. And Your Honor asked for some records -THE COURT: Well, I mean, they didn't turn their back on it the first time. When they started losing money in 2009, they said, uh-oh, you're losing money, $29 million by June 30th, 2009, your capital ratio's going, but you need to fix this. Then you lose more and more and more and more and the ratios are going down and down and down and down. This isn't just a sudden about-face just willy-nilly. This is --

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MR. BUFFONE: Well, Your Honor -THE COURT: They're watching the continued progression. They're watching a pattern. And they're saying all along, this is what you need to do. And what you're saying is, we didn't do it all that time. We were trying really hard. We think we were there. We were getting close. They pulled the plug too soon. And I understand what you're saying, but I don't see how I can determine as a matter of law that -- that that day was too soon, given the -- all the days that preceded it -MR. BUFFONE: Well -THE COURT: -- based on the hope that something different would have happened in the next 30 days, when everything that you've presented me with was contingent on things that I -- I'm not sure where I'm supposed to find the reasonable expectation that this would have happened, in particular the bank's changing, moving away from -- from the requirements of the cease and desist, or the Legent transaction. That was a critical leg of your plan. Their decision to turn that down, once -- once that happened, the plan was sunk. So what was in the plan that was going to make up the difference if you weren't allowed to do that? MR. BUFFONE: Well, Your Honor, just quickly, then I want to come back to address your main point. Legent was not a cornerstone. THE COURT: Okay.

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MR. BUFFONE: Legent was an add-on. It would have added additional capital, but the 200 million recapitalization if it had gone forward was more than adequate to meet all the needs of the bank. Legent would have added additional deposits, and those deposits would have been helpful to the bank, but the capitalization did not involve Legent. It was part of the recapitalization plan because it showed that additional deposits would roll into the bank, but it was not a necessary part of this bank getting to the level of capitalization that its regulators wanted it to be in. THE COURT: Was it one of the contingencies in any of the agreements? MR. BUFFONE: It was, Your Honor. THE COURT: That -- that's the problem. It's also interrelated that when one of the pieces falls, what did you have to put -- so how can you say we would have had the 200 if the 200 was contingent on the Legent transaction? You wouldn't have. MR. BUFFONE: Well, again, Your Honor, we don't know what the anchor investors would have done. Told that, would you like to have all of these Legent deposits? Of course. We'll make a condition. Well, the regulator won't approve Legent. Will you change your mind? They're going to want to look at the overall deal, what's the regulator's willing to do and not willing to do. That's the analysis that didn't happen here. Your Honor, before I stood up --

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THE COURT: I'm not sure where the legal requirement is. You gave them agreements that had the contingencies in it that, as you said, sophisticated investors decided to put in. And you told them these -- these are -- these are negotiable, but these are in there. And why are they supposed to, when -- when it's clear that those contingencies can't be met, say, well, let's send it back for another round of -MR. BUFFONE: Because -- I'm sorry, Your Honor. I didn't mean to interrupt. THE COURT: Let's ask them all if they still want to give the money under these circumstances. Wasn't it your obligation to say, here's our -- here's plan A; if Legent doesn't go through, here's plan B? I mean, wasn't -- wasn't the onus on the bank to do that, to show that side of it? MR. BUFFONE: Well, Your Honor, that comes down to the process questions here of the bank wasn't given sufficient time to do that. I mean, this all happened very quickly in late December and early January, when the RCP is denied, notification of the undercapitalization. On January the -- the CRP was rejected and the Legent purchase were denied on January the 18th. On the 19th, the S memo's signed, on the 20th, the L memo's signed, and on the 21st, the bank is seized. There was no time to tell the agency, you're wrong. The anchor investors are willing to negotiate over these terms and conditions. We're telling you they are. Let us know how we

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can prove to you that they are. THE COURT: But you -- what I reject is not so much that the clock stopped ticking when you say it stopped ticking, but when it started ticking. It seems that as early as March 2009 is when they started saying problems with the institutional investors, problem with the capitalization, show me, show me. And not saying that the bank wasn't trying, but it's not like December 13 was the first day they said this is important to us. MR. BUFFONE: Well, Your Honor, I say that -- when I stood up, I said I take very seriously Your Honor's admonition that we hadn't adequately backed up our rhetoric with facts, so let me give you some record cites -THE COURT: Okay. MR. BUFFONE: -- to support the point that Your Honor's at. So let's begin with the reports of examination. In 2009, at Administrative Record page 159, quote, liquidity and cash flow management were satisfactory for the bank's day-to-day operations. Liquidity is the key to all of this, Your Honor. And as of the report of examination in 2009, the bank's being told that liquidity, cash flow management are satisfactory in order to meet day-to-day operations. In 2007 -THE COURT: But the 2009 was not -- it also says liquidity risk concerns have been elevated. Capital is less than satisfactory. The bank's asset quality has deteriorated.

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Concentration is in higher risk loans that are creating a stress on the bank's earning performance. They -- no, they weren't done with you yet, but it -and they didn't say this is completely unacceptable, we're going to shut them down tomorrow, but it was not a sunny report. It was decidedly mixed. It says this is where the improvement needs to be. This is where the pressure points are. This is what we're worried about. I'm not saying that it was over then. I'm saying that liquidity didn't pop up in December. This is where it starts. MR. BUFFONE: Well, Your Honor, there would not have been a recapitalization plan if it weren't for the economic reality that was facing every bank in the country. The list you just read off could have applied to any institution. Of course they were taking it seriously and addressing it with the recapitalization plan and their continuation of their business model to maintain deposits for the institutional depositors. What the -- what this is really all about is maintaining the deposit fund. That's what the legislation tells us. That's the reason why the regulators have the awesome powers that they do to seize private property. So how should the agency have made sure that there was the least loss to the deposit fund here? The actions that they took guarantied a loss, it guarantied an outflow of the

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institutional depositors, guarantied that everything would be shut down, the recapitalization would not have occurred. THE COURT: Well -MR. BUFFONE: If there had been more time, there would have been a dramatically decreased possibility of loss to the insurance fund had this transaction gone forward. THE COURT: Well, let me ask you just a couple questions about that, because that is a compelling part of your brief, that it's the things they did that ultimately made the depositors have to go, and so we were in an untenable position. They said fix this, and then they did everything they could do to stop us from fixing it. One of the things that you talk about is the FDIC decision to recharacterize the deposits as brokered deposits, and that that's a flawed decision, that's a reversal of their prior position and it wasn't supported by the factual circumstances here. Once the FDIC did that, though, how can the OTS's actions, which were predicated on that decision, be deemed to be arbitrary and capricious? Is that the decision that's part of this case as well? MR. BUFFONE: Well, Your Honor, to the extent it's in the record, it's part of this case. So I'm -- I don't think it's before this Court. The FDIC was dismissed as a party. But let's talk about the merits of it. First of all, it was on appeal to

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the FDIC so -THE COURT: Right. MR. BUFFONE: -- there was no finality. But more importantly, the broker deposit determination was subject to regulations, was based upon regulations and precedent of the FDIC. In order to come into compliance, each of the institutional depositors who remained at the bank amended their depository agreements to come into compliance with FDIC guidance so that that problem could be eliminated; yet another indication of the dynamic nature of what was going on at the bank, of the commitment of the institutional depositors willing to respond to regulatory demands and do what was necessary in order to comply with regulatory concerns. This wasn't a static situation, and that's the best indication of how serious the institutional depositors were about staying at the bank. THE COURT: Okay. MR. BUFFONE: Your Honor, we've been going for a while here, and I was about to switch over to what would be a fairly lengthy recitation of citations to the factual record, but I want to be guided with the issues that Your Honor would like to hear argument on. THE COURT: Well, I think you know exactly what I think where my concerns lie, so I think you might want to go ahead and -MR. BUFFONE: Okay.

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THE COURT: -- tell me where you want me to look in the record. MR. BUFFONE: Let's start with the -- what I submit is the core premise of the institutional depositors were prepared to leave the bank, because I think the record supports exactly the opposite premise, that the institutional depositors were prepared to leave their deposits at the bank. I won't focus on it, but even in the L memo, the agency didn't object to concentrate -indicated that it had not objected to concentration in, quote, several previous examinations. That's in Administrative Record page 12. So even in the legal memo, they're recognizing that in the past they hadn't objected to the institutional deposits. We've talked about the MSCS deposits and how the other institutional depositors withdrew their ERISA funds so that they weren't subject to the same reason why the MSCS deposits had to leave the bank. At Administrative Record 1553 through 1725 there is a submission by the bank which lays out the current state of play with the institutional depositors. On December the 21st, the OTS had ordered the bank to revise its liquidity plan by December the 28th. The revised plan was submitted on the 28th, along with relevant agreements amending and indicating that the institutional depositors were contractually obligated to maintain their funds at the bank. It laid out a series of recent conversations that had occurred.

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THE COURT: Contractually obligated. Are you talking about the forbearance agreements? MR. BUFFONE: No, Your Honor. There were -- for both of the agreements, pick one out, but for example, Equity Trust could only take out one-sixth of their deposit a month, so it was staged for any withdrawals over a significant period of time. There was a statement at AR 1554: none of the remaining institutional depositors will seek to withdraw their funds. That was based upon -- that wasn't made up out of whole cloth. That was based upon representations from the institutional depositors being passed through the bank back to the regulators. As I mentioned earlier, they had stuck with the bank through these very difficult times, and they were willing to do so so long as the recapitalization remained a viable option. The cite for that is Administrative Record 1554. THE COURT: What was the page that you just cited where OTS said that none of the depositors were going to move their money? MR. BUFFONE: No, no. That was the bank. THE COURT: The bank said that. Okay. MR. BUFFONE: Representing that to the OTS. THE COURT: Okay. MS. BUFFONE: And that was also at Administrative Record 1554.

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THE COURT: All right. MR. BUFFONE: Specifically were Equity Trust and Lincoln prepared to leave their significant deposits at United Western Bank. In this same record, page 1556, it indicates that Equity Trust was supportive of the bank's operations and its recapitalization efforts. Equity Trust agreed to not terminate what Your Honor's referred to as a short-term forbearance until February the 15th of 2011, and recognized that 30-days' notice was required before beginning deposit withdrawals. The earliest deposit would have -- excuse me. The earliest withdrawal would have occurred on March the 18th of 2011, and it could have only been taken out one-sixth a month for six months. So changing this from a liquidity crisis to perhaps a liquidity downgrade allowing time for the bank to proceed with its recapitalization plans in effort to attract other deposits or convince these institutional depositors to -- excuse me -institutional depositors to stay, that's also set out in Administrative Record page 82. The -- Lincoln permitted 90-day prior notice in order for there to be withdrawals. The citation there, Your Honor, is Administrative Record 1947, 1952 and 1556. At the time of the seizure on January 20th, the institutional depositors were in the process of negotiating with the bank over further extensions of their depository agreements.

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That's at Administrative Record 4192 and 4218. On -- that was consistent with the OCC's own recognition earlier on at OCC United Western Bank 1793 that there were strong indications that the institutional depositors were unlikely to immediately withdraw their deposits. The fact that -THE COURT: But let's say I agree that reason number two doesn't work, that they can't -- it was arbitrary and capricious to conclude that the bank would be likely to be unable to meet the depositors' demands. Let's say that I find that to be the weakest link in the acting director's decision. Do they need it? If I find that reason number three, the undercapitalization, was not arbitrary and capricious and it was supported by the record, can you still win? MR. BUFFONE: Well, Your Honor, I submit that we can. And we cite cases in our brief to indicate that all three grounds must stand, but let's assume for a moment that -THE COURT: Right. Right. I mean, you've said -argued several times that they need one of the statutory grounds. MR. BUFFONE: Well, I was going to say, Your Honor, I'll submit for purposes of this argument that we'll defend against all three statutory grounds. THE COURT: No. I know that. My point is, if there is one -- I mean, I'm concerned about the second one. I understand what you're telling me, and --

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MR. BUFFONE: Well, let's move on -THE COURT: -- but I -MR. BUFFONE: -- to the third one. THE COURT: Okay. But the capitalization issue to me, I'm more troubled by the contingencies and the non-binding nature of the investments than -- than you want me to be, and particularly given the fact that the contingencies turned upon the agency backing off from something that it had been insisting on for quite some time, and not to mention the transaction that wasn't going to happen. So I know you're saying that had we given -- been given more time, we could have satisfied them on capitalization two, we could have. And so my question is, was it unreasonable for them at this point on this record to say you've -- you've given us the best you've got. We don't think you can. And if I -- if I find that one to be not unreasonable, ultimately it doesn't matter if I agree with you about the second one, does it? MR. BUFFONE: Well, Your Honor, first, the third ground of Mr. Bowman's opinion is that the savings bank is undercapitalized as defined in 12 U.S.C. 1831o, subsection (b). That section contains other layers of recap- -- if Your Honor would give me one second. (Pause in proceedings) MR. BUFFONE: I just wanted to look at the statute for a second, Your Honor. (Pause - referring). There are layers of

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categories of capitalization, well capitalized. And I'm reading from section 1831(O) subsection B,1. THE COURT: Got it right in front of me. MR. BUFFONE: Well capitalized; adequately capitalized; undercapitalized, undercapitalized if it fails to meet the required minimum level for any relevant capital measures; significantly undercapitalized; and critically undercapitalized. The statute goes on to define the types of capital restoration plans that are required for those various levels of undercapitalization. So Mr. Bowman didn't find that the bank was significantly undercapitalized or critically undercapitalized, and they in fact requested a capital restoration plan. If the capital restoration plan had been accepted, Your Honor, the bank would have had two years to return to adequately capitalized status. It was barely beneath the minimum of what was required to be found to be undercapitalized. And what Mr. Bowman said in grounds three, that the savings bank is undercapitalized and failed to submit a capital restoration plan acceptable to the OTC within the time prescribed. This was all bound together on the third ground. It was not a finding of undercapitalization in the bottom two categories that would have called for prompter action. It was barely falling into that category of undercapitalization. If the recapitalization plan had been accepted, if

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there had been an opportunity to sandpaper it off and make sure that it was acceptable to the agency, there would have been two years to return to an adequate level of capitalization. This did not require that the immediate action that was taken here be taken at the time that it was taken. That leaves us with only the first ground, the unsafety and unsoundness. THE COURT: I'm not sure. Are you saying because they didn't do something else, but they did -- they did pick this section. They said it's undercapitalized and their restoration plan wasn't acceptable. So the question for me, then, is was it unreasonable and arbitrary and capricious to find the plan to be unacceptable? And they say it's unacceptable because it turned upon the purchase that we're not going to approve. It turned upon contingent, non-binding investment agreements, and that's why it's unacceptable to us. And (pause) -MR. BUFFONE: Well, Your Honor, first -THE COURT: And you're saying it's unreasonable for three reasons. First of all, they didn't give us enough time; second of all, that these -- notwithstanding the fact that these sophisticated investors baked these contingencies into their agreements, they really wanted to abide by these agreements and they would have done it anyway, they would have changed them, they would have taken the contingencies out, they would have fixed it. And the question is why was it unreasonable for them to find that that was unrealistic?

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MR. BUFFONE: It was unreasonable, Your Honor, for them to have found that it was unrealistic at the time in the process that they did. It was unreasonable for them to have employed the procedures, or failed to employ the adequate procedures that they should have in order to have tested the threat to the deposit fund posed by the undercapitalization of the bank as opposed to the threat to the insurance fund that would occur from the precipitous seizure of the institution. The timing, the allowance of seven days here, Your Honor, is emblematic of an agency that's screaming loudly: this is a very serious situation that has to be addressed with extraordinary measures. We're not even going to give you the normal 45 days. We're not going to cut it down to 30 days. We're going to cut it down to five working days. What was there in the record that provides the rational connection between the decisions made and the facts found that would indicate that this decision had to proceed with the rapidity that it did. If there were concerns -THE COURT: Well, there were -- I mean, there's 30 more days before they reject the plan. So what happened in the -- you know, let's say they'd given you 35 days instead of five days. What happened in the ensuing 30 days that would have improved your capital plan? MR. BUFFONE: Well, Your Honor, a number of things. First, from the -- improve the capital plan or improve the

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capitalization? THE COURT: Right. You're saying if we'd only had closer to 45 days -MR. BUFFONE: Yes, I understand. THE COURT: -- instead of seven days, our plan would have been better. They didn't reject it for 30 days. So what happened in between that would have made your plan better? MR. BUFFONE: Well, Your Honor, what happened in between was -THE COURT: I mean, you didn't stop it. Like you say, it wasn't a static process. You were out there. You were talking to your investors -MR. BUFFONE: Right. THE COURT: -- you were talking to your depositors. What did they say, what did they do in the 30 days that made your plan stronger than it was the day you submitted it when you only had seven days to submit it? MR. BUFFONE: Your Honor, once the capital restoration plan was denied, the Legent transaction was denied, the train's coming down the track, even then there were ongoing negotiations up to the date of seizure, but the agency had made it very difficult by not permitting any breathing room for those negotiations, by making it quite clear that it wasn't interested in knowing how the negotiations were going or doing anything to further them.

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THE COURT: Right. My question was more specific and it really was focused on the 30 days between when you submitted the plan and they ultimately denied it. And they denied it the same day they denied the Legent transaction, which made your lives even more difficult. I understand that. But my question is, you say seven days just wasn't enough. If they'd given you 37 days, what happened in the time after the first seven days that would have improved the realistic possibility of the plan's success? MR. BUFFONE: Well, what happened, Your Honor, was, first of all, there was negotiations with the institutional depositors, changes in the depository agreements, changes in the forbearance agreements. THE COURT: And you gave them all that information, right? MR. BUFFONE: We gave them all that information. THE COURT: Even though your seven days was over, and you kept giving them the information. So they had it. MR. BUFFONE: Well, that -- that was on the liquidity point, Your Honor -THE COURT: Okay. MR. BUFFONE: -- not on the capital restoration plan. The capital restoration plan was denied. But even despite that, there was ongoing negotiations and efforts to raise capital for the bank.

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Your Honor, what you're suggesting is that the bank, faced with everything that it was facing and the need to meet the ever escalating demands of the regulators with ever -- ever shortening periods of time, at some point the regulator made it impossible for the bank to continue with the good faith effort to re-capitalize. And in the face of the denial of the capital -capital restoration plan and the Legent transaction, everything came to a full stop and seizure of the bank occurred. During the 30-day period before that, everything was going full speed. Your Honor, I'd like to return for a moment to the notion of the undercapitalization. You know, I would ask Mr. Sterbenz when he stands up to deny to the Court that there aren't many banks that are found to be undercapitalized that aren't seized. They simply do not fail banks for being first found to be undercapitalized without something more. Here there was no liquidity crisis, the deposits weren't going to leave, and there was negotiation for a realistic recapitalization plan. Standing alone, the undercapitalization of the bank was not a sufficient reason to seize it at any time and it certainly wasn't a sufficient reason to seize it at the time that it was. THE COURT: All right. Are there other things that you wanted to say that you haven't gotten to say? I wanted to give you a full opportunity. I mean, I feel like a lot of this is in your brief, and we've gone for a good bit of time this morning.

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I don't -- I want you to make sure that if there's something that you really want me to hear that you haven't said yet, that I hear it. MR. BUFFONE: Your Honor, may I go -THE COURT: Please. Go ahead. MR. BUFFONE: -- confer with other counsel? (Pause in proceedings) MR. BUFFONE: Thank you, Your Honor. I'll be brief. I hope I've been successful in at least convincing Your Honor that my position is that the linchpin of what the OTS, now OCC did here was to find that there was a liquidity crisis, the liquidity crisis was based upon their belief that the institutional depositors were about to flee, that the withdrawal of those funds required a recapitalization of the bank. Once -- if Your Honor finds that the agency was deficient in its determinations over liquidity, over its insistence that the deposits were going to leave in the face of evidence that they weren't -THE COURT: Let me just ask you one question. The sentence you just said, that it was the withdrawal of those funds that prompted the recapitalization needs, weren't they calling for recapitalization -- weren't they calling for both? I mean, if they stayed, they didn't think you needed more capital? MR. BUFFONE: Your Honor -THE COURT: I mean, even when they were all there, your capital ratios were going down and they were saying you needed to

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get them up before. MR. BUFFONE: Well, Your Honor -THE COURT: Aren't they two things? MR. BUFFONE: -- it's the circular reasoning I was talking about. Yes, the capital was going down and there was need for recapitalization. THE COURT: Okay. MR. BUFFONE: The question is how pressing was that need? It got pressing to the point where the agency thought they had to seize the bank because of the liquidity crisis. If it were not for that, we could have had a very staged recapitalization. This bank wasn't seized because it was undercapitalized. This bank was seized because the regulators believed that there was going to be a liquidity crisis and that would precipitate the need for prompt infusion of capital, and that's what Mr. Bowman said. THE COURT: Okay. MR. BUFFONE: Thank you, Your Honor. THE COURT: Thank you. We're going to give the court reporter a short break before we start with the defendants' argument. So let's -- we'll be back, it's -- I've got about 11:35. So why don't -- I mean, 11:25. Why don't we come back at 11:35. All right. Ten-minute break. Thank you. (Recess: 12:25 p.m. - 12:37 p.m.) THE COURT: Yes.

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MR. STERBENZ: May it please the Court. Your Honor, I would first on a personal note say that in this case, which we've been living with for two years, there's been a lot of motions hearings and a lot of proceedings before the Court -THE COURT: It can't have been two years. I don't think I've even been here two years. MR. STERBENZ: Well, almost two years. THE COURT: Seems like two years. MR. STERBENZ: What I want to say is that for the Government, I'm sure Mr. Sandler and Mr. Buffone would say the same thing, we've always felt that we've gotten a fair hearing from you. We've probably neither of us agreed with all the decisions you've made, but we appreciate the thought and the consideration that you've given to us as the litigants in the case before you. And in a sense, I think this is probably our last time in court on this case, so I thought I would say that before the case is over. THE COURT: All right. MR. STERBENZ: I had a -- I had a prepared presentation for Your Honor, but I think it would be more expedient to address the areas that came up in Mr. Buffone's argument and that the Court had particular questions or concerns about. THE COURT: Well, I think really what came up in Mr. Buffone's argument, he said it many different ways, but there's really only one question that came up in Mr. Buffone's

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argument, and it is essentially, where is the fire? Where was the fire? Where was the emergency in light of the lack of insolvency, the availability of funds, the fact that there was no run on the bank, the fact that there were investors trying to help, depositors who'd been there for a long time, were not severely undercapitalized, but just undercapitalized? Why -- why was it reasonable, why was it appropriate to pull the plug the day you pulled the plug? Let's -- let's all agree that there were problems with -- that needed to be fixed. They're trying to fix them. Why did this bank, going back to the metaphor I used way back when, why was it time to decapitate this bank that day? MR. STERBENZ: Liquidity, Your Honor, was what really drove this receivership, the liquidity crisis, which was not magic. If -- Your Honor, as we cite in our papers, the holding company for United Western Bank went to the NASDAQ stock exchange and said that we have a severe liquidity crisis in the offing. This is in November of 2010. They represented to the NASDAQ that 75 percent of their institutional depositors were going to be likely to have to withdraw from the bank in short order. And that is outlined at Administrative Record 2470 -- 2457 to 59. That's the NASDAQ's letter. So it was not an imagined liquidity crisis, it was a real one that was foreseen not only by the regulators in the years leading up to the receivership, but by the -- frankly, by the holding company when they were being honest with the NASDAQ.

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THE COURT: Well, but they weren't gone. They'd been there before. They stayed throughout the economic crisis, as -as plaintiff's counsel mentioned. Clearly it was possible that they could walk away, but how did you get "likely" out of it all? MR. STERBENZ: Well, they were required by law to walk away despite whatever their -- despite whatever their contractual obligations would have been to the -- to the bank. THE COURT: Well, the two that walked away, or the one and a half that walked away were required by law to walk away, but of the others, why would -MR. STERBENZ: They were required as well. THE COURT: But were they required by law because of something that the agency did that made that necessary? MR. STERBENZ: No, Your Honor. If you look at Administrative Record 1098, you have a brokered deposit determination signed by the federal deposit insurance corporation, 1098 to 1104. That was the final decision that the FDIC made about all of the deposits at the bank from the institutional depositors, from LTC, from ETC, from MSCS, from CPI and from Legent, that the FDIC made a determination that these were brokered deposits and that -THE COURT: What if I think that's the wrong determination? Is there anything I can do about that? MR. STERBENZ: No, Your Honor. That -THE COURT: Because the agency's action was reasonable

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based on that determination that isn't before me? MR. STERBENZ: The agency -- OTS, OCC doesn't make that call. That's an FDIC determination. THE COURT: Okay. MR. STERBENZ: That made -- they made their final determination on November 5th, 2010. Now, Mr. Buffone did mention that the bank appealed that determination, because there is a statutory carve-out that for an adequately capitalized institution may get a waiver of the brokered deposit restriction from the FDIC. THE COURT: Were they looking for a waiver or were they actually appealing the substantive determination these were brokered in the first place? MR. STERBENZ: They were requesting a waiver. THE COURT: Okay. MR. STERBENZ: And the problem with that waiver request is that there's a statutory bar, that once the bank falls below to undercapitalized, 12 U.S.C. Section 1838(1)(f) and 12 C.F.R. Section 337.6, which is described at AR 1099, the institute -- if the institution is undercapitalized, brokered deposits may not be accepted in any circumstances. So this was the basis, that and the restriction on employee benefit plan deposits, that was a separate statutory provision that affected all of the institutional depositors. THE COURT: Where does it say that in this decision?

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MR. STERBENZ: In which decision? THE COURT: The decision that's before me to review. MR. STERBENZ: The receivership decision. THE COURT: Right. MR. STERBENZ: It's described -- it's described in the S memo, which I -- which I would commend Your Honor. That's really the factual analysis that the staff made comprehensively before the receivership happened. And that the S memo is described, as described at -THE COURT: So basically these are his conclusions. MR. STERBENZ: -- AR 34. THE COURT: And if the reasons for the conclusions are set out in the S memo (pause) -MR. STERBENZ: The S memo gives the -- gives the analysis that the -- that the director relied upon in making the receivership determination. Now, if we take a step back here, Mr. Buffone made a strong statement that the contractual brokered -- the contractual agreements between ETC and LTC allowed only for a structured withdrawal of deposits over a period of months. What's interesting, Your Honor, is that MSCS had the same structured withdrawal provision. On December 20th, 2010, they told the bank, give us all of our money and give it to us now. We didn't say over six months. We're going to start a process. They said, give us our cash now. And what did the bank

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do? The bank didn't wait six months. The bank didn't break it up into pieces. The bank delivered $200 million in liquidity and cash to MSCS on demand. So the same sort of contractual structured withdrawal requirement was ignored by the bank when one of its institutional depositors made a demand for its funds. I think it is quite reasonable for the regulators seeing that massive withdrawal by a very large institutional depositor on demand, that the same -- the same circumstances were very likely to happen with the other two institutional depositors, the large ones, LTC and ETC, each of which, as Your Honor indicated, had only given short-term forbearances that were expressly predicated on the resolution of this recapitalization transaction, which -THE COURT: Well, and I thought that was the reason that you told me in your briefs that -- that this liquidity crisis was a problem, because they'd only given short-term forbearances and they were contingent. Did you argue in your brief, did I miss it, that this was legally required, so it really didn't matter what was in the agreements? They were going no matter what? MR. STERBENZ: We did describe, I believe, in our reply brief the MSCS withdrawal on demand and that there was no -there was no honor in this structured withdrawal settlement. THE COURT: No. I'm talking about the other ones. MR. STERBENZ: Yes.

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THE COURT: You said that it was reasonable to assume that the other two who hadn't -- it was likely that the other two were going to withdraw their deposits for purposes of the -- the director's second grounds, because it was required. So we weren't making a prediction. It was a done deal. And I recall the arguments in the brief that we think it was likely because they'd only agreed to forebear for a couple of months, the forbearance was contingent on something that wasn't going to happen, so it was completely reasonable and not arbitrary and capricious for us to -- it wasn't just an assumption, it was a pretty darn good prediction that they were going to be out the door. But did you actually say to me none of that matters, because they had to go as a matter of law? MR. STERBENZ: No, we didn't -- we didn't make that argument explicitly. THE COURT: So why are you telling me that for the first time in your oral argument? MR. STERBENZ: Well, it's because something -- this is something that had been raised by my colleague in his -- in his oral argument here. THE COURT: Well, he didn't say anything in his oral argument that he didn't say in his brief. He said it differently. But the whole thrust of the brief, the whole argument that I'm supposed to consider is whether it was arbitrary and capricious for OTS to decide that it was -- that

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the bank was likely to be unable to pay its obligations or meet its depositors' demands. And their whole argument was that you jumped the gun. It wasn't likely, even though it was possible, that the depositors were going to move their money, because we had a good relationship with them, they actually really wanted to stay. And in your brief, you said, well, it was kind of contingent. It wasn't as good as they thought it was. But now you're saying to me there was no possibility that they were going to stay, because as a matter of law, they had to walk out the door. And where's the record citation for that? You say that's in the S memo. I think you need to give me the page. MR. STERBENZ: It's described in the S memo at AR 34. THE COURT: All right. MR. STERBENZ: In the footnote. What I was saying, Your Honor, is that the forbearance agreements were expressly and explicitly predicated on the -- on the recapitalization transaction being -- being -THE COURT: That issue I understand. I mean, I want to talk about that, but you've just put something really stark in front of me, which is the idea that the depositors had no choice, no choice. So the agency wasn't even making a prediction. And I'm fixating on that because that's -- that obviously really changes the dynamic, and I just want to make sure that you just changed the dynamic this morning when you stood up or -- or it's

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me and I just missed it and you've been saying this all along. MR. STERBENZ: No. We're emphasizing. It was not a main point of our brief, but we did -- one thing that we did cite in both briefs to the Court was this representation that the -that the holding company made to the NASDAQ predicting that 75 percent of their deposits were going to have to leave the bank. THE COURT: Right. MR. STERBENZ: So that -- I mean, this is -- this is an elucidation or further detailing of the basis for that -- that liquidity crisis that was not imagined, but which was in fact predicted by the bank itself, or the bank's holding company itself, because that, frankly, was what was going to happen. They could not hold brokered deposits and they could not hold employee benefit plan deposits in either -- in either case. And they were -- the institutional depositors, as long as the relationship they had had, they were headed for the hills. LTC -- and I would say in terms of reasoned -THE COURT: Well, how is executing a forbearance agreement indicative of an intent to head for the hills? Isn't it indicative of an intent to try to stick around and see what happens? MR. STERBENZ: Pending the execution of that recapitalization transaction, which was not going to happen after January 18th. That was a dead letter. THE COURT: And it was a dead letter because?

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MR. STERBENZ: As we laid out in our papers, Your Honor, there were several -- there were several elements. First, the agency was not going to weigh the meet and maintain safe capital requirement of the cease and desist order. The bank was informed on that on explicit -- explicitly that there will be no waiver of the C and D order, there will not be. This is not up for negotiation. Where -- we touch on this in our papers where the bank made a number of must-have as opposed to nice-to-have concessions from the agency. So that certainly was not going to happen. The second element, the bank's capital restoration plan and vision to return to the same sort of high risk lending and purchase of securities that had gotten them in trouble in the first place, and they were going to -- rather than keep the bank at the same size, they were going to swell up the bank from 2 billion to $3.5 billion in a period of very -- 18 months, if I'm not mistaken. That's in their capital restoration plan. Congress requires the prudential regulator not to accept a capital restoration plan which is going to increase the risk to the institution. So that growth in assets was absolutely unacceptable, especially since it was predicated on going back to the same old same old that this bank had sustained massive losses on in the previous two and a half years. Third, there was the purchase of this penny stock brokerage, Legent Clearing, which had a highly negative

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enforcement history, which was losing money hand over fist, which had lost its largest customer, which was two-thirds of its accounts. THE COURT: Well, didn't -- didn't OTS spell the doom of the plan by waiting till -- if you reject the transaction the same day you reject the plan, how did that give them time to respond to the fact that this piece of their plan wasn't going to be there? I mean, why isn't it arbitrary to say, okay, if one of the components of your plan is this, we're going to tell you before we reject your plan that we're rejecting that so that you can tell us what you would do instead? I mean, if we're talking about fairness and reasonableness here, isn't there something to their complaint that all of this happens on the same day? MR. STERBENZ: I don't think I would agree with Your Honor. And the key element here is the meet and maintain safe capital. Before this capital restoration plan was ever submitted, the regional director, Mr. Gerbick, wrote to the bank and told them that under no circumstances are we going to waive the meet and maintain capital provisions of the cease and desist order. THE COURT: And where -- just give me that cite if you've got it. MR. STERBENZ: It is at (pause) -THE COURT: If you don't have it handy, you can tell me later. Or has, you know, just --

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MR. STERBENZ: I want to say AR 1441, but I don't -THE COURT: Okay. MR. STERBENZ: I don't have it here. THE COURT: Okay. MR. STERBENZ: But that was -- that was the -- and we do cite it in our papers. THE COURT: Okay. MR. STERBENZ: That was the nice-to-have versus must-have provisions. THE COURT: Right. And I think that's the problem that they have, because the waiver underlies all of the agreements that they say we're going to make it possible for them to come up with the 200 million, all those investors wanted this to happen before they would put up the money. That's a real contingency. It's not a little negotiable contingency. They're sophisticated investors. So that -- that, I think, is the toughest problem for them. MR. STERBENZ: They also raised only half the money. They only raised a hundred billion. They -- and the last day before the receivership, they sent us some -- some letters from a post office box in the Cayman Islands saying, oh, I'm interested in maybe having $25 million of this deal, but there -- as you -they were all provided on the same terms of the recapitalization transaction that had already been disapproved by the agency. Those are all contained in the agency's analysis of those last

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gasp letters. THE COURT: Well, the anchor investors, the hundred million, was part of the recapitalization plan. MR. STERBENZ: And that money was raised. We can -- we can be -- we can assume that that money was raised in October of 2010. THE COURT: Okay. And the rest of them, the Level and the Oak Hill and all the other money that if you added to it got it to 200. I mean, the Olympus was oral. The other ones, when did they come in? MR. STERBENZ: Well -THE COURT: And -- but -- but I guess their point is if they were trickling in at the last minute, isn't that a sign that maybe more time would have helped them and that you moved too soon? MR. STERBENZ: The history of representations of the bank about capital raising are questionable at best. We laid out in the footnote the various and sundry promises that the bank made to raise capital by certain dates throughout 2010 that they said, OTS, we're going to get it done by June 30th, 2010. Well, June 30, 2010, comes and goes. And we're going to get it done by September 30th. September 30th comes and goes. We get a plan in in October that raises only half the money, but we're going to work on getting the other half. And for the next four months, there were plenty of

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promises: well, we're just almost there, we're almost there, we're almost there; the check's in the mail, OTS; here, we got a post office box from the -- from the Cayman Islands, these guys might be interested; oh, here's a -- here's a letter signed by somebody with no return address; oh, that -- that gets us to the -- to the promised land. Of course none of those were real cash. They were all expressions of interest that were submitted solely to try and derail the receivership that the bank knew was coming. The bank had plenty of advance notice of the receivership. The FDIC told the bank in December of 2010 that the receivership was likely. The bank was downgraded to a composite rating of five at the end of December 2010. As Judge Lamberth's decision in James Madison says, a composite five means that receivership is imminent and that an injection of funds is immediately required. So the bank wasn't caught unawares here. They had -they had a month and a half notice that receivership was a likely consequence if they failed to -- failed to raise their capital levels and get their act together. And to say that if we'd given them a couple more weeks, I think the agency reasonably discounted those promises over -- give -- which were the same that had been given over a long period of time by this bank. In terms of the CRP, I would point out one thing to Your Honor, and that is that the statute in the 45-day matter, the statute requires that the -- that the maximum period for

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submission of a CRP is 45 days after the bank becomes undercapitalized. This bank became undercapitalized on September 30th of 2012. Now, because of some creative bookkeeping and failure to recognize losses on their MBS portfolio, they managed to stave that off and -- until they were finally ordered by the agency to take the proper write-downs in the beginning of December. But if we take the -- if we take congress's word on it, they should have had a capital restoration plan in the middle of November. THE COURT: When did the agency first deem them to be undercapitalized? MR. STERBENZ: Well, they were directed to take the write-downs on December 3rd or 13th of 2010. I -- excuse me, Your Honor. I don't recall the exact date. And shortly thereafter, then, the institute -- the institution was directed to submit a CRP. Now, it was -THE COURT: Why were they only given seven days? MR. STERBENZ: Because as was set forth in the letter from Mr. Gerbick, and I think we cited in our papers, the institution at that point was in an unsafe and unsound condition. They had had massive and continuing losses. They had had inability -- rapidly drop in capital levels. They were at severe risk of institutional depositors who were going to be departing because of the brokered restriction deposit and because of the employee benefit plan deposits. There simply was not enough time

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to give them 45 days until late January to do the CRP. And the agency's implementing regulation permits the agency to shorten the period if circumstances warrant. THE COURT: Well, when the depositors that had to leave because the ERISA problem left, and they didn't do it over time, they did it all at once, did they -- did they have the money to give them? MR. STERBENZ: They did at that point. THE COURT: They did? So now we're in a situation where there's the other two, they haven't left, and so they might like to stay. And what you're saying is if they'd left at that point, they wouldn't have had the money to give them and that that was imminent? MR. STERBENZ: Well, that the -- that the acting director made the determination that this was likely to occur in the near term, that those funds -- that those institutional deposits were going to depart. Now, the statute doesn't require us to actually wait until those institute -- until those depositors pull their funds. To use a metaphor, you know, we're allowed to put the brakes on the speeding car before it goes over the cliff, which is what Mr. Bowman did in this case. The withdrawal of just ETC's funds exceeded the entire liquidity of the bank. They had something on the order of $680 million on deposit. The bank's maximum liquidity was about 400. The other depositor was in the

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$200 million range. The bank needed just for its other retail deposits $50 million in liquidity to fund day-to-day operations. There were no other reasonable sources of liquidity. Their liquidity credit card was maxed out. The Federal Reserve had cut them off, the Federal Home Loan Bank of Topeka had -they had maxed out almost their entire line with them. There was only $15 million left. They had already accessed the quick rate deposit system and gotten $200 million of deposits that built some liquidity. But that's not a business model that's going to sustain. That's a short-term, short-gap measure to raise funds from hot -- from hot sources of liquidity. The problem that killed this bank is the concentration of institutional deposits. Coupled with the losses and the drop in capital made it inevitable that withdrawal by a single or a couple of large depositors would crash the bank. And so the -in making a predictive judgment as to what was going to happen, the acting director had to use a proper level of discretion based on his expertise and the expertise of the staff. And that's laid out in pretty excrutiating detail in the S memo. And I would say that the S memo also differentiated between the different institutional depositors. There was one institutional depositor, Legent Clearing, which was a depositor as well, but that the staff determined was not likely to withdrawal. Because the nature of, the structure of its deposits, the staff felt that they were -- their funds were going

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to stay in the bank. So it was not that everybody's going to leave. It was LTC, ETC, the remainder of the MSCS deposits were likely to go. Legent was likely to stay. That's a hallmark of reasoned decision-making when you -- when you can draw distinctions factually that would lead to various -- various depositors. Your Honor touched on an important point here, and that is that this recapitalization transaction was almost Rube Goldbergesque in its complexity. Everything was dependent on almost everything else falling into place. The first half of the anchor depositors were going to come in, but only if the agency would rewrite the C and D order. The C and D order would require the agency to approve the purchase of this penny stock brokerage firm and to waive -- waive the requirements of the C and D order. They had to raise money from another hundred million dollars worth of investors. Everything was dependent on everything else. And while my colleague this morning would say that everything is negotiable, the regulator is not a business partner here. The regulator has to pass on the plan and the deals that are -- that are presented to it. There's nothing in the statute or in the bank regulation practice saying that the regulator is an active participant in the business negotiations. We're not their business partner. We're their regulator. We can only pass on the applications that they give to us. They give us an application that says that we must purchase Legent Clearing as a

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must-have element of this plan. Well, if the regulator determines that the money laundering problems and the penny stock fraud problems that Legent Clearing had been engaged in made it an unsuitable organization to bring underneath the FDIC's deposit funds, we don't have to negotiate that anymore. I mean, this agency had -- this broker has -THE COURT: The agency has some discretion about when to do what it does. There seems to be something to the bank's argument that essentially the agency held the keys to the kingdom and then it faulted them for being unable to unlock the door. You're saying you have to hold on to those institutional depositors if you want to stay in business, but then it's taking action such as the OTTI charge that makes them go. So how are they supposed to work with you and meet your demands if, no, you're not their business partner, but if the very things you're telling them are essential to you, you're making it impossible for them to accomplish? MR. STERBENZ: Very simple way to attack this problem, it would have been to try and do something that the bank did similarly in 2009. They went out to the capital markets and they raised about 65, $70 million worth of capital in the capital markets. And they down-streamed this capital to the bank. For a short while, that raised their capital ratios, but of course at this point the bank was beginning to recognize massive losses on its MPS portfolio, and its bad loans were snowballing, so that

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capital infusion was quickly eaten up. And the bank at that point was unable to go back to the capital markets for a standard raise. Now, they could have -- and this is Monday morning quarterbacking. They could have come up with a deal that didn't lock them in to this recapitalization transaction. Like we describe in our papers, this October 2010 recapitalization transaction had a specific section to it which says that the bank will no longer negotiate or seek to find other sources of capital other than this transaction. They were locked in at that point. That was their decision. That was not -THE COURT: They were locked in in -- which agreement was dependent on that? MR. STERBENZ: That was the -- that was the recapitalization transaction October 24th, 2010. And we do cite in our papers -THE COURT: The one with the anchor. MR. STERBENZ: With the anchors. THE COURT: Was dependent on their plan being accepted by you? MR. STERBENZ: Yes, but (pause) -THE COURT: I just want to make sure what you just said, that I understood all the "its" and the "the's" in that sentence. MR. STERBENZ: Forgive me, Your Honor. Sometimes my

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mouth moves faster than my brain. THE COURT: It's not you, it's me. But tell me what it was, what it was that you said that they -- they chose to bake into a critical agreement, a particular contingency, and I want to make sure I know which agreement and which contingency. MR. STERBENZ: That's -- that's the recapitalization transaction with Oak Hill and the anchor investors. THE COURT: Okay. MR. STERBENZ: And one provision of that agreement locked the bank in: no other negotiations with no other possible partners. That -- it was an exclusivity provision. And at that point the bank really either had to pull off this transaction or nothing. And that limited their flexibility, because this investment agreement came with a whole series of hedges and contingencies, which included the OTS waiving the meet and maintain safe capital provision. THE COURT: Well, earlier you said the first hundred I'll grant them they raised. So that's the anchor one. MR. STERBENZ: Yes. THE COURT: And you just said that was riddled with contingencies and hedges. So which is it? In your view, did they raise the first hundred or did they not raise the first hundred? MR. STERBENZ: The first hundred, one of the contingencies was they had to go out and get another hundred

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from -THE COURT: Okay. MR. STERBENZ: -- another group of investors, which they never succeeded in doing. THE COURT: And -- and they had the contingency that you all would stand down from the terms of the cease and desist, which you weren't going to do. MR. STERBENZ: And reasonably so, Your Honor. I mean, it was the cease and desist order that codified the regulatory requirements that we had been telling them for two years, you -first nicely, yes, let's have an MOU, let's encourage you to get to these levels. And then when the bank showed no ability to meet or maintain the safe amount of capital, the cease and desist order, that's the most severe enforcement mechanism that the regulators have short of receivership. It has the force of law. It can't -- it's -- it can't be subject to collateral attack in court by statute. We cite that in one of the footnotes in our second brief. That's -- that is the standard that the bank was required to maintain after June 30th of 2010, and now four months later, they want out of it. Well, I'm sorry. You were ordered to meet and maintain 12 and 8 percent capital ratios until we tell you you're not. So it's not arbitrary and capricious for the agency after that point to say you will follow the law, you will follow the order that you consented to and that which entered -- which

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was entered. In fact, it would have been absurd for the agency to impose this requirement and then just a few months later say, ah, never mind. Go ahead and grow the bank 75 percent in a short period of time. Go ahead and let those capital levels dwindle down again. Go back to the same sorts of lending and high risk purchases of mortgage-backed securities that got you into trouble in the first place. Go ahead. We really weren't serious. The plaintiff's entire case, in my view, comes down to, we should have gotten more time, Your Honor, but that's -- that's a -- that's a prudential judgment that the regulator has to make. The prudential regulator had a long history with this bank and a long history of broken promises by the bank, going back to 2007, I should add. Your Honor cited the 2007 report of examination. In that report of examination, the concentration of institutional depositors at this bank exceeded 70 percent, which is almost exactly the same amount as at the time of receivership. THE COURT: But I don't think you can really say that prior to 2009 the agency was upset with the bank. Really, the tone changes, I'm not saying unreasonably, but things changed within that March 2009 report of investigation. I think it's hard to go back earlier than that and say, no, it's always -they've always been a problem. They have a history of missed promises. Whatever it was, it's -- once you -- facing the circumstances they were facing in 2009, say we need to do something, I think that's kind of where the clock started

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ticking. I don't think it started in December, like they say, but I think it's a little unfair to say it started before March 2009, isn't it? MR. STERBENZ: I agree, but I would point to you two sections of that 2007 exam, which came -- which chickens came home to roost later on. First, the regulator told the bank in 2007 that because of your business model, you have to maintain capital levels well above the well-capitalized level of tradition, which is not to -- at above -- at above a ten percent risk-based capital level. That's -- when they failed to do that in the next examination, that's when the alarm bells came out. The second part of that examination I would point Your Honor to is the bank's promise that we're going to get away from those institutional deposits. We have this new community banking strategy where we're going to take deposits from the local area. At that point in 2007, 70 percent of their deposits were from institutional depositors. So you'd think they would have made some effort in the next two years to push that number down as they promised. But two years later the examiners come back, and it's up to 87 percent. So rather than doing what they had told the regulator, they'd gone just the opposite direction, increased that institutional deposit risk. And when you have declining capital combined with losses, combined with economic crisis, the antennae went up with the examiners at that point. And you saw in the record, you see

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an ever increasing level of concern, memoranda of exhortations, memoranda of understanding, further examinations, capital -- and then the C and D order, which is the most severe thing that the regulator can do. So it was a long story. It was not a short one. The last thing that a regulator wants to do is shut a bank down, because in the end it does cost the taxpayers money, it does cost the FDIC's fund money, but at the same time have an obligation not to let the car go over the cliff. And that is what -- that is what the acting director did in this case. THE COURT: The problem with the metaphors is then they're going to stand up and say it wasn't a speeding car heading towards a cliff, it was really only going 30 miles per hour, and it wasn't a cliff, it was a ditch, and so -- don't -but I want to put the metaphors aside, because they're not helpful, because everybody's got them. What is your response to the argument that they made at the end, which is, maybe so. This car's heading at some speed towards something at some level of bad, but you had banks pitching off cliffs left and right at this time. Why, why them then, given the fact that we're talking undercapitalization as opposed to substantial undercapitalization, given the fact that they've got these institutional depositors who would like to try to stay, they've got the anchor investors who would like to try to give money,

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you've got decent, honest people running the bank, there's no suggestion that they're putting this money in their pocket, they're just making business judgments that you think just weren't viable anymore in this -- in the climate? Why them then, given the awesomeness of this remedy that you're talking about? MR. STERBENZ: Your Honor is asking the question that Mr. Buffone suggested. I'm actually glad that you asked that, because I could spend about 30 minutes thinking how I would answer that. The answer is there are many undercapitalized banks submitting capital restoration plans to their regulators that were based on realistic assumptions, that don't increase the risk to the deposit insurance fund, and which are granted by the regulator on a regular basis. Certainly not every undercapitalized bank is placed in receivership. Heavens no. I can't state the number that are presently undercapitalized for OCC, but I know that there are more than a handful. But those banks came up with capital restoration plans that didn't have -weren't filled with the Swiss cheese of holes that this plan had. They're not asking for penny stock brokerages to be brought under the bank, they're not asking to be relieved of the provisions of the cease and desist order so the banks keep -- meet and maintain safe capital. They aren't asking the regulators to allow the bank to almost double in size in the course of 18 or 24 months. They're not asking the regulator to go back -- to be allowed to

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go back to start writing sub prime loans or whatever sorts of lines of business that got them in trouble in the first place. All of these things United Western Bank insisted on in their CRP and were quite adamant about it. While they now say this is all negotiable, we can't go by what they say is negotiable, we can only go by what they submit to us. And what they submitted to us, even on the last day of receivership, is we were interested in putting money in so long as you meet all these conditions of the October 2010 investment agreement. And that was a dead letter at that point. They were not going to be allowed to purchase Legent, this penny stock brokerage. They were not going to be allowed to operate with less than the levels of capital that they were already being required to do. They were not going to be allowed to expand the size of this bank and go back into the questionable areas of business that got them in trouble in the first place. That was -- that's really the answer why at this point. THE COURT: All right. And I think that's also kind of your closing argument, too. MR. STERBENZ: Thank you, Your Honor. THE COURT: I mean, if there's something important else you wanted to tell me. MR. STERBENZ: One other thing I would point to, Your Honor, and that is Mr. Buffone's argument closed with a claim that the bank was barely beneath the minimum level to be

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undercapitalized. I think that's misleading. The bank itself in its capital restoration plan, which is at AR 1491, projected that its year end 2010 risk-based capital level was down to 6.4 percent. So between the end of September, when they had reported on a TFR as amended for OTTI that they were at 7.8, within that three-month period, they lost another 1.4 percent of their remaining risk-based capital. This is the bank's own projections that they provided the agency. So they were -- they were well into the undercapitalized level with continuing losses and were soon to be spiraling further downward. THE COURT: All right. Thank you. MR. STERBENZ: Thank you, Your Honor. THE COURT: All right. Mr. Buffone, I know you have something to say, and I'm going to let you say it. I want to caution you that I gave you an hour and 20 minutes on the front end and I've read all your pleadings, and I really want, like, five minutes. Just pick the most important things you want to tell me, and -MR. BUFFONE: I can do less, Your Honor. THE COURT: -- I'm going to let you tell me. And I won't ask you any questions while you do it, but -MR. BUFFONE: Your Honor, I'll give you less. THE COURT: All right. MR. BUFFONE: And I appreciate the opportunity. I'm going to first of all try to release us from the metaphor of the

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speeding car on the cliff and take us to a metaphor that Your Honor invoked, and that's, where is the fire. And what we heard Mr. Sterbenz say is that -- admit that the fire was with liquidity, the argument that I had just made to Your Honor. Well, what's his new argument? His new argument is that the two remaining major institutional depositors were required by law to remove their deposits because of the brokered deposit determination of the FDIC. At AR 1759, Your Honor, I quote, United Western Bank promptly notified the FDIC of its intent to appeal the determination, and the FDIC agreed not to take any action to enforce the determination pending resolution of United Western Bank's appeal. Not only was it appealed, it was stayed. Then Mr. Sterbenz cites to you -THE COURT: He says that you didn't appeal, you moved for a waiver. Did you appeal the brokered determination? He says yes. Or -- you've got a real nodder at the end of the table back there. Or -- which is fine -- or did they -- did they seek a waiver or did they seek an appeal? MS. PRIETO: Both. MR. ABARIOTES: Both. THE COURT: Okay. MR. BUFFONE: They put in a waiver based, as I presented in my argument, on the modifications of the agreement. THE COURT: Okay. And what was the page you just read to me from the record?

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MR. BUFFONE: That was page 1759 from the Administrative Record. THE COURT: Okay. MR. BUFFONE: Your Honor, then Mr. Sterbenz, I think in a tacit admission that there was no basis for the determination that the fire needed to be put out immediately comes up with a new ground that has no validity and then cites to Your Honor footnote 15 from the brief at page 34. Well, footnote 15 of their brief deals with ERISA deposits. It's not a determination that it was somehow illegal, a newly coined theory that it's somehow illegal for these deposits to be at the bank. Your Honor, this case is all about liquidity, it's all about the determination of whether or not the institutional depositors were about to leave, and the timing of the agency's decision to determine that they weren't allowed to leave. Excuse me. A determination that they were about to leave, in the face of a record that they were not. Your Honor, there's only one other thing I want to comment on, because I think it's very emblematic of the problem with the agency's decision, the problem with the way it's been defended here, and the reason why Your Honor should rule in favor of my client. What we heard Mr. Sterbenz stand up and say was to repeat what he had in his brief, this almost offhanded comment: oh, and some of those letters even came with a Cayman Island P.O.

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Box. Well, Your Honor, if that's the problem, does the regulator sit back and say, oh, Cayman Island. That must be a fly-by-night company. How can we pay any attention to that? Why not ask for some more information? Who is this company? Tell us who they are. Go look it up yourself. These were not fly-by-night operations. These were legitimate investors offering to put up millions of dollars into a transaction that had risk. THE COURT: If they were willing to walk away from the meet and maintain, that to me is the biggest problem. I -- I understand what you're saying about the predictions and the flaws in their theory that your depositors were about to walk away, but everything you had, everything you presented, everything that you said that was going to make the bank whole was dependent upon their walking away from something that they told you over and over again they weren't going to walk away from. And that, I feel, is problematic. And if you -MR. BUFFONE: Your Honor, walking away from the meet and maintain requirement, two quick arguments. First of all, as I mentioned, the capital restoration plan if accepted would have allowed two years to come up with those capital levels, so it shows we were prepared to come up with them immediately upon closing of the recapitalization plan. The meet and maintain requirement says that you're to meet and maintain these capital levels that would be required if you had lower capitalization.

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Once we had full capitalization at 200 million, plus perhaps the Legent deposits, what continuing meaning would the meet and maintain requirement have had? All it would have done would have been to make it harder for the bank to obtain certain possessions of the OCC. THE COURT: But you're asking me that, you're asking them that, but the point is anchor put it in their agreement. It was important to them for some reason. This sophisticated investor said that -- that is my contingency or you're not getting this money. MR. BUFFONE: And that was at the time that the anchor investment agreement was negotiated, Your Honor. And again, I won't repeat myself, but this was a dynamic, ongoing process. There were many milestones that should have indicated to the agency that progress was being made, that this was a group, whether it was the institutional depositors or the anchor investors or the new investors, who were willing to sit down and talk. We didn't want to be a business partner with the agency. We wanted to be a regulatory partner. We wanted to not hear from on high what -- what they were going to tell us our agreement said. We wanted to sit down and talk to them about it. There was no fire here, Your Honor. There was no need to put it out. If there was a fire, it was being stoked by the agency to put more and more pressure on this bank to drive away the institutional depositors, to drive away the anchor investors

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and to make sure that it failed. Thank you, Your Honor. THE COURT: All right. Thank you very much. I very much appreciated the arguments of counsel, the quality of the arguments, the quality of the briefs. I appreciate the participation of the note writers and the head shakers. I've -I've played all those roles. I've been the one at the lectern, I've been the one at the table. None of them are easy and they're all important. And I know everybody's worked very hard on this and believes everything they've said, and I'm going to -I've taken it very seriously from the minute you all walked in here. I'm going to continue to take it seriously, and I'm going to have it under advisement and we'll issue an opinion when we can. Thank you. MR. BUFFONE: Thank you, Your Honor. THE COURT: Thank you. (Proceedings adjourned at 1:25 p.m.)

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CERTIFICATE OF OFFICIAL COURT REPORTER

I, Kellie M. Humiston, RMR, CRR, certify that the foregoing is a correct transcript from the record of proceedings in the above-entitled matter.

December 7, 2012 ___________________ Kellie M. Humiston _____________________ Dated