EXHIBIT 1 

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 1 IN THE UNITED STATES DISTRICT COURT

 FOR THE NORTHERN DISTRICT OF ILLINOIS

 2 EASTERN DIVISION

 3 LAWRENCE E. JAFFE PENSION PLAN, ) on behalf of itself and all ) 4 others similarly situated, ) ) 5 Plaintiff, ) ) 6 vs. ) No. 02 C 5893 ) 7 HOUSEHOLD INTERNATIONAL, INC., ) et al., ) Chicago, Illinois 8 ) March 26, 2009 Defendants. ) 9:30 a.m. 9

 VOLUME 8

10 TRANSCRIPT OF PROCEEDINGS - PRETRIAL CONFERE

 BEFORE THE HONORABLE RONALD A. GUZMAN

11

12 APPEARANCES:

13 For the Plaintiff: COUGHLIN STOIA GELLER RUDMAN &

 ROBBINS LLP

14 BY: MR. SPENCER A. BURKHOLZ

 MR. MICHAEL J. DOWD

15 MR. DANIEL S. DROSMAN

 MS. MAUREEN E. MUELLER

16 655 West Broadway Suite 1900

17 San Diego, California 92101 (619) 231-1058 18

 COUGHLIN STOIA GELLER RUDMAN &

19 ROBBINS LLP

 BY: MR. DAVID CAMERON BAKER

20 MR. LUKE O. BROOKS

 MR. JASON C. DAVIS

21 MS. AZRA Z. MEHDI

 100 Pine Street

22 Suite 2600

 San Francisco, California 94111 23 (415) 288-4545

24

25

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 1 APPEARANCES: (Continued) 2 For the Plaintiff: MILLER LAW LLC

 BY: MR. MARVIN ALAN MILLER

 3 115 South LaSalle Street

 Suite 2910

 4 Chicago, Illinois 60603 (312) 332-3400 5

For the Defendants: CAHILL, GORDON & REINDEL LLP 6 BY: MR. THOMAS J. KAVALER

 MS. PATRICIA FARREN

 7 MR. DAVID R. OWEN

 MS. JANET A. BEER

 8 MR. JASON M. HALL

 MR. JOSHUA M. NEWVILLE

 9 MS. KIM A. SMITH

 MS. SUSAN BUCKLEY

10 MS. YAFIT COHN

 MR. MICHAEL WERNKE

11 80 Pine Street

 New York, New York 10005 12 (212) 701-3000

13

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Court Reporter: NANCY C. LaBELLA, CSR, RMR, CRR 23 Official Court Reporter 219 South Dearborn Street

24 Room 1222

 Chicago, Illinois 60604 25 (312) 435-6890 Nancy LaBella@ilnd.uscourts.gov

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 1 THE CLERK: 02 C 5893, Jaffe v. Household

 2 International, Incorporated.

 3 THE COURT: Good morning, everyone.

 4 I think last time we were together, we were talking

 5 about addressing demonstrative exhibits sometime soon, doing

 6 some scheduling for the jury selection and I believe there was

 7 a -- what was benignly described as a housekeeping matter

 8 regarding some witnesses. How do you wish to proceed?

 9 MR. KAVALER: Your Honor, I have a housekeeping

10 matter prior to the housekeeping matter. I recognize this is

11 unusual, given the rules, but could I orally move the

12 admission pro hac vice of Ms. Yafit Cohn of the New York bar

13 who will be with us today to participate in the

14 demonstratives. Counsel for plaintiffs has no objection. We

15 will file the requisite paperwork nunc pro tunc later today or

16 perhaps tomorrow. We just didn't get a chance to get that

17 done. She's the only person on our team here today who is not

18 admitted pro hac or a regular member of the bar and/or the

19 trial bar of this court.

20 THE COURT: Sure. Do you have any objection?

21 MR. DOWD: None, your Honor.

22 THE COURT: Okay.

23 MR. KAVALER: Thank you, your Honor. Appreciate it.

24 Mr. Dowd.

25 THE COURT: Still don't know how you want to proceed.

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 1 MR. DOWD: Your Honor, I think -- this is where we

 2 are. We exchanged demonstrative exhibits late yesterday

 3 afternoon. The parties have talked about plaintiffs'

 4 demonstrative exhibits. We were working our way through

 5 defendants' demonstrative exhibits earlier this morning trying

 6 to resolve objections if it were possible. I think we can

 7 probably start with plaintiffs' if the Court -- if it would

 8 please the Court.

 9 MR. KAVALER: Then, your Honor, we see on your

10 calendar that you have other matters at 10:30. We were

11 hopeful that when you break, we can go out and resolve the

12 remaining issues between ourselves or at least as much as

13 we're able to. And when we come back, proceed.

14 THE COURT: Very well. Let's proceed that way then.

15 What do you have?

16 MR. DOWD: Your Honor, these are the demonstratives

17 that we turned over to defendants last night. If I may

18 approach.

19 (Tendered.)

20 THE COURT: So this book is plaintiffs'

21 demonstratives exhibits?

22 MR. DOWD: Yes, they're numbered in the bottom

23 right-hand corner.

24 THE COURT: Indeed they are, from 1 to 154, I take

25 it.

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 1 Okay. Objections to these?

 2 MR. HALL: Yes, your Honor. I think we can probably

 3 do them in batches to some extent.

 4 Jason Hall for defendants.

 5 Our objections, starting with No. 1 and I think it

 6 goes through No. 25, are that the exhibits themselves, the

 7 demonstratives themselves, are headed with a title that says

 8 Household's false and misleading statements or something to

 9 that effect. And defendants' position is that that title is

10 unnecessarily prejudicial, and it should properly be

11 Household's alleged false and misleading statements.

12 MR. DOWD: Your Honor, I think that the jury is going

13 to hear that plaintiffs are accusing the defendants of false

14 and misleading statements. And that's exactly what we're

15 going to set out to prove in the trial. Certainly we chose to

16 phrase false and misleading statements because that's what

17 they're going to hear in the jury instructions. We could have

18 said lies defendants told during the class period. We could

19 have said fraudulent things that defendant said during the

20 class period. And we thought we chose a word that was fairly

21 neutral but still at least allow the jury to connect what we

22 were trying to prove with the jury instructions they were

23 going to hear.

24 THE COURT: Will the word "alleged" cure it for you?

25 MR. HALL: Yes, your Honor.

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 1 THE COURT: Add the word "alleged." That's in front

 2 of the word false, not in front of "Household."

 3 (Laughter.)

 4 THE COURT: What else?

 5 MR. DOWD: I think defendants' next objection is

 6 Exhibit 31 apparently, your Honor. Oh, they withdrew that.

 7 Sorry, your Honor.

 8 MR. HALL: That's correct, your Honor. The next one,

 9 your Honor, is No. 38, which is an organizational chart that

10 folds out.

11 Defendants' only objection on this document is that

12 at the top, it lists an outside consultant that Household

13 worked with, named Andrew Kahr. And your Honor may recall

14 that Mr. Kahr was the subject of one of defendants' motions in

15 limine, which your Honor denied. But the plaintiffs have

16 suggested here in this chart that Mr. Kahr was an employee of

17 Household like these other people and also that he was at the

18 top of the company; and defendants contend that that's

19 misleading.

20 MR. DOWD: Your Honor, I think that Mr. Kahr, as the

21 Court is aware, plays a role in this case. I think he has to

22 be somewhere near the top of the chart because the evidence in

23 this case will show that Mr. Kahr was directly hired by

24 Mr. Aldinger and Mr. Schoenholz, the two guys running the

25 company. And so I think it only fair for Mr. Kahr to be up

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 1 where they are. He's the one that they consulted with.

 2 THE COURT: How is the chart going to be used?

 3 MR. DOWD: I believe, your Honor, this chart -- it

 4 may be used in opening statements, just to give the jurors

 5 some feel for where these different people are. And it may

 6 also be used, I assume, in closing statement just -- closing

 7 arguments just to remind the jury of the different witnesses

 8 who appeared and testified.

 9 THE COURT: Okay. I don't see what's objectionable

10 here. If counsel wants to say in his opening statements that

11 Mr. Kahr was really at the top of the corporate structure

12 because he ran the whole show in terms of his proposals, and

13 he wants to then argue that he proved that at the end of the

14 trial, he can do that. This chart is nothing more than an

15 extension of his argument. This is what he's going to argue

16 the evidence will show. If he does it that way, it's

17 appropriate.

18 If he attempts somehow to imply that this is an

19 organizational chart that comes from Household International

20 or that is accepted by Household International, then you have

21 a problem. But if he's going to use it the way he described,

22 I don't see a problem.

23 MR. HALL: Understood, your Honor. Thank you.

24 Your Honor, turning to plaintiffs' demonstrative

25 No. 40, this is a document and -- this is a document, your

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 1 Honor, that relies -- and plaintiffs intend to use apparently

 2 with their expert, their accounting expert, Mr. Devor. The

 3 underlying documents here, your Honor, that support these

 4 numbers have both been excluded from evidence under Rule 408

 5 pursuant to one of defendants' motions in limine related to

 6 the settlement. Defendants don't believe it's appropriate for

 7 Mr. Devor then to --

 8 THE COURT: I'm sorry. What numbers are you

 9 referring to?

10 MR. HALL: Your Honor, in the middle of the table on

11 this exhibit, there are numbers that say amount attributable

12 to improper lending practices. Those numbers their expert

13 drew from two documents essentially, both of which have been

14 excluded from evidence.

15 THE COURT: What documents are those?

16 MR. HALL: Your Honor, it's essentially the

17 settlement agreement itself, the $484 million, and a document

18 that had previously been used in this case that was created by

19 Carin Rodemoyer, who was an employee of the consumer lending

20 business. And I can get your Honor the exhibit numbers in a

21 moment.

22 MR. DOWD: Your Honor, I think this is a fairly

23 straightforward issue. The defendants filed a Daubert motion

24 on Harris Devor, our accounting expert. And the Court issued

25 a two-page opinion on the 23rd of March. And what the

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 1 Court -- initially the Court had said that we couldn't use

 2 what's been called in this case Rodemoyer 17. I believe if

 3 the Court wants to look, it's actually Plaintiffs' Exhibit

 4 681. It was a calculation. And I have a copy if the Court

 5 wants or Mr. Hall needs it as well.

 6 (Tendered.)

 7 MR. DOWD: And essentially, your Honor, Mr. Devor in

 8 rendering his opinion -- and I have no dispute with counsel

 9 that the Court said we couldn't offer Rodemoyer 17, which is

10 the Plaintiffs' Exhibit 681 that the Court is looking at. It

11 was an internal calculation of potential refunds from improper

12 lending practices that Ms. Rodemoyer prepared in the summer of

13 2002.

14 As to Mr. Devor, he took Rodemoyer 17 and he took the

15 bottom line number, the 484 million of the settlement, and

16 what he said was, there are two ways that one could look to

17 see how much money Household generated from improper lendin

18 practices. He says one way is look at the 484, the dollar

19 amount of the settlement. That's one number you could put on

20 it. He says the second number you could put on it is the

21 internal calculations that the company did, which were

22 performed by Ms. Rodemoyer. Defendants addressed both of

23 those issues in their Daubert motion.

24 Ultimately, your Honor, in your opinion, you said

25 that Mr. Devor could testify, could give his opinion about how

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3-26-09 Pretrial Conf. Day 8 3/26/2009 6:40:00 AM

 1 much of the revenue Household reported for 1999 through the

 2 second quarter of 2002 was attributable to predatory lending

 3 practices. And these are the documents -- this is the

 4 evidence that Mr. Devor relied on to give that opinion.

 5 The Court goes on to say in the opinion, Defendants

 6 can explore on cross-examination the extent to which the

 7 documents on which Devor relies -- Household's estimate of the

 8 refunds it might have to make -- that's Rodemoyer 17 or

 9 Plaintiffs' Exhibit 681 -- or the multistate investigation

10 settlement agreement -- which is the 484 -- are sufficient to

11 support his opinion.

12 Here's my understanding of what the Court was telling

13 me I could do: That doesn't allow me to go back and say the

14 Court's earlier opinion that I can't put in Plaintiffs'

15 Exhibit 681 is now overruled by the subsequent opinion. I

16 will not offer Rodemoyer 17. What I'm going to have to do is

17 ask Mr. Devor, Have you tried to quantify how much money was

18 derived from these predatory lending practices? Yes, I have.

19 And, sir, what is your opinion as to how much revenue was

20 derived from predatory lending practices based on the

21 documents you reviewed? He's got two choices. He can say 484

22 for the jury; he can say the -- I think it adds up to 3.2

23 billion, your Honor.

24 And at that point, the second part of the Court's

25 order kicks it. It's up to the defendants then to figure out

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 1 how they want to cross him, how they want to do it, whether

 2 they want to use the document itself, whether they want to use

 3 Ms. Rodemoyer's deposition testimony, where, to a certain

 4 extent, she says, well, I think I was doing this or whatever

 5 that testimony may be that helps them. We think it helps us.

 6 Certainly they think it helps them. That's my understanding

 7 of what the Court is allowing us to do.

 8 MR. HALL: Your Honor, to the extent Mr. Devor has an

 9 opinion about the amount of revenue that was attributable to

10 these practices that's independent of documents the Court has

11 excluded, defendants wouldn't seek to argue that he shouldn't

12 be permitted to do that. But where here, these demonstrative

13 exhibits are clearly indicating an effort of Mr. Devor to

14 stand up and say I've relied now on the amount of the

15 settlement, which the Court has explicitly held is out of this

16 case, and the amount of this quantification that was part of

17 the settlement negotiation process, which this Court has

18 explicitly held is out of the case. Defendants think it's

19 inappropriate to put up a demonstrative exhibit which

20 essentially holds those numbers up for their truth.

21 MR. DOWD: Your Honor, I think in response to that,

22 first of all, we don't think the Court has said the amount of

23 the settlement is out. I mean, clearly it's going to be

24 integral to the damages issues in this case. And Mr. Burkholz

25 will address that when we get to it I take it.

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 1 Second, I mean, you look at 681, your Honor, and I'm

 2 not -- I don't want to reargue the old motions. I just don't

 3 think that's appropriate. However, this is what he based his

 4 opinion on. I mean, this is what his opinion was based on.

 5 So I assume that the Court understood that because the

 6 defendants probably spent 20 pages explaining it in their

 7 Daubert motion. So he's allowed to give his opinion. His

 8 opinion is based on those two things. That's the evidence

 9 that Household produced that would allow someone to quantify

10 the amount attributable to predatory lending practices.

11 THE COURT: This is the problem we face with all of

12 the exhibits and all of the information regarding the various

13 settlements, the negotiations for settlements, the proposals

14 to settle, the results of the settlements, et cetera. The

15 rule against allowing these things into evidence as such is

16 based upon the desire to promote settlement. Period.

17 But the law is also clear that if it's not being

18 offered to prove liability or acceptance of liability or the

19 types of things that will cause a litigant to not want to

20 engage in settlement conferences because they're afraid that

21 that will harm them further on down the line, if the evidence

22 is being offered to prove other things, then it's admissible.

23 To the extent possible, I am trying to keep out any

24 gratuitous presentation of the settlements, the amount of the

25 settlements and negotiations. And I think my rulings reflect

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 1 that.

 2 On the other hand, when experts rely upon this

 3 information and when the information becomes the best and

 4 maybe the only way to show damages in this case with respect

 5 to certain alleged improper acts, we have a countervailing

 6 interest. And to the extent that the information is used for

 7 that purpose, it's going to come in. To the extent that

 8 experts relied upon it -- properly relied upon it, used it in

 9 their calculations, it's going to be -- it's going to be

10 coming in.

11 And the damages issue in this case really is a large

12 factor to take into account in determining how much of this

13 evidence comes before the jury. I've said that before. It's

14 the only way to prove damages.

15 MR. HALL: May I respond briefly to that, your Honor?

16 THE COURT: Sure.

17 MR. HALL: I think that there are two issues. One is

18 the issue that Mr. Dowd alluded to, including whether and to

19 what extent plaintiffs' damages expert, their loss causation

20 expert, Professor Fischel, will be allowed to rely on the

21 terms of the settlement. And that's an issue that's not

22 presented by this demonstrative.

23 Another issue is whether their accounting expert, who

24 is here on the liability side of the case to prove falsity and

25 the other elements of their 10(b) claim, is going to be

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 1 allowed to rely on these. In one instance, the settlement

 2 amount relates arguably to the damages in this case, which is

 3 the movement of the stock price. In the other instance, it

 4 relates only to showing the truth essentially of what was

 5 alleged in the settlement allegations.

 6 THE COURT: I'm not really sure I follow how you

 7 reach that conclusion.

 8 MR. HALL: Well, your Honor, Mr. Devor, who opines on

 9 this issue in his report, isn't opining as to damages in the

10 securities case. He's opining as to -- you know, to what

11 extent essentially did Household benefit from the practices

12 that the plaintiffs say were misrepresented, not that they

13 were wrong. That's not what this case is about. This case is

14 about whether certain practices weren't disclosed then to the

15 market.

16 MR. DOWD: And, your Honor, you know, we have to

17 demonstrate materiality. We have to demonstrate some sort of

18 quantification so that defendants can't stand up and say

19 predatory lending could have been two cents, could have been

20 three cents, could have been five bucks, could have been two

21 billion, but plaintiffs couldn't tell you. And that's all

22 they're trying to do, is to not allow us, with documents that

23 there's -- the only objection to them is 408, that an expert

24 relied on to show that quantification; and they are just

25 trying to drive a truck through 408.

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 1 Your Honor, I mean, with all due respect, I mean,

 2 what 681 has to do with 408 is beyond me, this exhibit. And

 3 I'll live with that ruling, your Honor. The Court makes

 4 rulings. We adapt and overcome. I mean, that's part of our

 5 job as lawyers. But to try to wipe it out completely when the

 6 Court then issues a ruling directly dealing with plaintiffs'

 7 accounting expert and says we can do it is just unfair.

 8 THE COURT: Well, I think the ruling has already been

 9 made here. I've indicated that he can testify to these

10 things; and that includes, of course, the material that is

11 explained in the motions that he relied upon in doing so.

12 MR. DOWD: Thank you, your Honor.

13 THE COURT: That's the way the baby gets sliced this

14 time. Okay.

15 MR. DOWD: I believe defendants' next objections were

16 on 42 and 43.

17 MR. HALL: Yes. Could we have a moment, your Honor?

18 (Brief pause.)

19 MR. DOWD: We actually have reached an agreement on

20 42 and 43, your Honor. We're just going to combine the year

21 '99.

22 THE COURT: Okay.

23 MR. HALL: Your Honor, I'm going to let my colleague,

24 Mike Wernke, speak to these.

25 THE COURT: As long as you're doing some shuffling

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 1 around, I believe there's a case we're ready to call on the

 2 call. We'll recall this.

 3 (Brief recess.)

 4 THE CLERK: Recall, 02 C 5893, Jaffe v. Household

 5 International, Incorporated.

 6 THE COURT: Okay. So 42 and 43 have been agreed to?

 7 MR. DOWD: Yes, your Honor.

 8 MR. HALL: Your Honor, I think the next one in order

 9 that we have an objection to is No. 49, plaintiffs'

10 demonstrative 49.

11 Your Honor, the issue here is simple. The

12 plaintiffs' demonstrative states that income was overstated by

13 $133 million, but it's unclear as to the time period at issue

14 here. And, in fact, the restatement that's at issue extends

15 over a number of years. And the implication here, we think,

16 is that the income was overstated by $133 million in some

17 undetermined period of time. It could have been one quarter

18 or one year.

19 MR. DOWD: Your Honor, this is a classic example of a

20 demonstrative we're going to use with a witness. The number

21 is 133 million. He's going to explain what it is over

22 different periods of time. I don't think it's an attempt to

23 mislead anyone. He's going to explain exactly what the

24 restatement amounts are.

25 In other words, they're not saying the number is

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 1 53.

 2 MR. DOWD: Yes. They had an old version that has

 3 been corrected.

 4 MR. HALL: Your Honor, we're just going to confirm

 5 that the numbers that appear on Exhibit 53 and the other

 6 demonstrative exhibits like No. 53 match up with Mr. Devor's

 7 report. And to the extent that they match up, we'll withdraw

 8 our objections.

 9 THE COURT: Okay.

10 MR. HALL: Next, your Honor, that defendants object

11 to is No. 86.

12 Actually, your Honor, this one we can withdraw our

13 objection. I think both sides now have an understanding,

14 based on the Court's instruction, that the titles would come

15 off of the demonstrative exhibits. And with that

16 understanding, we can withdraw our objection to the rest of

17 the content here.

18 THE COURT: Okay.

19 MR. HALL: The next, No. 92, your Honor, is

20 essentially the same issue. This one they've got the SEC seal

21 on the top. And I just want to make sure we all understand

22 that that SEC seal likewise will be removed.

23 THE COURT: Yes.

24 MR. DOWD: And I assume that applies to the

25 defendants' exhibits too. Their demonstratives also contain

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 1 the SEC seal.

 2 THE COURT: And you want that out?

 3 MR. DOWD: Yes. If it comes out on mine, it should

 4 come out on theirs. Otherwise I'm fine with it.

 5 THE COURT: No captions and no seals.

 6 MR. HALL: All right.

 7 THE COURT: That goes for the presidential seal as

 8 well. You cannot have the presidential seal on any of your

 9 exhibits.

10 (Laughter.)

11 MR. HALL: And No. 116, your Honor, I believe is the

12 same issue. You know, again, we just want to confirm that

13 both sides agree that the experts are going to be limited to

14 the contents of their reports. And with that understanding --

15 and assuming these numbers match up to Mr. Devor's report --

16 we'll withdraw this objection.

17 THE COURT: Okay.

18 MR. HALL: All right. Our next objection, your

19 Honor, is on No. 125. Here, again, this essentially has moved

20 now out of the heading and down into the body of the

21 demonstrative, the same words we agreed shouldn't be in the

22 title. And so our objection then now is to saying words false

23 and misleading in the body of the slide.

24 MR. DOWD: Your Honor, my understanding is I take off

25 reported charge-off statistics were false and misleading. I

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 1 think the other stuff is actually in the --

 2 MR. HALL: With that understanding, we can withdraw

 3 our objection to No. 125.

 4 THE COURT: Okay.

 5 MR. HALL: And with the same understanding, we'll

 6 withdraw on 126 and 127.

 7 On No. 128, I believe we're going to get a modified

 8 version from the plaintiffs that will consolidate 1999 into

 9 one number, which will match up with their expert's report.

10 MR. DOWD: That's correct, your Honor.

11 MR. HALL: And, your Honor, the last -- we withdraw

12 our objections on the rest of these, except No. 149. Here,

13 your Honor, this is a slide presumably that plaintiffs intend

14 to use with Professor Fischel which mentions the $484 million

15 settlement explicitly. We had talked about that earlier. And

16 I believe the Court clarified that to the extent the

17 plaintiffs need to use that number with one of their experts,

18 including Mr. Devor or Mr. Fischel, that the amount of the

19 settlement is going to be allowed to be presented to the jury.

20 We just want to clarify that that will be the limit of the

21 $484 million settlement's use in the trial.

22 THE COURT: I don't know that I can do that. I don't

23 know what's going to happen during the trial. I mean, you may

24 bring it up. I don't know. Or you may open the door. Or

25 there may be some other legitimate function for it.

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 1 MR. HALL: Okay, your Honor.

 2 THE COURT: I'm not prepared to make an advisory

 3 ruling as to anything.

 4 MR. HALL: I understand, your Honor. I guess all I'm

 5 saying is to the extent that the Court's previous order was

 6 limited -- and this falls within that order -- and it's used

 7 here to establish plaintiffs' loss causation argument or to

 8 advance plaintiffs' loss causation argument, we'll withdraw

 9 the objection on this slide.

10 MR. BURKHOLZ: Thank you.

11 THE COURT: That's why it's there, right? That's

12 what you're going to use it for?

13 MR. BURKHOLZ: Yes.

14 THE COURT: Okay.

15 MR. HALL: Your Honor, that's the last of the

16 defendants' objections on plaintiffs' demonstrative exhibits.

17 THE COURT: Thank you. We go the other way now.

18 MR. HALL: Yes, your Honor.

19 Your Honor, if I may approach, I'll hand you up a

20 copy of the defendants' demonstratives. There's an electronic

21 form on a DVD. If you'd like, we could have someone put them

22 up on the screen.

23 THE COURT: Are they all in here?

24 MR. HALL: No, your Honor. Some of them are

25 animations so they don't --

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3-30-09 Trial Day 1 3/30/2009 6:11:00 AM

 1 PROSPECTIVE JUROR BERARD: No.

 2 MR. KAVALER: Are you satisfied with your union

 3 pension fund?

 4 PROSPECTIVE JUROR BERARD: Very much so.

 5 MR. KAVALER: Okay. Very good. Excellent.

 6 Sir?

 7 PROSPECTIVE JUROR HUNT: I had the same kinds of --

 8 I'm involved in a union in our work, but we don't have a

 9 pension through our work -- through our union.

10 MR. KAVALER: You have the same experience, training

11 younger members of the union?

12 PROSPECTIVE JUROR HUNT: Correct.

13 MR. KAVALER: Teaching them their jobs?

14 PROSPECTIVE JUROR HUNT: Correct.

15 But we don't have any pension through our union.

16 MR. KAVALER: How long have you been doing that?

17 PROSPECTIVE JUROR HUNT: Ten years.

18 MR. KAVALER: I saw your hand up?

19 PROSPECTIVE JUROR ARCHBOLD: Staff training in

20 orientation for new staff for new students coming in.

21 MR. KAVALER: Okay. All right.

22 And how many of you supervise other people in your

23 job?

24 (Hands raised.)

25 MR. KAVALER: The same three people.

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 1 Tell me how many people you supervise?

 2 PROSPECTIVE JUROR ARCHBOLD: 56.

 3 MR. KAVALER: 56.

 4 And are they always a hundred percent on message?

 5 Ever have any problems with them?

 6 PROSPECTIVE JUROR ARCHBOLD: Oh, no.

 7 MR. KAVALER: Sometimes you give them training and

 8 someone doesn't get it?

 9 PROSPECTIVE JUROR ARCHBOLD: Correct.

10 MR. KAVALER: What do you do, follow up?

11 PROSPECTIVE JUROR ARCHBOLD: Follow up. Follow w

12 our Human Resource Department, follow their set protocol.

13 MR. KAVALER: And sometimes they still don't get it?

14 PROSPECTIVE JUROR ARCHBOLD: Correct.

15 MR. KAVALER: What do you do, then?

16 PROSPECTIVE JUROR ARCHBOLD: Well, it's a layered

17 response to how you handle it.

18 MR. KAVALER: There's a process?

19 PROSPECTIVE JUROR ARCHBOLD: There's a process.

20 MR. KAVALER: Okay.

21 But when that happens, it's not because you're not

22 training them, is it?

23 PROSPECTIVE JUROR ARCHBOLD: I hope not.

24 MR. KAVALER: All right.

25 If someone asked you if you were doing a good job,

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 1 you'd say, "Yes, I am"?

 2 PROSPECTIVE JUROR ARCHBOLD: Yes.

 3 MR. KAVALER: Even if one of them wasn't with the

 4 program?

 5 PROSPECTIVE JUROR ARCHBOLD: Correct.

 6 MR. KAVALER: Over here (indicating), a couple hands

 7 in the front row. I will work my way across.

 8 PROSPECTIVE JUROR BERARD: From one to three hund

 9 MR. KAVALER: Three hundred? Very impressive.

10 Let me ask you the same questions. Do all three

11 hundred people invariably do everything you are teaching them

12 perfect?

13 PROSPECTIVE JUROR BERARD: Oh, no.

14 MR. KAVALER: How many would you say don't get the

15 message?

16 PROSPECTIVE JUROR BERARD: The first time out or --

17 MR. KAVALER: Over time.

18 PROSPECTIVE JUROR BERARD: Most of them will get it

19 over time.

20 MR. KAVALER: What would you say your success rate

21 is? 80 percent? 90 percent?

22 PROSPECTIVE JUROR BERARD: Maybe 85.

23 MR. KAVALER: 85.

24 Do you consider that pretty good?

25 PROSPECTIVE JUROR BERARD: Yeah.

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 1 MR. KAVALER: Me, too. That's impressive.

 2 PROSPECTIVE JUROR BERARD: It's the way you go abou

 3 it.

 4 MR. KAVALER: 85 is impressive. 95 would be more

 5 impressive.

 6 PROSPECTIVE JUROR BERARD: Well, it's almost

 7 impossible, though.

 8 MR. KAVALER: Almost impossible.

 9 It's certainly a goal to be sought.

10 PROSPECTIVE JUROR BERARD: Yes.

11 You want a hundred percent, if you could get it, but

12 you have to be realistic sometimes.

13 MR. KAVALER: That's right, you try for a hundred.

14 PROSPECTIVE JUROR BERARD: Yep.

15 MR. KAVALER: You are happy at 95 and you're content

16 at 85.

17 PROSPECTIVE JUROR BERARD: Yep.

18 MR. KAVALER: It doesn't mean you're doing a bad job.

19 PROSPECTIVE JUROR BERARD: No.

20 MR. KAVALER: You, too?

21 PROSPECTIVE JUROR HUNT: One to six.

22 MR. KAVALER: Six people.

23 The same question. When you train these six people,

24 when you give them some guidance how to do their job, do all

25 six of them get it a hundred percent right all the time?

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 1 must also accept those facts as proved without the

 2 presentation of evidence.

 3 You should use common sense in weighing the evidence

 4 and considering the evidence in light of your own observations

 5 in life.

 6 In our lives we often look at one fact and conclude

 7 from it that another fact exists. In law we call this an

 8 inference. A jury is allowed to make reasonable inferences.

 9 Any inference you make must be reasonable and must be based o

10 the evidence in the case.

11 You have also already heard the phrases "direct

12 evidence" and "circumstantial evidence." Direct evidence is

13 proof that does not require an inference, such as the

14 testimony of someone who claims to have personal knowledge of

15 a fact. Circumstantial evidence is proof of a fact or a

16 series of facts that tends to show that some other fact is

17 true.

18 As an example, direct evidence that it is raining is

19 the testimony from a witness who says, I was outside a minute

20 ago and I saw it raining. Circumstantial evidence that it is

21 raining might be the observation of someone entering a room

22 carrying a wet umbrella. One calls for an inference. The

23 other does not.

24 The law makes no distinction between the weight to be

25 given to either direct or circumstantial evidence. When the

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 1 time comes to deliberate on your verdict, you should consider

 2 all the evidence, including the circumstantial evidence.

 3 Now, what is not evidence. The following things are

 4 not evidence, and you must not consider them as evidence in

 5 deciding the facts of this case:

 6 The attorneys' opening statements, their interim

 7 statements at the end of each week and their closing arguments

 8 are not evidence; the questions and objections of the

 9 attorneys are not evidence; any rulings I make on those

10 objections, any testimony that I instruct you to disregard,

11 and anything you may see or hear when the court is not in

12 session, even if what you see or hear is done or said by one

13 of the parties or by one of the witnesses or by one of the

14 attorneys.

15 During the course of the trial, I may instruct you

16 that certain evidence is being admitted for a limited purpose

17 only. When I do so, you must consider that evidence only for

18 that limited purpose and no other.

19 It will be your task, ladies and gentlemen, to decide

20 whether the testimony of each of the witnesses is truthful and

21 accurate in part, in whole or not at all. You also have to

22 decide what weight, if any, you give to the testimony of each

23 witness.

24 From time to time during the trial, I may be called

25 upon to make rulings of law on objections or motions by the

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 1 lawyers.

 2 When I sustain an objection, I am excluding that

 3 evidence from this trial for a good reason. When you hear me

 4 say that I have overruled an objection, that means that I am

 5 permitting that evidence to be admitted and may be considered

 6 by you.

 7 You should not infer or conclude from any ruling or

 8 other comment I may make that I have any opinions about how

 9 you should decide this case. I do not. And if I sustain an

10 objection and a question then goes unanswered by a witness,

11 you should not guess or speculate what the answer might have

12 been. And you should not draw any inferences or conclusions

13 from the question itself or from any ruling that I may make.

14 At times during the trial -- and you have already

15 seen an example of this -- it may be necessary for me to talk

16 with the lawyers here at the bench outside of your hearing or

17 by calling a recess. We meet because often during the trial,

18 something comes up that doesn't involve your function as a

19 jury. During the bench conferences or sidebars, you must

20 remain seated in the jury box.

21 I will do everything in my power to keep the number

22 and length of these conferences to a minimum. However, in

23 every trial, there are some sidebar conferences. Please keep

24 in mind the importance of the matters you are here to

25 determine and be patient while we resolve these issues.

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 1 You will be provided with paper and pens for taking

 2 notes. You are not required to take notes. If you feel that

 3 taking notes will distract you from paying attention to the

 4 testimony and the witnesses, do not take any notes.

 5 Any notes that you take during this trial are only

 6 aids to your memory. The notes are not evidence.

 7 If you do not take notes, you should rely on your

 8 independent recollection of the evidence and not be unduly

 9 influenced by those who have taken notes. Notes are not

10 entitled to any greater weight than the recollections or

11 impressions of each juror about the testimony.

12 If you do decide to take notes, mark your notepad

13 with your name. When you leave the courthouse during the

14 trial, your notes will be left in the jury room. When you

15 leave at night, your notes will be secured and not read by

16 anyone. At the end of the trial, your notes will be

17 destroyed; and no one will be allowed to read the notes before

18 they are destroyed.

19 You must not read the notes taken by your fellow

20 jurors for the same reason that you are not to discuss the

21 case until after all of the evidence has been presented.

22 You should pay close attention to the testimony as it

23 is given. At the end of the trial, you will have to make your

24 determination based on what you recall of what the testimony

25 was. You will have a copy of all the exhibits that are

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 1 MS. FARREN: Okay. Thank you, your Honor.

 2 THE COURT: So then unless there's a better

 3 suggestion, the Court will not read this statement to the

 4 jury. And we will simply either give it to them to take back

 5 with them during their deliberations or determine some other

 6 method by which we may want to publish the contents.

 7 I look at some of these facts, and it occurs to me

 8 that during the course of the trial, you all may decide by

 9 agreement that some of them just simply aren't necessary. But

10 it's up to you.

11 So we have our choice now. We can either take up the

12 limiting instructions that are proposed or we can take up the

13 issue of the juror.

14 MR. BURKHOLZ: Why don't we take the more painful

15 one, the limiting instructions. Try to work our way through

16 this.

17 THE COURT: You think that's more painful, huh?

18 MR. BURKHOLZ: I do.

19 We have a disagreement about this limiting

20 instruction regarding various categories of evidence.

21 Basically the first one is the analysts' reports, investor

22 relation reports, presentations by Household executives at

23 conferences, rating agency reports, newspaper, magazine

24 articles.

25 We think the jury should simply be told that the --

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 258

 1 these documents are not admitted to show that they were true.

 2 And leave it at that. There are many other purposes that they

 3 can come in for, and we want to limit it to that.

 4 If we would just look at the first one, the analysts'

 5 reports, they could come in to show the effect on the price of

 6 Household stock. They could come in to show the notice to

 7 defendants of what the analysts were saying. And we don't

 8 want to have to limit it in this particular document. We'd

 9 rather see, as the evidence comes in, if the Court can modify

10 the instruction to show what purpose it's coming in for.

11 MS. FARREN: Well, your Honor, we followed and rely

12 on pattern instruction 1.09. Committee report suggests -- and

13 obviously it makes sense to avoid confusing the jury -- that

14 you don't just state what it's not admitted for. You explain

15 what it is admitted for, otherwise the jury would be in the

16 dark, I should think, about what they're to do with it.

17 THE COURT: Well, I think there's a problem with just

18 telling the jury you can't consider these for what is likely

19 for them to be the most obvious use for this information

20 without giving them some explanation. Now, it may be that

21 there is more than one other use, and that this instruction

22 should include those other possibilities and indicate, to the

23 extent that they find the evidence is effective as to those

24 issues, they can consider it as to those. But I don't think

25 it would be very effective to simply tell them, here's what

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 1 the reports say, but we're not offering them to prove to you

 2 what the reports say. We're offering them to prove to you

 3 something else. We're not going to tell you what it is.

 4 MR. BURKHOLZ: If that's the case, we can offer to

 5 the Court what we think the different purposes are at this

 6 time or later.

 7 THE COURT: How soon are we going to be dealing with

 8 this?

 9 MS. FARREN: Forgive me, your Honor. I didn't hear

10 you.

11 THE COURT: How soon are we going to be dealing with

12 this?

13 MR. BURKHOLZ: Probably this week at some point.

14 MS. FARREN: I should think, your Honor, that the

15 limiting instruction should be read before plaintiffs' first

16 witness, Ms. Ghiglieri, because the essence of her testimony,

17 based on her report, will be an amalgam of civil complaints

18 that your Honor has admitted only for the truth -- forgive me,

19 only for notice. Customer complaints, the same thing.

20 And we have a bit of a dispute, your Honor, about the

21 meaning of your Honor's omnibus ruling on the proper use of

22 federal and state exam reports. So that would be another

23 issue that would, of course, leap out in Ms. Ghiglieri's

24 testimony because she places heavy reliance or at least cites

25 heavily to state exam reports. We had understood your Honor

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 1 to --

 2 THE COURT: I think the issue is do we do it now or

 3 later. It seems to me that we can afford to at least wait

 4 until most likely the lunch break. During that time, if you

 5 can get together what you believe are the other possible uses

 6 for each of the categories of these exhibits.

 7 MR. BURKHOLZ: We'll do that.

 8 THE COURT: I'm looking at limiting instruction --

 9 proposed limiting instruction No. 2. The first is an

10 instruction with respect to the federal government and other

11 investigatory reports. Do you want to address that at this

12 point?

13 MR. BURKHOLZ: We could, your Honor. Mr. Brooks is

14 going to handle that particular part.

15 MR. BROOKS: We don't believe any limiting

16 instruction is proper, your Honor. Defendants moved in their

17 motion in limine on these exam reports under 403 to exclude

18 the reports. The Court ruled that those reports come in. The

19 Court remarked that defendants' arguments went to the weight

20 rather than the admissibility of the regulatory documents.

21 And defendants didn't move on any hearsay grounds, Judge, to

22 exclude the reports. They didn't do it. They didn't do it,

23 your Honor, because they fall squarely within 803(8).

24 And so, Judge, there's no limiting instruction -- the

25 Court didn't -- in its order didn't indicate that there would

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 1 be a limiting instruction like it did for complaints. For

 2 example, on page five of the omnibus order, the Court said

 3 defendants may propose a limiting instruction. With respect

 4 to the state and federal regulatory exams, that's not there.

 5 So, Judge, we think these exam reports come in for

 6 all purposes. They haven't moved to exclude on hearsay. The

 7 Court's ruling was not based on any hearsay determination.

 8 And so the limiting instruction that they've proposed is

 9 entirely improper.

10 THE COURT: Response.

11 MS. FARREN: Your Honor, I don't want to tell the

12 Court what was on its mind, but Mr. Brooks is mistaken that we

13 did not move on the basis of hearsay and Rule 408 and other

14 bases because these exam reports are rife with the type of

15 evidence that your Honor has ruled is admissible only for the

16 limited purpose of notice.

17 And we have examples, your Honor, where, for example,

18 the OTS has a report that does nothing but recap the

19 allegations in certain civil complaints, appear to take them

20 as true and also recite settlements and other types of

21 evidence, including customer complaints that your Honor has

22 held should be admitted only for the purpose of notice.

23 We understood that to be the basis of your Honor's

24 ruling in part B of the omnibus ruling; that the regulatory

25 documents are probative of scienter. It will aid in

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 1 determining the scienter notice.

 2 And then on page eight, your Honor, in -- on page

 3 eight in -- the Court says -- forgive me -- seven. Once

 4 again, plaintiffs may rely on the federal and state regulatory

 5 examinations and complaints in other litigation which targeted

 6 the inadequacies of Household policies to establish notice and

 7 scienter.

 8 Then when your Honor was talking about individual

 9 customer complaints, it harked back to point B and adopted its

10 rationale, which we understood, your Honor, to be notice only.

11 THE COURT: Okay. Well, the ruling that I made was

12 based essentially on Federal Rule of Evidence 803(8) relating

13 to public records and reports. And that rule states pretty

14 clearly that records, reports, statements or data compilations

15 in any form of public offices or agencies setting forth, A,

16 the activities of the office or agency or -- and here's the

17 matter that seems to apply -- B, matters observed pursuant to

18 duty imposed by law, as to which matters there was a duty to

19 report.

20 And it goes on to make exclusions in criminal cases,

21 police officers and so on, which don't apply here.

22 I think that ruling applies to these investigatory

23 reports from these agencies. It was their duty to make

24 observations, report those observations and to make findings

25 and report those findings; and they've done that. And to the

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 1 extent they've done that, the reports come in.

 2 MS. FARREN: Thank you, your Honor. But that doesn't

 3 deal with respect with the Rule 408 and the double and triple

 4 hearsay aspects of these reports to the extent that your Honor

 5 has ruled that those -- that type of information that some of

 6 the agencies merely recite comes in only for notice. I think

 7 we need some --

 8 THE COURT: I think the duty to observe language does

 9 actually deal with that. It says that if they report

10 something they have a duty to observe, then that report is not

11 hearsay. They had a duty to observe these things, these

12 complaints and all these other things; and they're reporting

13 them as part of the investigative report. And that reporting

14 of them is not hearsay.

15 MS. FARREN: Your Honor, I'm agreeing with that. But

16 I'm trying to turn the Court's attention, if I may, to the

17 double hearsay and triple hearsay problems with that.

18 When, for example, the OTS says, all the complaints

19 that your Honor has found should come in only for notice, this

20 or that group of customers alleged X, Y, Z, if the jury is not

21 somehow keyed into the fact that that's not necessarily true,

22 that is to say, the truth of the allegations of whatever

23 customer is being cited haven't been adjudicated, aren't

24 necessarily true, the fact that a state or a federal

25 regulatory agency may say something about it may give it undue

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 264

 1 weight in the eyes of the jury and really eradicate your

 2 Honor's ruling on --

 3 THE COURT: I think what you're talking about is

 4 called cross-examination, and that's what you do. You

 5 cross-examine, and you point out that these complaints are --

 6 have not been adjudicated. There's been no trial. That's

 7 what you do when experts and others take into account reports

 8 and other matters that, although may not be admissible

 9 themselves, come into evidence. That's what you do when

10 investigative reports include facts which under this exception

11 come into evidence; you attack the weight to be given to those

12 findings and those observations by cross-examining the people

13 who introduce them. That's the ruling on that.

14 MS. FARREN: Thank you, your Honor.

15 MR. BROOKS: Thank you, your Honor.

16 THE COURT: I think there are others here; are there

17 not? Complaints that were filed publicly against Household

18 and certain other lawsuits during the class period. Do you

19 have an objection to the limiting instruction on that?

20 MR. BURKHOLZ: I think that one is fine, your Honor.

21 THE COURT: I agree. Third, plaintiffs will offer

22 evidence about complaints made by certain individual customers

23 of Household.

24 MR. BURKHOLZ: That one is fine too.

25 THE COURT: Fourth, plaintiffs will offer evidence

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 Ghiglieri - direct

 417

 1 A. That -- what that -- says is: "Flipping. Frequent and

 2 multiple refinancings, usually of mortgage loans, requiring

 3 additional fees which strip equity from the borrower."

 4 Q. Then the final bullet point looks like: "Collection of

 5 up-front single-premium credit insurance"?

 6 A. Right. And they're describing: "Life, disability or

 7 unemployment, when the consumer does not receive a tangible --

 8 net tangible -- financial benefit."

 9 Q. Were there any other regulatory materials you surveyed

10 when looking at what practices constituted predatory lending

11 practices during the 1999 to 2002 time frame?

12 A. Yes. I had a number of them that I describe in my report;

13 and, I had an appendix with some more. So, there was quite a

14 few.

15 Q. And what sorts of materials did you consider?

16 A. Issuances by the different regulators was one. I looked

17 at information that was out in the financial press. And

18 testimony before Congress.

19 There was quite a bit of testimony during this time

20 regarding predatory lending practices of various kinds.

21 Q. Did you prepare a demonstrative exhibit to assist you in

22 explaining to the jury the meaning of "predatory lending"?

23 A. I did.

24 Q. I show you what has been marked as Plaintiffs' Exhibit 35

25 for identification.

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 Ghiglieri - direct

 418

 1 Can you tell us what this is -- what this exhibit

 2 shows?

 3 A. Yes.

 4 I think this characterizes the umbrella term

 5 "predatory lending" and it covers deceptive sales practices,

 6 which includes misrepresentation of the loan terms; and, it

 7 also includes unfair loan terms to the borrower; things that

 8 would be of no benefit to the borrower or make it beyond their

 9 ability to repay.

10 So, this is basically a description of the umbrella

11 term "predatory lending."

12 Q. Now, you testified that you concluded that Household

13 engaged in widespread, systemic predatory lending practices

14 during the 1999 to 2002 time frame.

15 Did you prepare a demonstrative to assist the jury in

16 understanding the predatory practices that Household engaged

17 in during that time frame?

18 A. I did.

19 Q. I'm showing --

20 THE COURT: Would this be a good time to take our

21 break? It's almost 3:00 o'clock and it looks like you're

22 moving into something else.

23 MR. DROSMAN: Absolutely, your Honor.

24 THE COURT: Ladies and gentlemen, we'll take our

25 afternoon break now. We'll break for 20 minutes and resume

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 419

 1 the testimony after that.

 2 (Jury out.)

 3 THE COURT: You may step down, ma'am.

 4 THE WITNESS: Thank you.

 5 THE COURT: Anything we should take up before we

 6 break?

 7 MR. DROSMAN: Nothing for plaintiffs, your Honor.

 8 MR. MILLER: Can we cool it down in the courtroom,

 9 Judge?

10 THE COURT: Sure. Not a problem.

11 MR. DROSMAN: Now that you mention it, I would

12 appreciate that.

13 THE COURT: We'll call GSA and let you know.

14 MR. HALL: Your Honor?

15 THE COURT: Yes.

16 MR. HALL: We had agreed on some limiting

17 instructions before. I think some of them may be applicable

18 to the rest of this witness' testimony.

19 I don't know whether you want to cover those now.

20 THE COURT: Yes, that seems almost as important as

21 cooling things down. Why don't we go over that now.

22 (Laughter.)

23 MR. BURKHOLZ: I'll make it quick, your Honor. I

24 think we've reached agreement on all the language.

25 THE COURT: Okay.

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 1 MR. BURKHOLZ: I think we have a Joint Instruction

 2 No. 1, which has those five categories, starting with the

 3 "Analyst Reports."

 4 THE COURT: Give me 30 seconds. Let me go back and

 5 retrieve that.

 6 I guess I left it on my desk, not thinking we were

 7 going to deal with it. Give me a second. I will be right

 8 back.

 9 (Brief pause.)

10 THE COURT: Go ahead.

11 MR. BURKHOLZ: So we had on Joint Instruction No. 1

12 five different categories of evidence. We have language that

13 would go to -- it's agreed upon -- would go at the end --

14 let's look at the first one, the analyst reports. At the end

15 of that paragraph where it says, "The analyst report was

16 publicly available and for no other purpose," after "publicly

17 available," we would add the following language: "Whether

18 they affected the price of Household stock or that defendants

19 were on notice of the contents."

20 THE COURT: I'm sorry. Give that to me again.

21 MR. BURKHOLZ: "Whether they affected the price of

22 Household stock or that defendants were on notice of the

23 contents."

24 THE COURT: Of?

25 MR. BURKHOLZ: "Of the contents."

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 1 THE COURT: You are going to have to give it to me

 2 one more time.

 3 "Whether they affected the price of Household" --

 4 MR. BURKHOLZ: "Household stock or that defendants

 5 were on notice of the contents."

 6 MR. HALL: Your Honor, I think there is a grammatical

 7 issue. At the beginning of that same line it says, "Show that

 8 the contents of the analyst reports was," and it should say

 9 "were" there.

10 THE COURT: It says "contents," so I guess so.

11 "This evidence is admitted only to show that the

12 contents of the analyst reports were available, whether they

13 affected the price of Household stock or that defendants were

14 on notice of the contents."

15 Is that correct?

16 MR. BURKHOLZ: That's correct.

17 MR. HALL: With the word "publicly" before

18 "available," your Honor. The word "publicly" before the word

19 "available."

20 THE COURT: "The contents of the analyst reports was

21 publicly available."

22 MR. HALL: Yes, your Honor.

23 THE COURT: That's what I have here. I just didn't

24 read it.

25 Okay. Next?

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 1 MR. BURKHOLZ: We would propose that language would

 2 go in the same location for the second -- the next paragraph,

 3 the investor relations reports, at the end of that paragraph

 4 after "publicly available" and before "and for no other

 5 purpose." We would add that same language.

 6 THE COURT: So do you want the language "and for no

 7 other purpose" to come, then, at the end of the additional

 8 material?

 9 MR. BURKHOLZ: Yes.

10 THE COURT: Same language at the end of the second

11 paragraph or the second --

12 MR. BURKHOLZ: Correct.

13 MR. HALL: Correct.

14 THE COURT: -- document designation.

15 Then we move on to the third.

16 MR. BURKHOLZ: The third one just has one change. We

17 would not have in the second piece of what we are adding in,

18 that the defendants were on notice of the contents. They are

19 making misstatements. Clearly they were on notice of those

20 contents. So it would just be whether they affected the price

21 of Household stock.

22 THE COURT: Okay.

23 MR. BURKHOLZ: And then the next page, the fourth and

24 fifth categories would have the agreed upon language, the two

25 additional conditions.

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 1 THE COURT: The same language as one and two?

 2 MR. BURKHOLZ: Yes.

 3 THE COURT: Okay. Fifth?

 4 MR. HALL: Your Honor, the next and last issue, I

 5 believe, is on Limiting Instruction No. 4, which relates to --

 6 THE COURT: Is the same language for the fourth and

 7 the fifth?

 8 MR. BURKHOLZ: Yes.

 9 MR. HALL: Yes, your Honor.

10 THE COURT: Okay. Okay.

11 MR. HALL: And the next, your Honor, is Limiting

12 Instruction No. 4, which --

13 THE COURT: What happened to two?

14 MR. HALL: I believe we addressed that earlier, your

15 Honor.

16 THE COURT: I'm sorry.

17 MR. HALL: We addressed that one earlier. I don't

18 believe there are any changes to that one.

19 MR. BURKHOLZ: Right. That's the one that had the

20 exam reports, the second one.

21 THE COURT: Okay. Go ahead.

22 MR. HALL: Turning to Limiting Instruction No. 4,

23 and this deals with limited purpose evidence that's the basis

24 of expert testimony. We agreed on some language. So it's

25 kind of a redraft of what's here. I can just read it slowly.

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 1 THE COURT: Let me make sure I have got this

 2 straight, then.

 3 The language you just went over was for Limiting

 4 Instruction number?

 5 MR. HALL: No. 1.

 6 THE COURT: No. 1?

 7 MR. HALL: Yes.

 8 THE COURT: And for Limiting Instruction No. 2?

 9 MR. BURKHOLZ: We agreed upon that this morning.

10 THE COURT: I don't recall that. What did you agree

11 on this morning?

12 MR. BURKHOLZ: That was the one where we struck the

13 second paragraph regarding the examination reports, and the

14 remainder of it, we were fine with the language.

15 THE COURT: Give it to me exactly because I don't

16 have a note of that here, for some reason. We are okay with

17 4. We are okay with 3 and 2. And 1 was not okay. And I

18 don't have any --

19 MR. BURKHOLZ: That was stricken from the document,

20 the language regarding examination reports. So the

21 instruction would just start off with the complaints.

22 THE COURT: With the second?

23 MR. BURKHOLZ: The second. Exactly.

24 THE COURT: So that's stricken altogether.

25 MR. BURKHOLZ: Just that the second paragraph of the

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 1 instruction, the, "First, plaintiffs will offer certain

 2 documents created by state and" --

 3 THE COURT: A little bit louder. I just can't hear

 4 you.

 5 MR. HALL: It's the paragraph that begins with the

 6 word "First," your Honor, that paragraph is stricken.

 7 THE COURT: Right.

 8 "First, plaintiffs will offer certain documents

 9 created by state or federal agencies." That was what was

10 objected to, and that's been stricken now. We have agreed to

11 that.

12 MR. BURKHOLZ: The rest of it is fine.

13 THE COURT: The rest of it stays the way it was.

14 Okay.

15 Now you want to go to your proposed No. 4?

16 MR. HALL: Correct.

17 THE COURT: Okay.

18 MR. HALL: And here, your Honor, we have new language

19 that we have agreed upon. Is the easiest way for me to read

20 that now?

21 THE COURT: I can't think of any other way.

22 I have lost your feed.

23 I don't know. Are you folks getting the court

24 reporter's feed out there?

25 MS. FARREN: Yes, your Honor.

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 1 THE COURT: You are. Well, it's just me then, for

 2 some reason.

 3 MR. HALL: I will read this out, your Honor. If it's

 4 convenient, we can just rewrite it neatly and hand it up.

 5 THE COURT: Okay.

 6 MR. HALL: This is Limiting Instruction No. 4. The

 7 instruction will read, "Recall that certain evidence is

 8 admitted for the limited purpose of showing that the contents

 9 were publicly available, or whether they affected the price of

10 Household stock, or that defendants were on notice of the

11 contents.

12 "You may also consider such evidence for the limited

13 purpose of assisting you to evaluate the witness' opinion."

14 This will refer to an expert witness.

15 "The underlying information must not be used by you

16 for any substantive purpose for which the evidence is not

17 admitted.

18 "I will let you know when and if the evidence is to

19 be considered for a limited purpose."

20 THE COURT: Okay. If you took a poll among those 12

21 jurors, how many different definitions do you think you would

22 get for the word or the phrase "substantive purpose"?

23 MR. BURKHOLZ: Twelve.

24 MR. HALL: Your Honor, I think we could resolve that

25 issue by just saying -- well, you could just say, "and for no

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 1 other purpose," as we did with the other instructions at the

 2 end of that long --

 3 MR. BURKHOLZ: That's fine.

 4 THE COURT: Sounds good to me.

 5 Now, when do you want these delivered?

 6 MR. HALL: Your Honor, I think it would be

 7 appropriate to deliver them before the remainder of

 8 Ms. Ghiglieri's testimony. I think she may -- I expect she

 9 may cross over into some areas where she is relying on

10 underlying material that's admitted for a limited purpose.

11 MR. KAVALER: Your Honor, this is the issue I

12 addressed earlier today.

13 THE COURT: Yes, it is.

14 MR. KAVALER: I would like it done every single time

15 she does it, but my guess is she is going to do it at some

16 point continuously on a staccato basis. I don't believe it's

17 reasonable to ask you to do it every time, but I want to

18 protect the record.

19 THE COURT: I don't have a problem with giving it

20 now.

21 You don't have any objection, do you?

22 MR. BURKHOLZ: No. We can give it once.

23 THE COURT: If we are going to do it, then it seems

24 that we really ought to give one instruction, just

25 incorporating all these different types of documents rather

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 1 than four instructions, each one beginning with, "You will

 2 recall." So it's going to take a little massaging of the

 3 language.

 4 I will see what I can do.

 5 MR. KAVALER: Thank you, your Honor.

 6 THE COURT: We probably still have about five minutes

 7 left on our break.

 8 (A brief recess was taken at 3:16 p.m. until 3:33 p.m.)

 9 THE COURT: So I think we will bring the jury out.

10 The first thing we will do is give them this instruction; is

11 that correct? That's what we agreed on?

12 MR. KAVALER: That would be fine, your Honor.

13 THE COURT: Very well.

14 MR. DROSMAN: Your Honor, before you bring out the

15 jury, just a couple of issues.

16 First, I think this monitor can be turned on, but it

17 isn't on right now. Is there any way we can get that on?

18 THE COURT: Yes. You push a button.

19 (Laughter.)

20 MR. DROSMAN: I thought that you controlled it. I am

21 sorry.

22 And then, the second issue, your Honor, is that we

23 prepared some binders with the exhibits that I am using in

24 evidence today, your Honor, for the jury. If we have your

25 permission, I would like to provide a binder for each juror

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 1 with the exhibits that we are going to be using. It's a

 2 little difficult to see things on the screen. This way they

 3 will have their own documents in front of them.

 4 MR. KAVALER: We haven't seen it, your Honor.

 5 THE COURT: You haven't seen it?

 6 MR. KAVALER: I don't believe so.

 7 THE COURT: Then you can't use it.

 8 MR. DROSMAN: Okay.

 9 THE COURT: Show it to them first.

10 Anything else?

11 MR. DROSMAN: That's it, your Honor.

12 THE COURT: All right. Let's bring them out.

13 (Jury in at 3:34 p.m.)

14 THE COURT: Welcome back, ladies and gentlemen.

15 Before we recommence the testimony, you will recall

16 that I have informed you that there may be times during the

17 course of the trial when evidence would be admitted for a

18 limited purpose only and that I would so advise you, and that

19 when I advise you in that manner, you are to consider that

20 particular evidence only for that purpose and for no other

21 purpose.

22 The attorneys tell me we are quickly coming into

23 territory which will encompass several types of evidence that

24 will be offered only for a limited purpose. So let me give

25 you a specific instruction now on that.

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 1 Please bear with me.

 2 It is likely that a number of documents known as

 3 analyst reports, which I think you have already heard

 4 something about, will be offered in evidence. Analyst reports

 5 are written by market analysts employed by investment banks or

 6 brokerage firms who comment on Household's business, its

 7 securities, and the economy in general.

 8 These reports are not admitted to show that what the

 9 analyst said was true but only to show that the contents of

10 the analyst reports were publicly available, whether they

11 affected the price of Household stock, or to show that the

12 defendants were on notice of the contents and for no other

13 purposes.

14 There is more.

15 There are also certain documents entitled "Investor

16 Relations Reports" that may be offered into evidence.

17 Household's investor relations reports were prepared by

18 Household employees for internal use within the company. The

19 investor relations reports typically include quotations or

20 excerpts from selected analyst reports.

21 To the extent that the investor relations reports

22 quote from, attach, or paraphrase statements made by the

23 analysts, you may consider those portions of the investor

24 relations reports only for the limited purpose of showing that

25 the contents of the analyst reports were publicly available or

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 1 whether they affected the price of Household stock or to show

 2 that the defendants were on notice of the contents and for

 3 only those purposes.

 4 There is a third category of documents as well.

 5 Evidence will be offered about certain presentations

 6 that Household executives made to analysts and to investors

 7 either in person or in conference phone calls.

 8 This evidence is admitted for the limited purpose of

 9 showing that the contents of the presentations made by the

10 Household executives was publicly available, that they

11 affected the price of Household stock -- or that they affected

12 the price of Household stock and for no other purpose.

13 You may also -- we may also receive in evidence

14 reports prepared by rating agencies that relate to Household's

15 financial condition. These reports also are not admitted to

16 show that the rating -- what the rating agency said was true.

17 Rather, this evidence is admitted only to show that the

18 contents of the rating agency's reports was publicly available

19 or whether they affected the price of Household stock or that

20 the defendants were on notice of the contents of these reports

21 and for no other reasons.

22 A fifth type of document is newspaper and magazine

23 articles which may be offered for the limited purpose of

24 showing that the contents of the articles were publicly

25 available and for no other purpose. They are not being

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 1 admitted to show that the contents of the newspaper or

 2 magazine articles were actually true.

 3 You may also be exposed to evidence about complaints

 4 that were filed publicly against Household in certain other

 5 lawsuits during the relevant time period. This evidence, like

 6 the others, is not admitted to show that the allegations

 7 asserted in the complaints against Household in those other

 8 lawsuits were actually true. Rather, these documents -- that

 9 is, the complaints that were filed -- and any testimony about

10 them are admitted only for the limited purpose of showing that

11 the existence and nature of the prior lawsuits were known to

12 one or more of the defendants, showing that this information

13 was publicly available, or whether the complaints affected the

14 price of the Household stock and for no other purpose.

15 You may also be exposed to complaints made by certain

16 individual persons, customers of Household. This evidence --

17 that is, the complaints by individual customers of

18 Household -- is also not admitted to show that the customers'

19 complaints were true. The evidence is admitted only for the

20 limited purpose of showing that the existence and nature of

21 the complaints were known to one or more of the defendants and

22 for no other purpose.

23 There may also be evidence presented about

24 settlements that Household entered into to resolve legal

25 proceedings during the relevant period. Evidence about a

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 1 settlement is not admitted to show that Household was at fault

 2 or that Household engaged in any wrongdoing in the matter that

 3 was settled. Again, the evidence is admitted only for the

 4 limited purpose of showing whether the settlement affected the

 5 price of Household stock and should be considered and may be

 6 considered only for that purpose.

 7 I guess I want to make sure that I have this correct

 8 from the attorneys. The instruction regarding the information

 9 assumed by the various expert opinions, do you want that

10 instruction given at this point as well?

11 MR. HALL: Yes, your Honor.

12 THE COURT: All right. I believe I have the language

13 that you folks agreed to. If it is, it's acceptable to me and

14 I will deliver it to the jury. If I misspeak, let me know and

15 we will make the appropriate correction.

16 During the course of testimony by expert witnesses

17 who you may hear, you may hear evidence regarding the category

18 of documents I have already told you about. Evidence

19 regarding publicity, notice, price, and things of that nature

20 will be explained to you during the course of the expert's

21 testimony.

22 The underlying information that you receive in this

23 manner must not be considered by you for the purpose of

24 determining -- must not be considered by you as evidence of

25 the truth of the information but rather is being admitted for

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 1 the limited purpose of showing you -- or assisting you to

 2 evaluate the expert witness' opinion and how sound that

 3 opinion is.

 4 The underlying opinion must not be used by you for

 5 any other purpose than to evaluate the opinion of the expert

 6 witness.

 7 You may proceed.

 8 MR. DROSMAN: Thank you, your Honor.

 9 BY MR. DROSMAN:

10 Q. Ms. Ghiglieri, before the break I asked you whether you

11 prepared a demonstrative exhibit to assist you in explaining

12 your conclusion that Household engaged in a variety of

13 predatory practices during the 1999-to-2002 time frame.

14 Did you prepare such an exhibit?

15 A. I did.

16 Q. Would that assist you in explaining your testimony?

17 A. Yes, it would.

18 Q. At this time I will show you what has been marked as

19 Plaintiffs' Demonstrative Exhibit 29 for identification.

20 What are the entries on Plaintiffs' Exhibit 29?

21 A. These are the various predatory lending practices that I

22 found when I was reviewing all of the documents.

23 Q. Let's take the first predatory lending practice listed,

24 the effective or equivalent rate.

25 Can you tell the jury what that is?

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 1 A. Yes. Household's rates were higher than its competitors.

 2 So in order for it to be able to make loans, they came up with

 3 a way of describing their rates as effective rates.

 4 Basically what they would do is tell the customer,

 5 you can pay your mortgage payment -- half of your mortgage

 6 payment every two weeks instead of making your mortgage

 7 payment once a month. And in that way, you will pay it off

 8 faster. And that's true because you make 13 payments instead

 9 of 12 payments if you make a half of a payment every other

10 week.

11 But what they would do is, they would then calculate

12 what they called an effective rate and compare it to someone

13 that's making their payment once a month for 30 years. And

14 they would say, because you are paying less interest, you are

15 paying a lower interest rate, which is not true.

16 If I took out a 30-year mortgage and I refinanced it

17 somewhere else after two years, the amount of interest I would

18 pay to the first lender would be less than if I would have

19 stayed there for 30 years and paid it. But my interest rate

20 didn't change.

21 So Household used what they called this effective

22 rate. Sometimes they would call it equivalent rate.

23 Sometimes they would call it comparative rate. But they would

24 couch this, their higher rate, in terms of this biweekly

25 payment plan and say, you know, your effect rate is lower. So

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 1 this is an example.

 2 Someone would come in, apply for a loan or refinance

 3 their current loan. Household would do this effective rate

 4 calculation based on the biweekly payment plan. And they

 5 would say, well, you currently have an 8 percent rate. But if

 6 you come and refinance with us, the effective rate would be

 7 7 percent. And the customer would say, oh, that's great; I am

 8 going to refinance. But really what would happen is, the

 9 interest rate would still be, you know, 12 and a half or

10 13 percent.

11 So Household used this predatory lending practice to

12 get people to come in and borrow from them, even though their

13 rates were not competitive. If they would have said, if you

14 pay your loan every two weeks on the current loan, the rate

15 would be 4 percent, you know, as compared to our 7 percent.

16 So the reason why Regulation Z is in place, as I said

17 this morning or earlier -- I am sorry -- this afternoon is

18 lenders are required to only use the annual percentage rate so

19 that customers can compare from lender to lender what the

20 rates are so they can compare apples to apples. Regulation Z

21 is violated when you come up with all these different sorts of

22 rates to give to the customer. So that was the effective

23 equivalent rate scam that Household was running during this

24 1999-to-2002 time frame.

25 Q. Now, we have touched on the second practice, insurance

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 1 packing. But can you tell us what that is?

 2 A. Yes. Insurance packing is when you add insurance premiums

 3 for credit life, accident and health, unemployment, whatever

 4 kind of insurance, on to the loan without the borrower's

 5 knowledge. That's a typical insurance packing definition.

 6 Household did some of that.

 7 They also would tell the customers that the insurance

 8 was required. Sometimes they wouldn't tell them at all. And

 9 if the customer would come to the loan closing -- let me back

10 up a minute.

11 What Household trained their employees to do was to

12 assume that the customer wanted all of these insurance

13 products. So when the customer got to the loan closing, the

14 insurance would already be added on. If the customer would

15 notice it, they would say many times, oh, we have to run all

16 your loan documents; this is going to take a long time.

17 If the customers, you know, asked about it and really

18 said, we don't want it, we don't want it; they would say,

19 don't worry about it. You can cancel after 30 days.

20 They would get their premium back -- a portion of

21 their premium back, but the premium would still be on their

22 loan. And they would be making not only payments over

23 30 years because of the insurance, they would also be paying

24 interest on that insurance premium.

25 So this is considered a predatory lending practice.

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 1 And it's particularly egregious when the type of insurance is

 2 single premium credit insurance. And that is where you make a

 3 premium payment up-front. You pay it off, of course, as you

 4 pay your mortgage off over 30 years, but the insurance only

 5 lasts for five years. So you no longer have insurance, and

 6 still after the fifth year, you are paying for this. So

 7 regulators in a lot of states have prohibited this. That is a

 8 particularly egregious predatory lending practice.

 9 Q. Did you see instances in which Household packed single

10 credit premium insurance on?

11 A. Yes.

12 Q. What about the next practice, failure to properly

13 disclose? Can you tell us what that is?

14 A. Failure to properly disclose is in two major categories.

15 There were a lot of problems with disclosure, but I will

16 confine it to these two categories.

17 One is the good faith estimate. And for anyone that

18 has gone to close on a home, you will know that when you make

19 an application to a lender, three days after the application

20 is accepted you are supposed to receive a good faith estimate

21 of the closing costs. And that's under the Real Estate

22 Settlement Procedures Act, which is known as RESPA.

23 The good faith estimate that Household would give,

24 when they would give it -- sometimes they didn't give it;

25 sometimes it was late -- but when they would give the good

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 1 faith estimate, it was a wide range. They would say, your

 2 closing costs are going to be between zero dollars and $8,000.

 3 The majority of the time on the documents that I

 4 looked at, Household charged at the high end of the range or

 5 in excess of the range. The lenders are never supposed to

 6 charge in excess of what they have on the closing costs

 7 without redisclosing. But in many cases, Household would

 8 charge in excess of that range.

 9 Household's practice was to charge at the high end of

10 the range. And if you look at the regulatory literature, when

11 you give a range and almost all the time when you charge at

12 the high end of the range, it's considered deceptive if you

13 are giving too wide of a range to a borrower. So that's one

14 of the problems with failure to properly disclose. And it's

15 considered a predatory lending practice.

16 The other example of failure to disclose was the

17 prepayment penalty. A prepayment penalty is when you go to

18 pay off your mortgage either through refinance or from other

19 means and you are charged a penalty for paying it off. Some

20 states have prohibited this, but some states have not.

21 And when Gary Gilmer took over Household in 1999 --

22 1998, starting in 1999 they increased the amount of the

23 prepayment penalty from three years to five years. What that

24 meant was, if you came in to pay off your loan inside of five

25 years, you were charged six months' worth of interest as a

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 1 penalty.

 2 And this prepayment penalty disclosure was buried in

 3 the fine print in the middle of the loan documents. You know,

 4 you always have a big stack of loan documents to sign. Many

 5 times the customers didn't know about this prepayment penalty.

 6 If they would see the prepayment penalty and ask

 7 about it, they would be told, don't worry about it; it will be

 8 waived. And then, of course, as I saw in some of the

 9 complaints, people would have to move for their job or

10 whatever and come into Household and they would say, sorry,

11 it's not waived.

12 So those are two examples of failure to disclose: the

13 good faith estimate being in too wide of a range and the

14 prepayment penalty not being clearly disclosed.

15 Q. The next practice is excessive fees and points.

16 Can you tell us what that is and how it existed at

17 Household?

18 A. Yes. Excessive fees and points. A point is 1 percent of

19 the loan balance. And what discount points are normally used

20 for is to buy down the rate. So if your lender has a program,

21 for example, where if you pay 1 or 2 points, you can buy down

22 the rate by, you know, like a half a percent or something,

23 that's a decision that the borrower and the lender -- that the

24 borrower makes in negotiation with the lender.

25 As an examiner, when I am looking at a lender's books

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 1 A. I reviewed a document called First Mortgage Sales. And it

 2 had a couple different iterations over the time period that I

 3 looked at it. And in there, it trained the employees how to

 4 derive that effective rate that concealed the true annual

 5 percentage rate from the customer.

 6 And then I also looked at a document regarding

 7 insurance sales. And in there, it taught the employees how to

 8 assume that the customer wanted the insurance, called the

 9 assumptive close. And it taught them how to just

10 automatically put that insurance on the loan documents.

11 Q. Did you review any training by a man named Lew Walter?

12 A. Yes, I did.

13 Q. And who is Lew Walter?

14 A. He was a training officer in the northwestern division of

15 Household.

16 Q. Now, let's take a look at Exhibit 379, which I placed

17 before you and defense counsel.

18 Do you recognize that document?

19 A. I do.

20 Q. What is it?

21 A. This is a document -- it's a multipage document. There's

22 a fax cover on top. And it's from Rob O'Han to Tom Detelich.

23 It's dated May 20, 2002. And there is an e-mail attachment to

24 it on the second page, and there's some other pages here too.

25 Q. Why do you recognize Plaintiffs' Exhibit 379?

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 1 A. This is one of the documents that I've looked at in

 2 formulating my opinions.

 3 MR. DROSMAN: Plaintiff's offer Exhibit 379 into

 4 evidence.

 5 MR. KAVALER: Your Honor, I believe this is a limited

 6 purpose document.

 7 THE COURT: It will be admitted. The jury has

 8 already been instructed on the limited purpose evidence.

 9 MR. DROSMAN: Thank you, your Honor.

10 BY MR. DROSMAN:

11 Q. Let's talk about Plaintiffs' Exhibit 379. You mentioned

12 that this was a fax from Rob O'Han to Tom Detelich. Who is

13 Rob O'Han?

14 A. Rob O'Han was one of the district general managers at

15 Household, I believe was his title.

16 Q. Was he a sales officer?

17 A. Yes. The sales staff reported up through him.

18 Q. And what about Tom Detelich?

19 A. Tom Detelich was a senior officer at Household. I can't

20 remember his exact title.

21 Q. And he was an officer in the consumer lending business

22 unit; is that right?

23 A. I believe so.

24 Q. A managing director in that unit?

25 A. Yes.

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 1 Q. Could you take a look at the second page of the document,

 2 page ending 075.

 3 Is there anything on that page that appears to be an

 4 e-mail that supports your opinions in this case?

 5 A. Yes.

 6 Q. And can you tell me what that is?

 7 A. Yes. This is an e-mail regarding a discussion about

 8 how -- what they're doing in Florida. It says Florida review

 9 is the subject. And it was written from someone in human

10 resources to Scott Schneider, and it was forwarded to Rob

11 O'Han.

12 And if you look at the -- it says, Here is the

13 summary of the timeline of the issues, July 1999. And that's

14 hard to read, but I'll see if I can read it for you.

15 It says, Lew Walter rolled out the First Mortgage

16 Sales workshop to all HFC sales divisions, with the exception

17 of southwest, July 1999 to August 1999. The southeast

18 division was rolled out approximately July 1999. The workshop

19 workbook or -- I think there's a word missing there. I think

20 it should say contained -- a worksheet on the biweekly plan

21 versus the 30-year program, equivalent rate. The equivalent

22 rate would be described as the rate that would be needed if

23 they were to pay the same amount of interest over a 30-year

24 term at a bank compared to our proposed loan. The form was

25 designed as a tool for the AEs -- and that's account

Household Unsigned Page 493 - 496

 495 

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 1 executives -- to work up the numbers so that they could do

 2 comparisons. The worksheet was not to be distributed to the

 3 customers.

 4 Q. So this shows that the equivalent rate training was rolled

 5 out in July of 1999; is that right?

 6 A. Yes. It was part of that First Mortgage Sales document

 7 that I looked at.

 8 Q. And why is that significant to your opinions in this case?

 9 A. Well, because Household always said in its responses to

10 the regulators and its public discussions in the press that

11 this particular practice among others were the result of a

12 rogue employee or a rogue branch. And that wasn't true. This

13 was what the employees were trained to do nationwide. And I

14 saw evidence of it all over the country in many locations.

15 And, here, they're talking about it in Florida.

16 Q. Now, when you say rogue employee, you're talking about

17 some bad apple at Household; is that what you mean?

18 A. Well, that's what I assume Household meant by saying rogue

19 employee or rogue branch. It only happened over there.

20 Q. And if you turn to page ending 077, there appears to be

21 another e-mail with a catalog of some customer complaints.

22 Can you tell me whether that's significant to your

23 opinion?

24 A. Yes, it is.

25 Q. And what's significant about page ending 077 to your

Household Unsigned Page 493 - 496

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 18 of 245
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 1 Q. And a "DSM" is a "Division Sales Manager"?

 2 A. I think it's called "District Sales Manager."

 3 Q. And Rob O'Han was a senior executive in the Sales

 4 Department at Consumer Lending?

 5 A. Yes.

 6 I can't remember his exact title. "District General

 7 Manager," or something like that.

 8 Q. I'll show you what has been marked as Plaintiffs' Exhibit

 9 898 for identification.

10 (Document tendered.)

11 BY MR. DROSMAN:

12 Q. Do you recognize Plaintiffs' Exhibit 898?

13 A. I do.

14 Q. What is it?

15 A. This is the Insurance Training Manual that I referred to

16 earlier, that I looked at in formulating my opinions.

17 Q. And is it a -- does it contain a cover memo?

18 A. Yes, it contains a cover memo.

19 Q. What is the date of the cover memo?

20 A. The cover memo date is May 12th, 2000.

21 Q. And to whom is the cover memo addressed?

22 A. "All HFC Branch Sales Managers."

23 Q. What's the subject?

24 A. "Insurance Service Staff Meeting."

25 MR. DROSMAN: Your Honor, Plaintiffs offer Exhibit

Household Unsigned Page 525 - 528

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 1 898 into evidence.

 2 THE COURT: It will be admitted.

 3 (Plaintiffs' Exhibit No. 898 received in evidence.)

 4 BY MR. DROSMAN:

 5 Q. Now, we spoke about the effective rate. Let's turn to

 6 insurance, which we've also touched on.

 7 Is this document significant to your opinions

 8 regarding -- or your conclusion -- that Household engaged in

 9 insurance packing?

10 A. Yes.

11 Q. Okay.

12 Let's take a look at the first page of the document.

13 Is there anything significant about that document or

14 that page that's significant to your opinion?

15 A. Yes, a couple of things.

16 In the first paragraph, the last sentence, it says,

17 "In addition, the company benefits from a profitability and

18 growth standpoint; and, of course, you benefit from an

19 incentive compensation standpoint."

20 Q. Why is that significant?

21 A. This is significant because part of the compensation

22 program at HFC -- or, I'm sorry, at Household -- rewarded

23 employees for packing on as much insurance as possible. And

24 they're articulating that in the front of this training

25 manual.

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 1 Q. What about the second to the last paragraph on this page?

 2 A. Right.

 3 The second to the last paragraph says, "To assist you

 4 in achieving these goals -- " oh, are you talking about -- oh,

 5 the second to last. Sorry.

 6 Anyway, this was -- this particular document was --

 7 so that they could conduct training in their individual

 8 locations.

 9 The second to the last paragraph that's highlighted

10 up there says, "I look forward to you achieving 100

11 percent-plus of your -- " and I don't know what that means

12 "NWP" -- "goals in both credit and non-credit products, and to

13 a 75 percent customer acceptance rate in all branches."

14 Q. And do you know what a "75 percent customer acceptance

15 rate" refers to?

16 A. Yes. That was what, in regulatory parlance, we talk about

17 as penetration ratios. And what they wanted was 75 percent of

18 any loan that was made to have this insurance product added

19 onto it. And we call that as -- in the regulatory field --

20 "penetration ratio."

21 Q. And they were seeking a 75 percent penetration --

22 A. Yes.

23 Q. -- ratio?

24 A. Yes.

25 And, from a regulatory perspective, that's very, very

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 1 high.

 2 Whenever you -- and I used to go into banks and

 3 examine for this very thing, to see if Regulation Z was being

 4 complied with. Because if insurance is required, they have

 5 to disclose it in a separate location than if it's not

 6 required.

 7 And, so, what we would look at is if the bank would

 8 say, "Oh, no, we don't require it," we would look at

 9 penetration ratios to determine if, in fact, they do require

10 it, but they're just saying that.

11 And anything above 50 percent -- that was sort of our

12 rule of thumb -- was considered very high and could be

13 indications of insurance packing, and that insurance was

14 required.

15 Q. Let me direct your attention to the page ending "493."

16 And if you could take a look at that page and let me

17 know if there's anything on this page that appears to be part

18 of a training manual for insurance that is significant to your

19 opinion?

20 A. Yes.

21 Are they pulling it up?

22 Q. Yes. Just go ahead and testify.

23 A. In the second paragraph, it says -- they're talking about

24 selling insurance: "A good way to do this is by using the

25 assumptive close," and I've talked about that a couple times

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 19 of 245
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 1 bottom of the page there?

 2 A. Right, "Insurance."

 3 I found this component to be particularly interesting

 4 because not only did it reward the individual salesperson for

 5 packing on insurance of a variety of kinds -- credit life,

 6 single premium credit, accident and health; you know,

 7 whatever -- but there was a portion of the incentive went into

 8 a pool for all branch employees.

 9 So, it helped produce peer pressure for the branch

10 for everyone to do this particular practice. So, this

11 component I found particularly interesting.

12 Q. What is this? Were they offered additional compensation

13 for the more insurance they sold?

14 A. Yes.

15 And the branch was, too, if they met certain goals.

16 Remember the penetration ratio that they wanted in

17 that other document was 75 percent. So, they wanted 75

18 percent of all the loans that they made to have some sort of

19 insurance packed on there.

20 Q. Now, did you prepare a demonstrative exhibit to assist you

21 in explaining how Household's compensation practices

22 encouraged predatory lending practices?

23 A. Yes.

24 Q. I'm showing you what has been marked as Plaintiffs'

25 Demonstrative Exhibit 32 for identification.

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 1 Can you tell us what this exhibit shows?

 2 A. What this exhibit shows is the various incentives on the

 3 left. We talked about "New Money Volume," "Loan Account

 4 Gain" -- I should use my clicker here -- "Margin and

 5 Insurance."

 6 And these are the predatory lending practices that

 7 they encouraged. So, let's just take them one at a time or --

 8 is that okay?

 9 Q. Sure. That's fine.

10 Why don't we take the first one, "New Money

11 Incentive." Tell us what practices that encouraged?

12 A. Okay. "New Money Incentive," so here we have -- remember,

13 this is an incentive based on how much new money is booked.

14 And, so, what it encouraged was loan flipping because

15 each time they did these rapid refinances or continual

16 refinances, they would add on points, they would add on

17 insurance premiums and they would add on fees.

18 So, it encouraged loan flipping; it encouraged equity

19 stripping, because every time they added on points and fees

20 and insurance premiums, of course, it stripped off the equity;

21 it encouraged insurance packing, because insurance was part of

22 the new money; and, it encouraged putting maximum points on,

23 because that was also part of the new money.

24 The second one is "Loan" -- is "Volume" -- "Loan

25 Volume Incentive." And these are the number of loans,

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 1 remember. And, so, that encouraged loan flipping and loan

 2 splitting. Because for each new loan that they booked, they

 3 got a certain number of points.

 4 If they split it into two, they got more points. And

 5 when they split it into certain kinds of loans, they got even

 6 more points. And that kind of changed over the course of

 7 time.

 8 The third one -- "Loan Account Gain" -- that

 9 encouraged -- remember, now, this is the attrition. This is

10 -- if the overall book of business goes down, you don't get

11 your incentives. So, they were trying to prevent attrition,

12 trying to prevent anybody from paying off their loan too fast.

13 And this encouraged loan flipping because every time

14 that, you know, the loan needed to be refinanced or whatever,

15 it kept the loan balances going up with the extra products and

16 points and everything being added on.

17 Of course, equity stripping, because when all that

18 was added on, it stripped away equity; and, insurance packing,

19 because that added to the loan balances.

20 So, "Loan Account Gain" encouraged those types of

21 predatory lending practices.

22 For "Margin Incentive," we talked about that.

23 Everyone -- every applicant -- that came to Household had a

24 benchmark rate that was calculated based on the

25 creditworthiness of the borrower.

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 1 And the sales executives were incentivized by

 2 increasing that as much as possible. So, at the highest rate

 3 possible, adding on as many points as possible.

 4 And, then, the last one: "Insurance Packing" --

 5 "Insurance Incentive." Not only were the individuals

 6 rewarded, but they could be rewarded based on sort of the peer

 7 pressure of the branch, and that encouraged insurance packing.

 8 Q. All right.

 9 As a regulator now, let's talk about -- we talked a

10 little bit about the Quality Assurance and Control Department

11 at Household?

12 A. Yes.

13 Q. Often abbreviated as the "QAC" Department.

14 Are you familiar with Quality and Assurance Control

15 Departments at various lenders that you've examined over the

16 years?

17 A. Yes.

18 Q. And what are the purpose of these QAC Departments,

19 generally?

20 A. Well, generally, the purpose is to make sure that the

21 lender is complying with various laws; and, you would need

22 someone to go and look at the loan files to determine that.

23 And, then, the second thing would be to make sure

24 that they're complying with Household's policies or the

25 company's policies.

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 20 of 245
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 1 Q. Now, is there anything significant about that complaint to

 2 your opinions in this case?

 3 A. Well, what I found interesting about this complaint was,

 4 first of all, non-English speakers, if you remember the OCCs

 5 issuance, it talked about sometimes you have non-English

 6 speakers, and that's a particular class that can be taken

 7 advantage of.

 8 And here we have the Hispanic non-English speaker,

 9 the daughter serving as an interpreter. So, that kind of

10 perks your ears up for possible predatory lending.

11 And, then, of course, again, we've got the biweekly

12 payment plan with the EZ Pay. This is in Phoenix, Arizona.

13 You know, we've seen these in different places around

14 the country. And, you know, the effective rate presentation,

15 again.

16 Q. Why do you think that this is the effective rate

17 presentation?

18 A. Because they're talking about, "If you pay off your loan

19 every two weeks, it will pay out like a 7.58 percent 30-year

20 loan, only you pay it off much sooner."

21 The one thing that's missing here from the

22 presentation is how many years sooner is it paid off? 18?

23 17? Whatever.

24 And, then, they talk about single premium credit

25 insurance, which is a particularly predatory product because,

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4-01-09 Trial Day 3 4/1/2009 6:02:00 AM

 1 remember, it tacks on to your 30-year loan, but it goes away

 2 in five years. And, so, that's been prohibited by a lot of

 3 states.

 4 Q. So, they were told that they would have this 7.58 percent

 5 interest rate with their loan?

 6 A. Yes.

 7 Q. Turn to the next page, the page ending "765".

 8 A. The first sentence says, "Respondents did not tell us

 9 their biweekly payment quote did not include transaction fees,

10 property taxes or homeowners insurance on their home."

11 That's something I saw in a lot of the complaints --

12 and we haven't really talked about that -- but when you're

13 making a comparison of apples to apples, you want to make sure

14 that your mortgage payment, in fact, is the same -- contains

15 the same -- things as your current mortgage payment.

16 And this was a complaint that a lot of consumers had,

17 was that Household would not include their taxes and

18 insurance, and that's what their current one included.

19 So, when they were saying, "We'll give you a smaller

20 payment," that wasn't true.

21 And, then, the second sentence says, "Respondents

22 also did not explain that our loan included substantial loan

23 origination fees, substantial upfront insurance premiums and

24 an actual interest rate of 11.79 percent, a prepayment penalty

25 if we tried to pay off our loan before five years."

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 1 Q. So, what predatory practices were employed by Household

 2 with respect to this person, José Nanez?

 3 A. Well, they have the effective rate presentation given to

 4 them. They had single premium insurance being required -- and

 5 that's particularly predatory. They had failure to disclose

 6 the -- that the insurance and taxes were not in the new

 7 payment, as were on the old, so they could compare. And they

 8 didn't -- failure to disclose the prepayment penalty.

 9 Q. And what does the last sentence of this complaint say?

10 A. The last sentence says, "We believe the respondents

11 targeted us for predatory loans due to our national origin:

12 Hispanic. As a result of their predatory lending, respondents

13 have stripped away part of our loam equity and we are in

14 danger of losing our home."

15 So, that's the equity stripping, again, that we

16 talked about.

17 Q. Why don't I show you what's been marked as Plaintiffs'

18 Exhibit 1096 for identification.

19 (Document tendered.)

20 BY MR. DROSMAN:

21 Q. Do you recognize Plaintiffs' Exhibit 1096?

22 A. I do.

23 Q. What is it?

24 A. This is a complaint from Amy Adams in New Cumberland,

25 Pennsylvania. It's dated September 10th, 2002, and it's

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4-01-09 Trial Day 3 4/1/2009 6:02:00 AM

 1 addressed to Household.

 2 Q. And why do you recognize 1096?

 3 A. This is one of the documents that I looked at in

 4 formulating my opinions.

 5 MR. DROSMAN: Plaintiffs offer Plaintiffs' Exhibit

 6 1096 into evidence.

 7 MR. KAVALER: Your Honor, this is another one of

 8 those limited documents.

 9 THE COURT: Okay.

10 It will be admitted.

11 MR. DROSMAN: Thank you, your Honor.

12 THE COURT: The jury has been instructed on the

13 documents.

14 MR. KAVALER: Thank you, your Honor.

15 (Plaintiffs' Exhibit No. 1096 received in evidence.)

16 BY MR. DROSMAN:

17 Q. Let's take a look at the first page of the document. You

18 said that this document was sent to Household.

19 What was the date it was sent to Household?

20 A. September 10th, 2002.

21 Q. If you look at the second paragraph of the letter, what --

22 A. Now, this is a complaint that's not on the complaint form,

23 that -- she actually wrote this letter herself.

24 Q. And if you look at the last page of the letter -- the page

25 ending "448" -- why don't we look at the page ending "448" of

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 21 of 245
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 1 Q. Did it bear on your opinion that the predatory practice

 2 specifically in this case, the use of effective rate or

 3 equivalent rate, was widespread?

 4 A. Yes.

 5 Q. And how does it support -- in what way does it support

 6 your opinion?

 7 A. Well, they went -- they actually went and did tests

 8 themselves to see if what the complaints that they were

 9 receiving about this effective rate presentation were true.

10 And they've concluded that, in fact, that the way that

11 Household was structuring their rates were intended to

12 mislead, misdirect and confuse the borrower or deceptive sales

13 practices, which is part of the definition of predatory -- or

14 covers -- the predatory lending term covers deceptive sales

15 practices.

16 Q. If you look at the next paragraph, third sentence in, it

17 begins, A subpattern of this pattern of confusion.

18 A. Yes.

19 Q. Does that have any bearing on your conclusions in this

20 case?

21 A. It does. It says, A subpattern of this pattern of

22 confusion has been identified by the Department in HFC's

23 misuse of the good faith estimate and what appears to be

24 intentional confusion about discount points charged on certain

25 loans. This subpattern of confusion has been identified by

Household Unsigned Page 613 - 616

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4-01-09 Trial Day 3 4/1/2009 6:02:00 AM

 1 the Department in over half of the recent complaints and is

 2 discussed in greater depth below.

 3 Q. How does that bear on your opinion in this case?

 4 A. Well, my opinion is that they used the good faith estimate

 5 to confuse the borrower by showing a wide range of closing

 6 costs when, in fact, they were going to be charged at the

 7 higher rate or possibly greater than the range. And this

 8 supports my opinion.

 9 Q. If you could turn to page ending 670. And I guess the

10 first -- the second full paragraph on that page. It begins,

11 The Department has also identified three additional concerns.

12 Does that have any significance to your opinions in

13 this case?

14 A. Yes.

15 Q. Why?

16 A. This says that, The Department has identified three

17 additional concerns resulting from borrower confusion over the

18 biweekly and bimonthly program. One, borrowers have been told

19 that by accepting the biweekly payment program, they can

20 effectively reduce the interest rate on their loan from

21 approximately 14 percent down to 7 percent. The Department

22 has encountered reference to this 14 to 7 percent statement a

23 number of times and addressed the problem directly with HFC

24 management in mid 2001. HFC informed the Department that the

25 practice was isolated to a single branch in Washington and

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 1 that the matter was not a corporate practice. However, the

 2 Department has identified the practice to other branches in

 3 Washington and has received reports from other regulators in

 4 other states concerning the practice. Contrary to HFC's

 5 claims, the Department does not believe the practice is

 6 isolated.

 7 Q. How is that relevant or significant to your opinions in

 8 this case?

 9 A. They're concluding that this effective rate presentation

10 is cropping up in other than just the Bellingham, Washington,

11 office, which is what HF- -- Household would always say that's

12 the rogue office, Bellingham, Washington; and that they're

13 hearing from regulators around the country that this is

14 cropping up there too. And that supports my opinion that

15 Household engaged in systemic and companywide predatory

16 lending practices.

17 Q. If you turn to the page ending 671. It's a continuation

18 of identify patterns that the Department of Financial

19 Institutions in Washington has observed. If you look at

20 number five on that page. It's the second paragraph there.

21 It's entitled prepayment penalty.

22 A. Yes.

23 Q. The first sentence of that paragraph, does that support

24 your opinion in this case?

25 A. Yes. It says, Consumers complained that they were unaware

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4-01-09 Trial Day 3 4/1/2009 6:02:00 AM

 1 of a prepayment penalty or that they were told they did not

 2 have a prepayment penalty. However, their loans did contain a

 3 prepayment penalty.

 4 Q. And if you take a look at the next page, page ending 672.

 5 The heading number six indicates an insurance packing. Do you

 6 see that?

 7 A. Yes.

 8 Q. Did the Washington DFI or Department of Financial

 9 Institutions also find indications of insurance packing?

10 A. Yes.

11 Q. And if you take a look down at seven, upselling loans.

12 A. Yes.

13 Q. The first sentence under seven, upselling loans, does that

14 support your opinion in this case?

15 A. It does. And this is basically the loan splitting. The

16 Department found that HFC attempts to provide both a first and

17 a second mortgage to borrowers regardless of the borrower's

18 desire or need for two loans.

19 And that's the loan splitting that we talked about.

20 Q. I'll show you what has been marked as Plaintiffs' Exhibit

21 445 for identification.

22 (Tendered.)

23 BY MR. DROSMAN:

24 Q. Do you recognize Plaintiffs' Exhibit 445?

25 A. I do.

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 1 Q. So volume, you belive, refers to volume of loans?

 2 A. Loan volume, yes.

 3 Q. The greater the volume, the more loans you're selling?

 4 A. The greater the volume, the more loans will be on your

 5 books. The more loans on your books, the more money you make

 6 Q. And they're looking at the impact of disclosures on how

 7 many loans they can sell?

 8 A. Yes.

 9 Q. What do you understand disclosures to mean in that

10 context?

11 A. Disclosure of the existence of a prepayment penalty,

12 instead of being buried in really fine print somewhere;

13 disclosure of the actual closing costs, instead of the wide

14 range of the good faith estimate; disclosure of the actual

15 annual percentage rate, rather than the effective rate. Those

16 types of disclosures. And the impact that they would have on

17 loan volume, which would be negative if they were actually

18 disclosed.

19 Q. Explain that to me. What's the relationship between

20 disclosure and selling more loans or loan volume?

21 A. Well, if you -- if you're a lender that has high rates and

22 you properly disclose your high rates and borrowers can

23 otherwise find another lender that's going to give them a

24 lower rate, it has a negative effect on volume. You can't

25 book as many loans because people aren't going to agree to it.

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 1 Or if you properly disclose that you have a

 2 prepayment penalty, that if you pay your loan within the first

 3 five years, it's going to be six months' worth of interest as

 4 a penalty and the borrower can go down the street and get

 5 some -- a loan that doesn't have a prepayment penalty, where

 6 are they going to go?

 7 Same with the closing costs. If you disclose what

 8 you actually think the closing costs are going to be, which is

 9 what the regulation requires, rather than a wide range when

10 you know you're going to charge at the top or above the range,

11 people are not going to agree to take a loan out with you.

12 And so there's an inverse relationship, if you're

13 that kind of a lender, to proper disclosure and how many loans

14 you'll be able to book.

15 Q. And then if you take a look at page ending 391, in the

16 same document. This is, again, from Mr. Schoenholz to

17 Mr. Aldinger.

18 Does this information have any significance to you?

19 A. Well, it just tells me that they were talking at the board

20 level, at the very highest level of Household, about predatory

21 lending in 2001.

22 Q. And what did they view -- the heading up there says major

23 issues and obstacles. What did they view predatory lending

24 as?

25 A. I'm assuming they viewed it as --

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 1 MR. KAVALER: Objection, your Honor.

 2 THE COURT: Sustained.

 3 BY MR. DROSMAN:

 4 Q. What's your understanding as to how major issues and

 5 obstacles relates to predatory lending on that page?

 6 A. They were listing the major issues and obstacles to their

 7 loan growth and their profitability. And so they have several

 8 listed here, and one of them is predatory lending.

 9 Q. So they highlighted that as a major issue and obstacle to

10 loan growth?

11 A. Or to their operating plan, what their goals were for

12 2001.

13 Q. Let's talk a little bit about ways in which you went about

14 reaching your conclusions in this case.

15 Did you ever look at, for example, the total number

16 of Household's loans, on the one hand, and then the number of

17 complaints on the other and try to calculate some sort of

18 complaint-to-open-loan ratio or percentage?

19 A. No.

20 Q. Why not?

21 A. Because that ratio is meaningless. Regulators look at

22 complaints on a complaint-by-complaint basis because it's very

23 difficult for people to file a complaint. It takes a lot of

24 energy. They have to put something in writing. They have to

25 get all their documentation together. And so when someone

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 1 complains, the regulators take it seriously. Even if there's

 2 a handful of complaints, the regulators take them seriously.

 3 They look at each complaint. They get the response

 4 from the lender, in this case Household. And they come to

 5 some conclusion whether laws had been violated or deceptive

 6 practices have been foisted on the borrower, whatever the

 7 issue might be. And so the -- the complaint framework and the

 8 complaint-based review of a lender does not lend itself to a

 9 ratio analysis of complaints to open loans. It's -- that's

10 not meaningful.

11 Q. Now, when you were -- you were a lender for 25 -- I mean

12 you were a regulator for 25 years; is that right?

13 A. Yes.

14 Q. And first you were a regulator with the OCC, the federal

15 government; is that right?

16 A. That's right, the regulator of national banks.

17 Q. And then a regulator for the Texas State Banking

18 Commission; is that right?

19 A. Right. I was the Texas banking commissioner.

20 Q. You headed that department?

21 A. Yes.

22 Q. Did you ever calculate this ratio of complaints to open

23 loans during your 25 years of regulatory experience?

24 A. No.

25 Q. Did you ever have anybody underneath you say calculate

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 1 this ratio?

 2 A. No.

 3 Q. When you were a regulator for 25 years, did you ever see

 4 this ratio being calculated?

 5 A. No, because it's not meaningful. It's not a meaningful

 6 ratio to calculate.

 7 Q. What did you look at as a regulator?

 8 A. Well, what you would do -- and we had some very large

 9 banks that we regulated, you know, like Sun Trust. When I was

10 a field examiner, we regulated Continental, Illinois National

11 Bank, First National Bank of Chicago. We regulated Exchange

12 National Bank. And, of course, they would have more

13 complaints than the smaller banks just in terms of number.

14 But it doesn't mean that we would look at the smaller banks or

15 the larger banks any differently.

16 We would look at the nature of the complaints. We

17 would look at geographic dispersion, especially for a bank --

18 when I was in Atlanta, for example -- that operated in

19 multiple states to see how widespread the practice was. We

20 would look at the -- not only the nature and the geographic

21 dispersion, but just how common it was, how many complaints we

22 were getting in a particular area. And then we would give the

23 information to the examiners so that they could widen their

24 scope in that particular area.

25 So it's something that's taken very seriously and is

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4-01-09 Trial Day 3 4/1/2009 6:02:00 AM

 1 looked on a complaint-by-complaint basis.

 2 Q. And when you said you would look at the nature of the

 3 complaints, you would look at whether they were very serious

 4 complaints or not so serious complaints?

 5 A. Yes. You would look at -- I mean, just using Household as

 6 a example, you know, I thought I was going to get a low

 7 interest rate loan, but really I have a high interest loan.

 8 And so you would look at how many of those complaints are you

 9 getting, where are they coming from, what law does that

10 violate, you know, and how serious do you view that. People

11 being deceived is viewed more seriously than a typo in a loan

12 document, for example. So, you know, we would weigh how

13 serious it was, of course, taking into consideration the

14 response from the lender.

15 Q. So not all complaints are viewed equally, correct?

16 A. That's right.

17 Q. And when you say geographic dispersion, you look at --

18 what do you mean by that, geographic dispersion?

19 A. Like, for example, we didn't have branch banking in

20 Illinois when I was a field examiner. But when I was in

21 Atlanta at the OCC, we had banks operating in five states. So

22 we would look to see if it was isolated to a particular state

23 because state laws vary, you know, depending on what the issue

24 was; or was it a companywide issue that we had to deal with at

25 the headquarters office. So just how widely dispersed are the

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 1 complaints and are the issues.

 2 THE COURT: Let me interrupt you here. We're five

 3 minutes from 4:30, and I want to have just a minute or two to

 4 talk to the jury. So you may step down at this point, ma'am.

 5 Folks, I've talked this over with the attorneys and I

 6 have calculated and recalculated the number of hours in a day

 7 and the amount of work we have to get done. And it does not

 8 appear to me that we can quit before 4:30 on a regular basis

 9 unless we can start before 10:00 o'clock. If all of you are

10 in agreement that we can start before 10:00 o'clock, we can

11 quit a little bit earlier; otherwise in order to get this case

12 finished within the time period that we quoted to you in the

13 notice we sent out, we have to go to at least 4:30 every day;

14 and that's pushing the limit.

15 So let me put the question to you: Is there anyone

16 who would be adverse to coming in and starting at, say, 9:45

17 instead of 10:00 o'clock?

18 Are you all in agreement with that? Give me a show

19 of hands if you cannot do that.

20 So we'll try it one more time just to make sure.

21 Anybody that cannot do that?

22 All right. Then let's start tomorrow at -- we'll try

23 it tomorrow and see if everyone can get here on time and we

24 can actually get started. At 9:45, we will commence with the

25 evidence and we will quit at -- I think you folks wanted to

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 644

 1 quit at 4:20 rather than 4:30. That will give you time to

 2 catch that earlier train and get home before the sun goes

 3 down. We will do it that way.

 4 I remind you again, do not discuss the case with

 5 anyone. Do not allow anyone to discuss it with you. Do not

 6 read, listen to or view any news stories about this case.

 7 Have a good evening and we'll see you tomorrow.

 8 (Jury out.)

 9 THE COURT: Okay. First, do the attorneys have any

10 issues?

11 MR. DOWD: No, your Honor.

12 MR. KAVALER: Your Honor, as far as the first

13 Thursday of the last day of the first week, I assume we're

14 going to have our six minutes apiece for interim summations

15 and I assume they'll be at the end of the day.

16 THE COURT: To be honest with you, it occurred to me

17 that we've had so little testimony, we're not even through

18 with one witness, that it would be best to forgo that this

19 week, use the time to get the testimony in and begin next week

20 with that practice where you actually have some substance to

21 talk about. Right now you would be, I guess, both trying to

22 summarize the as yet unfinished testimony of one witness. It

23 doesn't appear to me to be a valuable use of time.

24 So the answer is no, we're not going to do it this

25 week. We haven't gotten enough evidence in, I think, to make

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 651

 1 agree to them or you file with me separate motions indicating

 2 that you want me to change the instructions I've already

 3 given. The idea is not to confuse the jury. It's to try to

 4 help them and clarify the tasks for them. And what we're

 5 doing here is confusing me, and I know it's going to confuse

 6 them.

 7 MR. KAVALER: Your Honor, this is the instruction

 8 that we agreed upon. You asked me yesterday --

 9 THE COURT: Get all of the instructions together, all

10 of the instructions on all of the issues regarding all of the

11 documents that you agreed to; and I will once more charge the

12 jury. But I will do it all at one time and all with agreed

13 language that's going to be in writing. If you can't agree,

14 just file separate motions before me, and I will determine

15 whether there needs to be a different charge than was already

16 given.

17 MR. KAVALER: Very good, your Honor.

18 THE COURT: Okay. I have an issue for you. I

19 received a note from a juror: Dear Judge Guzman. After much

20 thought and numbers crunching, it appears that if I continue

21 to serve, I will not be able to make my mortgage. My wife and

22 I have been trying to figure where we could cut back to make

23 up the shortfall. I knew that it was going to be tough.

24 Because I work a rotating shift, I would lose the income I

25 normally make on Saturday and Sunday as my job would want to

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 652

 1 put me on a straight shift, left paren, no Saturday, Sunday,

 2 right paren. I regret that I'm making this request of you,

 3 but I must.

 4 Your thoughts.

 5 MR. DOWD: It's a tough one, your Honor. Maybe I

 6 could talk to Mr. Kavaler over the break and see if there's

 7 something that we could agree on.

 8 MR. KAVALER: I'm certainly happy to talk to

 9 Mr. Dowd.

10 THE COURT: All right. We'll postpone the issue

11 until the break.

12 Carole, let's bring the jury out, please.

13 (Jury in.)

14 THE COURT: Good morning, ladies and gentlemen.

15 Welcome back. We're ready to proceed.

16 Counsel.

17 MR. DROSMAN: Thank you, your Honor.

18 CATHERINE GHIGLIERI, PLAINTIFFS' WITNESS, PREVIOUSL

19 DIRECT EXAMINATION (Resumed)

20 BY MR. DROSMAN:

21 Q. Good morning, Ms. Ghiglieri.

22 A. Good morning.

23 Q. When we broke for the day yesterday, we were talking about

24 why you didn't think it made sense -- you had never seen

25 anybody calculate a ratio or a percentage of complaints to

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 653

 1 open loans.

 2 Do you recall that?

 3 A. I do.

 4 Q. And you talked about the fact that you looked at the

 5 seriousness of the allegations, the geographic dispersion or

 6 spread of those allegations.

 7 Did you look at anything else when assessing

 8 complaints, customer complaints?

 9 A. Well, in the Household case or just as a regulator?

10 Q. As a regulator.

11 A. As a regulator, I would look at the nature of the

12 complaint, what type of a complaint was it, what were the

13 allegations in terms of violations of law; and, of course,

14 then how widespread was it in the particular lender, how

15 serious was it, what was the response of the company. So you

16 try and take everything into consideration.

17 Q. Did you also look at the trend of complaints, whether they

18 were increasing or decreasing over time?

19 A. Yes.

20 Q. And why did you do that?

21 A. Well, because if -- whenever a complaint would come in, we

22 would always send it to the regulated entity. In the case --

23 in my case, that would be national banks or state banks. And

24 we would ask, you know, how -- what do you think about this

25 complaint; and if it's valid, how are you going to resolve it.

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 654

 1 And so you would expect if it was a legitimate issue, for it

 2 to be corrected. So if we continued to see complaints of the

 3 same nature, you know, then we might send an examiner out to

 4 do a special investigation, for example. Or we would

 5 definitely send the complaints to the examiners in case they

 6 wanted to expand the scope of their examination.

 7 Q. And in this particular case, when you were examining the

 8 documents to arrive at your conclusions, did you look at all

 9 three of these issues with respect to the complaints that

10 customers made about Household?

11 A. Yes.

12 Q. Are there other reasons that a ratio of complaints to open

13 loans wouldn't provide you with useful information?

14 A. Well, it doesn't lend itself to a ratio analysis, such as

15 looking at how many loans in a loan portfolio are past due,

16 because people who have been taken advantage of often don't

17 know they've been taken advantage of so they don't know to

18 complain. And a lot of people that are mad about something,

19 for example, I've been taken advantage of, won't go to the

20 effort to write it down and send it in. And that's what we've

21 known over the course of time. So it's just not something

22 that lends itself to a ratio analysis.

23 You have to take every complaint seriously. You have

24 to analyze every complaint. And you have to get the

25 explanation from the lender to find out why are we getting

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 1 these complaints as a regulator, why -- do they continue to

 2 come, why are they escalating or whatever.

 3 Q. So if a person were deceived by Household, say, by the

 4 effective rate scheme or insurance was packed on, and they

 5 never realized they were deceived, would you expect that

 6 person to complain?

 7 A. No, because --

 8 MR. KAVALER: Objection, your Honor.

 9 THE COURT: Basis of the objection?

10 MR. KAVALER: Requires a state of mind of customers,

11 other people who might or might not -- do or do not -- it's

12 hard to understand what expertise she has that enables her to

13 do this.

14 THE COURT: Sustained.

15 BY MR. DROSMAN:

16 Q. Why is it that -- based on your expert experience, would

17 you expect or -- a person who had been deceived, did you see

18 those people and they never recognized that they had been

19 deceived when you were an expert, did you see those people

20 file complaints?

21 MR. KAVALER: Objection, your Honor.

22 THE COURT: Sustained.

23 BY MR. DROSMAN:

24 Q. Let's talk about Household in particular. Were all the

25 complaints that customers filed at Household, were those all

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 656

 1 logged?

 2 A. No. The complaints that were filed with the field, the

 3 branch sales staff, were not logged into the system for a long

 4 time, I should say. I think they tried to log some of those

 5 in later on at the end of 2002. But in the beginning of the

 6 time period that I was looking at, 1999 to mid 2002, anything

 7 that was filed -- any complaint that was filed with the

 8 branches was not logged. It was only the ones that weren't

 9 resolved at the branches that made it into the general log

10 system.

11 And I might add, there were some issues about people

12 not logging even those in. There were a lot of e-mails back

13 and forth with some senior management officials saying, you

14 know, we've noticed that in this particular area, the

15 complaints aren't being logged. And that went on throughout

16 almost the whole time period I was looking at.

17 Q. I'll show you what we'll mark as Plaintiffs' Exhibit 1148

18 for identification.

19 (Tendered.)

20 BY MR. DROSMAN:

21 Q. Do you recognize Plaintiffs' Exhibit 1148?

22 A. I do.

23 Q. And what is this document?

24 A. This is a document that discusses the logging of

25 complaints. And it's an e-mail string. The last e-mail is

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 1 dated August 28, 2002.

 2 Q. And who sent this e-mail string, the bottom one?

 3 A. The bottom one is sent from Stephen Hicks of Household to

 4 Tom Detelich, Robin Allcock, James Kauffman and others.

 5 Q. Why do you recognize Plaintiffs' Exhibit 1148?

 6 A. This is one of the e-mails that I saw that talked about

 7 their inability to be able to get all of the complaints

 8 logged.

 9 MR. DROSMAN: Plaintiffs offer Exhibit 1148 into

10 evidence.

11 THE COURT: It will be admitted.

12 BY MR. DROSMAN:

13 Q. Let's go ahead and take a look at Plaintiffs' Exhibit

14 1148.

15 And you spoke about the e-mail from Mr. Hicks. Who

16 is Mr. Hicks?

17 A. He's an official at Household.

18 Q. The director of policy and compliance there?

19 A. Yes.

20 Q. And it was his job to interface with the regulators?

21 A. Yes.

22 Q. And then is -- the first paragraph there in the e-mail

23 that Mr. Hicks sent, it's entitled complaints. Do you see

24 that?

25 A. I do.

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 1 Q. Is there any significance to that paragraph to your

 2 opinion?

 3 A. Yes. This is what I was talking about. It says, I spoke

 4 at length with the clerk and the manager of the rapid response

 5 team regarding unlogged complaints. The clerk admitted that

 6 she might not have communicated the complete context of her

 7 conversation with Mike Pinto. She indicates that on several

 8 occasions, Mike has forwarded complaints to her which he has

 9 worked but not resolved. In those instances, she has asked

10 him if he had logged them into the database and he has

11 indicated no. She and others in the department speculated on

12 the number of unlogged complaints he might be holding and

13 whether the ones he resolved were ever logged in. It was also

14 speculation as to the reasons why he might not log them in. I

15 apologize for this confusion.

16 Q. What's the date of this e-mail?

17 A. August 28, 2002.

18 Q. Why is this significant to your opinion?

19 A. Because this is at about the end of the time frame that I

20 looked at. And this is one of the criticisms in my report,

21 was that Household didn't know the sum total of the complaints

22 that they had on any given topic because they weren't being

23 logged. The ones that were in the branches were not being

24 logged if they were resolved at the branches. And so there

25 was no way for Household really to understand what the

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 1 magnitude of the complaints were.

 2 Q. And if you take a look at the next page, page ending 201.

 3 And the first paragraph, fourth sentence begins Jada Howard,

 4 manager of the RRT.

 5 Do you see that?

 6 A. Yes, I do.

 7 Q. Can you tell me whether that's significant to your opinion

 8 in this case?

 9 A. It is because it says Ms. Howard, manager of the RRT --

10 which is rapid response team -- indicates that Mike is not the

11 only DMG -- which is the district general manager -- who does

12 not log in complaints when they are received. She indicates

13 that on many occasions, she receives complaints from other

14 district general managers that have been worked but not

15 resolved which have not been logged into the complaint

16 tracking database.

17 Q. Is there significance to that?

18 A. Yes. Household continued to tell the regulators in the

19 documents that I looked at that this was an isolated instance,

20 whatever the complaint was. It was a rogue employee. It was

21 a rogue branch. And this demonstrates that they did not have

22 an idea of the magnitude of the complaints on any given issue.

23 Q. Now, yesterday we spoke about compensation, various

24 components of the compensation plan that you said encouraged

25 certain predatory lending practices. Do you recall that

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 660

 1 discussion?

 2 A. Yes.

 3 Q. And did you prepare a demonstrative that showed the

 4 percentage of compensation in which an employee could expect

 5 to receive through incentive compensation?

 6 A. I did.

 7 Q. I'll show you what has been marked as Plaintiffs'

 8 Demonstrative Exhibit 33 for identification.

 9 What does this exhibit show?

10 A. What this is, it shows that the sales staff received 60

11 percent base salary and then 40 percent incentive. And so the

12 base salary, they would get regardless. The incentive portion

13 of this, they would receive based on the insurance incentive,

14 the margin incentive, the loan account incentive, the loan

15 volume incentive and the loan dollar -- I can't remember what

16 the first one was -- incentive. And so during the 1992 -- I'm

17 going to try this to see if I can get it to work. During the

18 1992 --

19 Q. Do you mean 1999?

20 A. I'm sorry. 1999 to 2002 time frame, the average incentive

21 award was between $1,000 and $2,500 per month. And that's

22 significant because on the left-hand side, you'll see the base

23 salary for account executives, and this was the frontline

24 sales staff, was only $2,000 a month. So they could either

25 increase their salary or compensation by between 50 percent

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 661

 1 and 150 percent depending on if they met these targets. So

 2 they could receive a significant amount of compensation for

 3 engaging in those predatory lending practices that we talked

 4 about.

 5 Q. And was one of the ways that they could more than double

 6 their base monthly salary by packing insurance on?

 7 A. Right, and meeting the insurance incentive.

 8 Q. Now, we also spoke about the difference between an

 9 examination and an investigation. And we looked at some

10 reports of examinations yesterday.

11 Did you also see instances in which states instituted

12 investigations of Household?

13 A. Yes.

14 Q. Did you prepare a demonstrative to show a timeline of the

15 investigations that states engaged in?

16 A. I did.

17 Q. I'll show you what has been marked as Plaintiffs'

18 Demonstrative Exhibit 30 for identification.

19 And these are fairly small bubbles. Can you tell us

20 what this demonstrative shows?

21 A. Yes. Let me just read -- I'll read from the -- let's see

22 if I can get this to work.

23 I'll read from the top left-hand box because they're

24 very difficult to read. That one says May -- oh, good. May

25 21, 2001, Washington State provides Household with a summary

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 662

 1 of complaint investigation.

 2 So this -- they did a special investigation because

 3 of the number of complaints that they received regarding these

 4 predatory lending practices. And this is where they provided

 5 Household with the summary information.

 6 The next one is September 25, 2001. And that is

 7 coming from Minnesota where they issued a subpoena for records

 8 regarding these practices.

 9 Q. Can you tell me what that means, issues a subpoena for

10 records?

11 A. It's not often done by a regulator because normally they

12 can get information from the regulated entity. But in this

13 case, Minnesota felt like they weren't getting what they

14 needed, and so they issued a subpoena requiring Household to

15 give them certain information.

16 Q. And a subpoena commands or compels Household to turn ove

17 documents?

18 A. Yes.

19 The next one is November 14, 2001. And the State of

20 California sues Household for various practices that they

21 deemed were predatory and in violation of their laws.

22 The next one, December 4, 2001. Minnesota is now

23 providing Household with a summary of its investigation, and

24 that would include the documents that they looked at under the

25 subpoena.

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 667

 1 out of whole cloth because they wouldn't know to say these

 2 words. And the similarity of complaints in various parts of

 3 the country told me that this was a widespread issue.

 4 And as I looked at the training and as I looked at

 5 the compensation, how they were being compensated and how m

 6 money they could make, it offset any of Household's policy

 7 that says we're ethical, we believe in ethical lending. It

 8 offset any of the e-mails that I saw that said we don't engage

 9 in predatory lending or this is a rogue officer.

10 Q. Did you consider Household's response that it did not

11 engage in insurance packing, for example, because the

12 insurance penetration rates were incorrectly calculated?

13 A. Well, they would say that they don't require insurance.

14 And they would say we don't require insurance, see, look at

15 our policies that say we don't require insurance or look at

16 this document that we're having the consumer sign that says we

17 don't require insurance.

18 But what regulators do when they go in to look at a

19 lender is they look at the penetration ratios. There was one

20 piece of correspondence that I saw where Household was trying

21 to persuade the regulator to use ineligible borrowers as part

22 of the calculation. And what that is, is a person who doesn't

23 qualify for insurance. And so if you're calculating a

24 penetration ratio, you can't use ineligible borrowers because

25 that gives you an unrealistic penetration ratio.

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 1 So there were a lot of things. And I just kind of

 2 attribute that to maybe a little spin. But there were a lot

 3 of things that regulators do to make sure that what the

 4 lenders are telling them is valid. And in the case of

 5 insurance packing, the regulators will look at the penetration

 6 ratios.

 7 Q. Did you consider Household's response that the range of

 8 fees and points in a good faith estimate were actually

 9 reasonable?

10 A. Did I -- say --

11 Q. Consider Household's explanation that the range of fees

12 and points that they provided in the good faith estimate were

13 actually reasonable?

14 A. No. I mean, it's unreasonable because, as the Housing and

15 Urban Development agency opined, when you see borrowers bein

16 charged at the high end of the range or even in excess of the

17 range, which is a violation of RESPA, it gives you the

18 impression that there's not good faith there with how they're

19 disclosing to the borrower what their closing costs are going

20 to be. So that explanation, that closing costs in that wide

21 of a range from zero to, you know, $8,500 was reasonable, was

22 not persuasive.

23 Q. Did you consider Household's response that it launched a

24 full investigation of complaints regarding effective rate?

25 A. I did consider that.

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 669

 1 Q. And did that explanation change your view that Household

 2 engaged in widespread, systemic predatory lending practices?

 3 A. No, for several reasons. If you recall, complaints are

 4 not logged at the branches. That's one problem. So all the

 5 effective rate complaints, they would have no way of knowing

 6 what the magnitude of that is.

 7 Also, in May of 2001, they went on a document

 8 destruction binge where they said, if there's anything in the

 9 file regarding effective rate, we want it to be destroyed. So

10 there was no way for them to know how many borrowers' files

11 had had that effective rate presentation taken out.

12 And I had one other point, but I lost it.

13 Q. Did you see instances, for example, where Household went

14 out and tried to reach out to all of the people who had been

15 scammed by the effective rate?

16 A. Well, there was no way for them to know that because they

17 didn't do a full investigation of looking at the compensation,

18 looking at the training. The documents in this particular

19 area were purged. And there was just no way for them to know

20 who had been affected.

21 From the documents that I saw, the branches in

22 handling the complaints -- there was no central office

23 compliance review person that would actually reach out to the

24 customers. So there was never a confirmation that these folks

25 were being taken advantage of on the effective rate. They

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 670

 1 were relying on the branch folks for that. And --

 2 Q. You said that the documents were purged. What do you mean

 3 by that?

 4 A. There were some documents that I looked at, some e-mails

 5 that went out and said if we have anything regarding effective

 6 rates, we want to get that out of the files. And there were

 7 some documents to indicate that it wasn't just the blank forms

 8 that were destroyed, but actual information in the loan files

 9 if there was an effective rate presentation. That's why if

10 they went back and looked at who was taken advantage of

11 regarding the effective rate, there was -- would be no way for

12 them to know the universe of those people.

13 The other thing is they did look at -- in mid 2002

14 when they were dealing with the states attorneys general, they

15 did look at the effective rate. And they came up with I

16 believe it was 46 complaints out of -- you know, I don't know

17 how many they were looking at. But this was late in the game,

18 and all these other things had taken place; so there was no

19 way that that study was effective in my opinion.

20 Q. The study you're talking about, these are people who had

21 complained about the effective rate?

22 A. Yes.

23 Q. Were people who had been scammed by the effective rate but

24 didn't realize they had been scammed, were they included in

25 that study?

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 1 then we would also look at charged-off loans. And those would

 2 be loans that would have not paid for so long that the lender

 3 just doesn't think they're ever going to get paid, and so

 4 they're actually taken off the books; so those would be called

 5 charged-off loans.

 6 Q. What is a delinquent loan?

 7 A. A delinquent loan is a loan that has not paid in

 8 accordance with its terms. And Household used a term that

 9 other lenders use and it's called a two-plus delinquencies,

10 and that's a loan that hasn't been paid for two months or 60

11 days.

12 Q. And that's the two-plus delinquency number that you're

13 referring to --

14 A. Yes.

15 Q. -- at Household?

16 Did Household report the amount or the number of

17 two-plus delinquent loans or the percentage of two-plus

18 delinquent loans?

19 A. Yes.

20 Q. What does it mean for a loan to be two-plus delinquent?

21 A. It means that the borrower hasn't paid for two months or

22 60 days.

23 Q. What if the borrower hasn't paid for three months or 90

24 days, would the loan be two-plus delinquent then?

25 A. Right. It means two months delinquent or more basically.

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 1 Q. So did Household report this as a percentage, this

 2 two-plus delinquency number?

 3 A. Yes.

 4 Q. And if Household reported that its two-plus delinquency

 5 percentage was, for example, 4.5 percent, what did that mean?

 6 A. That meant that 4 percent of the loans in the portfolio

 7 were greater than 60 days past due or two months past due.

 8 Q. What is the significance of a lender reporting its

 9 two-plus delinquency number statistic?

10 A. This is -- this is a vital statistic that lenders report

11 because it's a predictor of future financial health and also

12 gives you an indication of the current condition of the

13 lender.

14 Q. And you mentioned the charge-off as another indicator of

15 loan quality?

16 A. Yes.

17 Q. What is that?

18 A. That's where the loan becomes so far past due that the

19 lender says we're just not going to get paid on this loan, so

20 they'll actually take it off the books. They'll charge it off

21 the books.

22 Q. Did you prepare a demonstrative exhibit to assist you in

23 explaining how loans go from being current to being two-plus

24 delinquent to being charged off?

25 A. I did.

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 1 Q. I'll show you what's been marked as Plaintiffs'

 2 Demonstrative Exhibit 36 for identification.

 3 Can you tell us what this exhibit shows?

 4 A. Right. So if you look at the current bucket here -- we'll

 5 just call these buckets. That's what Household called them.

 6 And you have all the current loans here. As a regulator, this

 7 is where you hope all their loans are, but realistically you

 8 know they're going to have some that aren't going to pay.

 9 So when a person doesn't pay two months' worth of

10 payments, it goes into the second bucket, which is the

11 two-plus bucket. And that's missing payments for 60 days or

12 two months.

13 And then as time goes on and they keep missing more

14 and more payments, at some point, it will fall into the

15 charge-off bucket when the lender has no expectation of

16 further collection.

17 Q. Is there a relationship between two-plus delinquency

18 numbers and loan quality?

19 A. Yes. There's a direct correlation between the two-plus

20 numbers and loan quality. The higher the two-plus number, the

21 worse the loan quality. So the more delinquencies that a

22 lender has, the worse their loan quality.

23 Q. Now, did Household report these two-plus delinquency

24 numbers in its form 10-K annual report?

25 A. Yes.

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 1 Q. Can you explain for the jury what it means to re-age a

 2 loan?

 3 A. Re-aging a loan means you do something to the loan to take

 4 it from being delinquent to putting it back on a current

 5 basis. It could be a variety of things. If a person has

 6 gotten sick and now they're back to work, you have a

 7 discussion with them as a lender and you say, okay, well, why

 8 don't we sort of start fresh. And there's a variety of ways

 9 to do it. But you can start fresh, and they can start paying

10 again after not paying for a certain time; and that would be

11 re-age. There would be a memo in the file discussing why the

12 loan was re-aged, and it would be something done on a

13 case-by-case basis.

14 Q. Was there -- did Household re-age loans?

15 A. Yes. Household re-aged loans in a variety of ways and

16 didn't have individual discussions. Some of them were -- they

17 would re-age whole portfolios automatically. They engaged in

18 a variety of things.

19 Q. When you said they would re-age whole portfolios

20 automatically, did they engage in this sort of call to the

21 borrower and ask them whether they're back on their feet and

22 maybe we can give you a break; was that how Household did it?

23 A. No. They would engage in a variety of practices where

24 they would automatically re-age. They would send the

25 borrowers an offer that said we'll let you skip the next

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 1 payment. If we don't hear from you, we'll take that as a yes.

 2 And then, you know, it allowed them to re-age whole

 3 portfolios.

 4 Q. Did Household engage in automatic re-aging?

 5 A. Yes.

 6 Q. What is automatic re-aging?

 7 A. Automatic re-aging is -- what Household did is if a loan

 8 met a certain criteria, they would re-age the whole entire

 9 portfolio; and the borrowers wouldn't even know they had been

10 re-aged.

11 Q. So the borrower might be 60, 90 days delinquent; and all

12 of a sudden, they were current?

13 A. Yes.

14 Q. And Household just did that automatically?

15 A. Yes.

16 Q. Now, is there a relationship between re-aging loans and

17 two-plus delinquencies?

18 A. Yes. There's a direct correlation between the two.

19 Q. Did you prepare a demonstrative to show you the

20 relationship between two-plus delinquency and re-aging loans?

21 A. I did.

22 Q. I'll show you what's been marked as Plaintiffs'

23 Demonstrative Exhibits 26 and 27 for identification.

24 26 and 27.

25 Can you tell us what this demonstrative shows?

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 1 A. So as re-agings go up, as loans are re-aged, which is

 2 taken out of the two-plus bucket and put back in current, the

 3 number of two-plus delinquencies goes down. So this is taking

 4 loans from the two-plus bucket and putting them over into the

 5 current bucket. So there's an inverse relationship between

 6 re-aging and delinquent -- two-plus delinquencies.

 7 Q. What if two-plus delinquencies go up instead of down, what

 8 is the effect on re-aging?

 9 A. Well, if they -- if Household stopped re-aging, for

10 example, or diminished the amount of their re-aging, the

11 re-aging would go down and the delinquencies would go up

12 because then the -- there was no way to make those loans

13 current. So here re-aging is going down and the two-plus

14 numbers are going up, so it's a direct inverse relationship.

15 Q. And is re-aging of loans significant to a regulator?

16 A. Yes. When I was a field examiner, this is one of the

17 things that we looked at in particular to determine if a

18 lender was masking their delinquencies. We would look at a

19 variety of tactics that they could use, for example, rewriting

20 the loan, forbearance, a variety of things. And we would look

21 to see how prevalent that was in the loan portfolio because

22 the more they were doing that, the more it would lead us to

23 conclude that they were masking delinquencies.

24 Q. Now, during your reviews as an expert in this case, did

25 you determine whether Household used re-aging to manipulate

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 1 its two-plus delinquency number?

 2 A. Yes, that was one of my conclusions, was that Household

 3 used various re-aging tactics and practices to mask their

 4 delinquencies.

 5 Q. I'll show you what has been marked as Plaintiffs' Exhibit

 6 1387 for identification.

 7 (Tendered.)

 8 BY MR. DROSMAN:

 9 Q. Do you recognize Plaintiffs' Exhibit 1387?

10 A. I do.

11 Q. What is it?

12 A. This is an e-mail from Elaine Markell to Rich Peters and

13 others at Household -- she was at Household -- regarding the

14 Re-aging Fitch Servicer Presentation Slides, dated November

15 12, 2002.

16 Q. Why do you recognize this document?

17 A. This was one of the documents that I looked at in

18 formulating my opinions on the re-aging issues.

19 MR. DROSMAN: Plaintiffs move Exhibit 1387 into

20 evidence.

21 THE COURT: It will be admitted.

22 BY MR. DROSMAN:

23 Q. Why don't we start at the bottom e-mail, I guess, the

24 first in the string. And can you tell us, first, who Elaine

25 Markell is in this e-mail?

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 1 A. Elaine Markell is a woman who worked in the mortgage

 2 services division, which was kind of the sister division of

 3 consumer lending.

 4 Q. And was she the vice president of default services in that

 5 mortgage services business unit?

 6 A. Yes.

 7 Q. And it looks like she's sending an e-mail to Rich Peters.

 8 Was he the vice president of credit risk for Household

 9 mortgage services?

10 A. Yes.

11 Q. What's significant to you about this e-mail that

12 Ms. Markell is sending?

13 A. Well, if the -- if you could highlight this -- the

14 paragraph here. It says, Rich, you need to change the slides

15 for the presentation.

16 And this is for the presentation to Fitch.

17 First of all, what you have on the slides does not

18 represent the policies in place since September 27 when I was

19 directed to add back EZ pay restructures and restructures on

20 bankruptcies 13.

21 That means Chapter 13 bankruptcies.

22 The bankruptcy 13 restructures were done upon receipt

23 of the plan without the payment of funds. In addition to

24 that, restructures were done on any Chapter 13 where one

25 payment was made in the past 60 days. Since there was no

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 1 Q. -- just to take it out of the delinquent bucket repeatedly

 2 and put it back in the current?

 3 A. Right. And the time frame is, it's in the two-plus bucket

 4 and you re-age so it goes back to current. So it takes a

 5 number of months. It takes two months to get it back in the

 6 two-plus bucket. Then you re-age it and it goes into the

 7 current. Then it takes a couple of months to get back there.

 8 So once they re-age, they have a little bit of time before

 9 they have to deal with it again.

10 Q. And who is asking for this information, this ratio of how

11 many loans had been re-aged multiple times?

12 A. It says Mr. Schoenholz is asking for it.

13 Q. And that's David Schoenholz, the CFO of the company?

14 A. Yes.

15 Q. I'll show you what has been marked as Plaintiffs' Exhibit

16 654 for identification.

17 (Tendered.)

18 BY MR. DROSMAN:

19 Q. Do you recognize Plaintiffs' Exhibit 654?

20 A. I do.

21 Q. And what is this?

22 A. This is an e-mail from Dave Stockdale to various managers

23 or senior -- senior managers at Household. And the subject is

24 retail services re-age policy. And the date is September 4,

25 2001.

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 1 Q. And why do you recognize this document?

 2 A. This is one of the documents I looked at in formulating my

 3 opinions.

 4 MR. DROSMAN: Plaintiffs offer Exhibit 654 into

 5 evidence.

 6 THE COURT: It's admitted.

 7 BY MR. DROSMAN:

 8 Q. Why don't we take a look at this. The bottom e-mail

 9 appears to be from Dave Stockdale; is that right?

10 A. It looks like it's from Dave Stockdale to Paul

11 "Markawitz."

12 Q. Paul Makowski?

13 A. I'm sorry. I'm mispronouncing his name. Makowski, yes.

14 Q. Mr. Makowski was the chief credit officer; is that

15 correct?

16 A. Yes.

17 Q. If you take a look at the second paragraph of the e-mail,

18 does that have any significance to your opinion?

19 A. Yes. This is what I was talking about. This says, For

20 maximum benefit to year-end, retail sales should perform the

21 re-age between the customer cycle date and the month-end with

22 a sweep at month-end. This will ensure that all September

23 re-ages will be unable to reach two-plus by year-end.

24 In other words, they're going to take all of them at

25 a certain time because then it would prevent them from

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 1 progressing back to the two-plus number by year-end when they

 2 have to report it on their 10-K.

 3 Q. So is this significant to your opinion that Household

 4 manipulated its two-plus delinquency number through the use of

 5 re-aging?

 6 A. Yes.

 7 Q. Why?

 8 A. Well, because they're discussing how they're going to

 9 manipulate their delinquency number by using the re-age

10 practice at a certain -- and they're even planning when

11 they're going to use it so that these loans won't then become

12 delinquent and show up again in the two-plus bucket at

13 year-end.

14 Q. Then the last sentence there says, This will ensure that

15 all September re-ages will be unable to reach two-plus at

16 year-end.

17 A. Yes.

18 Q. Do you see that?

19 What do you understand that to mean?

20 A. Well, they were timing the re-ages so that they could

21 prevent the ones in this particular category from becoming

22 delinquent again, such that it reaches that two-plus bucket at

23 year-end so they don't have to disclose it as delinquent.

24 Q. They have to disclose all the delinquent loans at the

25 year-end in their form 10-K, their annual report?

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 1 A. Yes.

 2 Q. And so what's your conclusion about why -- what this means

 3 here?

 4 A. So they're timing these re-ages so that this group of

 5 loans will not show up as two-plus delinquent at year-end.

 6 Q. And they do that by re-aging those loans?

 7 A. Yes, at a certain time. They're timing it because they

 8 know that the progression will be that it will go to 30 days

 9 past due, then 60 days past due, in which case it's going to

10 end up in the two-plus bucket. So they're timing it so that

11 doesn't happen until January so they don't have to disclose

12 it.

13 Q. I'll show you what has been marked as Plaintiffs' Exhibit

14 454 for identification.

15 (Tendered.)

16 BY MR. DROSMAN:

17 Q. Before we actually get to 454, there was one issue on that

18 last exhibit that we were talking about that I wanted to

19 discuss with you.

20 If we can put back up 654, the first page.

21 And this is the example of the timing of the re-ages

22 so that they wouldn't be delinquent at year-end. If you look

23 at the top e-mail, it looks like it was forwarded by

24 Mr. Makowski?

25 A. Yes.

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 1 Q. And was it forwarded to Mr. Schoenholz?

 2 A. Yes. He was cc'd on it.

 3 Q. Perhaps we can zoom in on that so we can see whether it

 4 was forwarded to Mr. Schoenholz.

 5 So you said Mr. Schoenholz received a copy of this

 6 e-mail?

 7 A. Yes.

 8 Q. Why don't we turn now to Plaintiffs' Exhibit 454 for

 9 identification.

10 Do you recognize Plaintiffs' Exhibit 454?

11 A. I do.

12 Q. What is it?

13 A. This is a document. It's an e-mail string. And it's got

14 some handwritten notes and then a chart attached to it.

15 Q. And the e-mail string that you talked about, who is the

16 e-mail from?

17 A. Well, there are several e-mails, but some of them are from

18 Gary Gilmer.

19 Q. And what are the dates?

20 A. The date of the bottom e-mail is February 22, 2000.

21 Q. And what's the subject of the e-mail?

22 A. And the subject is "cut."

23 Q. Why do you recognize Plaintiffs' Exhibit 454?

24 A. This was one of the documents that I looked at in

25 formulating my opinions.

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 1 MR. DROSMAN: Plaintiffs offer Exhibit 454 into

 2 evidence.

 3 THE COURT: It will be admitted.

 4 BY MR. DROSMAN:

 5 Q. Let's take a look at the bottom e-mail on page ending 417

 6 that you said is entitled "cut."

 7 That's from Dick Schaffer; is that right?

 8 A. Yes, and he's sending this to Gary Gilmer.

 9 Q. And that's the defendant in this case?

10 A. Yes.

11 Q. And Dick Schaffer is the managing director of operations

12 for the consumer lending division; is that correct?

13 A. Yes.

14 Q. Can you tell me what's significant about the text of that

15 e-mail?

16 A. Well, he's saying here, I just revisited the two-plus

17 forecast with each of my guys. Bottom line looks like a $25

18 million cut without the magic, parentheses, grace period, and

19 75,000 with it. We are a little afraid of the 29-day month so

20 we aren't being overly aggressive with this forecast. It

21 looks pretty solid.

22 Q. Let's just focus on the first two sentences of that

23 e-mail. Bottom line looks like a $25 million cut without the

24 magic, parens, grace period, and $75 million with it.

25 Is he talking about the two-plus delinquency number

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 1 in this case?

 2 A. Yes.

 3 Q. And is he talking about a cut to the two-plus delinquency

 4 number?

 5 A. Yes.

 6 Q. So what do you understand this to mean here?

 7 A. Well, what Household did is they would give their

 8 borrowers 15 days after the date that the payment was due as a

 9 grace period to make their payment. And so, unlike other

10 lenders who just report delinquencies straight up, what they

11 would do is, say, for example, a loan was 74 days past due,

12 they would deduct 15 days from that and that would bring it

13 back down to 59 days and so they wouldn't report that as a

14 two-plus number, a loan that's in the two-plus bucket.

15 So they would use grace periods as a way to mask past

16 due by deducting 15 days from how many ever days the loans

17 were past due in the two-plus bucket and bringing them back

18 into the current bucket.

19 And so what he's saying here is that without the

20 magic of the grace period, they would not be -- it would look

21 like their delinquencies would be cut 25 million; but with

22 using this grace period tactic, they would be able to cut

23 two-plus numbers 75 million.

24 Q. So they could cut $50 million from their two-plus numbers

25 by using the magic of the grace period; is that right?

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 1 A. Yes, yes.

 2 Q. And does this -- is this significant to your opinion that

 3 Household used re-aging practices like the grace period to

 4 manipulate its two-plus numbers?

 5 A. Yes. I mean, there's no reason to do that unless you were

 6 manipulating your delinquencies.

 7 Q. Who is receiving this particular e-mail?

 8 A. Mr. Schaffer was sending it to Gary Gilmer.

 9 Q. I'll show you what has been marked as Plaintiffs' Exhibit

10 262 for identification.

11 (Tendered.)

12 BY MR. DROSMAN:

13 Q. Do you recognize Plaintiffs' Exhibit 262?

14 A. I do.

15 Q. And what is Plaintiffs' Exhibit 262?

16 A. This is a series of e-mails that describes the cut in

17 delinquencies using this tactic for the grace periods, of

18 deducting the 15 days and pushing it back into the current

19 bucket. And they're quantifying it from a dollar perspective

20 each month. There's a series of them.

21 Q. And who is the recipient of these e-mails?

22 A. Let's see here. It looks like Douglas Friedrich.

23 Q. And he's the managing director, the head honcho, of

24 mortgage services at Household; is that right?

25 A. Yes.

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 1 Q. And why do you recognize Plaintiffs' Exhibit 262?

 2 A. This is one of the documents that I reviewed in

 3 formulating my opinions.

 4 MR. DROSMAN: Plaintiffs offer Exhibit 262 into

 5 evidence.

 6 THE COURT: Admitted.

 7 BY MR. DROSMAN:

 8 Q. Why don't we take a look at the first page of this series

 9 of e-mails.

10 What's the title of the e-mail?

11 A. So the title of the e-mail is two-plus reconciliation.

12 Q. And what does this particular e-mail show?

13 A. It shows that the adjustment for the 15-day grace period

14 was $19 million in this case for this month, the month of --

15 it would be the prior month, so January 2001.

16 Q. So that the re-aged number was actually 431, is that

17 right, according to Sarah's figure?

18 A. Yes.

19 Q. And then they're deducting or lowering that re-age number

20 by 19.7 million; is that right?

21 A. Actually the number is the two-plus number and so then

22 they're taking out the 15-day grace period. So they're

23 adjusting the two-plus number.

24 Q. And what are the parens around the 19.7 million?

25 A. That means they're taking it out. It's negative.

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 1 Q. The final two-plus delinquency number that they come up

 2 with after taking out the grace period is what?

 3 A. 418 million.

 4 Q. And you said that this e-mail was sent on 2/6/01, so it

 5 would be for the month of January, right?

 6 A. Right.

 7 Q. Let's look at the next page, page ending 842.

 8 And this e-mail was sent on March 7, 2001; is that

 9 right?

10 A. Yes.

11 Q. Again, sent to Doug Friedrich, the head of Household's

12 mortgage services unit; is that right?

13 A. Right.

14 Q. And what's this showing here?

15 A. And this is the two-plus reconciliation again. So it

16 shows that the two-plus numbers for the grace period

17 adjustment were being reduced by 16 million.

18 Q. Again, lowering the two-plus numbers by 16.1 million

19 for --

20 A. Right, for that month.

21 Q. For that month.

22 What about the next page?

23 A. This is similar. These are all these same sort of

24 reconciliations. So here the grace period adjustment is

25 17,483,000. So two-plus numbers are being reduced by this

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 1 grace period adjustment.

 2 Q. And what's the date of this e-mail?

 3 A. August 7, 2001. So this would be for July.

 4 Q. And do the rest of the e-mails show the same thing?

 5 A. Yes.

 6 Q. Does this -- is this significant to your opinion that

 7 Household used re-aging tactics like the use of the grace

 8 period to manipulate its two-plus delinquency numbers?

 9 A. Yes.

10 Q. Why?

11 A. Well, because there's no reason to make this kind of

12 adjustment. Other lenders just do a straight-up deal. Here,

13 what they were doing is using their grace period to move loans

14 from the two-plus bucket back to current. And the pass --

15 these sorts of delinquency numbers are very important to

16 regulators and others because it shows the condition of the

17 loan portfolio.

18 Q. Is this grace period right here, is this the same grace

19 period we heard referred to earlier in an earlier e-mail as

20 the magic?

21 A. Yes.

22 Q. Now, is there a relationship between predatory lending on

23 the one hand -- we talked quite a bit about that yesterday --

24 and the use of practices like re-aging to hide the true

25 quality of Household's loans on the other?

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 1 A. Yes, there is a relationship.

 2 Q. Did you prepare a demonstrative to assist you in

 3 explaining the relationship between predatory lending

 4 practices on the one hand and hiding the quality of

 5 Household's loans on the other?

 6 A. I did.

 7 Q. I'll show you what has been marked as Plaintiffs'

 8 Demonstrative Exhibit 31 for identification.

 9 Can you tell us what this exhibit shows?

10 A. Yes. Household starts out making a predatory loan. And

11 remember, they're packing on fees and insurance premiums and

12 stripping away the equity. And what happens is, the borrower

13 cannot pay the loan. It's too large for the borrower to pay.

14 So Household has one of two choices. They can either

15 re-age it so that it's not showing up on their two-plus

16 bucket. Or they can refinance it or rewrite it down below,

17 which is flipping it, adding more insurance, adding more fees

18 to it.

19 And then --

20 Q. Let me just pause there. To refinance it or rewrite it,

21 does that take it out of the two-plus bucket as well?

22 A. Right. And it brings it back to current. So they can

23 either re-age it using some sort of tactic that we've already

24 talked about or they can actually rewrite it and make a new

25 loan and start over.

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 1 Q. Okay.

 2 A. And then, no matter what, the borrower still can't pay

 3 because the loan is so packed full of products, premiums and

 4 fees and can't go anywhere else because the equity has been

 5 stripped and the loan to value is too high so they're stuck.

 6 And Household then has one of two choices. They can either

 7 rewrite it on the top, which is flip it again and add more

 8 fees and premiums, insurance premiums to it, or they can

 9 re-age it using one of the tactics, like the grace period or

10 one of their other tactics.

11 Q. So if they rewrite it right here, does that -- again, that

12 takes it out of the delinquent bucket; now all of a sudden

13 they have a brand new loan so it's current again?

14 A. Yes. So whether they re-age it or they rewrite it, that's

15 going to bring it to the current bucket. But rewriting it

16 allows them to pack on more fees and insurance premiums. So

17 they can do -- they can either re-age it or rewrite it.

18 Q. And you talked -- is there a predatory lending practice

19 that this implicates right here?

20 A. Yes. I mean, it implicates all sorts of predatory lending

21 practices, loan flipping because they're re-aging it multiple

22 times, insurance packing, equity stripping. If they rewrite

23 it into two loans, that would be loan splitting. You know,

24 originally they're reeling them in with the effective rate, as

25 Dennis Hueman would say, and blocking the back door with the

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 1 prepayment penalty so that -- and because they've stripped out

 2 the equity, there's nowhere for them to go to refinance.

 3 Q. So what's the last step?

 4 A. So the borrower still can't pay, and the cycle starts over

 5 again and go on one of two paths. So there's a correlation

 6 between predatory lending practices and the need for Household

 7 to re-age and mask their delinquencies.

 8 Q. Thank you, Ms. Ghiglieri.

 9 MR. DROSMAN: I have no further questions at this

10 time.

11 THE COURT: You may cross-examine.

12 MR. KAVALER: Thank you.

13 CROSS-EXAMINATION

14 BY MR. KAVALER:

15 Q. Good morning, Ms. Ghiglieri.

16 As you know, I'm Tom Kavaler, and I represent the

17 defendants. And we've met before, correct?

18 A. Yes.

19 Q. Okay. I'm going to ask you a few questions today about

20 the same subject matter you've been talking about for the past

21 couple of days. And my time is sort of limited, so I'm going

22 to try and ask you questions that can be answered yes or no.

23 If I do that, will you answer them yes or no?

24 A. If I can answer them with a yes or a no.

25 Q. Perfect. Thank you.

Household Unsigned Page - - 702

 700 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 Now, it's correct that you never worked at Household

 2 International?

 3 A. Correct.

 4 Q. And, in fact, you've never worked at any company in the

 5 private sector, only in the government?

 6 A. Incorrect.

 7 Q. Okay. Where did you work in the private sector?

 8 A. Well, I launched Rate Genius, which is a company that

 9 refinances automobile loans. And I also worked at our family

10 bank when I was in high school and college.

11 Q. Okay. And you were never a customer of Household

12 International?

13 A. That's correct.

14 Q. And when you were the head of the Texas Department of

15 Banking, you didn't personally regulate Household; someone

16 else did that, correct?

17 A. A sister agency regulated it, the Consumer Credit

18 Commissioner.

19 Q. Right. And am I correct that you never met Bill Aldinger

20 or Gary Gilmer or Dave Schoenholz personally?

21 A. That's correct.

22 Q. And you never met Tom Detelich or Lisa Sodeika either?

23 A. That's correct.

24 Q. You never met or spoke with anyone else whom you

25 understood to be an employee of Household at the time you were

Household Unsigned Page - - 702

 701 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 speaking to them?

 2 A. I'm sorry. I couldn't hear what you were saying.

 3 Q. I apologize. Let me try it a little louder.

 4 You never met or spoke with anyone else whom you

 5 understood to be an employee of Household at the time you were

 6 speaking to them?

 7 A. That's correct.

 8 Q. And you never interviewed any former Household employees,

 9 correct?

10 A. That's correct.

11 Q. And you never interviewed any present Household employees

12 correct?

13 A. That's correct.

14 Q. Do you know John Bley, who used to be the commissioner of

15 the Washington State Department of Financial Institutions?

16 A. Yes, I do.

17 Q. You've seen him sitting here in the back of the courtroom

18 the last couple of days listening to you?

19 A. Yes.

20 Q. And you know that when he was the director of the

21 Department of Financial Institutions in Washington, he did

22 regulate Household, correct?

23 A. Yes.

24 Q. And you mentioned Mr. Cross a couple of times. He worked

25 for that same Washington agency?

Household Unsigned Page - - 702

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 35 of 245
4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 Q. Yes.

 2 A. I don't know how many complaints they had on effective

 3 rate in total.

 4 Q. Do you know what percentage of their loans generated

 5 complaints about effective rate?

 6 A. I didn't see a percentage, but I do know that Household

 7 calculated refunds of $1.2 billion for the effective rate

 8 presentation that they made. So I'm assuming it was a large

 9 number of loans and must have been a pretty substantial

10 percentage.

11 Q. But you can't tell me what that percentage is?

12 A. No.

13 Q. You know that Household had, during the relevant time, in

14 Mr. Gilmer's business unit about 3.2 million accounts?

15 A. I don't know if that's true or not.

16 Q. You don't know that.

17 Okay. You know that that's set forth in Household's

18 10-K for the year 2001?

19 A. It could be. I looked at the -- some of the past due

20 charts. I didn't analyze the 10-Ks.

21 Q. Do you have any reason to question the number that

22 Household put in its 10-K describing how many accounts they

23 had?

24 A. I don't have any reason to question it.

25 Q. Okay.

Household Unsigned Page 711 - 714

 711 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 MR. KAVALER: Can we see Exhibit 852.

 2 BY MR. KAVALER:

 3 Q. This -- you recognize this as Household's 10-K for 2001?

 4 A. That's what it says.

 5 Q. Okay.

 6 Can we pull up where it shows the number of loans.

 7 You see there, it's talking about this business has

 8 approximately 1,400 branches located in 46 states, 3.2 million

 9 open customer accounts, 39.5 billion in managed receivables

10 and 13,000 employees.

11 Do you see that?

12 A. I see that.

13 Q. Do you understand that to be describing the business unit

14 that Mr. Gilmer ran?

15 A. Yeah. I mean, that's what it says.

16 Q. Okay. You have no reason to doubt that?

17 A. No.

18 Q. All right. So half of 1 percent of 3.2 million accounts

19 would be 16,000 accounts?

20 A. If you say so.

21 Q. I'm reluctant to say so because the other thing I'm not

22 good at is math. But I've been told that. I think that's

23 right.

24 Did you see 16,000 effective rate or equivalent rate

25 complaints?

Household Unsigned Page 711 - 714

 712 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 A. I didn't see 16,000. I looked at over a hundred

 2 complaints, and they had various complaints. That's what I

 3 looked at.

 4 Q. Did you ever manage a large public company?

 5 A. No.

 6 Q. Did you ever work at a large public company?

 7 A. No.

 8 Q. Are you aware that large public companies have a tendency

 9 to measure almost everything that can be measured?

10 MR. DROSMAN: Objection.

11 THE COURT: Sustained.

12 BY MR. KAVALER:

13 Q. Did you notice when you were looking at Household's

14 documents that Household had a tendency to measure many thin

15 and express things in terms of percentages?

16 A. Well, I saw a lot of percentages in the documents I looked

17 at.

18 Q. Have you ever heard the phrase in your experience as a

19 regulator "you can't manage what you can't measure"?

20 A. I don't know if I've ever heard that before or not.

21 Q. Okay. So you can't tell me how many effective rate

22 complaints there were and you can't tell me what percentage of

23 Household's open accounts were; is that correct?

24 A. Well, Household can't either. I mean, because not all the

25 complaints were tracked. So I for sure can't, and I question

Household Unsigned Page 711 - 714

 713 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 whether Household can.

 2 Q. That was my question, whether you could.

 3 A. I don't know how I could have because they weren't all

 4 tracked. I didn't see a document showing all of them.

 5 Q. Short answer is you can't tell me either how many they are

 6 or what percentage of the open loans they represent; is that

 7 right?

 8 A. I would only be able to tell you if I saw a document like

 9 that.

10 Q. So, therefore, you can't tell me?

11 A. Well, I didn't see anything to be able to tell you that,

12 no.

13 Q. And you can't tell me whether they were more than one-half

14 of 1 percent of the open loans, can you?

15 A. I didn't -- I don't have a basis to tell you because I

16 didn't see anything like that.

17 Q. That means you can't tell me, correct?

18 A. Well, I can't tell you what I haven't seen.

19 Q. I agree with that.

20 Now, you said a couple of times in the last couple of

21 days that Household had to come up with a way of describing

22 its rates, its effective rates, because its rates were higher

23 than the rates of competitors. Do you recall that?

24 A. Yes.

25 Q. What competitors were you comparing Household to?

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 36 of 245
4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 A. Well, I was looking at, for example, the Dennis Hueman

 2 video where he's talking about competitor rates being higher.

 3 And I saw some other documents discussing Household's rates

 4 versus competitors. So I didn't really analyze whether it

 5 would have been a bank or a finance company or anything like

 6 that. I'm just looking at what was in the documents from

 7 Household employees.

 8 Q. The competitor Mr. Hueman talked about was Billy Bob's

 9 Loan Company, right?

10 A. Yes.

11 Q. Did you think there really is a company called Billy Bob's

12 Loan Company or did you think he was just using that as an

13 example?

14 A. Well, there would be no way to tell -- there would be no

15 reason to tell a consumer that their rate was lower than it

16 really was if their rates weren't -- if their rates were

17 competitive because they could just be straight up with them.

18 Q. That's your opinion, right?

19 A. Yes.

20 Q. I'm trying to find out if you know any facts. Do you know

21 which competitors charged what rates?

22 A. I didn't do a survey of the time period and Household's

23 rates.

24 Q. Therefore, the answer to my question is, no, you don't,

25 correct?

Household Unsigned Page 715 - 718

 715 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 A. Unless I saw something in one of the documents. I can't

 2 recall sitting here. I may have looked at something. But

 3 just sitting here, I can't think of --

 4 Q. You mentioned a moment ago in your answer -- you mentione

 5 the word banks. You understand that finance companies and

 6 banks are different?

 7 A. Well, they have to comply with the same lending laws, but

 8 they are different with how they fund their operations. I

 9 agree with that.

10 Q. Banks have deposits; finance companies do not?

11 A. That's right.

12 Q. And that affects their cost of funds?

13 A. Right.

14 Q. So finance companies generally charge rates different than

15 banks?

16 A. Their cost of funds are generally higher and so they

17 generally charge more, yes.

18 Q. So, therefore, for you to say that Household charged

19 higher rates than banks would be nothing more than to say

20 Household is a finance company and a bank is a bank, right?

21 A. Well, that would be one of the reasons, yes.

22 Q. So putting aside banks, do you have a list for me of

23 finance companies who had lower rates than Household?

24 A. I think I just said that I didn't do a survey of who

25 charged what rate.

Household Unsigned Page 715 - 718

 716 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 Q. Okay. So every time you told us throughout your testimony

 2 that Household had to use effective rate techniques because

 3 its rates were higher than someone else, if I ask you who the

 4 someone else is, you don't know?

 5 A. Well, I remember reading in Andrew Kahr's information

 6 where he talked about how they needed to show Household's

 7 rates being more competitive. And so I concluded that their

 8 rates were higher than their competitors. But I didn't do an

 9 analysis of the time frame. I didn't go back in time and try

10 and figure out who was charging what rate.

11 Q. So your basis was something Andrew Kahr said?

12 A. I -- well, Andrew Kahr, the Dennis Hueman video and other

13 documents that I saw.

14 Q. Let's take them one at time.

15 The Dennis Hueman video, you mean the portions that

16 this jury saw?

17 A. Yes.

18 Q. Where he referred to Billy Bob's Loan Company?

19 A. Well, he was using an example; but he was teaching his

20 sales staff to sell the loans when they otherwise wouldn't be

21 able to because their rates were higher.

22 Q. I'm trying to find out higher than whose.

23 A. Well, I don't have their competitors' names for you or the

24 interest rates.

25 Q. You think Mr. Gilmer knows what his competitors' rates

Household Unsigned Page 715 - 718

 717 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 were?

 2 A. Hopefully.

 3 Q. Okay. You said Mr. Kahr -- you got some information from

 4 Mr. Kahr. Was he ever an officer of Household?

 5 A. No, he was a consultant.

 6 Q. Was he an employee of Household?

 7 A. He was a consultant.

 8 Q. A consultant is someone that you pay money to to get an

 9 opinion from, sort of like an expert witness, right?

10 A. Or you get help in figuring out how to grow your loan

11 portfolio, I mean, different suggestions.

12 Q. Did Mr. Kahr provide -- did you see somewhere in

13 Mr. Kahr's materials a list of the competitors of Household

14 who charged lower rates that you've talked about for the last

15 three days?

16 A. I don't recall that, seeing that in his information.

17 Q. You didn't conduct a survey of any other competitors? You

18 didn't do any analysis? You don't have a chart to show us

19 that says this competitor charged this and Household charged

20 that? Nothing like that?

21 A. No.

22 MR. KAVALER: Let's see the list again.

23 BY MR. KAVALER:

24 Q. The next thing up there is insurance packing.

25 Can you tell me how many claims of insurance packing

Household Unsigned Page 715 - 718

 718 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 37 of 245
4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 there were throughout all of Household?

 2 A. Well, Household -- the internal documents from Household

 3 showed approximately $160 million in refunds, and so I'm

 4 assuming that that was quite a large number.

 5 Q. Well, my question was: Can you tell me either as a number

 6 or a percentage how many claims there were of insurance

 7 packing during the time period you examined?

 8 A. Not precisely.

 9 Q. Do you think there was 16,000?

10 A. I don't know. I didn't see a number. I only saw what the

11 estimate of the refunds based on insurance packing would be.

12 Q. If Household says that its calculations showed the number

13 was less than half of 1 percent, do you have any basis to

14 suggest they're incorrect?

15 A. No.

16 Q. You testified that it's your opinion that when a customer

17 got to a loan closing, the insurance would already be added

18 on. Do you remember that?

19 A. Yes.

20 Q. Did you ever attend even one loan closing at Household?

21 A. No.

22 Q. Do you know if Mr. Gilmer ever attended any house closings

23 at Household -- or loan closings? Let me start again.

24 Do you know if Mr. Gilmer ever attended any loan

25 closings at Household during his career?

Household Unsigned Page 719 - 722

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4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 A. I don't know.

 2 Q. Now, you testified that you consider single premium credit

 3 insurance to be a predatory product, correct?

 4 A. Yes.

 5 Q. And you testified that -- you told this jury yesterday or

 6 Tuesday, I guess, that you looked at what was in the financial

 7 press during this time as well, correct?

 8 A. I did.

 9 Q. So you know that the securities analysts specifically

10 approved of Household's credit insurance sales which added to

11 Household's profitability for the investors, don't you?

12 A. Can you ask me that again?

13 Q. Sure. From your reading of the financial press, you saw

14 articles which indicated that the security -- let me start

15 even further back.

16 You know what a securities analyst is?

17 A. Yes.

18 Q. Those are people who review the filings of a company and

19 comment on them for the financial community, correct?

20 A. Yes.

21 Q. And their reports are read by various investors; they're

22 reprinted in newspapers and things of that nature, correct?

23 A. Well, I didn't read any analysts' reports.

24 Q. You read press stories?

25 A. Just press stories, financial -- I mean, regulatory

Household Unsigned Page 719 - 722

 720 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 issuances and things like that.

 2 Q. You didn't read anything about the market reaction to what

 3 Household was doing?

 4 A. No.

 5 Q. You didn't see any commentary by the analysts reported in

 6 the press specifically focusing on insurance sales, saying

 7 this is good for the investors because it adds to the

 8 profitability of the company for the benefit of the investors?

 9 A. I didn't read any analysts' information.

10 Q. And you didn't see that covered in the press?

11 A. No.

12 Q. And that wasn't included in the 40 boxes of materials you

13 looked at?

14 A. No.

15 Q. And investors' counsel didn't tell you they had all those

16 materials?

17 A. Well, I did the survey on my own, so I didn't pull down

18 any analysts' reports.

19 Q. Okay. And you know that Household disclosed to investors

20 that it offered credit insurance and, therefore, the

21 marketplace knew that this was a product offered by Household,

22 correct?

23 A. I didn't look at the SEC filings other than to just look

24 at the past due charts, so I don't know what they disclosed.

25 Q. I see. So if I show you SEC filings that disclose that,

Household Unsigned Page 719 - 722

 721 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 you'll tell me you didn't look at them?

 2 A. Right.

 3 Q. So you just went to the SEC filing and looked for what you

 4 were looking for?

 5 A. I was just looking at their past due charts.

 6 Q. Right. You weren't looking to see generally what one

 7 could learn about Household by looking at the SEC filings?

 8 A. No, I didn't read the SEC filings. That was beyond what I

 9 was asked to do.

10 Q. Beyond what you were asked to do. You were asked to come

11 here and talk to this jury about a very specific subject, and

12 you didn't look at anything beyond that?

13 A. I looked at the documents in the case regarding predatory

14 lending and re-aging, but I didn't analyze the SEC filings,

15 no.

16 Q. But you are a member of the Georgia bar and the D.C. bar,

17 I think you said, inactive?

18 A. Uh-huh.

19 Q. You understand that this case is a securities fraud case,

20 don't you?

21 A. Yes.

22 Q. You understand it's about the disclosure that Household

23 made to the investors, correct?

24 A. Yes.

25 Q. And you understand the issue in the case is whether that

Household Unsigned Page 719 - 722

 722 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 38 of 245
4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 A. Well, I thought you asked me if I saw where they met with

 2 California and they blessed them doing this particular thing.

 3 Q. I don't believe I used the word "blessed."

 4 A. And I said, no, I didn't see that.

 5 Q. If that's what you heard, I apologize for any confusion I

 6 might have caused. I don't think I used the word "blessed."

 7 I asked about a dialogue.

 8 They were having a dialogue with California, correct?

 9 A. Yes, if you want to couch it like that, a dialogue.

10 Q. And you weren't at that meeting?

11 A. No, I wasn't.

12 Q. Mr. Detelich and Mr. Schneider were at that meeting?

13 A. That's what it says here.

14 Q. Right.

15 A. I have no way of knowing.

16 Q. But you have no reason to doubt it?

17 A. I mean, I have no -- no knowledge whatsoever if they were

18 there or not.

19 Q. Okay. Let's go to loan flipping. I think that's the next

20 one.

21 You said loan flipping is simply continuous

22 refinances, correct?

23 A. Yes.

24 Q. And you said each time Household would refinance a loan,

25 they would flip a loan?

Household Unsigned Page 767 - 770

 767 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 A. I don't know if I said each time. Are you reading from my

 2 testimony?

 3 Q. I'm reading from your testimony in this courtroom on March

 4 31, at Page 444, Line 24 to Page 445, Line 1. Quote: Each

 5 time Household would refinance a loan, they would flip a loan.

 6 Is that what you meant to say?

 7 A. Well, I guess what I meant to say was, in doing loan

 8 flipping, they would refinance a loan and add more fees and

 9 products. I'm sure that in all the loans that they made, we

10 could find one or two or how many ever where they refinanced

11 that it wasn't considered loan flipping. But a lot of the

12 documents that I've looked at had loans refinanced more than

13 one time, where they would add the points all over again and

14 they would add the insurance premiums all over again. And

15 that's what I was referring to there.

16 Q. So your position is not it's each time, but it's a very

17 high level of incidence?

18 A. Where they were doing loan flipping.

19 Q. That's what I'm trying to find out. What you testified

20 is, each time Household would refinance a loan, they would

21 flip a loan.

22 Let's start with refinance. A refinance means a

23 customer has a loan. He comes back to the same lender, and he

24 comes out with a new loan with new terms; and he pays whatever

25 costs are associated with that, correct?

Household Unsigned Page 767 - 770

 768 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 A. Right.

 2 Q. That's a common practice, isn't it?

 3 A. Yes.

 4 Q. Is --

 5 A. It's not a common practice to charge points all over again

 6 or it's not a common practice to add insurance all over again

 7 or every time or as many times as you can. That's the

 8 difference between just doing a refinance and actually doing a

 9 predatory loan flipping. That was sort of the distinction I

10 was just trying to make to you just now.

11 Q. So you have no quarrel with a plain vanilla refinance,

12 right?

13 A. Right.

14 Q. What percentage of Household loans are you now saying --

15 what percentage of Household refinances are you now saying

16 constitute flipping?

17 A. I don't know the number, but I do know that when they

18 looked at it internally for refunding for loan flipping, it

19 came out to -- I think it was $60 million. So it was a large

20 number of loans that they flipped.

21 Q. But yesterday it sounded like you were saying it was a

22 hundred percent; today it sounds like you're off the hundred.

23 I'm trying to find out where you are now.

24 A. I don't know what the exact number is. But based on

25 internal documents at Household with how much they calculated

Household Unsigned Page 767 - 770

 769 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 that they were going to have to refund for loan flipping,

 2 which totaled $60 million, I'm assuming that it's a large

 3 number. Now, what the exact number is, I don't know. I did

 4 not calculate the specific number of loan flippings or equity

 5 strippings or anything like that. I didn't feel that was

 6 necessary for me to reach conclusions regarding whether they

 7 did or did not do predatory lending.

 8 Q. But certainly if what anyone took from your testimony

 9 yesterday that -- when you said each time Household would

10 refinance a loan, you're clearly saying today you didn't mean

11 each time?

12 A. Well, I think I was talking in context of loan flipping.

13 And so if you take sentences in isolation, it's easy to, you

14 know, decide what you're going to say about it. But what I

15 think I was referring to in this section was loan flipping.

16 And where they were loan flipping, each time they did a

17 refinance, they would add those points and fees.

18 Q. So taking sentences in isolation doesn't give you a fair

19 view of what was actually said; is that your point?

20 A. No. I'm just saying you have to take it in context of

21 what you're saying. And that's what I tried to do in this

22 case, where I tried to look at as many documents as I could.

23 Of course, I didn't look at every single one. I understand

24 that. But I tried to look at quite a few so I could draw some

25 conclusions.

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 39 of 245
4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 Q. Taking it in context, as you just said, would be like

 2 looking at the entire company to make a judgment about what

 3 kind of company it was as opposed to looking at things that

 4 exist up and in one-half or less of 1 percent of the company's

 5 operations; would you agree with that?

 6 A. Well, you're focused on the percent or the number of

 7 complaints or the number of loans or whatever you're saying.

 8 I took a broader view of that, and I looked at the type of

 9 lending practices they engaged in. I looked at what their

10 training was. I looked at what their -- how were their

11 employees compensated. I looked at the internal audit. I

12 looked at their compliance function. I looked at complaints.

13 I looked at the investigations and the examinations by the

14 regulators.

15 So I looked at and used the methodology that I would

16 use as a bank regulator. When we would go in to examine First

17 National Bank of Chicago, for example, it was impossible for

18 us to look at every single solitary loan that they had. So we

19 had to make some judgments as far as how many loans we were

20 going to look at, how many, you know, depository accounts we

21 were going to look at so that we could check compliance with

22 the laws. And where we found problems, we would expand that.

23 And so it -- it -- it -- that sort of an analysis doesn't lend

24 itself to calculating the exact number of loans in each of

25 those categories. I looked at a much broader spectrum of

Household Unsigned Page 771 - 774

 771 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 things for the company.

 2 Q. I think the next thing on your list was blocking the back

 3 door. And the last thing on your list. Okay. We're making

 4 progress.

 5 And you said that if Household makes a loan and the

 6 customer only stays for a short time, they're not going to be

 7 as profitable as if the customer would stay and pay, correct?

 8 A. Are you reading from my testimony?

 9 Q. I am reading from the trial transcript on March 31 at Page

10 464, Line 21 to 465, Line 1. The question was:

11 Question: Why is that significant to your opinion?

12 You said, Answer: Well, because Household is in the

13 business of making loans. And if they make a loan and the

14 customer only stays for a short time, you know, they are not

15 going to be as profitable as they would be if the customer

16 would stay and pay. I left out the "you know?"

17 A. Thank you for doing that. So -- and your question is?

18 Q. The question is: Do you recall that testimony?

19 A. Yes.

20 Q. Okay. When you talk about the profitability of customers,

21 you're talking about the profitability to the owners of the

22 company, which is the investors, correct?

23 A. When I made that statement, I was focused on the amount of

24 income that Household was going to generate. And ultimately

25 when you talk about the company, you talk about its investors,

Household Unsigned Page 771 - 774

 772 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 I suppose. That's not generally what I focus on. But, yes.

 2 But here I was just trying to discuss the income stream of the

 3 company.

 4 Q. You say that's not generally what you focus on. You've

 5 never been the CEO of a public company, have you?

 6 A. Not the CEO.

 7 Q. You don't know what Mr. Aldinger focused on during the

 8 years he was CEO of Household?

 9 A. Well, I know Household focused on growth in the 1999, you

10 know, to 2000 time frame. But, of course, every company has

11 to focus on profitability, whether you're publicly traded or

12 not, because otherwise you would go out of business.

13 Q. There you go.

14 And so that's what you were saying here, that --

15 let's talk -- a profitable loan is better for the company,

16 better for the shareholders, better for everybody than an

17 unprofitable loan, correct?

18 A. Yes. And from my standpoint, a sound loan is better for

19 the company than an unsound loan or a good loan is better than

20 a bad loan because if it's a bad loan, you don't get paid.

21 Q. And you mentioned the word income. In addition to income,

22 the company has to focus on costs, right?

23 A. You mean just generally their costs or --

24 Q. Sure.

25 A. Sure.

Household Unsigned Page 771 - 774

 773 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 Q. And profit is the difference between income and costs?

 2 A. Income less expenses, right.

 3 Q. Okay. And do you understand that when a loan is priced,

 4 the company takes into account certain costs, including the

 5 cost of getting that money it's going to lend -- if it's not a

 6 bank, it doesn't have deposits -- and it makes certain

 7 assumptions as to how long the loan will last?

 8 A. Yes.

 9 Q. Okay. And let's assume they've -- they've assumed a

10 length of five years, and the customer pays off after one

11 year. The company will not make the profit it assumed it

12 would make on that loan, correct?

13 A. Yes.

14 Q. Okay. So to protect the profit for the company's

15 shareholders, the company has two choices. They can raise the

16 prices to all borrowers thereby increasing income and then one

17 borrower or another will pay off early and so be it and the

18 company will still make enough profits for its shareholders

19 because everybody pays more; or they could try to focus the

20 incremental cost on the fellow who pays off early, correct?

21 A. I just have never seen something like that. I've seen

22 other frameworks, but I'm not familiar with that.

23 Q. You're not familiar with what I'm describing?

24 A. Well, I understand what you're trying to say; but the

25 specifics of what you're saying, I haven't --

Household Unsigned Page 771 - 774

 774 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 40 of 245
4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 the middle -- you know, what? Let me just read the whole

 2 paragraph.

 3 "I'm sure you can come up with additional and better

 4 alternatives. Out of this wealth of possibilities, I would

 5 like us to choose for now one standard approach to

 6 qualification, applicable to all our present fixed-rate,

 7 fixed- term mortgage production, a specific program with which

 8 Legal -- " that's the Law Department, right?

 9 A. Yes.

10 Q. " -- will be comfortable."

11 Do you see that?

12 A. I see it.

13 Q. All right.

14 And, then, down on the bottom of that page, the

15 paragraph one up from the bottom, he says, "Whatever approach

16 we end up (soon!) recommending, in order to make essentially

17 all our mortgages 'alternative,' our idea we'll have to pass

18 muster with Legal's -- " I'm sorry -- "Legal, Systems, Sales

19 and Gary."

20 Do you see that?

21 A. Yes.

22 Q. He's talking about the Law Department, the Systems

23 Department, the Sales Department and Gary Gilmer, correct?

24 A. I'm assuming that's what he means.

25 Q. Okay.

Household Unsigned Page 799 - 802

 799 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 And, then, on the page ending in production numbers

 2 "891," two pages from the back, right above the words "late

 3 fees" there, let's look at the sentence above that.

 4 He says, "Let's check with the lawyers to assure that

 5 we make any such provision workable and effective."

 6 Do you see that?

 7 A. Yes.

 8 Excuse me.

 9 Q. Do you need a drink or something? Are you all right?

10 A. I'm fine.

11 Q. Okay.

12 You also testified, I believe, about a memo from

13 Randy Raup, which is in evidence as Plaintiffs' Exhibit 349.

14 MR. KAVALER: Your Honor, may I approach?

15 THE COURT: Yes.

16 (Document tendered.)

17 BY THE WITNESS:

18 A. Thanks.

19 MR. KAVALER: Thank you, your Honor.

20 BY MR. KAVALER:

21 Q. And you testified about this document a couple of days

22 ago. Do you remember that?

23 A. Yes.

24 Q. And in the middle of the first page under "13. Collection

25 Counselling," it says, "Gary Gilmer and Ken Robin will

Household Unsigned Page 799 - 802

 800 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 determine appropriate next steps."

 2 Do you see that?

 3 A. I do.

 4 Q. That's the same Ken Robin who was the General Counsel of

 5 the parent company, correct?

 6 A. Yes.

 7 Q. And, then, underneath it says, "Overall, Gary Gilmer and

 8 Dave Schoenholz will continue to co-head the Andrew Kahr

 9 initiative areas within USCF."

10 Do you see that?

11 A. I do.

12 Q. Now, it's the latter sentence that counsel for the

13 investors read to you -- and you read back to him -- two days

14 ago at this podium. The sentence I read is directly above it,

15 right?

16 A. Yes.

17 Q. So, you understood that this meant -- in this memorandum

18 that was shown to you by counsel for the investors -- that

19 Mr. Gilmer, the head of the Business Unit, and Mr. Robin, the

20 General Counsel of the entire company, would be involved in

21 determining what would happen next?

22 A. Well, how I read this memo is the sentence that says,

23 "Gary Gilmer and Ken Robin will determine appropriate next

24 step," goes to collection counselling, which wasn't really

25 something that I touched on in my reports.

Household Unsigned Page 799 - 802

 801 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 "But, overall, Gary Gilmer and Dave Schoenholz will

 2 continue to co-head the Andrew Kahr initiative areas within

 3 Consumer Finance," I understood to mean that they were

 4 spearheading the initiatives that were developed in

 5 conjunction with Andrew Kahr.

 6 Q. All right.

 7 But you certainly understood that Mr. Robin had some

 8 role in this process, correct?

 9 A. Yes. For the collection counselling I see his name there,

10 yes.

11 Q. Okay.

12 Let's look at one more memorandum from Mr. Kahr.

13 Let's not.

14 Let's move on. You testified that Household was

15 focused on growth and didn't care if loans didn't comply with

16 the law.

17 Do you recall that?

18 A. I know I've said before that Household was focused on

19 growth, at the expense of compliance.

20 Q. What you said at trial transcript Page 448, Lines 6

21 through 12, was this: "Because the corporate culture in the

22 1999 to 2002 time frame was really focused on growth, at the

23 expense of other things -- like compliance -- and this

24 document shows that."

25 Counsel for the investors said:

Household Unsigned Page 799 - 802

 802 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 41 of 245
4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 "Q. When you say it was focused on growth at the

 2 expense of compliance, what do you mean by that?"

 3 Answer by you:

 4 "A. They were focused on growth and they didn't care

 5 if loans didn't comply with the law or whatever."

 6 Do you recall that?

 7 A. Yes.

 8 Q. Okay.

 9 Now, the memo we looked at a couple minutes ago from

10 Gary Gilmer, where he says, "We maintain zero tolerance for

11 inappropriate and unethical behavior, and demonstrate that

12 with swift action -- " and you and I talked about "swift

13 action" means terminating people -- would be inconsistent that

14 view, wouldn't it?

15 A. Well, I didn't agree with that memo on a variety of -- for

16 a variety of -- reasons, which I go into in my report and

17 which I discussed at my deposition.

18 If they were so concerned about ethical behavior, why

19 would they have developed all these predatory lending

20 practices; and, then, compensated their employees and trained

21 them how to sell them; and, then, compensated their employees

22 for selling them?

23 So, all of the memos in the world don't mean anything

24 if you don't then go through and check for compliance with

25 them.

Household Unsigned Page 803 - 806

 803 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 And, so, I know he wrote them, but it doesn't mean

 2 anything, and especially from a regulatory standpoint. That's

 3 one of the things that the regulators do, is they check to

 4 make sure that what the policies are, are actually being

 5 complied with. And, at Household, they were not.

 6 Q. You said, "I don't agree with that memo."

 7 You agree he wrote it, correct?

 8 A. Oh, yes.

 9 I saw several memos from Mr. Gilmer where he said,

10 "We don't engage in predatory lending. We, you know, have

11 ethical behavior." But that just wasn't the case. They

12 engaged in predatory lending practices. They developed

13 predatory lending practices. They trained their employees how

14 to sell them. And they compensated their employees, based on

15 engaging in these predatory lending practices.

16 So, like the Attorneys General said, there's a

17 disconnect between what Household says its policies are and

18 what's happening on the ground.

19 And I found that to be true.

20 Q. So, what you're saying is, in your opinion, the company

21 did not perform, as Mr. Gilmer said in these memos it should?

22 A. That's my opinion.

23 Q. You're familiar with the phrase "Tone At the Top"?

24 A. I am.

25 Q. Mr. Gilmer was setting the tone at the top; he was sending

Household Unsigned Page 803 - 806

 804 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 a message to all employees, "This is what I want you to do,"

 2 correct?

 3 A. Well, "Tone At the Top" is a term that came into being

 4 with Sarbanes-Oxley, and it has to do with corporate

 5 governance. And in the Bank Directors College classes that I

 6 hold for the bank directors, this is something that we teach

 7 them: How important "Tone At the Top" is.

 8 And that means that they have a corporate culture

 9 that requires ethical behavior, and they have a code of

10 conduct; and, then, they check to make sure that the way that

11 their employees are behaving is in compliance with that.

12 And that's what Household didn't do here. They

13 didn't focus on compliance during this 1999 to 2002 time

14 frame, to make sure that what Mr. Gilmer was saying was, in

15 fact, happening.

16 And, really, how could they have because the products

17 that they were offering consumers, the way that they were

18 training their employees and the way they were compensating

19 their employees, how could they expect anything else other

20 than predatory lending to be conducted?

21 Q. Those are your opinions?

22 A. Yes.

23 Q. And you believe the regulators, who you referred to in

24 your direct testimony, share those opinions?

25 A. Many of them shared my opinions, yes.

Household Unsigned Page 803 - 806

 805 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 Q. And there are many other regulators who don't share those

 2 opinions, correct?

 3 A. I'm not sure I understand. That didn't think they engaged

 4 in predatory lending?

 5 Q. Correct.

 6 A. There were a few states that issued reports that didn't

 7 show those types of violations. And I don't know how

 8 expansive their -- the scope of their -- examination.

 9 But, ultimately, all 50 states came to an agreement

10 with Household and fined them $484 million for these predatory

11 lending practices.

12 So, ultimately, all of the states ended up signing

13 onto that.

14 Q. You reviewed a number of state regulatory exams of

15 Household, which were complimentary of Household, which you

16 didn't mention in your direct testimony, correct?

17 A. Not a number. I know there were a few that I reviewed,

18 that had violations of other types of things, but not of

19 predatory -- you know, the types of practices.

20 I didn't do a complete review of everything that

21 Household might have violated in that time period. I focused

22 on whether or not they engaged in predatory lending.

23 So, the examination reports had much other

24 information in there, requiring corrective action, that went

25 to other things besides predatory lending.

Household Unsigned Page 803 - 806

 806 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 42 of 245
4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 But I do know that a few states had things other than

 2 predatory lending in them.

 3 Q. And a few states had very complimentary things to stay

 4 about Household?

 5 A. Well, in some of the time frames that -- early on before

 6 the complaints got high and some of these other things

 7 happened, where all the states got together to do an

 8 investigation, you can find things in the examination reports,

 9 you know, that were not negative. That's true.

10 Q. More than not negative, they were complimentary?

11 A. Well, I mean, however you want to phrase it. It would

12 depend on the subject.

13 I don't think they said, "You're not engaged in

14 predatory lending." I don't recall seeing that:

15 Congratulations, you're not engaged in predatory lending."

16 Q. All right.

17 You talked about the -- let's look at some of the

18 state reports.

19 You didn't actually conduct any state regulatory

20 reviews of Household for any state, did you?

21 You were not the reviewing authority in any of these

22 states?

23 A. For -- you mean during the time frame?

24 Q. In other words, what you did is you -- what you did in

25 your direct testimony is you -- commented on regulatory

Household Unsigned Page 807 - 810

 807 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 reports prepared by states, which you didn't participate in?

 2 A. Well, no. I -- I -- couldn't have because I wasn't

 3 employed by those organizations.

 4 I looked at the materials that were turned over.

 5 Q. The answer is: I'm right, you didn't participate in

 6 those --

 7 A. Right, no, I did not participate in the original

 8 examinations. That's correct.

 9 Q. Okay.

10 One of the states you talked about is the Washington

11 State DFI report. Do you remember that?

12 A. Yes.

13 Q. And we looked at a letter. I think it's Plaintiffs' 1333.

14 We're getting a copy of that, but it was a letter

15 from Mr. Cross transmitting a copy of the Washington State

16 Report.

17 Do you recall that?

18 A. I know I looked at several things from Washington State.

19 I'd have to see what you're talking about.

20 Q. Okay. Give me a second. We'll find it.

21 MR. KAVALER: Plaintiffs' 1333.

22 (Brief pause.)

23 BY MR. KAVALER:

24 Q. We'll find it in a minute.

25 A. Okay.

Household Unsigned Page 807 - 810

 808 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 Q. In any event, you know who Mr. Cross is?

 2 A. I do.

 3 Q. Okay.

 4 And he's the author of the report that you talked

 5 about the day before yesterday?

 6 A. There were several Washington reports.

 7 Q. The Washington Extended Report. Do you remember that one

 8 A. Yes.

 9 Q. Okay.

10 And that's the one where he reviewed 19 customer

11 accounts.

12 Do you remember that?

13 A. I'd have to look at the report to see exactly what you're

14 referring to.

15 Q. Okay.

16 Here it is right here (indicating).

17 MR. KAVALER: Your Honor, may I approach?

18 BY THE WITNESS:

19 A. Show me what he just -- oh, I'm sorry.

20 BY MR. KAVALER:

21 Q. It's 290.

22 A. Do you want me to get it?

23 Q. Yes. That would be fine.

24 Absolutely. Thank you?

25 It's 290 and his cover letter is Plaintiffs' 1333.

Household Unsigned Page 807 - 810

 809 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 They're both in evidence and you were discussing both

 2 of them here a couple days ago.

 3 (Brief pause.)

 4 BY MR. KAVALER:

 5 Q. You're not doing any better than I was. Let me give you

 6 one.

 7 A. 290?

 8 Q. 290.

 9 A. And 1333.

10 Okay.

11 Q. Okay.

12 That's the Chuck Cross I'm talking about.

13 A. Okay.

14 Q. All right.

15 And do you recall that, with regard to this report,

16 Mr. Cross -- the author of that report -- gave some testimony

17 in a deposition, which you read, where he said his review of

18 these 19 complaints -- 19 customer complaints -- that formed

19 the basis for this report was woefully inadequate to reach any

20 statistically-valid conclusions about Household's business.

21 Do you remember that?

22 A. Where are you reading from?

23 Q. I'm reading from his deposition testimony, which I believe

24 you've seen.

25 I'll be happy to get you a copy of that.

Household Unsigned Page 807 - 810

 810 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 43 of 245
4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 A. I do.

 2 Q. Okay.

 3 And, in the course of reviewing the files that you

 4 reviewed, did you come across the underlying documents related

 5 to Mr. Nanez's complaint?

 6 A. I reviewed some documents. I'm not sure which ones you're

 7 talking about.

 8 Q. Let me show you a couple and see if it refreshes your

 9 recollection.

10 Let's start with a document which I will mark as

11 Defendants' 1080 for identification.

12 (Document tendered.)

13 BY MR. KAVALER:

14 Q. Is this one of the documents you looked at?

15 A. It might have been. I've seen this type of document

16 before.

17 Q. Okay.

18 And this document has Mr. Nanez's name on it --

19 Ms. Nanez and Mr. Nanez?

20 A. Yes.

21 Q. All right.

22 And it says on the top --

23 MR. KAVALER: I'm sorry, your Honor, I offer

24 Defendants' 1080 in evidence.

25 MR. DROSMAN: This isn't on the exhibit list, your

Household Unsigned Page 835 - 838

 835 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 Honor.

 2 MR. KAVALER: That's why it's 1080, your Honor.

 3 THE COURT: Yes, I guess it's not.

 4 Is there an objection?

 5 MR. DROSMAN: It's hearsay, your Honor.

 6 THE COURT: What's it being offered to prove?

 7 MR. KAVALER: Your Honor, it's offered -- she says

 8 she reviewed it. It's offered in response to the testimony

 9 she gave yesterday, to show the response that Household made

10 to the very complaint that she testified about yesterday.

11 THE COURT: Overruled.

12 MR. KAVALER: Thank you, your Honor.

13 (Defendants' Exhibit 1080 received in evidence.)

14 BY MR. KAVALER:

15 Q. Now, you see on the top --

16 MR. KAVALER: Withdrawn.

17 BY MR. KAVALER:

18 Q. If I recall your testimony correctly yesterday, your point

19 was that Mr. Nanez -- or Ms. Nanez -- said she had to take

20 single premium credit insurance in order to get a loan; is

21 that correct?

22 A. I'd have to look at that complaint, again, to see exactly

23 what it says on the complaint.

24 Q. Okay.

25 Let me try it this way. I can show you your

Household Unsigned Page 835 - 838

 836 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 testimony yesterday.

 2 MR. KAVALER: I am having difficulty with the

 3 transcript.

 4 BY MR. KAVALER:

 5 Q. Let me do it this way: This document, 1080, is headed

 6 "Optional Credit Insurance Disclosure."

 7 Do you see that?

 8 A. I see that.

 9 Q. And first thing it says after the name of the creditor,

10 the name of the borrowers and some boxes with some amounts in

11 it, is a sentence that begins in capital letters, "No credit

12 insurance is required to obtain this loan."

13 Do you see that?

14 A. I do.

15 Q. All right.

16 And this is the document signed by the borrowers --

17 the Nanezes -- on the next page, correct?

18 A. Yes.

19 Q. So, they received a written disclosure from Household

20 which says on the top, it's an "Optional Credit Insurance

21 Agreement" and says in the beginning of the text in capital

22 letters, "No credit insurance is required to obtain this

23 loan."

24 Do you see that?

25 A. I see it.

Household Unsigned Page 835 - 838

 837 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 Q. Okay.

 2 And that would alert them to the fact this credit

 3 insurance is both optional and not required to obtain the

 4 loan, correct?

 5 A. If they spoke English. They're Spanish speakers.

 6 Q. Do you know that for a fact or you just assuming that?

 7 A. Well, I'm reading it from the complaints. I pulled the

 8 complaint out.

 9 Q. Okay.

10 A. "We are Hispanic and our primary language is Spanish."

11 Q. Okay.

12 And your point is: This document is in English?

13 A. It is in English.

14 Q. Okay.

15 So, as a regulator, what would you like to see?

16 Would you like to see Household provided them with a

17 disclosure in Spanish?

18 A. Well, there are a couple things.

19 One, if you are lending money to someone that doesn't

20 speak English, at least I know -- from the bank's

21 standpoint -- they've got forms. All of their documents are

22 in all the different languages of the clients that they serve.

23 The second thing is Household always claimed that

24 their insurance was optional; but, if you remember, I talked

25 about the penetration ratios.

Household Unsigned Page 835 - 838

 838 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 44 of 245
4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 When you look at how many loans were made and how

 2 many insurance policies were written on those loans, if it

 3 gets above 50 percent, the regulators think that credit

 4 insurance is actually required.

 5 In this complaint, it actually says that: "The

 6 Household's representative told us that we had to get single

 7 premium credit insurance."

 8 So, it conflicts with the language in this document,

 9 which, if they spoke English, they would have been able to

10 read and maybe ask a question about.

11 But, notwithstanding that, this is symptomatic of

12 insurance packing that was complained of in various states

13 around the country.

14 Q. All right.

15 So, part of the problem is the document is in English

16 and you believe they spoke Spanish?

17 A. Well, they said they spoke Spanish. I'm just looking at

18 their complaint.

19 I don't know them personally.

20 Q. Understood.

21 So, let's look at the other document in the loan

22 file, which is the Loan Payment and Security Agreement.

23 We'll mark this as Defendants' 1081 for

24 identification.

25 (Document tendered.)

Household Unsigned Page 839 - 842

 839 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 BY MR. KAVALER:

 2 Q. Did you see that document, as well, when you were looking

 3 at the documents relating to the claim of Mr. and Mrs. Nanez?

 4 A. I'm not sure. I have seen documents that look like this.

 5 I don't know if I saw this particular one.

 6 Q. Let me see if I can refresh your recollection.

 7 It has Mr. Nanez's name and Ms. Nanez's name on the

 8 first page?

 9 A. That doesn't help.

10 I've seen documents like this, but I can't tell you

11 for sure if I saw this particular document.

12 Q. Okay.

13 It's called a "Loan Payment and Security Agreement"?

14 A. That's what it says at the top, yes.

15 Q. Now, on the last page, next to the Nanez's signatures, it

16 has a paragraph in Spanish.

17 Do you see that?

18 A. Yes.

19 Q. Do you happen to read Spanish?

20 A. No, I don't.

21 Q. Do you see the paragraph right above it? It translates it

22 in English.

23 A. Okay.

24 Q. Okay.

25 The English says, "Notice the borrowers may request

Household Unsigned Page 839 - 842

 840 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 the Truth in Lending Disclosures be provided in the Spanish

 2 language before signing any loan documents."

 3 And the Spanish, I won't even try, but it says -- the

 4 first word is "Aviso," which I think means something very

 5 similar to "Notice."

 6 My guess is the language in Spanish and English is

 7 the same.

 8 Does that sound reasonable to you?

 9 A. Sure.

10 Q. Okay.

11 Does that refresh you recollection that when you

12 looked at the Nanez loan file, you saw that the Nanezes were

13 provided with a disclosure document which contained a notice

14 in Spanish that they were entitled to request that all of

15 their documentation be provided in Spanish, if they wanted?

16 A. I can't read Spanish, but the English translation says,

17 "Truth in Lending Disclosures."

18 So, this optional credit insurance, I don't know if

19 that's part of the "Truth in Lending Disclosure."

20 Q. Okay.

21 A. But it does have something here in Spanish that says that

22 they have the opportunity to get their Truth in Lending

23 Disclosures. That would be Regulation z.

24 Q. In Spanish?

25 A. It is in Spanish, yes; but, it doesn't have anything to do

Household Unsigned Page 839 - 842

 841 

4-02-09 Trial Day 4 4/2/2009 9:04:00 AM

 1 with this document that you showed me that's in English,

 2 regarding optional credit insurance.

 3 Q. Right.

 4 Let me be clear. There's a statement in Spanish that

 5 says, "You can get the disclosures in Spanish," right?

 6 A. It says, "Truth in Lending Disclosures." That's different

 7 than disclosures.

 8 Q. Okay.

 9 And you saw documents like this in the course of your

10 investigation?

11 A. Yes.

12 MR. KAVALER: I offer Defendants' 1081, your Honor.

13 MR. DROSMAN: No objection, your Honor.

14 THE COURT: Admitted without objection.

15 (Defendants' Exhibit 1081 received in evidence.)

16 BY MR. KAVALER:

17 Q. So, it says on the front, "Loan Repayment and Security

18 Agreement"?

19 MR. KAVALER: And go to the last page.

20 BY MR. KAVALER:

21 Q. And you see the box in the upper left (indicating) --

22 that's what we're talking about.

23 It says in English, "Notice: The borrowers may

24 request that the Truth in Lending Disclosures be provided in

25 the Spanish language before signing any loan documents."

Household Unsigned Page 839 - 842

 842 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 45 of 245
EXHIBIT 4 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 46 of 245
Trial Day 5 4/6/2009 6:11:00 AM

 893

 1 pervasive, they started to disbelieve Household, which is

 2 exactly what she was saying. Very hard for me to look at

 3 their response, their detailed response, and not, by this

 4 point in time, two weeks before they reached this settlement

 5 when they know they're under this scrutiny, to say that that's

 6 a fair response to the complaint. Asked as a regulator, you

 7 get the answer of what the regulators did.

 8 Finally, the third time it came up, your Honor --

 9 first of all, by then it's out; and it's become an issue

10 that's being talked about. He asked her, Don't you think the

11 guy did a superb job. After getting the wrong answer for

12 himself moments before on the regulator question, two pages

13 later, at Page 864 to 865, she says she doesn't agree. There

14 were pervasive problems. The regulators were on them at this

15 point. It's two weeks before the $484 million settlement.

16 And I think, your Honor, there is no question that

17 all of her answers were responsive to his questions. He

18 opened the door. And then he compounded his error by then not

19 moving to strike, not objecting, which he described Thursday

20 afternoon after we finished as a tactical decision on his

21 part. Well, your Honor, when you make a tactical decision

22 like that, you waive your objection.

23 And, your Honor, it's not as if defense counsel

24 wasn't warned. I mean, there is no question that the $484

25 million settlement is coming in in certain parts of this case,

Household Unsigned Page - - -

 - 

Trial Day 5 4/6/2009 6:11:00 AM

 894

 1 without question. There are no fewer than five press

 2 releases, three on defendants' exhibit list, two on ours, that

 3 the parties have vetted that are coming into evidence in this

 4 case. So the jury is going to hear about it. There is no

 5 question about that. Those documents are already -- have been

 6 marked. There are no objections to them at this point.

 7 And I go back to day seven of our pretrial hearings,

 8 your Honor, at Pages 658 to 661 where the Court basically

 9 said, I don't think anybody is seriously contending that the

10 fact there was a settlement is not going to come into

11 evidence, are you? I mean, how does the market know unless

12 there's an announcement?

13 You went on to say, Sure, but one of the facts for

14 sure is going to be that there was a settlement. And

15 Mr. Newville answered, Yes, your Honor.

16 We got back to it when we were talking about

17 Mr. Devor's opinion on the restitution issue. And he went

18 on -- Mr. Hall asked a question. He withdraw an objection to

19 one of our demonstratives. And he said, We had talked about

20 it earlier. I believe the Court clarified, to the extent that

21 the plaintiffs need to use that number -- referring to the

22 484 -- with one of their experts, including Devor or Fischel,

23 that the amount of the settlement is going to be allowed to be

24 presented to the jury. We just want to clarify that that

25 would be the limit of the 484 million settlement use in trial.

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 895

 1 And the Court said, I don't know that I can do that.

 2 I don't know what's going to happen during the trial. I mean,

 3 you may bring it up. I don't know. You may open the door or

 4 there may be some other legitimate function for it. I'm not

 5 prepared to make an advisory ruling as to anything.

 6 And so they were forewarned, forearmed. And yet

 7 instead, they ask questions where they drove the expert

 8 witness specifically into answering with the 484. Not all the

 9 states, maybe many, but not all the states were against them?

10 Well, all 50 settled with them so -- for predatory lending

11 practices. That's a responsive answer.

12 And before I take my seat, your Honor, I would just

13 like to clarify that on Thursday afternoon when we finished,

14 Mr. Kavaler asked a series of questions about do you know the

15 number of loans that were affected by these different

16 practices. And as he well knew from reading Ms. Ghiglieri's

17 report, she has a section about how much Household calculated

18 the refunds at, their estimates of those types of practices.

19 That's the way she had to answer that question. He knew that.

20 She answered it that way. And we intend to go into that this

21 morning because it's a fair response to their question of the

22 number of loans. Well, the number of loans, all I can tell

23 you is you calculated 1.2 billion. And she should be allowed

24 to say that, your Honor. I don't think there's any question

25 that it's clear that Mr. Devor is allowed to say that based on

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 896

 1 the Court's pretrial ruling. He had a similar opinion.

 2 THE COURT: Okay. Well, I reviewed to the best -- as

 3 best I could the transcript over the weekend. I must say, I

 4 wasn't as conscientious and effective as either of you. But

 5 several things struck me.

 6 First, I also did a review of my pretrial rulings.

 7 And neither side has touched on this, but I think that there

 8 are really two rulings that apply to this situation, the one

 9 that has been mentioned already regarding the use of the

10 settlement and the terms and so on; and another one, which in

11 some ways was more of a direct ruling on what we have before

12 us, which was the admissibility of the underlying evidence

13 that experts relied upon for purposes of evaluating the

14 expert's opinion. And we even instructed the jury on that.

15 We said we're going to allow that evidence in. We're going to

16 instruct the jury that they're to use it only for purposes of

17 evaluating the expert's opinion.

18 And it seems to me that what we have here is a

19 situation that kind of slid between the cracks of those two

20 opinions. We have one opinion saying we're not going to go

21 into the terms of the settlement for purposes of showing

22 liability. We have another opinion that says experts can go

23 into matters that are otherwise inadmissible, and the jury can

24 use that information for the purpose of judging the expert's

25 opinion.

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 897

 1 What I think nobody addressed -- well, I know nobody

 2 addressed prior to trial is what happens if one of the things

 3 that the expert relies upon is the very settlement and the

 4 terms and conditions of that settlement in reaching her

 5 opinion or conclusion about the issue of liability, the

 6 existence of predatory lending, which is what has happened

 7 here. This expert obviously relied upon not only the reports

 8 but the actual fact of the settlement, that all of these

 9 states participated in the settlement, as a basis for

10 corroborating her opinions regarding the pervasive and

11 extensive nature of the various predatory practices that she

12 opines Household was engaged in. Nobody addressed that issue

13 prior to trial specifically. And, thus, we have this

14 happening.

15 It's pretty clear to me from the pretrial exhibits

16 and motions that it ought to have been clear to both sides

17 that this expert was relying upon that settlement in reaching

18 some of her conclusions.

19 Now, to the point of the questions and answers here,

20 to me what drives this ruling is exactly what Mr. Kavaler here

21 pointed out. It is that, early on in the cross-examination,

22 it was clear that this witness was going to rely upon the

23 terms of that settlement in answering questions about whether

24 other investigators agreed with her, the number or extensive

25 nature of the alleged wrongdoings by Household. But at no

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 898

 1 point, even after it was clear to me and it ought to have been

 2 clear to everybody, if not from the pretrial discovery,

 3 certainly from her answers on the stand that she was going to

 4 be relying on these things, was an objection made. At no

 5 point was there a request for a clarification from the Court

 6 on its ruling. At no point was there a request that the Court

 7 admonish the witness. At no point, until the very last

 8 question, which resulted not only in an answer by the witness

 9 but a rejoinder by counsel really in his responsive question

10 where he pointed out the $3 billion increase in Household's

11 stock after they announced this settlement, a fact not in

12 evidence, which he assumed in his question and forced the

13 witness to admit she didn't know about.

14 Now, you can't allow a series of answers that

15 apparently violate what you believe is the appropriate

16 interpretation of the Court's rulings to go on and on and on,

17 continue to ask questions, make no objections and sort of keep

18 in your hip pocket the fact that you may be objecting to these

19 things later on if the cross-examination doesn't turn out the

20 way you want it to. You can't reserve an objection. You have

21 to voice it at the time that the inappropriate answer comes

22 out.

23 By his own count, we have about six inappropriate

24 answers here, none of which were objected to, not a single

25 one, not until after the testimony was done for the day and

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 899

 1 the witness stepped down did counsel make any comment to the

 2 Court. And at that point, his only comment was that he wished

 3 to voir dire the witness, not that he objected to her answers.

 4 Clearly if there was an objection here, it was

 5 waived. Now, I'm not so sure there was an objection because,

 6 as I said, the Court has not addressed -- because nobody has

 7 presented to it squarely -- the question of to what extent

 8 this witness, if she testifies that she relied upon this

 9 settlement and the terms of it in reaching her opinion, can

10 testify to those terms. Nobody has asked us to issue a ruling

11 on that, and we haven't. By now, of course, it's too late.

12 She has done that.

13 I find that all of the answers she gave, with the

14 possible exception of the last one, were directly responsive

15 to the questions. If you ask a witness to quantify the number

16 of particular types of complaints in order to undermine her

17 opinion that this particular type of wrongdoing was pervasive,

18 she's going to give you the answer that she has. And the

19 answer this witness had -- and it's clear from her report --

20 was that she had depended upon the amount of money that

21 Household set aside to repair the injuries that are alleged to

22 have taken place from that particular type of misconduct; in

23 other words, the settlement and the various aspects of the

24 settlement. Those answers were all responsive to the

25 questions.

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 900

 1 What I think was not necessarily responsive, and I'm

 2 ruling now that the witness will be instructed, is for her to

 3 mention the amount of the settlement. That was not necessary.

 4 The number of states, sure. The money or dollar amount I

 5 don't think is particularly necessary. Can't blame the

 6 witness for saying it. It obviously constituted a part of her

 7 reasoning in coming to her conclusions. But I'm instructing

 8 you to instruct her that she is not to do that unless she's

 9 specifically asked a question directly asking her to mention

10 the amount of the settlement or the size of the settlement in

11 answering any other questions.

12 That's the Court's ruling. And I'll try to put

13 something in writing afterwards to the extent that I have

14 time.

15 I don't feel there's any need for a voir dire. I

16 feel you do need to instruct your witness that she's not to go

17 into the amount of the settlement. If she's asked questions

18 directly relating to how she estimated the degree of the

19 problems that she opined Household had, the extent to which

20 they were pervasive and so on, then she can answer in terms

21 of, to the extent that it's true and that she relied upon it,

22 her analysis of the amount of money they set aside to address

23 the issue.

24 Can we bring the jury out now?

25 MR. KAVALER: Your Honor, may that instruction to

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 Ghiglieri - redirect

 961

 1 said, in essence, we don't engage in predatory lending. Do

 2 you recall that?

 3 A. I do.

 4 Q. And did these memos change your conclusion as to whether

 5 Household engaged in widespread, systemic predatory lending

 6 practices during the 1999-to-2002 time frame?

 7 MR. KAVALER: Objection, your Honor, replicates the

 8 direct.

 9 THE COURT: I'll sustain the objection. You're going

10 to have to ask specific questions or move on. We can't just

11 regurgitate.

12 BY MR. DROSMAN:

13 Q. Okay. I'll show you Plaintiffs' Exhibit 550 in evidence.

14 (Tendered.)

15 BY MR. DROSMAN:

16 Q. Ms. Ghiglieri, you recall Plaintiffs' Exhibit 550?

17 A. I do.

18 Q. And this was a document that you considered in formulating

19 your opinions, correct?

20 A. Yes.

21 Q. And this is a letter from the multistate attorney

22 generals; is that right?

23 A. That's right.

24 Q. And that's -- it's addressed to Household?

25 A. Yes.

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 Ghiglieri - redirect

 962

 1 Q. And it's dated August 15, 2002; is that right?

 2 A. August 14, the letter?

 3 Q. Is it dated August 15 -- you're right, August 14, 2002.

 4 A. Yes.

 5 Q. And then if you could look at the page ending 756, and the

 6 third paragraph down. It's the third -- begins the third

 7 sentence in, The explanations and rationales. It reads, The

 8 explanations and rationales Household articulated on July 9

 9 and in the July 17 letter have not given us any reason to

10 reconsider our position that the practices we earlier

11 identified present serious problems under a variety of

12 consumer protection and regulatory laws. Further, the

13 responses provided no information which has led us to change

14 our position that those identified practices warrant changes

15 in the future and relief for Household's customers who

16 suffered from them in the past.

17 Do you see that?

18 A. I do.

19 MR. KAVALER: Objection, your Honor. This, again, is

20 rehashing exactly what we went over in the direct.

21 MR. DROSMAN: This is her chance to explain why Gary

22 Gilmer's letters -- self-serving memoranda are not persuasive.

23 MR. KAVALER: Your Honor, I move to strike the

24 comment about self-serving. That's counsel's unsworn

25 testimony.

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 Ghiglieri - redirect

 963

 1 And, secondly, that's precisely the point he made in

 2 the direct for precisely the same reason. We're going over it

 3 again to bolster the prior testimony. I didn't think that was

 4 the purpose of redirect. In that case, I'll recross her and

 5 we'll go through it forever.

 6 THE COURT: I'd rather not go on forever, clearly.

 7 The objection will be sustained. If you have new

 8 material to bring out, you may do so. The same material may

 9 not be gone over again.

10 BY MR. DROSMAN:

11 Q. You mentioned today that it would be a conflict for you to

12 testify as an expert if you had worked previously at

13 Household. Do you recall that?

14 A. Yes.

15 Q. Why do you believe that it would be a conflict for you to

16 testify as an expert if you worked at Household?

17 A. Because if I take an expert witness case, the first thing

18 I do is see if I have a conflict. If it concerns a past place

19 that I worked, I wouldn't be able to be objective.

20 So, for example, if it has to do with the Department

21 of Banking in Texas during the time frame when I was there, I

22 would be opining on the decisions that I made; and that would

23 not be objective opinions by an objective person.

24 Q. You mentioned today that re-aging may have a positive

25 effect on the cash flow of the business, correct?

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 Ghiglieri - redirect

 964

 1 A. Yes.

 2 Q. Does that have any significance to your opinion that

 3 Household engaged in re-aging practices to mask its two-plus

 4 delinquency numbers?

 5 A. Well, the positive effect is only if the person keeps

 6 paying. But if you recall, we discussed that last week, that

 7 the way that these loans were structured made it very

 8 difficult for the people to pay because the balances kept

 9 going up with all the fees and insurance premiums being packed

10 on. And so then, they would become delinquent. Household

11 would re-age them, pack on some more things. They wouldn't be

12 able to pay again. Household would re-age them. So it had a

13 negative effect on cash flow, not positive.

14 MR. KAVALER: Your Honor, move to strike everything

15 after the phrase as you recall, we discussed last week. It's

16 precisely that; what we discussed last week.

17 MR. DROSMAN: Your Honor, I ask that he not make

18 speaking objections.

19 THE COURT: Make a legal objection.

20 The objection is overruled. The answer may stand.

21 MR. DROSMAN: Thank you.

22 BY MR. DROSMAN:

23 Q. Finally, you were contacted by lawyers for the defendants

24 after you were retained in this case by plaintiffs, correct?

25 A. Yes.

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 49 of 245
Trial Day 5 4/6/2009 6:11:00 AM

 1 Q. Mr. Gilmer, I take it that you recognize Exhibit 458. You

 2 have seen it several times in the last few days during the

 3 trial; is that right, sir?

 4 A. Yes, I do.

 5 Q. Sir, is that a copy of an e-mail that you prepared and

 6 sent on or about December 22nd, 1998?

 7 A. That is correct.

 8 Q. And you sent it to people at Household in consumer lending

 9 that reported to you; is that correct?

10 A. That's true.

11 Q. And the title of your e-mail was "Growth in 1999," sir; is

12 that right?

13 A. That's correct.

14 Q. And you say, "I think we have talked about this enough

15 that everyone understands just how important it is to us next

16 year and beyond." Is that right?

17 A. That's exactly right.

18 Q. When you said that, you were referring to growth; is that

19 correct, sir?

20 A. That is correct.

21 Q. You go on to say that you met with senior management on

22 Thursday, December 18th for seven hours; is that right, sir?

23 A. That's what it says, yes.

24 Q. When you are talking about senior management, do you mean

25 Mr. Aldinger?

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 985 

Trial Day 5 4/6/2009 6:11:00 AM

 1 A. Unfortunately, it's been ten years ago, so I can't recall

 2 who was there. But senior management could have been a part

 3 of this team that's listed here. It could have been others in

 4 the organization. I don't know if I meant Mr. Aldinger, but

 5 it might well have been.

 6 Q. How about Mr. Schoenholz? Was he at the meeting? Do you

 7 remember?

 8 A. No, I don't recall.

 9 Q. Have you ever used the phrase "senior manager" to refer to

10 Mr. Aldinger and Mr. Schoenholz?

11 A. Yes, indeed.

12 Q. And you said the meeting went on for seven hours. Is that

13 correct, sir?

14 A. That's what it says.

15 Q. And it was devoted almost entirely to growth; is that

16 right?

17 A. That's exactly right.

18 Q. Do you recall, sir, was an Andrew Kahr present at the

19 meeting on December 18th?

20 A. No. Remember, I said I don't remember the meeting.

21 Q. So you don't recall whether he was there one way or the

22 other, I take it?

23 A. No. That's correct.

24 Q. And you say that "We stink at growth." Is that right?

25 A. Well, I am sure it's on here, and we probably did stink at

Household Unsigned Page 985 - 988

 986 

Trial Day 5 4/6/2009 6:11:00 AM

 1 growth.

 2 Q. Mr. Gilmer, I think this is true, but just to help you out

 3 a little bit, from time to time they highlight the documents

 4 up here. You got a monitor so I can prompt you to the

 5 specific spot. All right, sir?

 6 A. Very good.

 7 Q. You go on to talk about this concept of growth; is that

 8 correct?

 9 A. That is correct.

10 Q. In fact, you prepared a chart that showed how Household

11 stock was valued compared to what you called their peers; is

12 that right?

13 A. I did indeed.

14 Q. And in this chart -- I mean, it's got "Household" at the

15 top, "Providian" at the bottom. But actually you were showing

16 your people that Household was dead last in terms of earnings

17 multiple; is that correct?

18 A. That's exactly what this chart shows.

19 Q. So you felt that -- in this chart, when you prepared it,

20 you felt that Household stock was undervalued compared to

21 these other companies; is that right?

22 A. That's a fair conclusion.

23 Q. And you go on to say, "As you know, a company's stock is

24 simply a reflection of the market's confidence in its ability

25 to consistently generate future earnings growth."

Household Unsigned Page 985 - 988

 987 

Trial Day 5 4/6/2009 6:11:00 AM

 1 Do you see that?

 2 A. Yes, I do.

 3 Q. And I take it you believed that at the time. That's why

 4 you wrote it?

 5 A. Indeed, that would be correct.

 6 Q. Sir, there, when you are talking about the market's

 7 confidence, you are talking about Wall Street; is that right?

 8 A. That would be at least a part of it, yes.

 9 Q. And you talk about that confidence is in its ability to

10 consistently generate future earnings growth.

11 Let me ask you, sir, did you mean by that, that when

12 people are valuing a stock, one of the things that they look

13 at is how that company is going to grow in the future; is that

14 right?

15 A. That would be a critical component of their evaluation, I

16 would think, yes.

17 Q. And you say that "This market does not have much faith in

18 our ability to deliver that growth." Is that right?

19 A. As reflected by the chart.

20 Q. And you go on to say that you have spoken to half the

21 analysts on Wall Street in the last ten days.

22 Do you see that?

23 A. Yes, I do.

24 Q. I guess you say, "spoken to what seems like half the

25 analysts on Wall Street." Is that fair?

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 50 of 245
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 1 A. I do.

 2 Q. And what you meant by that is that a significant part of

 3 the borrowers who were paying off loans early lived in states

 4 or owned property in states that didn't allow prepayment

 5 penalties; is that right?

 6 A. That does appear to be correct, yes.

 7 Q. So you say, "Given that the Parity Act allows us" -- as

 8 you understood it -- "to overcome that problem, we need to get

 9 that implemented right away."

10 Is that right?

11 A. Let me explain what the Parity Act was as I understood it,

12 to be clear.

13 Q. Well, you can just answer my question, sir.

14 Is that what you wrote at the time: "Given that the

15 Parity Act allows us, as I understand it, to overcome that

16 problem, we need to get that implemented right away"?

17 A. If you would like for me to testify that you have

18 correctly read that sentence, the answer is correct. You

19 have.

20 Q. That's my question, sir.

21 A. Okay.

22 Q. And Ms. Allcock replied that same day to you,

23 January 13th, 1999; is that correct, sir?

24 A. That is correct.

25 Q. And in her response she said that they will put that issue

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 1013 

Trial Day 5 4/6/2009 6:11:00 AM

 1 on the top of the list; is that correct?

 2 A. Right. Right, she does say that.

 3 Q. Sir, I would like to show you what's been marked as

 4 Plaintiffs' Exhibit 463.

 5 (Document tendered.)

 6 BY MR. DOWD:

 7 Q. I will ask you to take a look at that, if you would.

 8 MR. DOWD: Copy for counsel.

 9 (Document tendered.)

10 MR. DOWD: Your Honor, I would offer 463 at this

11 time.

12 THE COURT: It will be admitted.

13 (Said exhibit was received in evidence.)

14 BY MR. DOWD:

15 Q. Have you had a chance to look at 463?

16 A. I am ready.

17 Q. Is that a copy of an e-mail that you prepared and sent to

18 Household officers and employees on or about October 13th,

19 1999?

20 A. It appears to be so, yes.

21 Q. And among others, you sent it to Mr. Detelich, Mr. Vozar;

22 is that correct?

23 A. Joe Vozar and Tom Detelich. That's correct.

24 Q. You also sent it to a Dennis Hueman; is that correct, sir?

25 I'm looking about halfway down the second column there.

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 1014 

Trial Day 5 4/6/2009 6:11:00 AM

 1 A. That is correct.

 2 Q. And the title of your e-mail is "MAC follow-up." Is that

 3 correct?

 4 A. That is correct.

 5 Q. What did "MAC" stand for?

 6 A. Management Advisory Committee.

 7 Q. And that was like a term of art, those initials. MAC just

 8 meant Management Advisory Committee?

 9 A. That's correct.

10 Q. What was the Management Advisory Committee at this point

11 in time at consumer lending, sir?

12 A. I don't recall. I don't recall who was on it. It was a

13 group of people -- you mean what was its function?

14 Q. Yes, sir.

15 A. Its function was to meet and discuss issues of the day for

16 our company. My recollection is that it met at least

17 annually. It may have even met quarterly. Again, get around

18 the table, talk about things that are going on in the company

19 or we need to apply a focus and come up with some ideas and

20 flesh those out and move forward from there.

21 Q. And you say that the purpose of your note -- I take it you

22 mean your e-mail -- is to update the people receiving it on

23 "the considerable progress we have made on the suggestions

24 generated at the MAC meeting in June."

25 Is that right, sir?

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 1015 

Trial Day 5 4/6/2009 6:11:00 AM

 1 A. Right.

 2 Q. Looking down about the fourth entry that you make here on

 3 the first page of Exhibit 463, it states, "Create an insurance

 4 penetration report on house mail."

 5 Do you see that?

 6 A. It does.

 7 Q. What's an insurance penetration report? What did that

 8 phrase mean, sir?

 9 A. An insurance penetration report would be a report that

10 would tell management what it needed to know about its results

11 for insurance sales. And specifically -- I guess you could

12 look at it from several different angles, but primarily it

13 would answer the question, how well are we doing at selling

14 this product, either in premium -- by premium volume of some

15 sort or perhaps by the numbers of customers that would accept

16 the product? It could be any combination of those. But

17 fundamentally, that's what it was for.

18 Q. Do you recall, sir, whether the insurance penetration

19 report included percentages of customers that were accepting

20 insurance?

21 A. It probably would have. I would expect it to, sure.

22 Q. And that was something that you tracked at Household in

23 this era?

24 A. Absolutely. Yes, we would.

25 Q. Sir, the next entry says, "Spread live check' drops over a

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 Gilmer - direct

 1116

 1 MR. DOWD: And I'd offer 1204, your Honor.

 2 THE COURT: It will be admitted.

 3 (Brief pause.)

 4 BY THE WITNESS:

 5 A. Okay. I haven't read all the pages, but I've got the gist

 6 of it, I think.

 7 BY MR. DOWD:

 8 Q. If you need a second when we get to a page, let me know.

 9 All right, sir?

10 A. Okay.

11 Q. Is a that a copy of a report of examination prepared by

12 the Office of Thrift Supervision for an examination that

13 started on or about August 27, 2001, and ended on or about

14 March 26, 2002?

15 A. That, I believe, is correct.

16 Q. And it's for Household Bank FSB; is that right, sir?

17 A. That is correct.

18 Q. And during the period beginning August 27, 2001, until

19 sometime early 2002, you were on the board of Household Bank;

20 is that right?

21 A. That's right.

22 Q. Sir, I'd ask you to turn to the second page of Exhibit

23 1204 if you would.

24 A. Okay.

25 Q. And it's the one that ends with the Bates range 40. Is

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 Gilmer - direct

 1117

 1 that a copy of a letter from the Office of -- or OTS, the

 2 Department of the Treasury, dated April 12, 2002, to the board

 3 of directors of Household Bank?

 4 A. That is correct.

 5 Q. Sir, I'd ask you to go to the page that ends with the

 6 Bates range 44 if you would, a bunch of zeroes and then a 44.

 7 A. Okay.

 8 Q. You have that in front of you?

 9 A. I do.

10 Q. And the beginning of that page, it says, Examination

11 Conclusions and Comments Continued; is that right? At the top

12 of the page there?

13 A. That is correct.

14 Q. And OTS states in that section, A potential predatory

15 lending practice existed in the requirement for personal

16 property insurance on loans in the Texas agency offices; is

17 that right?

18 A. That's right.

19 Q. Did you receive a copy of this report at the time?

20 A. I probably did. It seems that a whole page is missing or

21 at least a substantial part of the page from which you just

22 read is missing.

23 Q. I --

24 A. Is that right or wrong?

25 Q. I think that there were -- as I understand it, the OTS

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 Gilmer - direct

 1118

 1 produced documents and gave us what was relevant pursuant to 

 2 subpoena.

 3 A. I have no idea. I just point out that all of the material

 4 leading up to this sentence you're reading is missing.

 5 Q. I understand that, sir.

 6 A. Okay.

 7 Q. There's nothing I can do about that. You understand that,

 8 right?

 9 A. You understand when you read a sentence at the end of a

10 paragraph where it appears that the whole page in front of it

11 is missing, it's difficult for me to understand what your --

12 what the context is in which you're reading it. But that's

13 the only point I'm making.

14 Q. Right. I get these from the OTS. But you would have got

15 it with the entire page there when you were at Household,

16 right, sir?

17 A. Would you forgive me if I didn't memorize this page from

18 eight years ago?

19 Q. Absolutely.

20 A. Okay. Thank you.

21 Q. I'm just pointing out why. You seem to be asking me a

22 question. I don't want you to --

23 A. I am.

24 Q. -- misunderstand, like I somehow cut this page off. I

25 didn't, sir.

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 Gilmer - direct

 1119

 1 A. I'm sure you wouldn't do that.

 2 Q. We go on, sir, to page -- Bates range that ends with

 3 numbers 56. I'd ask you to take a look at that if you would.

 4 A. Okay.

 5 Q. And there's a section there entitled Predatory Lending and

 6 Services.

 7 Do you see that?

 8 A. I do indeed.

 9 Q. And the OTS states, A consumer lending policy requires

10 insurance on personal property used as collateral for loans

11 originated by former Beneficial Finance agency offices in

12 Texas.

13 Do you see that?

14 A. I do.

15 Q. And if you go down a little further on the page, it says,

16 Based on our loan review, insurance premiums can be up to 9

17 percent of loan proceeds. The premium is an upfront fee and

18 included in the total loan proceeds.

19 Do you see that, sir?

20 A. I do.

21 Q. It goes on to say, Although most homeowners and renters

22 would have existing insurance coverage, over 95 percent of the

23 borrowers obtained insurance through the agency offices.

24 Do you see that, sir?

25 A. I do indeed.

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 1140

 1 about the existence of prepayment penalties.

 2 Do you see that, sir?

 3 A. I do.

 4 Q. Do you see that on the next page, they talk about

 5 insurance packing and fraudulent sale of insurance?

 6 Do you see that?

 7 A. I do.

 8 Q. They go on to say, HFC's practice is to hard sell

 9 insurance products. These practices break down into four

10 categories. One, aggressive sales tactics; two, inclusion of

11 insurance without customer knowledge; three, making borrowers

12 believe insurance is a requirement.

13 Do you see those entries?

14 A. I do.

15 Q. And you understood that was the State of Washington's

16 position back here in May of 2002, and they were telling you

17 about that position; is that right?

18 A. I understood it to be based on the 19 accounts that they

19 looked at, yes.

20 Q. You didn't understand it to be based on more than just 19

21 customer complaints, sir?

22 A. That is -- that is not -- my understanding -- correct me,

23 I'm sure, if I'm wrong -- but the basis of their examination

24 was 19 accounts. Is that wrong?

25 Q. Yeah, I believe they looked at a lot more than that, sir.

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 1141

 1 But when we got to that report from the State of Washington,

 2 you told me that you couldn't ever remember reading it before?

 3 A. Yes, I don't remember reading it before. Is that in

 4 conflict with my recollection that it was 19 accounts? I

 5 don't know that it says 19 accounts in there. My

 6 recollection, from talking with the people in my organization,

 7 was that it were very limited number of accounts that they

 8 reviewed. And my -- it might have been 20. Maybe it was 18.

 9 But the number was 18, 19, or 20. I think it was 19. And

10 that is my testimony. It is not different from my prior

11 testimony. And that's what it is.

12 Q. Okay. You didn't understand that they had also sent in

13 people essentially undercover?

14 A. Oh, yes. I think they had three -- I think they visited

15 three branches, as I recall.

16 Q. So in addition to the 19 customers, there was this

17 undercover issue; is that right?

18 A. I think that is right. Now, please forgive me again. I

19 don't remember what the issues were with the three visits.

20 Again, going back many years. But, I mean, you know, the

21 difficulty that I have is when we put a report up here that

22 doesn't have any -- any numbers, no statistics. It just says

23 this happened. It just says that happened. I did read the --

24 as I said, I read the first three pages of that report. It

25 said that we had 300 employees in Washington, I believe. We

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 Gilmer - direct

 1142

 1 had I don't know how many billions of dollars, how many -- I

 2 think there were 400,000 loans outstanding. That's on the

 3 report that you handed me a few minutes ago. Then you handed

 4 me this and say, well, this happened and that happened with no

 5 context. What am I supposed to say?

 6 Q. Sir --

 7 A. All I can give you is the truth.

 8 Q. Right. But you told me it was based on 19 customer

 9 complaints. Now you're telling me, oh, okay, now I remember

10 in addition to the 19 customer complaints, they sent in people

11 undercover three times; is that right?

12 A. That's exactly right.

13 Q. Did you understand that they were also talking to attorney

14 generals and regulators from across the country about the

15 practices?

16 A. I understood based on this and what you gave me and some

17 recollection of the time. And when you say across the

18 country, the United States has 50 states. That's a

19 groundbreaking announcement. There were some attorneys

20 general, as noted there, that did not agree with what we were

21 doing. That's pretty clear in what you just handed me. I

22 also know that there were many attorneys general that didn't

23 have a problem with what we were doing.

24 Q. Sir, let me stop you there. After you left the company in

25 August of 2002, Household continued to deal with these

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 1143

 1 attorneys generals from across the country; isn't that right?

 2 A. Well, that would be difficult for me to testify to

 3 something that happened after I left the company. Would you

 4 like me to speculate?

 5 Q. I'm not asking you to speculate, sir. I'm asking --

 6 A. You --

 7 Q. -- if you know from your personal knowledge.

 8 What was your official resignation date?

 9 A. I didn't resign. I retired after 32 years, counselor.

10 Q. Okay. And when was the last day that you officially

11 resigned?

12 A. I didn't resign.

13 Q. Retire, sir.

14 A. Thank you. There's a big difference in resigning [sic]

15 after 32 years and resigning. So I didn't resign. I retired.

16 My retirement was -- was phased over several months beginning

17 in about June of 2002, and I started to step back from

18 day-to-day operations. And I spent most of my time away from

19 the office beginning sort of July time frame. And by the end

20 of December, I was completely -- officially retired. I didn't

21 have any -- any active management duties really from the June

22 time frame. Maybe that helps you.

23 Q. Okay. So you're not aware of what took place between

24 these attorneys generals and Household between the time of,

25 say, June and October 11, 2002?

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 1 payment, the money would be there and the customers --

 2 another great product, I thought, by the way. It helped the

 3 customers.

 4 Q. Also beneficial to the customer? Also beneficial to the

 5 customer?

 6 A. Very much so, especially to our customers.

 7 Q. What about the company? Was it good for the company?

 8 A. Again, for the same reason that I just talked about with

 9 the biweekly payment plan. It was convenient for the

10 customer. The customer -- I think I described our customers

11 earlier as having spotty credit. Some of that was their

12 neglect, not remembering, not taking it as seriously as

13 perhaps they should. This took away that -- that doubt or

14 that opportunity for just piling on to their previously bad

15 credit pattern.

16 So it instilled a little discipline in their lives as

17 far as their credit was concerned. So it was very helpful to

18 them; and as I mentioned on the credit quality side for us,

19 meaning the collection centers, when the customers pay more

20 regularly, you don't need as many collectors, and so we saved

21 a lot of money.

22 Q. That's an interesting point, Mr. Gilmer. What's a

23 collector?

24 A. A collector is -- they call them adjusters in some

25 companies, account executives in other companies. It's a

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 1 person who calls a customer when the customer misses a payme

 2 to remind the customer that the payment is due and to talk to

 3 the customer about making arrangements to get that payment in.

 4 Q. And what's a collection center?

 5 A. A collection center is a place where these collection

 6 collectors are housed. We had five or six collection centers

 7 at different times across the United States.

 8 Q. And are collection centers and collectors costs to the

 9 company?

10 A. Yes, and they're very expensive to maintain.

11 Q. Is there, therefore, a business incentive to minimize the

12 number of collectors or collection centers?

13 A. Yes. Yes, there were.

14 Q. Did having people voluntarily sign up for EZ Pay have any

15 impact on the number of collectors you needed to have?

16 A. Yes. Yes, it did.

17 Q. I think we'll come back to collectors in a minute.

18 And, Mr. Gilmer, was EZ Pay always a customer option,

19 a customer choice?

20 A. Yes, it was.

21 Q. Now, Mr. Gilmer, during this trial, you watched -- you sat

22 here and you saw the excerpts from the Hueman video that were

23 played here in the courtroom?

24 A. Yes, sir, I did.

25 Q. Have you ever seen that video before or any part of that

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 1 video before in your life?

 2 A. No, sir, not before last week.

 3 Q. When you say last week, you mean here in this room?

 4 A. Here in the courtroom, right.

 5 Q. What was your reaction when you saw that video?

 6 A. Disbelief. It was a despicable piece of material that was

 7 homemade by an executive who had no authority to do that, and

 8 I thought it violated the fundamentals of our company, and I

 9 thought it was a terrible reflection on our entire

10 organization that somebody would -- would do something like

11 that that could reflect on all of the fellow employees.

12 Q. Now, Mr. Gilmer, is that the only time that you were

13 outraged when you discovered that some employee had done

14 something contrary to your policies?

15 A. No, sir. It wouldn't be the only time I would have been

16 outraged; but I think if I had to rank outrage, that would

17 probably take the top billing.

18 Q. Did you ever express your outrage about something

19 employees were doing to Mr. Detelich, for example?

20 A. Mr. Detelich was frequently the recipient of my opinions

21 about things that I didn't like in the company.

22 Q. Let me ask you this, Mr. Gilmer: Is it the common

23 experience of people around you that they are the recipients

24 of your opinions?

25 A. Yes, sir.

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 1 Q. Whether they want them or not?

 2 A. They didn't have to ask.

 3 Q. Would you describe -- how would you describe your

 4 personality in a business setting?

 5 A. Blunt. Hopefully fair. Let me add fair, but certainly

 6 blunt.

 7 Q. Certainly blunt. Nobody doubts where you stand.

 8 A. I don't think so.

 9 Q. Let me show you Defendants' 37. Copy for counsel. Look

10 at the second page.

11 Is that your handwriting on this document?

12 A. Yes, sir, it is.

13 Q. Is that a note you wrote to Mr. Detelich?

14 A. Yes, sir, it is.

15 MR. KAVALER: I offer 37, your Honor, Defendants' 37.

16 THE COURT: It will be admitted.

17 (Defendants' Exhibit 37 received in evidence.)

18 BY MR. KAVALER:

19 Q. Mr. Gilmer, let's turn to the second page of this document

20 bearing Bates range 8110. Is that your handwriting on the

21 right?

22 A. Yes, sir, it is.

23 Q. Read it to the jury, please.

24 A. It says, "Tom, this is an outrage." And then --

25 Q. That's your signature underneath it?

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 1 time of residence, income, debts and property values. Also,

 2 there were five loans where the AE did not follow underwriter

 3 instructions and waived payoffs. Sandy Stewart was terminated

 4 for dishonesty, and all incentives have been withheld."

 5 Do you see that?

 6 A. Yes, I do.

 7 Q. What does "all incentives have been withheld" mean?

 8 A. It means any pending pay, compensation, that she had

 9 coming was revoked.

10 Q. The next one says, "Bellevue, NE, Midwest Division.

11 During a QAC audit of insurance sales, there was evidence of

12 the sale of insurance after the customers had requested no

13 insurance on the loans. QAC is doing further review to

14 determine employee involvement. Employee interviews will be

15 done on former and present employees. BSM Will DeRosear is

16 being placed on CA" -- what is CA?

17 A. Corrective action.

18 Q. -- "for his failure to handle audit insurance sales and

19 cancelations in his branch."

20 What does this mean, Mr. Gilmer? Was someone

21 misbehaving with regard to insurance?

22 A. It certainly appears so, yes.

23 Q. Was remedial action taken?

24 A. Indeed it was.

25 Q. Go down two, three to Santa Maria, California, Southwest

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 1 Division.

 2 You know what, Mr. Gilmer, let me just move it along.

 3 Are these all examples of people who were terminated or

 4 otherwise sanctioned for violating various company rules?

 5 A. Yes, sir.

 6 Q. These are just the reports from two months from two

 7 different divisions -- one division, right?

 8 A. That's correct, region.

 9 Q. Let me go back to the Code of Conduct we were looking at,

10 Defendants' 148, down at the bottom we looked at it says, "I

11 understand that failure to observe and follow the above may

12 result in the termination of my employment."

13 Was that Household's policy?

14 A. Yes.

15 Q. Okay. Mr. Gilmer, these are all events that you have

16 personal knowledge of?

17 A. Yes.

18 Q. Did Household have a video that it showed to people in

19 connection with a closing?

20 A. Yes, sir, we did.

21 Q. Whose idea was that, Mr. Gilmer?

22 A. That was my idea.

23 Q. Why did you come up with this video?

24 A. Well, I -- I wanted to make absolutely sure as best I

25 could that every loan was handled the way it should be

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 1245 

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 1 handled. By that I mean all the policies and all the

 2 procedures and all the requirements, all the disclosures and

 3 so forth were given and explained properly.

 4 And short of my being able to be there myself

 5 personally and understanding that no matter how many rules and

 6 regulations we may have, we're dealing with thousands of

 7 people, there's going to be somebody out there who wouldn't

 8 play by the rules. So I came up with the idea, look, if I

 9 can't be in every loan closing, the next best thing to do

10 would be to put a video together, using professional actors,

11 and ask the borrower to view that video before they left our

12 branch.

13 Now, in that video -- I thought about all the things

14 that could go wrong. You know, did they understand, for

15 example, insurance? Did they understand, for example,

16 prepayment penalties? Did they understand other loan terms,

17 such as contract rates? All the things that we've heard about

18 over the last few days.

19 And so I asked the human resources department to

20 develop a video so that we could have one final -- on top of

21 everything else, we could have one final, unalterable, always

22 consistent -- a video always says the same thing, you can play

23 it a thousand times, it says the same thing -- that these

24 customers could watch so that there could be absolutely no

25 confusion, at least in my mind, or at least it could come as

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 1 close as possible to my actually being in the room personally,

 2 and I -- it was a very expensive endeavor to do that, as you

 3 can imagine, mailed out thousands of these things, but I

 4 thought it was worth it, and so I did it.

 5 Q. Mr. Gilmer, how long is this video?

 6 A. It's several minutes long.

 7 Q. And have we prepared a short extract that's much shorter

 8 to play?

 9 A. That's right.

10 MR. KAVALER: Your Honor, may we play the video?

11 It's Defendants' Exhibit 183.

12 MR. DOWD: Object as hearsay, your Honor, and lack of

13 foundation as to the timing of it.

14 MR. KAVALER: I can address the timing of it. It's

15 certainly not hearsay, your Honor.

16 THE COURT: Well, was there an objection at the

17 pretrial conference?

18 MR. DOWD: Yes, your Honor.

19 THE COURT: I don't have it.

20 MR. KAVALER: Want me to add the timing to the

21 foundation, your Honor?

22 May I ask him one more question?

23 THE COURT: Sure.

24 BY MR. KAVALER:

25 Q. Mr. Gilmer, was this video played during the time we're

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 1351

 1 Each of the 45 states had their own separate rules, required

 2 their own separate documents. And it was a nightmare to try

 3 and keep up with all of those things. And no matter what your

 4 systems, if you have, you know, thousands of rules in 45

 5 states to try and comply with, the opportunity for error was

 6 clear and obvious. So what we wanted to do was move away from

 7 that and ask, look, just give us a set of rules, one set of

 8 rules that we can use, one set of documents that we could use

 9 and -- whatever that is; and we will stick with that. So that

10 was our -- and it was obviously good for us because it saved a

11 lot of money at the end of the day.

12 Q. Let's go to the next sentence here. That's the one

13 counsel read to you. It quotes you, Mr. Gilmer. It says,

14 Gary Gilmer, president and chief executive of Household's

15 subsidiaries HFC and Beneficial, said the company's position

16 on predatory lending is perfectly clear. Quote, Unethical

17 lending practices of any kind are abhorrent to our company,

18 our employees and most importantly our customers.

19 Do you see that?

20 A. I do.

21 Q. Mr. Gilmer, was that statement true when you made it?

22 A. Absolutely.

23 Q. Why do you say that, sir?

24 A. Well, because it was my long-stated, long-held and, in

25 fact, currently-held view that there is just no place in any

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 1352

 1 business -- and certainly not in a business where you have the

 2 trust of your customers, where that's important -- so

 3 important, in fact, it involves their homes -- where you could

 4 have a -- tolerate a circumstance where there's any less than

 5 absolute honesty and integrity. Just couldn't have it.

 6 So it's another example, in addition to the ones that

 7 we talked about earlier, where I took the opportunity to say

 8 that publicly.

 9 Q. Mr. Gilmer, was that statement false when you made it?

10 A. Absolutely not.

11 Q. Did you think it was false when you made it?

12 A. No.

13 Q. Did you have any doubt in your mind about the truth of

14 that statement when you made it?

15 A. None whatsoever.

16 Q. Did you think you were being reckless in making that

17 statement?

18 A. No, I didn't think I was reckless. I thought it was

19 absolutely factual.

20 Q. Did you have any discomfort at all in making that

21 statement publicly?

22 A. I had none then and I have none today.

23 Q. Did you understand, sir, that investors -- current and

24 potential future investors -- might read that statement and

25 rely on it as an accurate statement of facts?

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 1353

 1 A. Sure.

 2 Q. Did you believe it to be an accurate statement of facts?

 3 A. I did indeed.

 4 Q. Did you intend to mislead or deceive anybody when you made

 5 that statement?

 6 A. No.

 7 Q. Do you think you misled or deceived anybody when you made

 8 that statement?

 9 A. No, sir.

10 Q. Now, Mr. Gilmer, you've been sitting in this courtroom

11 since this trial began, right?

12 A. I have indeed.

13 Q. And you've heard various testimony about various things,

14 about various regulators and various examinations around the

15 country?

16 A. I have.

17 Q. How can you give the testimony you just gave in light of

18 those facts?

19 You said earlier you were responsible for everything

20 that happens in consumer lending. And you've heard all this

21 testimony, whatever it is, whatever it means; and you say the

22 statement that you just made here, unethical lending practices

23 of any type are abhorrent to our company, our employees and

24 most importantly our customers. How can you swear that with

25 what you've heard here?

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 1354

 1 A. I don't believe it is in conflict whatsoever because while

 2 it is true that among the millions of accounts and thousands

 3 and thousands of employees that we have had and have at

 4 Household and Beneficial, not every one every day did the

 5 right thing. They're not any different from -- I'd say the

 6 people in this courtroom.

 7 But it is absolutely true that day in and day out,

 8 these were good people. And they did the right thing every

 9 day. They came in and did the right thing. I'm talking about

10 the 99 point something percent. Pick a number you like. Say

11 I'm way off and it's 95 percent. And I wouldn't tar 15,000

12 people with a label of predatory lending on the basis of a few

13 bad apples. What -- what kind of a leader would I be if I

14 refused to stand up for the tens of thousands of people that

15 gave it their best every day and say, okay, well, they were --

16 they're all bad people because somebody made a mistake or

17 somebody didn't care or somebody in the organization didn't

18 follow the rules?

19 So I was proud to stand up and make that statement.

20 It was accurate. I believed in it, and I believe in the good

21 side of people; and I believe in the good side of our people.

22 I trained those people. I hired those people. I set the

23 example for those people, and they did the right thing.

24 Yeah, you know, we saw some examples of some people

25 who didn't do the right thing, Mr. Kavaler. That didn't have

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 1355

 1 anything to do with the vast majority of them who did and who

 2 do the right thing every day. So I stand by that. Yes, there

 3 were reports -- I've seen them; we talked about them; what

 4 about this page; what about that example. They were real

 5 examples. No question about that.

 6 And I know it had been said earlier on this stand

 7 that percentages don't matter, that -- I don't calculate

 8 ratios. I heard that time after time. It doesn't make any

 9 difference. Well, I tell you, it does make a difference. I

10 don't live in a fantasy world. I live in a world where there

11 are real people doing real work with real customers and

12 looking after real shareholders. So I can't, as a manager of

13 a 15,000 person operation, stand up and say, well, we made a

14 mistake so we're all bad people. We're all crooks. That's

15 not a real world. That's -- that doesn't work. I mean, that

16 works, I guess, if you don't have to deal with people and

17 problems and regulators and shareholders. Maybe that works.

18 But I tell you what, when you step out into the real world,

19 Mr. Kavaler, and you're dealing with real people, you can't

20 take the view that you make one mistake and you're dead. That

21 doesn't work.

22 Q. Mr. Gilmer, have you just described what your state of

23 mind was back then -- everything you testified to now, is that

24 what you were thinking back on March 23, 2001?

25 A. Indeed it was.

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 1 Q. The article in Origination News continues. It looks like

 2 it's still quoting you. Next paragraph, We are encouraged

 3 that the Federal Reserve Board has taken a deliberate and

 4 inclusive review of the issue and has set the benchmark for

 5 guidelines that ensure our customers are protected from

 6 unscrupulous lenders, while at the same time do not have their

 7 access to credit restricted.

 8 Does that reflect your thinking at the time,

 9 Mr. Gilmer?

10 A. Yes, sir, it does.

11 Q. And it says, Household -- this is now the article not

12 quoting you, simply the journalist reporting -- the entity

13 reporting in its own words. Household has a long-standing

14 history, the company noted, of working with legislators and

15 regulators in the pursuit of responsible lending.

16 Is that true, Mr. Gilmer --

17 A. That is right.

18 Q. -- that the company has that history?

19 A. It does indeed.

20 Q. Mr. Gilmer, did you ever lie to the public, to the

21 investors, to the press, to the analyst community about the

22 business or the affairs of Household in any way?

23 A. Not one time.

24 Q. Did you ever instruct anyone else to do so?

25 A. No, sir.

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 1357

 1 Q. Did anyone ever instruct you to do so?

 2 A. No, sir.

 3 Q. Did you ever conceal any information from the public, the

 4 investment community, the press or anyone else about the

 5 affairs of Household that you deemed material or important?

 6 A. No, sir.

 7 Q. Did you tell anyone else to do that?

 8 A. No, sir.

 9 Q. Did you ever instruct any of Household's public relations

10 spokespeople to lie to the press?

11 A. Not one time ever.

12 Q. Did you ever instruct any of Household's public relations

13 spokespeople to conceal anything from the press or the

14 investment community or the investors or the public or the

15 government or anyone?

16 A. No, sir.

17 Q. Mr. Gilmer, did you ever conceal the existence of a

18 pervasive, nationwide, widespread predatory lending scheme?

19 A. No, sir.

20 Q. Did you believe that such a scheme existed at Household?

21 A. Absolutely not.

22 Q. Did you ever conceal or urge anyone else to conceal that

23 Household used restructuring to hide the true credit quality

24 of Household's loans?

25 A. Never.

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 1358

 1 Q. Did Household do that?

 2 A. No.

 3 Q. Did you think Household did that?

 4 A. No.

 5 Q. Did you have any suspicion that Household was doing that?

 6 A. No, sir.

 7 Q. Now, Mr. Gilmer, we heard some brief reference in the

 8 opening statement to something about an accounting

 9 restatement, having to do with the credit card business.

10 Did the credit card business report to you?

11 A. No, sir.

12 Q. Did you have anything to do with that restatement?

13 A. No, sir.

14 Q. Mr. Gilmer, during the time we're talking about here, did

15 you personally own any stock in Household?

16 A. Yes, sir, I did.

17 Q. And where did you obtain that stock? Tell me all the

18 different ways in which you obtained Household stock during

19 the years 1998 through 2002.

20 A. Well, it didn't start in 1998. It started in 1972. We

21 bought -- Marilyn and I bought our first five shares in 1972.

22 And every year after that, we bought shares. We took our own

23 money and we bought shares.

24 In addition to that, there were times when Household,

25 as a part of our compensation program, would give us shares,

Household Unsigned Page - - -

 - 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 57 of 245
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 Gilmer - cross

 1415

 1 (Tendered.)

 2 BY MR. KAVALER:

 3 Q. Which is a report of the FDIC.

 4 Do you remember that?

 5 A. I do.

 6 Q. And investors' counsel read to you from this document,

 7 asked you some questions about it. Let me turn to page 689 in

 8 the lower right-hand corner.

 9 A. Okay.

10 Q. And you see there it says in the third line or the second

11 line -- I'm sorry. Let me back up.

12 The thrift appears to be involved to some extent in

13 predatory lending. Further, a consumer advocacy group has

14 named the Household organization as 2001 predatory shark

15 lender of the year.

16 Do you see that?

17 A. I do.

18 Q. Who was that consumer advocacy group, do you know?

19 A. That would be ACORN.

20 Q. Class action and other large lawsuits have been filed

21 against the organization.

22 And then the Federal Deposit Insurance Corporation

23 says, Regardless of the validity of these accusations, the

24 organization has a very high level of reputational risk due to

25 its lending activities.

Household Unsigned Page - - 1418

 - 

4-8-09 Trial Day 7 4/8/2009 6:14:00 AM

 1 Do you see that?

 2 A. I do.

 3 Q. Is that what you mean by headline risk?

 4 A. That's exactly what I mean.

 5 Q. And it says, This could have a significant adverse effect

 6 on the institution.

 7 Do you agree with that, Mr. Gilmer?

 8 A. I do.

 9 Q. Mr. Gilmer, you sat in this courtroom and you listened to

10 the opening statements, did you?

11 A. I did.

12 Q. And you sat here and you listened to the testimony of

13 Ms. Ghiglieri, the expert witness, did you?

14 A. I did, sir.

15 Q. Mr. Gilmer, as you sat here and listened to Mr. Dowd and

16 Ms. Ghiglieri describe a company, did you recognize the

17 company they were describing as the company you worked for for

18 32 years?

19 MR. DOWD: Objection, your Honor, asked and answered.

20 THE COURT: The objection will be sustained.

21 MR. KAVALER: Your Honor, I have no further questions

22 for this witness at the present time.

23 THE COURT: Redirect.

24 MR. DOWD: Thank you, your Honor.

25 REDIRECT EXAMINATION

Household Unsigned Page - - 1418

 1416 

4-8-09 Trial Day 7 4/8/2009 6:14:00 AM

 1 BY MR. DOWD:

 2 Q. Good morning, Mr. Gilmer.

 3 A. Good morning.

 4 Q. You looked at a document earlier, Mr. Kavaler was showing

 5 you, about EPS; that you had a target of $4.05 in that year

 6 and then you hit $4.08; is that right?

 7 A. That is correct.

 8 Q. That restatement about the credit cards, did the EPS

 9 number go down after that restatement, do you know?

10 A. I had no involvement in that. I don't know what it

11 affected.

12 Q. You didn't have any idea that the -- as a result of that

13 credit card restatement, that the company's net income went

14 down and its EPS went down when they had to restate it?

15 A. No, that's not what I said. I said I was not involved in

16 it, and I don't know what years it affected, nor how it was

17 allocated. So I don't know if it affected -- to answer your

18 question, earnings would go down if you restated and reported

19 lower earnings. Of course, that would be true. I don't know

20 which years were affected, nor how much they were affected.

21 And I don't know if it was included in the numbers we looked

22 at, the 4.05, already or not.

23 Q. Okay. Mr. Gilmer, you had a chart prepared about how your

24 stock went from like 400,000 shares, I think you said, to like

25 900,000 shares?

Household Unsigned Page - - 1418

 1417 

4-8-09 Trial Day 7 4/8/2009 6:14:00 AM

 1 A. Yes.

 2 Q. Okay. And I'm just a little confused because you file

 3 forms with the SEC, right, Form 4s, as a reporting officer of

 4 the company?

 5 A. I'm sure we do.

 6 Q. And I didn't see you going into your pocket and buying

 7 500,000 shares during that time. Did I miss something, sir?

 8 A. Yes, you missed something.

 9 Q. Okay. Well, let me ask you this: Your 900,000, does that

10 include your stock options?

11 A. It includes all of my interest, as is required, I believe,

12 by law to be reported. And so it would include everything.

13 Q. So the 900,000 on the chart, sir, just so we're clear on

14 that, that includes the stock options you were granted during

15 the relevant time period, '99, 2000 and 2001, right?

16 A. That would absolutely be correct, sure.

17 Q. Oh, okay. So the 900,000 wasn't just stock, the common

18 stock that you owned; it includes a right to buy common stock

19 that was granted by the board of directors, right?

20 A. It included the following: It included all --

21 Q. Sir, just answer my question. Did it include the stock

22 options?

23 A. I've already said twice, I believe, that it included the

24 stock options.

25 Q. Okay. So let's take a look at those stock options because

Household Unsigned Page - - 1418

 1418 

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 1 13; is that right?

 2 A. That's what I've been trying to tell you, Mr. Dowd.

 3 That's the way a stock option works.

 4 Q. Right. No, I understand that. It's just that your

 5 counsel asked you today something about me asking about you

 6 exercising that 11 bucks. I just want to make sure we

 7 understand that's exactly what you did during the relevant

 8 time period, right, sir?

 9 MR. KAVALER: Objection to the form, your Honor.

10 THE COURT: I'll sustain the objection as to the form

11 of the question.

12 BY MR. DOWD:

13 Q. Mr. Gilmer, let me show you one more. I'll show you

14 what's been marked as Defendants' Exhibit 763.

15 (Tendered.)

16 BY MR. DOWD:

17 Q. And is that again, sir, a Form 4 that you filed with the

18 SEC?

19 A. Yes, sir, it is.

20 Q. Okay. And that's your signature there on the second page?

21 A. It is.

22 Q. Okay. And you were required to file these forms with the

23 SEC? This one too, right?

24 A. As I've said, I believe it is a requirement, yes.

25 Q. And, sir, on July 18, 2001, you exercised some more

Household Unsigned Page 1427 - 1430

 1427 

4-8-09 Trial Day 7 4/8/2009 6:14:00 AM

 1 options at 17 -- for 17,500 shares and, again, for 7,500

 2 shares; is that right, sir?

 3 A. That is correct.

 4 Q. And you were paying $13.62 for the 17,500 shares and then

 5 $19.87 for the 7,500 shares; is that right, sir?

 6 A. That -- that is the strike price on the -- on the stock

 7 options that I exercised.

 8 Q. That's what you paid, right?

 9 A. That's the way a stock option works, yes.

10 Q. And when you sold those shares that same day, you got

11 $68.84, $69 and $69; is that right, sir?

12 A. That's right. That's how much the stock had gone up since

13 I was granted the options. And so that's what I was able to

14 sell them for in the open market on that day, that's true.

15 Q. In other words, that's what my clients paid when they

16 bought them on that day, right?

17 A. Which is exactly the same I would have paid if I had been

18 in the open market on that day.

19 Q. Right. But you weren't in the open market; you were

20 exercising options, right, sir?

21 A. On that particular day. I had been in the open market

22 since 1972.

23 Q. I'm not asking about what you did in 1972, sir. I'm

24 asking you what you did on July 18, 2001.

25 A. That document actually -- accurately describes what I did

Household Unsigned Page 1427 - 1430

 1428 

4-8-09 Trial Day 7 4/8/2009 6:14:00 AM

 1 on -- what day did you say? July --

 2 Q. 18, 2001.

 3 A. I believe it was July 19, 2001, but I won't quibble over a

 4 day.

 5 Q. I think it says the 18th, but I won't quibble over a day

 6 either.

 7 A. I'm just looking at the signature.

 8 Q. Sir, I'm going to show you what I believe we have marked

 9 as Plaintiffs' Demonstrative Exhibit -- bear with me for a

10 second. I believe it's 150 -- 155.

11 I'll show a copy to counsel.

12 (Tendered.)

13 BY MR. DOWD:

14 Q. Sir, Plaintiffs' Demonstrative 155 -- we can bring that up

15 a little clearer.

16 Sir, we listed out the Form 4s that you filed with

17 the SEC during the relevant period, the three we just looked

18 at. Okay?

19 A. Right.

20 Q. They show the date that you bought stock, it shows the

21 date that you sold stock, it shows the prices that you paid or

22 the prices that you sold at. Is that right, sir?

23 A. That is correct.

24 Q. Okay. It looks to me like you made $3 million --

25 $3,065,000 just on your sales during the class period; is that

Household Unsigned Page 1427 - 1430

 1429 

4-8-09 Trial Day 7 4/8/2009 6:14:00 AM

 1 right, sir?

 2 A. I surely did.

 3 Q. Mr. Gilmer, sometime yesterday you said something about

 4 how there were no secrets at Household; is that right?

 5 A. That's correct.

 6 Q. Let me just ask you a question about that. I mean, I

 7 guess we use words like secret. We use words like

 8 confidential. I just want to double check some things so I

 9 understand it.

10 Yesterday you looked at Plaintiffs' Exhibit 967. It

11 was that letter from the OTS dated April 26, 2001. And I have

12 an extra copy.

13 MR. DOWD: I apologize, Mr. Kavaler, I didn't bring

14 an extra copy of the ones that were received. If you need a

15 moment to get it, let me know.

16 BY MR. DOWD:

17 Q. Now, this Exhibit 967, Plaintiffs' 967, that was a letter

18 from the OTS to the board of directors at Household Bank,

19 right?

20 A. That is.

21 Q. Okay. Now, let me just ask you, this was confidential,

22 right?

23 A. It has "confidential" stamped at the bottom of it.

24 Q. Well, I mean, you understand that the OTS didn't just

25 willy-nilly hand these out to everybody, right?

Household Unsigned Page 1427 - 1430

 1430 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 59 of 245
4-8-09 Trial Day 7 4/8/2009 6:14:00 AM

 1 GARY GILMER, SR., PLAINTIFFS' WITNESS, PREVIOUSLY S

 2 REDIRECT EXAMINATION - Resumed

 3 BY MR. DOWD:

 4 Q. Mr. Gilmer, yesterday I believe your attorney showed you a

 5 Defendants' Exhibit 37. I would ask you to take a look at

 6 that, if you would.

 7 (Document tendered.)

 8 BY MR. DOWD:

 9 Q. If you recall, sir, Defendants' Exhibit 37 was a fax where

10 you wrote the words "this is an outrage" on there.

11 Do you remember that?

12 A. Yes, I do.

13 Q. And you have it in front of you, sir?

14 A. I do.

15 Q. And you wrote that because you saw examples of your sales

16 force using an effective rate presentation; is that correct?

17 A. That appeared to be the case, yes.

18 Q. And you received this notification around April 8th of

19 2002. Is that fair?

20 A. I am sure there is a date on it, sir.

21 Q. I am looking at the front page of the cover sheet. It

22 says "4-8." Then there's some fax numbers on the bottom that

23 say April 8th, '02?

24 A. Okay.

25 Q. I take it you received it in that time frame, sir?

Household Unsigned Page 1443 - 1446

 1443 

4-8-09 Trial Day 7 4/8/2009 6:14:00 AM

 1 A. I am sure that I would have.

 2 Q. Sir, were you outraged because you considered the

 3 effective rate presentation being used by your sales force to

 4 be a deceptive practice?

 5 A. Yes. Yes, I was outraged by that.

 6 Q. So you do believe that the effective sales presentation is

 7 a deceptive practice?

 8 A. Depending on how it was used, it could be. And as I

 9 indicated here, I was outraged at the whole concept.

10 Q. Sir, I would like to show you what we will have marked as

11 Plaintiffs' 1470. And I will put that on here for now.

12 Plaintiffs' 1470, sir.

13 (Document tendered.)

14 BY THE WITNESS:

15 A. Thank you.

16 MR. DOWD: And I would offer Plaintiffs' 1470 at this

17 time, your Honor.

18 THE COURT: It will be admitted.

19 (Said exhibit was received in evidence.)

20 BY MR. DOWD:

21 Q. Now, sir, Plaintiffs' 1470 is a series of e-mails dated

22 April 4th, 2002; is that right?

23 A. That is correct.

24 Q. I would refer you to the bottom e-mail on the first page

25 of the exhibit. I would ask you to take a look at that, if

Household Unsigned Page 1443 - 1446

 1444 

4-8-09 Trial Day 7 4/8/2009 6:14:00 AM

 1 you would.

 2 A. I am sorry. Are you talking about the one from Robin

 3 Allcock?

 4 Q. No. At the very bottom, there is an e-mail there from a

 5 Megan Hayden to yourself, Mr. Detelich, and others.

 6 Do you see that?

 7 A. Yes, sir, I do.

 8 Q. I take it you would have received that around April 4th of

 9 2002?

10 A. Probably, yes.

11 Q. And in the text of her e-mail, which is on the second page

12 of Exhibit 1470, sir, Ms. Hayden discusses a call that she got

13 from a reporter in Washington State about a class action

14 lawsuit that had been filed; is that correct?

15 A. Could I take just one second?

16 Q. Sure. Go ahead.

17 A. I will try to be brief.

18 (Brief pause.)

19 BY THE WITNESS:

20 A. Okay. I am sorry.

21 BY MR. DOWD:

22 Q. And you agree with me, sir, that this discusses a phone

23 conversation that Ms. Hayden had with a reporter from the

24 Bellingham Herald; is that right?

25 A. That's what she says, right.

Household Unsigned Page 1443 - 1446

 1445 

4-8-09 Trial Day 7 4/8/2009 6:14:00 AM

 1 Q. And he had called her about a class action lawsuit that

 2 had been filed in Washington State around that time; is that

 3 right?

 4 A. That appears to be the case, yes.

 5 Q. And one of the things that the reporter asked her about,

 6 according to her e-mail, is that the lawsuit claims that "We

 7 are misrepresenting the benefits of the EZ Pay product and are

 8 quoting effective rates (he used that term) in order to coerce

 9 customers into believing they are getting a better deal than

10 the one we were truly giving them."

11 Do you see that, sir?

12 A. I do.

13 Q. So you understood that there was a lawsuit that had

14 accused your people of using the effective rate presentation

15 as of April 4th, 2002; is that right, sir?

16 A. Apparently that must have been widely known. And I must

17 have known about it, having read this document.

18 Q. You knew about it, right?

19 A. Right. I must have at the time. I don't remember

20 exactly, but I must have at the time.

21 Q. Now, counsel asked you some questions about when this

22 lawsuit was filed in August of '02. I remember some of those,

23 sir.

24 But let me ask you, when you wrote "this is an

25 outrage" on April 8th, '02, you knew about this other lawsuit

Household Unsigned Page 1443 - 1446

 1446 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 60 of 245
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 1 all about effective rates on April 4th, right?

 2 A. Okay. Say that again, please, Counsel.

 3 Q. What I am asking you is, you got an e-mail on April 4th,

 4 2002, about a reporter in Washington calling up asking about a

 5 lawsuit that alleged some effective rate misrepresentation,

 6 right?

 7 A. I believe that's what this says.

 8 Q. Okay. And then, at least four days later, when you got

 9 this e-mail or this fax about people quoting effective rates,

10 that's when you wrote "this is an outrage," right, sir?

11 A. That appears to be the case, yes.

12 Q. Okay. So you knew -- when you wrote "this is an outrage,"

13 you knew that there was a reporter snooping around, asking

14 questions about misrepresenting effective rates, right?

15 A. I assume, based on the dates of these two documents, but I

16 wouldn't draw any conclusion from that because I don't -- I

17 mean, I didn't connect one to the other, that I recall.

18 Q. Do you remember on April 4th, 2002, and April 8th, 2002,

19 whether you were connecting those two things or not, sir?

20 A. Of course not.

21 Q. Okay. Thank you.

22 Now, during my direct examination, sir, I showed you

23 a report.

24 MR. DOWD: And I will refer counsel to

25 Plaintiffs' 794.

Household Unsigned Page 1447 - 1450

 1447 

4-8-09 Trial Day 7 4/8/2009 6:14:00 AM

 1 I will grab you an extra copy of it in case those got

 2 wet up there.

 3 BY MR. DOWD:

 4 Q. Plaintiffs' 794 was a memo from Carla Madura dated

 5 May 25th, 2001. Do you see that, sir?

 6 A. I do.

 7 Q. And you got a copy of this one, too, didn't you, sir?

 8 A. Hang on one second and I can confirm that.

 9 (Brief pause.)

10 BY THE WITNESS:

11 A. I am sorry. I took far too long.

12 I did.

13 BY MR. DOWD:

14 Q. Sir, what Ms. Madura told you in that one was that there

15 were seven complaints of the ones she was reporting on that

16 made it to the level of an Attorney General, a Better Business

17 Bureau, or a regulator where people were claiming that

18 effective rate presentations were given to them; is that

19 right, sir?

20 A. Could I read that, please?

21 Q. Sure. We looked at it yesterday, but go ahead.

22 A. Just let me refresh my memory.

23 (Brief pause.)

24 BY THE WITNESS:

25 A. That's exactly what it says in the third paragraph, 7 of

Household Unsigned Page 1447 - 1450

 1448 

4-8-09 Trial Day 7 4/8/2009 6:14:00 AM

 1 27 complaints were about a rate issue.

 2 BY MR. DOWD:

 3 Q. And I take it this was just as outrageous, sir, back in

 4 May of 2001, that people were using this effective rate

 5 presentation, right?

 6 A. No.

 7 Q. Oh, it wasn't?

 8 A. No. Here is why. I believe that all of these complaints

 9 on the document that we just reviewed came from a single

10 branch in Washington. Now, that didn't make it any less an

11 issue. But in this case, I had a branch, one single branch,

12 that accounted for 18 customer complaints. That tells me that

13 we have got a serious problem in this branch.

14 Now, this document says that I have seven complaints

15 across the United States, I believe. So I would view every

16 one of these -- 18 and 7, that would be 25. I would view

17 every one of these complaints -- even though that I don't know

18 that they were valid, I would view every one of these

19 complaints as a very serious matter. But I would look at it

20 differently if I had 18 complaints in one branch and if I had

21 seven complaints in the United States.

22 Q. Okay. I just want to get this straight.

23 So to you it was worse if you had 18 complaints

24 isolated to a single branch than if you had seven complaints

25 that made it all the way to an Attorney General, the Better

Household Unsigned Page 1447 - 1450

 1449 

4-8-09 Trial Day 7 4/8/2009 6:14:00 AM

 1 Business Bureau, or a regulator all across the United States.

 2 That was less of a concern to you.

 3 Is that your testimony?

 4 A. I believe that's what I said.

 5 Look, talking about seven out of three-and-a-half

 6 million or 18 out of one branch, I mean, there is a huge

 7 difference.

 8 Q. Sir, I will show you what has been marked as Plaintiffs'

 9 Exhibit 798 and ask you to take a look at that, if you would.

10 (Document tendered.)

11 MR. DOWD: Copy for counsel.

12 (Document tendered.)

13 MR. DOWD: Your Honor, at this time I would offer

14 798.

15 THE COURT: It will be admitted.

16 (Said exhibit was received in evidence.)

17 (Brief pause.)

18 BY THE WITNESS:

19 A. All right, sir.

20 BY MR. DOWD:

21 Q. Sir, you agree with me that Plaintiffs' 798 is an e-mail

22 from Ned Hennigan to Tom Detelich and others at HFC; is that

23 correct?

24 A. That appears to be the case, right.

25 Q. And I will just note, sir, you didn't get a copy of this

Household Unsigned Page 1447 - 1450

 1450 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 61 of 245
4-8-09 Trial Day 7 4/8/2009 6:14:00 AM

 1 is.

 2 So to say that there were a gazillion effective rate

 3 complaints that came into the branch that some AE buried

 4 because he was able to fix it, that's not possible.

 5 Q. Oh, it's not possible, Mr. Gilmer. It's not possible that

 6 an AE, who already tricked a customer into this effective rate

 7 deceptive practice, couldn't then explain it away to the

 8 customer again a month, two months, three months later.

 9 That's not possible, sir?

10 A. I guess you could paint a situation where you could have

11 an AE who would be so callous as to violate policy and so

12 slick as to talk a customer into believing that they weren't

13 tricked the first time and that they didn't do anything about

14 it to fix it and then convince the customer not to complain to

15 anybody else because he couldn't fix it. I guess that would

16 be possible theoretically.

17 Q. Sir, yesterday we looked at -- or I think you have seen

18 during the course of the trial Plaintiffs' Exhibit 379; is

19 that right, sir?

20 I will show it to you. It was about this Ortega

21 complaint. Do you remember hearing about that?

22 (Document tendered.)

23 BY THE WITNESS:

24 A. I may well. If you could give me just a second here.

25 BY MR. DOWD:

Household Unsigned Page 1455 - 1458

 1455 

4-8-09 Trial Day 7 4/8/2009 6:14:00 AM

 1 Q. Sure, sir.

 2 (Brief pause.)

 3 BY THE WITNESS:

 4 A. If you would allow me to go back if I need to, it's going

 5 to take forever to read this thing.

 6 BY MR. DOWD:

 7 Q. Sure. That's fair enough.

 8 I would ask you to turn to the page that ends with

 9 the Bates range 090, if you would.

10 A. Okay. I am on 090.

11 Q. And, again, sir, this is an e-mail that we have seen

12 earlier during the trial.

13 You have been here the whole time, right?

14 A. I have been here the whole time.

15 Q. And this was an e-mail where the Ortegas said that they

16 had been quoted an effective rate, an effective interest rate,

17 that was lower than the rate that was actually on their loan

18 documents.

19 Do you remember hearing about that?

20 A. Give me one second, then. Okay? You have given me

21 several of these reports.

22 (Brief pause.)

23 BY THE WITNESS:

24 A. Okay. I have read the e-mail.

25 BY MR. DOWD:

Household Unsigned Page 1455 - 1458

 1456 

4-8-09 Trial Day 7 4/8/2009 6:14:00 AM

 1 Q. At the very bottom of that e-mail, it notes that, No

 2 corrective action was given as this was enforced from HFC

 3 training materials that existed at the time.

 4 Do you see that, sir?

 5 A. That is correct.

 6 Q. And, sir, can I ask you, did you ever disclose to the

 7 market that there were HFC training materials that taught

 8 sales reps or account executives to use an effective rate

 9 presentation?

10 A. Well, since I personally prohibited it, I certainly would

11 not have misled the market into thinking that I, as I have

12 said so many times, and my management team, as you have read

13 so many times, did not approve of this practice.

14 Now, it is fair to say what you just outlined here.

15 And that is, this says that there was some training program.

16 And I suspect it was the one that was out -- you remember the

17 one that we talked about the other day that was in existence

18 for two months before somebody caught it and pulled it out. I

19 expect it was that one, but I don't know, as I have never seen

20 this before.

21 That is all I can say.

22 Q. Sir, yesterday you talked about the pay right rewards

23 program. Do you remember that?

24 A. I do.

25 Q. And I think you said that it was one of your best products

Household Unsigned Page 1455 - 1458

 1457 

4-8-09 Trial Day 7 4/8/2009 6:14:00 AM

 1 ever; is that right?

 2 A. That is correct.

 3 Q. Sir, you had your deposition taken in this case on

 4 January 12th, 2007; is that right?

 5 A. It's been a couple years ago, right.

 6 Q. I would like to show what you said about pay right rewards

 7 at that time.

 8 MR. DOWD: And that's, for opposing counsel, at

 9 Pages 567 to 568 of the deposition.

10 (Videotape played in open court.)

11 BY MR. DOWD:

12 Q. Sir, do you agree with me that was the testimony you gave

13 back on January 12th, 2007, about the pay right rewards

14 program?

15 A. I certainly do. And I think I explained that in my

16 earlier testimony to you, that I had spent days and weeks

17 since I testified in that deposition going over all the

18 materials that I have been shown here and all the materials

19 that I had been shown during the time that I was preparing for

20 this with my attorneys. And I can tell you, I am much better

21 prepared, having gone over the documents today, than I was the

22 day I walked in and faced 5 million documents that I had seen

23 seven years earlier or five years earlier or whatever it was.

24 So I don't want you to get the wrong impression here.

25 Q. I understand that, sir. But you understood you were

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 62 of 245
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 1 having your deposition taken in the case, right? You had

 2 notice of that. Didn't you, sir?

 3 A. Of course I had notice of that.

 4 Q. And you understood that was an important deposition that

 5 people were going to be relying on your testimony, didn't you?

 6 A. And I apologize that I was unable to remember specifics of

 7 a product that we launched several years earlier that was

 8 buried amongst 5 million pages.

 9 A very different time, a very different circumstance.

10 And I can tell you right now, the pay right reward product,

11 I've gone over it in detail. We had documents up here today

12 and yesterday talking about how effective it was. It was a

13 great product, and I am very proud of it.

14 Q. And that's what you said yesterday. It was one of your

15 best products ever.

16 But you agree with me, in January 2007, you couldn't

17 remember anything about it, could you?

18 A. I agree with you that I didn't remember anything about it.

19 That's exactly right. That's exactly right.

20 Q. Now, yesterday I think you talked about Dennis Hueman's

21 video; is that right? Do you recall that testimony?

22 A. Right.

23 Q. And I believe yesterday you said that it was despicable;

24 is that right, sir?

25 A. The word I used -- I think I said it louder than that. I

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 1 said "despicable."

 2 Q. And do you believe that Mr. Hueman was on that video

 3 talking about things that were deceptive practices?

 4 A. It was very clear to me that Mr. Hueman was on that video,

 5 as I think everybody saw, talking about practices that I

 6 thought were just outrageous. And I mentioned, I believe --

 7 of course today, it was a circumstance where you he let us all

 8 down, all of our colleagues, our customers, and everybody.

 9 Q. And, sir, let me ask you this: Do you know that over a

10 year after you found that videotape -- or Mr. Detelich found

11 that videotape, do you know that Dennis Hueman was still being

12 asked to do training sessions on sales practices for

13 Household?

14 A. No. In fact, let me be clear, if I wasn't clear.

15 I saw that video for the first time in this

16 courtroom. I guess it was last week when you played it

17 repeatedly. And I found it despicable. I will tell you. If

18 I had seen that video two years ago or five years ago or

19 whenever it was, I would have fired Mr. Hueman. I would have

20 fired him.

21 And I think it's generally, almost always, in fact,

22 inappropriate for a person in the line of -- in the chain of

23 command to go around people and remove them directly. But I

24 will have to say, I would have done that.

25 Q. Sir, just so we are clear, then, you understood that

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 1 Mr. Detelich and Mr. O'Han, they saw that video at the time.

 2 Do you know that?

 3 A. Yeah. They probably did.

 4 Let me just make one other point.

 5 Q. I am just asking you that question.

 6 A. I don't know that they saw it in its entirety. But I

 7 think they certainly had it and they saw enough of it to know

 8 what it meant. I will say that.

 9 Now, I only saw a few snippets of it. I don't know

10 what was in the other 57 minutes, but maybe it was all great

11 stuff. I don't know. But I don't need to see the rest of it.

12 What I saw was enough for me.

13 Q. Sir, you understand -- or do you understand that Mr. O'Han

14 still had Mr. Hueman training people a year and a half later

15 on sales, in August of 2002?

16 A. I am assuming you wouldn't tell me that if it weren't

17 true.

18 Q. I will show you something if you want to see it.

19 A. No. That's what I said. I assume -- I would also --

20 number one, I am surprised at that.

21 Number two, I would expect that Mr. Hueman had been

22 retrained -- I am speculating about the whole thing,

23 obviously.

24 Q. Okay. Well, don't speculate for me, Mr. Gilmer. Just

25 tell me what you know.

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 1 A. Okay.

 2 Q. Did you understand -- when you watched this snippet of

 3 this videotape, did you understand that at the very beginning,

 4 the part that you saw when we were watching the opening

 5 statements, he said that he was "Teaching our AEs and our SAEs

 6 and, hopefully, some BSMs, too, on some sales techniques,

 7 things that I do as I visit around the branches and as I

 8 gather your people together."

 9 Did you hear him say that?

10 A. I heard that just as you heard that, Mr. Dowd. And I

11 cringed in my seat. Absolutely. You and I are in lockstep on

12 that.

13 That is exactly the kind of thing that happens in a

14 large organization like ours if there is even the smallest

15 lapse. And that's why I was continually sending out the memos

16 that you were kind enough to put up and hammering this home

17 and making these videos myself.

18 I mean, even with all of that, from time to time we

19 would have a bad apple slip through. It's embarrassing.

20 Q. In this situation you had a bad apple who was a DGM,

21 right, a division general manager?

22 He was responsible for parts of Texas, Arizona, New

23 Mexico, and Southern California, right?

24 A. I don't know the exact states that he was responsible for,

25 but he was responsible probably for 50 branches, a lot of

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 1 A. No.

 2 Q. Oh, all right, sir.

 3 A. It is not. Do you want me to explain it?

 4 Q. Yeah, you can explain it.

 5 A. Okay. Well, this net benefits test had a series of net

 6 benefit options. And to ensure that our customers received a

 7 net benefit, you had to qualify for at least one of these

 8 options.

 9 We had -- you see the numbers here, 34 of the 36 had

10 new money; 13 of the 36 -- and some of these have more than

11 one, obviously -- had second mortgage payoffs. And on and on

12 and on.

13 So that was exactly what I said. The net benefits

14 test works.

15 Q. So the other 64 you think all met the net benefits test?

16 A. That is my understanding of this, yes.

17 Q. Let's take a look at one more of these, just to clarify

18 it.

19 MR. DOWD: Counsel.

20 (Document tendered.)

21 BY MR. DOWD:

22 Q. Sir, I will show you what has been marked as

23 Plaintiffs' 559 and ask you to take a look at that.

24 (Document tendered.)

25 MR. DOWD: I would offer 559 at this time, your

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 1 Honor.

 2 THE COURT: It will be admitted.

 3 (Said exhibit was received in evidence.)

 4 (Brief pause.)

 5 BY THE WITNESS:

 6 A. All right, sir. I have read it.

 7 BY MR. DOWD:

 8 Q. Sir, this is a document entitled "Review of Benefits Test

 9 Booked Loans from November and December of 2001," right?

10 A. That is correct.

11 Q. I just want to understand how this test works.

12 Let's take a look at the very first entry there.

13 A. Okay.

14 Q. There is a loan that the date approved is November 21st,

15 2001. Do you see that, sir?

16 A. I do, yes.

17 Q. And then there is an account number and the loan amount.

18 Do you see that?

19 A. I do.

20 Q. And the loan amount was $269,000; is that right?

21 A. Yes, sir. That is correct.

22 Q. And this customer originally -- if you look at the third

23 column from the right, their rate on the first mortgage was

24 7.5 percent; is that right?

25 A. Okay. That is correct.

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 1 Q. And their contract rate and APR under the loan you were

 2 writing was 12.15 percent and 11 percent; is that right?

 3 A. If you give me one second. Which column are you in?

 4 That's right.

 5 Q. Last one.

 6 A. That's right. I see it.

 7 Q. So, in other words, they went from a 7.5 percent mortgage

 8 to a mortgage with a rate of 11 or 12.15 under the APR; is

 9 that right?

10 A. Hang on one second.

11 (Brief pause.)

12 BY THE WITNESS:

13 A. That appears to be correct.

14 BY MR. DOWD:

15 Q. And then, one of the benefits that's listed to the

16 customer is new money. And it says they got what looks like

17 about $31,000; is that right?

18 A. That's exactly right.

19 Q. And to get that $31,000, they paid points of $14,157; is

20 that right?

21 A. In points, I am not sure what kind of points they were.

22 They might well have been buy-down points. But there were --

23 it does say there were $14,000 worth of appraisal fees, title

24 fees and points of some sort, yes.

25 Q. Okay. So, in other words, this customer went from a

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 1 7-and-a-half percent loan to an 11 percent loan. They paid

 2 $14,000 to get that loan to get $31,000 in cash back; is that

 3 right?

 4 A. That is part of the story, yes.

 5 Q. Okay. Now, would that meet your benefits test criteria?

 6 A. Yes, it would.

 7 Q. Thank you, sir.

 8 Now --

 9 A. You wouldn't want me to talk any more about this, I am

10 sure, would you?

11 Q. No, I just want to understand it.

12 A. Well, if you want to understand it, I can talk a little

13 bit more about it.

14 Q. That's all right, sir. I am sure you will get your

15 chance. You do a lot of talking.

16 Now, sir, yesterday you talked about AMTPA. I think

17 today you talked about the Parity Act, right?

18 A. As you said, I talk a lot. So I probably did.

19 Q. And you explained yesterday how AMTPA was a law passed b

20 Congress in about 1982, and it talked about -- you talked

21 about the '80s were a very difficult time. And you said that

22 this was a law that permitted you to charge prepayment

23 penalties, right?

24 A. Yes. I reviewed the AMTPA law a couple weeks ago. And

25 that's my clear recollection, yes.

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 1 Q. Sir, you had your deposition taken in this case on

 2 January 11th, 2007, right?

 3 A. I did, yes.

 4 Q. So let me see what you said when you answered questions

 5 and answers about that at that time.

 6 MR. KAVALER: Page reference?

 7 MR. DOWD: I believe it's 147.

 8 (Videotape played in open court.)

 9 BY MR. DOWD:

10 Q. You agree with me, sir, that was the testimony you gave on

11 January 11, 2007, about AMTPA or the Parity Act, right?

12 A. I agreed with you before. It's two years ago, and that's

13 exactly what I said two years ago.

14 What you related to earlier was exactly what I said

15 yesterday.

16 And after weeks of cramming, I feel comfortable with

17 what I said yesterday. I believe that is the correct

18 definition of the Parity Act. And all of the testimony that I

19 gave yesterday I believe is correct.

20 Q. You just couldn't remember any of that back in January of

21 2007; is that correct?

22 A. As I said in my testimony there, I didn't remember the

23 particulars of the Parity Act. As you can see, it's a

24 complicated, technical, legal process.

25 I will have to say I couldn't remember things that

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 1 happened years and years ago on the day all of that paper was

 2 dumped on my desk. But I studied it in preparation for your

 3 question, and I think I have got it.

 4 Q. So you were unprepared for your deposition. Is that what

 5 you are telling me?

 6 A. Did I say that, sir?

 7 Q. I am just asking.

 8 You seem to know a lot more about AMTPA today than

 9 you did back then, two years ago.

10 A. I know a lot more about all of this stuff -- excuse my

11 term -- today than I did two or three years ago.

12 The last several months I have devoted my every

13 waking minute and every document that I could get my hands on

14 to get familiar with it. You bet I am a lot more familiar

15 with it. Sure.

16 Q. Sir, but again, you were under oath that day, right, when

17 you gave your deposition?

18 A. Not that I would have to be. I was under oath, but I

19 don't need to be under oath to tell the truth.

20 Q. But you were?

21 A. Let me say it again. I thought I said it.

22 I was under oath. I am under oath now. I would tell

23 the truth without regard to whether I am under oath. I don't

24 know what world other people live in, what their standards

25 are, but I tell the truth.

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 1 Q. Thanks, sir.

 2 Now, I think yesterday you also said that -- and I

 3 just want to make sure I got this right -- that Household's

 4 customers, borrowers, you didn't really expect them to make

 5 12 payments a year. You kind of expected them to make like

 6 11 payments a year.

 7 Did I get that right?

 8 A. That's a very broad definition. We expect them to make

 9 all of their payments over time. But when they come to

10 Household, it is because they haven't made 12 payments a year.

11 It would be unfair for us to expect that they would

12 forevermore make 12 payments a year.

13 So that's the -- that's why we had a business.

14 That's why we have a business.

15 Q. Why you had a business?

16 A. Well, I mean, I have been retired since 2002. Is that

17 what you mean?

18 Q. Yes.

19 A. Right. So I should say "had a business," right.

20 Q. Then, I just want to get one other thing just clear in my

21 mind.

22 I think you also said that the average loan at

23 Household lasted about five years; is that right?

24 A. The average real estate loan at Household -- I think the

25 last document that I saw was about 42 months.

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 1 Q. Forty-two months. So that's, what, three and a half

 2 years?

 3 A. You are right. It is three and a half years. Maybe it's

 4 52 months. I don't remember. It was years. It was several

 5 years, not several months.

 6 Q. Right. Somewhere between three and a half and five years?

 7 A. I think that's correct.

 8 Q. Now, was that something -- I think you said everybody kind

 9 of understood that, right?

10 A. Everybody understood --

11 Q. The people at Household, they kind of understood that, the

12 average loan term, how long somebody would last?

13 A. I don't know that -- I am trying to remember if there was

14 a standard published report that went out to the field that

15 said that or not. I don't think there was a standard report

16 that did, but maybe there was.

17 Q. Sir, yesterday -- I think you just touched on it

18 briefly -- you talked about restructuring of loans. And you

19 talked about sort of a bump in the road that a customer might

20 hit where they might miss some payments. Right, sir?

21 A. That is correct, where a customer would miss a payment.

22 Q. And you talked about how the customer would come in and

23 you would talk about it, right?

24 A. That was one of the processes that we would use for that.

25 There were a number of programs and processes over

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 Detelich - direct

 1777

 1 taken because this Washington report had been leaked to the

 2 press at various times?

 3 A. I don't know that we actually ever followed this line of

 4 argument.

 5 Q. So you don't know whether or not he followed the directive

 6 and got the information?

 7 A. He may have gotten the information. I don't know that it

 8 was ever a valid argument.

 9 Q. Have you ever seen a document that shows his analysis?

10 A. I don't have any recollection of it, so I'm guessing --

11 Q. And you never saw a document preparing for your testimony

12 here today that showed it, did you?

13 A. No, I did not. Yeah, certainly not.

14 MR. BURKHOLZ: Your Honor, I'm ready to go on to

15 another subject. If you want to take our 15-minute break.

16 I'm willing to go on.

17 THE COURT: We'll break now. We'll take our first

18 break, ladies and gentlemen. 15 minutes, as you requested.

19 (Jury out.)

20 THE COURT: You may step down, sir.

21 Anything you want to take up?

22 MR. BURKHOLZ: Nothing, your Honor.

23 THE COURT: Defense?

24 MR. KAVALER: Nothing, your Honor. Thank you.

25 THE COURT: We'll take our 15-minute break.

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 1778

 1 (Recess taken.)

 2 THE COURT: Okay. Are we ready for the jury?

 3 Let's bring them out. They're ready for us.

 4 (Jury in.)

 5 THE COURT: Counsel, you may proceed.

 6 MR. BURKHOLZ: Thank you, your Honor.

 7 BY MR. BURKHOLZ:

 8 Q. Sir, when we were talking about insurance goals for the

 9 company, it was your testimony that the goals for '99 and 2000

10 were 45 to 55 percent?

11 A. I think my testimony was that was what we generally built

12 into the compensation plan, yes.

13 Q. Let me show you what we've marked as Exhibit 1095.

14 (Tendered.)

15 MR. BURKHOLZ: A copy for counsel.

16 (Brief pause.)

17 BY MR. BURKHOLZ:

18 Q. You've read the document?

19 A. I have.

20 Q. And it's entitled 2000 Goals, correct?

21 A. That's right.

22 MR. BURKHOLZ: Your Honor, this is a documents that's

23 not objected to. I move it into evidence.

24 THE COURT: It will be admitted.

25 BY MR. BURKHOLZ:

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 1779

 1 Q. Tell me what it says under AE for insurance penetration.

 2 What's the percentage it says?

 3 A. It says 75.

 4 Q. Tell me what it says under branch for insurance

 5 penetration. What does it say?

 6 A. This document says 75.

 7 Q. Tell me what it says under the district for insurance

 8 penetration.

 9 A. It says 75.

10 Q. And tell me what it says under division for insurance

11 penetration.

12 A. 75.

13 Q. Thank you. You can put that to the side.

14 Let's talk about Dennis Hueman. He was the

15 southwestern division general manager in 2001, correct?

16 A. That would be correct, yes.

17 Q. So he was one of 16 DGMs covering Household branches

18 around the country, right?

19 A. I think it was 16 or 18, somewhere in there, depending on

20 the time frame.

21 Q. Fair to say that he was one of the top 25 of the

22 executives in the consumer lending division?

23 A. I don't know if I would characterize it that way, but he

24 was one of the 16 to 18 division general managers.

25 Q. Okay. He was one of the top 50 executives in consumer

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 1780

 1 lending at that time?

 2 A. I don't mean to nitpick here, but I don't know what you

 3 mean by "top."

 4 Q. In your hierarchy, in the pyramid in --

 5 A. On the organizational chart?

 6 Q. Yes. Top 50?

 7 A. He may have been maybe in top 50.

 8 Q. Certainly top hundred, right?

 9 A. On an organizational chart, he would have been positioned

10 in the top hundred, yes.

11 Q. Household had 30,000 employees at this time, right,

12 approximately?

13 A. Sounds about right, yes.

14 Q. How many did you have in consumer lending approximately?

15 A. 12,000.

16 Q. Now, Mr. Hueman's territory covered six states, Texas,

17 South Carolina and -- Southern California, Texas and four

18 others at the time, right?

19 A. Sounds about correct. Again, I know he was in California

20 at that time.

21 Q. And California was one of Household's biggest areas for

22 its business, wasn't it?

23 A. It's one of the largest states.

24 Q. I mean, for Household's volume of loans, it was in

25 California in a big way during this time in 2001, wasn't it?

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 1881

 1 A. Correct.

 2 MR. DOWD: Your Honor, at this time I'd offer

 3 Plaintiffs' 176.

 4 THE COURT: It will be admitted.

 5 (Plaintiffs' Exhibit No. 176 received in evidence.)

 6 BY MR. DOWD:

 7 Q. And, Mr. Schoenholz, plaintiffs' Exhibit 176 -- this

 8 Quality of Accounting Policies document -- that was a document

 9 that was prepared by Mr. McDonald; is that right?

10 A. I believe so.

11 Q. And Mr. McDonald was the Controller of Household during

12 this time period; is that right?

13 A. Right.

14 Q. Okay.

15 And in the organization there's the Controller; and,

16 then, he would report to you as the Chief Financial Officer;

17 is that right?

18 A. Correct.

19 Q. Okay.

20 And this was a document that was prepared for

21 discussions between Household's Audit Committee of the Board

22 of Directors and its outside auditors; is that correct?

23 A. Correct.

24 Q. Okay.

25 And it was -- you were required to prepare such a

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 1882

 1 document for these discussions pursuant to certain accounting

 2 professional standards; is that right?

 3 A. Correct.

 4 Q. And I take it this document was prepared in or about

 5 November, 2000; is that right, sir?

 6 A. I would think so.

 7 Q. And I take it you would have reviewed it before it was

 8 sent by Mr. McDonald on to the Audit Committee; is that right?

 9 A. I would think so.

10 Q. Okay.

11 And I'd ask you to turn to the page that ends with

12 the Bates range 8102, if you would -- 8102.

13 You see those numbers in the bottom right-hand

14 corner, right?

15 A. I do. 8- --

16 Q. -102.

17 A. Okay.

18 Q. And there's a section there that states, "Below is a

19 summary of the significant accounting policies which are

20 applied in our financial reporting and will be disclosed in

21 Household's 2000 Annual Report."

22 Do you see that?

23 A. I do.

24 Q. Then there's a section that includes the significant

25 accounting policies; is that right, sir?

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 1883

 1 A. Yes.

 2 Q. Okay.

 3 I'd ask you to flip a couple pages back to the page

 4 that ends with the Bates range 8107, if you would.

 5 A. (Witness complies with request.)

 6 Q. Do you have that in front of you, sir?

 7 A. I do.

 8 Q. One of those significant accounting policies identified in

 9 this document was entitled, "Provision and Credit Loss

10 Reserves"; is that right?

11 A. Correct.

12 Q. And one of the issues that's discussed in this section is,

13 essentially, delinquency; is that correct, sir?

14 A. It really talks about re-aging receivables.

15 Q. Okay.

16 And, so, when you -- you said re-aging of

17 receivables; is that right?

18 A. Correct.

19 Q. Okay.

20 And when you say "re-aging of receivables," is it

21 also fair to call that "re-aging of loans"?

22 A. Yes.

23 Q. Okay.

24 And the first sentence there says, "Our credit

25 policies also provide for reset of the contractual delinquency

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 1884

 1 status of an account to current, subject to certain limits.

 2 If either a predetermined number of consecutive payments had

 3 been received, a certain behavior score is attained or the

 4 delinquency reason has been cured, based on product."

 5 Do you see that?

 6 A. I do.

 7 Q. And that's talking about this re-aging policy; is that

 8 right?

 9 A. Yes.

10 Q. And it goes on to say a little further down, "We track

11 performance of accounts after they are re-aged, to ensure that

12 re-age customers perform and make payments and that re-age

13 policies are not used simply to defer charge-off."

14 Do you see that?

15 A. I do.

16 Q. Okay.

17 So, this was one of the significant accounting

18 policies identified by Mr. McDonald in this document that he

19 sent to the company's Audit Committee; is that right?

20 A. That's correct.

21 Q. Now, if I'm reading Plaintiffs' Exhibit 176 correctly,

22 sir, it had said that, "These were significant accounting

23 policies which will be disclosed in Household's 2000 annual

24 report," right?

25 A. That's what it says, I believe.

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 1885

 1 Q. Okay.

 2 Sir, I'll show you what's been marked as defendants'

 3 Exhibit 851. I'd ask you to take a look at that, if you

 4 would.

 5 MR. DOWD: A copy for counsel.

 6 (Document tendered to counsel and the witness.)

 7 BY MR. DOWD:

 8 Q. Have you seen defendants' Exhibit 851 before, sir?

 9 A. Do you want me to go through the entire -- I mean, it says

10 it's a 10-K for 2000.

11 Q. Right.

12 I mean, this is Household International's Form 10-K

13 for the period ended 12-31-2000; is that right, sir?

14 A. I would assume so.

15 Q. Okay.

16 And this document -- this 10-K -- would have been

17 filed by Household with the SEC in or about March of 2001; is

18 that correct?

19 A. Right.

20 Q. And you would have signed off on it as the CFO of the

21 company; is that right?

22 A. That's correct.

23 Q. And if we look at the page that's marked with the Bates

24 range 15520, if we could.

25 Do you see that page?

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 1886

 1 A. I do.

 2 Q. And it actually contains your electronic signature as the

 3 Group Executive Chief Financial Officer, also the Principal

 4 Financial and Accounting Officer; is that right, sir?

 5 A. Correct.

 6 Q. Okay.

 7 Sorry, you just have to answer out loud because he's

 8 typing everything down.

 9 And, sir, did that mean -- when you signed off on

10 this -- you were taking the position that this document was

11 accurate in all material respects; is that right?

12 A. True.

13 Q. I mean, that was your understanding, correct?

14 A. That was my understanding.

15 Q. All right.

16 Sir, let me ask you a question. We had that

17 significant accounting policy about your re-aging practices

18 that Mr. McDonald had identified in Plaintiffs' 176; and,

19 tried as I might, I couldn't find where that was in this

20 document.

21 Am I wrong?

22 A. I don't know if it's in here or not. Do you want me to

23 look, too?

24 Q. I don't want to you take all day, but, sir, you know you

25 didn't disclose anything about your re-aging policies in this

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 Schoenholz - direct

 1887

 1 document in 2000; is that right?

 2 A. I don't recall one way or the other.

 3 Q. Okay.

 4 Where would you expect to find such a disclosure

 5 about your re-aging policies in this document?

 6 A. I think either in the Accounting Policy area or there's

 7 also my recollection in the documents, there's a Credit

 8 Administration section.

 9 Q. Okay.

10 Why don't you take a look at those two sections and

11 see if you can find that language that Mr. McDonald said was a

12 significant accounting policy?

13 MR. DOWD: Your Honor, at this time, I would also

14 offer Defendants' Exhibit 851.

15 THE COURT: It will be admitted.

16 (Defendants' Exhibit No. 851 received in evidence.)

17 (Brief pause.)

18 BY THE WITNESS:

19 A. I don't see it.

20 BY MR. DOWD:

21 Q. Okay.

22 You don't see the information that Mr. McDonald had

23 listed as a significant accounting policy; is that right?

24 A. Correct.

25 Q. Sir, I'd ask you to turn to the page that ends with the

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 1888

 1 Bates range 523, if you would, still staying within

 2 Defendants' Exhibit 851.

 3 A. (Witness complies with request.)

 4 Q. Sir, this part of the 10-K is the part where Household

 5 reports its net income; is that correct, sir?

 6 (Brief pause.)

 7 BY MR. DOWD:

 8 Q. If you want, sir, there's a screen in front of you and it

 9 kind of highlights some of those sections.

10 A. I believe this page is the Parent-Company-Only financial

11 statement.

12 Q. Okay.

13 And it shows a net income there of about 1.7 billion;

14 is that right?

15 A. That's correct.

16 Q. Okay.

17 And you always reported net income in your 10-Ks and

18 your 10-Qs; is that right, sir?

19 A. Correct.

20 Q. Nothing unusual about that. That's one of the basic

21 metrics that people would look at; is that correct?

22 A. Right.

23 Q. All right.

24 Sir, I'd ask you to turn to the page that ends with

25 the Bates range 588, if you would.

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 1889

 1 And, sir, that page sets forth the earnings per share

 2 for Household during the year 2000; is that correct?

 3 A. Correct.

 4 Q. Okay.

 5 So, in other words, there you show in 2000 diluted

 6 EPS of $3.55; is that right?

 7 A. Correct.

 8 Q. And EPS is derived by, basically, taking the net income

 9 and dividing it by the number of shares that are outstanding;

10 is that right?

11 A. And I believe you have to deduct preferred stock --

12 preferred dividends.

13 Q. Okay.

14 When you're in the diluted side, right?

15 A. Correct.

16 Q. Sir, I'd ask you to turn to the page that ends with the

17 Bates range 609, if you would, still staying within

18 Defendants' 851.

19 (Brief pause.)

20 BY MR. DOWD:

21 Q. Okay.

22 Do you have that page in front of you?

23 A. I do.

24 Q. Okay.

25 And this page shows an entry called, "Consumer

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 Schoenholz - direct

 1890

 1 Two-Month and Over Contractual Delinquency Ratios."

 2 Do you see that chart?

 3 A. I do.

 4 Q. All right.

 5 And, sir, this chart was what you reported regarding

 6 what you referred to internally and externally as your

 7 two-plus numbers; is that right?

 8 A. Correct.

 9 Q. Okay.

10 When you said "two-plus numbers" -- that phrase --

11 what did that mean at Household?

12 A. Two or more months delinquent.

13 Q. Okay.

14 So, in other words, what you did, for example, in

15 this chart is you would take your whole loan portfolio, is

16 that right, and you would take a look at that and figure out

17 what percentage of the people -- or of the loan dollars --

18 were more than two months delinquent; is that right?

19 A. By product.

20 Q. By product?

21 A. In total and by product.

22 Q. Okay.

23 So, in other words, you got "Total" down there a

24 couple times; and, then, you also have it broken down, for

25 example, one category is "Real Estate Secured;" is that right?

Household Unsigned Page - - -

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 1891

 1 A. Correct.

 2 Q. Sir, in this particular 10-K for the year December 31,

 3 2000, did you say anything in this one about the percentage of

 4 this portfolio -- this -- your two-plus numbers -- that had

 5 been re-aged before this number was arrived at during

 6 December -- at December 31st, 2000?

 7 A. Not in the 2000 10-K.

 8 Q. Okay.

 9 So, in other words, when you reported these two-plus

10 numbers, they didn't include loans that had been re-aged

11 during the year 2000; is that right?

12 A. Say that, again.

13 Q. Sure.

14 When you reported this number at the end of 2000, it

15 didn't include loans that had been re-aged and were current

16 because of that re-age; is that correct?

17 A. That's correct.

18 Q. Sir, in the December 31st, 2000, 10-K, in reporting the

19 company's net income at any time, did you say anything about

20 what amount of that income was generated by loans made, where

21 account executives had quoted customers an effective rate?

22 A. Say that, again, please.

23 Q. Sure.

24 In your 10-K for the year ended December 31, 2000 --

25 Defendants' Exhibit 851 -- did you say anything in reporting

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 1892

 1 net income about what amount of that income was generated by

 2 loans made, where account executives quoted a customer an

 3 effective rate?

 4 A. I'm sure not.

 5 Q. You said, what?

 6 A. No.

 7 Q. Okay.

 8 And in reporting net income in the Defendants'

 9 Exhibit 851, did you say anything about what amount of that

10 income was generated by loans made where account executives

11 gave a good-faith estimate with ranges from zero to in excess

12 of $6,000?

13 A. No.

14 Q. In reporting that net income in Defendants' Exhibit 851,

15 did you say anything about what amount of that income was

16 generated by loans made, when Household made two loans

17 contemporaneously with the second loan at a higher interest

18 rate?

19 A. No.

20 Q. In reporting net income, did you say anything about what

21 amount of that income was generated by account executives who

22 misled borrowers about points and fees?

23 A. Well, I personally don't think account executives misled

24 borrowers. So, we certainly wouldn't have disclosed that.

25 Q. Okay.

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 1893

 1 And you were there when the account executives were

 2 talking to all your loan customers?

 3 A. I was not.

 4 Q. And, later, the State Attorney Generals disagreed with you

 5 about whether account executives had misled people; is that

 6 right, sir?

 7 A. Certainly, that discussion with Attorney Generals.

 8 Q. And you understand that there were regulators during the

 9 period between 1999 and 2002 who found that your account

10 executives had misled borrowers; is that correct?

11 A. Would say that, again, please?

12 Q. Sure.

13 You understand that between 1999 and 2002, there were

14 state regulators who also found that your AEs had misled

15 borrowers about loan terms?

16 A. That was certainly their -- their -- opinion.

17 Q. Okay.

18 In reporting net income, did you say anything about

19 account executives who misled borrowers about insurance

20 products?

21 A. I would say the same thing I said before. I don't think

22 our account executives misled borrowers. So, we would not

23 have disclosed that.

24 Q. And, again, you weren't there, right, sir?

25 A. Correct.

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 1894

 1 Q. Okay.

 2 And, again, there were Attorney Generals who

 3 disagreed with you about that; is that correct, sir?

 4 A. That's correct.

 5 Q. And there were regulators who found that your account

 6 executives had misled borrowers about insurance products; is

 7 that right?

 8 A. What do you mean by "found"?

 9 I know that was certainly their opinion.

10 Q. Okay.

11 Well, when I say "found," when I'm talking about a

12 regulator, if they put together an exam report and sent it to

13 you, that's how I use the term.

14 A. Okay.

15 Q. All right, sir?

16 Sir, I'd like to show you what's been marked as

17 Defendants' 854.

18 Sorry, Mr. Schoenholz, there's a lot of Ks and Qs

19 over there (indicating) and some of them are pretty thick.

20 So, I've got to dig through the boxes.

21 (Document tendered to counsel and the witness.)

22 MR. DOWD: A copy to counsel.

23 BY MR. DOWD:

24 Q. And, sir, I show you what's been marked as Defendants'

25 Exhibit 854.

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 1895

 1 Is that a copy of the Household 10-Q for the period

 2 ended June 30th, 1999?

 3 A. That's what it purports to be, yes.

 4 Q. Okay.

 5 And it appears to be the 10-Q, right, sir?

 6 A. It appears to be the 10-Q.

 7 Q. Okay.

 8 And this 10-Q was filed with the SEC on or about

 9 August 16th, 1999; is that right?

10 A. Yes.

11 Q. Okay.

12 And, sir, again, turning to the page that ends with

13 the Bates range 905, you signed this 10-Q on behalf of

14 Household; is that right?

15 MR. DOWD: Your Honor, at this time I offer 854 --

16 Defendants' 854.

17 THE COURT: Has there been an answer to your

18 question?

19 MR. DOWD: No, your Honor. I was waiting for the

20 witness. I was trying to do an in-between. Sorry.

21 THE COURT: Wait for the answer.

22 BY THE WITNESS:

23 A. Your question?

24 BY MR. DOWD:

25 Q. Yes, sir.

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 1896

 1 You signed this 10-Q, Defendants' 854, on behalf of

 2 Household; is that right?

 3 A. I did.

 4 MR. DOWD: And now I'd move the admission of 854,

 5 your Honor.

 6 THE COURT: It will be admitted.

 7 (Defendants' Exhibit No. 854 received in evidence.)

 8 BY MR. DOWD:

 9 Q. Sir, I'd ask you to turn to the page that ends with the

10 Bates range 884.

11 Do you have that page in front of you, sir?

12 A. I do.

13 Q. And, again, just like in a 10-K, in the 10-Qs, this one --

14 Defendant' 854 -- for the period ended June 30th, '99,

15 Household reported its net income; is that right?

16 A. Yes.

17 Q. Okay.

18 And, sir, I'd ask you to turn to the page that ends

19 with the Bates range 897, if you would. Still within

20 Defendants' 854.

21 (Brief pause.)

22 BY MR. DOWD:

23 Q. Do you have that page in front of you?

24 A. I do.

25 Q. In this 10-Q, you also disclosed at Page 897 information

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 1897

 1 about your two-plus statistics; is that right, sir?

 2 A. Yes.

 3 Q. Okay.

 4 And that's the paragraph that begins, "Own Consumer

 5 Two Month and Over Contractual Delinquency."

 6 Do you see that?

 7 A. I do.

 8 Q. All right.

 9 And, then, you provided a table regarding your

10 two-plus numbers at Page 902 of this document; is that right?

11 A. Yes.

12 Q. Okay.

13 And, sir, one of the reasons that you reported your

14 two-plus statistics -- this information about the percentage

15 of your portfolio that was more than two months delinquent --

16 was because that was an important metric that both Wall Street

17 and investors looked at; isn't that correct?

18 A. Yes.

19 Q. Okay.

20 In other words, you were a loan company and the

21 quality of loans would be something that would be of interest

22 or be significant to readers of your financial statements; is

23 that right?

24 A. What I'm hesitating about is I think, taken by themselves,

25 it wouldn't be of great interest. I think it would be

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 1898

 1 interest in the context also of the loss reserves of the

 2 company -- to get a full picture of the credit position of the

 3 company.

 4 Q. Right.

 5 My question to you, though, was: One of the reasons

 6 that you put the two-plus statistics in your Qs and your Ks

 7 was because that's something investors would want to look at

 8 in considering the quality of your loan portfolio; is that

 9 correct?

10 A. Correct.

11 Q. And, sir, in arriving at the re-age -- or, I'm sorry, at

12 the two-plus numbers in Defendants' Exhibit 854 -- in this

13 10-Q, did Household say anything about the percentage of the

14 portfolio that had been re-aged before this number -- this

15 two-plus number -- had been arrived at?

16 A. I'm sure not.

17 Q. Okay.

18 Did Household say anything about the percentage of

19 this portfolio that had been re-aged multiple times before

20 this number was arrived at?

21 A. No.

22 Q. Sir, I'll show you what's been marked as Plaintiffs'

23 Exhibit 736. I'd ask you to take a look at that, if you

24 would.

25 (Document tendered to counsel and the witness.)

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 1899

 1 BY MR. DOWD:

 2 Q. Sir, do you recognize Plaintiffs' Exhibit 736 to be the

 3 Household International 10-Q for the period ending September

 4 30th, 1999?

 5 A. It purports to be.

 6 Q. Okay.

 7 And you have no reason to doubt that it is, right,

 8 sir?

 9 A. I don't.

10 Q. And looking at the page that ends with the Bates range

11 229, you signed off on this 10-Q for the period ended

12 September 30, 1999, as the Executive Vice-President and Chief

13 Financial Officer at Household; is that right?

14 A. Correct.

15 Q. And you were affirming that it was accurate in all

16 material respects; is that correct, sir?

17 A. Correct.

18 Q. And, sir, again, you would have reported net income

19 information in this document; is that correct?

20 A. Yes.

21 Q. And you would have reported earnings per share information

22 in this document; is that correct?

23 A. Yes.

24 Q. And, in addition to that, you would have reported your

25 two-month -- two-plus -- statistics; is that right?

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 1900

 1 A. Yes.

 2 Q. Okay.

 3 And, sir, I'd ask you to turn to the page that ends

 4 with the Bates range 8217, if you would.

 5 And, sir, about the -- I think it's the third and

 6 fourth entries down on that page --

 7 MR. DOWD: Well, first, your Honor, I'm sorry, I'd

 8 offer Plaintiffs' Exhibit 736.

 9 THE COURT: It will be admitted.

10 (Plaintiffs' Exhibit No. 736 received in evidence.)

11 BY MR. DOWD:

12 Q. And looking at the page that ends with the Bates range

13 217, sir, the sort of third and fourth bullet points down

14 there contain your two-plus information written out; is that

15 correct?

16 A. Yes.

17 Q. And that's information you would have signed off on prior

18 to the time this document was filed with the SEC; is that

19 right?

20 A. Yes.

21 Q. Okay.

22 And, then, you also provided your two-plus

23 information in a table format on the page that ends with the

24 Bates range 224; is that correct, sir?

25 A. Yes.

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 1 Q. And he goes on to say, The statistics are wrong because

 2 the row labeled re-aged once in the last 12 months is, in

 3 fact, the total of all accounts that received only one re-age

 4 in the last 12 months; however, some have had multiple re-ages

 5 over their entire life.

 6 Do you see that?

 7 A. Yes.

 8 Q. And then he goes on to say, Therefore, the other incorrect

 9 row is that labeled re-aged multiple times.

10 Do you see that?

11 A. I do.

12 Q. Did Mr. Makowski -- did you see Mr. Makowski's

13 certification in the summer of 2002?

14 A. I did. But I knew about -- this error that it refers to,

15 the guy -- the person who made the error was somebody who

16 worked for Makowski. And he and Makowski came up to me, oh,

17 within a few weeks after the Financial Relations Conference

18 after they figured out that they had made a clerical error and

19 made me aware of it.

20 Q. Okay. And so, sir, the numbers that you gave at the FRC

21 were wrong, right, about the multiple re-age issue?

22 A. The multiple re-age entry. So back on your chart where it

23 said December '01, 4.3 percent.

24 Q. Right.

25 A. That -- that 4.3 percent was wrong.

Household Unsigned Page 1995 - 1998

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 1 Q. Okay. And Mr. Makowski, in this certification, what we've

 2 marked as Plaintiffs' 188, he lists out what the numbers were

 3 as prepared and used at the FRC presentation; is that correct?

 4 A. That's correct.

 5 Q. And then he listed out what they should have been as

 6 corrected; is that correct?

 7 A. That's correct.

 8 Q. Okay. I just want to take a look at a few of these

 9 numbers if we could.

10 We had sort of a chart blown up so we can keep

11 Mr. Makowski's certification on a board.

12 MR. DOWD: Could I move in Plaintiffs' 188, your

13 Honor? I apologize.

14 THE COURT: It will be admitted.

15 MR. DOWD: Your Honor, we'll use Mr. Brooks as a

16 human easel if we can for a minute.

17 THE COURT: An interesting use.

18 BY MR. DOWD:

19 Q. Mr. Schoenholz, if I could, the numbers that

20 Mr. Makowski --

21 MR. SLOANE: Excuse me, your Honor.

22 THE COURT: Go ahead, counsel, move over there so you

23 can see it.

24 MR. SLOANE: Thank you, your Honor.

25 BY MR. DOWD:

Household Unsigned Page 1995 - 1998

 1996 

4/14/09 Trial Day 10 4/14/2009 6:10:00 AM

 1 Q. The numbers that Mr. Makowski said were wrong, among

 2 others, were, for example, this number about re-aged once in

 3 the last 12 months; is that right?

 4 A. That's correct.

 5 Q. And, for example, he says that 9.4 should really have said

 6 6.2; is that right?

 7 A. That's what that says.

 8 Q. Okay. And then he goes on to say that the multiple

 9 re-aged number that he told people back in April was 4.3 was

10 actually 7.5 percent; is that right?

11 A. That's correct.

12 Q. And then, for example, just looking at the numbers, the

13 4.3 that changed to 7.5 -- that should have been 7.5 -- we're

14 talking about somewhere around $3 billion in additional

15 multiple re-aged loans; is that right?

16 A. That's correct.

17 Q. In other words, he said it was 4 billion -- or you said in

18 April 2002, 4 billion 28 million; is that right?

19 A. That's correct.

20 Q. And Mr. Makowski said, no, that's wrong. The number

21 should be 7.025 billion, right?

22 A. Correct.

23 Q. Okay. Now, sir, the bottom line numbers stayed the same

24 because that's just talking about total in the portfolio

25 that's re-aged, right?

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 1 A. That's correct.

 2 Q. In other words, the loans that had been re-aged more than

 3 once, you had about 3 billion more than you told people in

 4 April of 2002; is that right?

 5 A. That was the error, correct.

 6 Q. Okay. And so you presented the multiple re-age numbers so

 7 that people could look at them in April 2002, but the numbers

 8 that you presented were wrong?

 9 A. They were wrong.

10 Q. Okay.

11 MR. DOWD: Thank you, Luke.

12 BY MR. DOWD:

13 Q. Now, sir, you also presented information about certain

14 recidivism statistics by product line; is that right?

15 A. Correct.

16 Q. Okay. And if you could take a look at page 567. And

17 we're back in Plaintiffs' Exhibit 135 again.

18 Do you have that page in front of you?

19 A. I do.

20 Q. Okay. And it's up on the screen there, right? We're

21 looking at the same page, Recidivism Statistics by Product,

22 right?

23 A. Correct.

24 Q. This, again, was a chart that you used at this April 2002

25 presentation; is that correct, sir?

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 1 A. That's right.

 2 Q. And you say -- what you were explaining here is once an

 3 account had been re-aged, you were trying to show the people

 4 at this presentation how many of them were current 12 months

 5 after that re-age; is that right?

 6 A. No, that's not right.

 7 Q. Okay. You were actually showing them how many had gone

 8 two-plus or charge-off a year later; is that right?

 9 A. That's correct.

10 Q. Okay. Sorry, sir. I misspoke.

11 So, in other words, what you were telling people here

12 is, of loans that had been re-aged, where you had reset a

13 customer, they had been late and you had reset them, re-aged

14 them, right?

15 A. Yes.

16 Q. Okay. And you're telling them, okay, of those loans that

17 we re-aged, for example, in real estate secured, at the end of

18 December 2001, only 13.1 percent of those had been charged off

19 or gone two-plus; is that right?

20 A. What I'm hesitating about is I don't remember what the

21 time period was when the loans were re-aged.

22 Q. So doesn't it say at the bottom, sir, Recidivisms reflect

23 accounts that are two-plus delinquent or charge-off one year

24 after re-age; is that right?

25 A. Correct.

Household Unsigned Page 1999 - 2002

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 1 Q. Okay. And you were telling people, of these loans we

 2 re-aged, only 13.1 percent of them went bad; isn't that right?

 3 A. That's what that says.

 4 Q. Okay. And you, in fact, told people at that Financial

 5 Relations Conference that 87 percent or 86.9 percent remained

 6 good; isn't that right?

 7 A. I don't know what words I said, but I would have said they

 8 had not gone two-plus or charged off.

 9 Q. Okay. Well, let's -- if you want, we can take a look at

10 the transcript of that conference, page 183 -- or Plaintiffs'

11 Exhibit 183. And I'd refer you to the Bates that ends 306.

12 Okay. And in that second paragraph, you told people,

13 the way to read this chart is, let's take real estate as an

14 example, 12 months later, 13 percent of the people went bad.

15 They either charged off or were two-plus delinquent.

16 Conversely, 87 percent of them remained good; is that right?

17 A. That's what it says.

18 Q. And then you walked through each of those product lines,

19 if we go back to Plaintiffs' 135. In other words, in addition

20 to real estate secured, you gave them recidivism numbers for

21 auto finance, MasterCard/Visa, private label and personal

22 non-credit card; is that right?

23 A. Yes.

24 Q. Now, sir, let me ask you: When you presented these

25 numbers, did you tell those people at those conference that

Household Unsigned Page 1999 - 2002

 2000 

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 1 you considered a loan to be good, to be in that 87 percent

 2 that remained good, if you had re-aged it again in those last

 3 12 months?

 4 A. I didn't know that at the time we made this presentation.

 5 Q. Okay. So let me just get this straight. I just want to

 6 understand. You told people 12 months later, 13 percent went

 7 bad, went either two-plus or charged off. 87 percent of those

 8 loans remained good after they had been re-aged, right?

 9 A. That's what this says.

10 Q. Okay. What you didn't tell those people that day was,

11 hey, in that 87 percent that remains good a year later, we

12 include people who went delinquent again during that year and

13 then we re-aged them to bring them current again; is that

14 right?

15 A. I don't think that's true.

16 Q. Sir, are you telling me you told people that?

17 A. What I'm saying is in the example you've just used, my

18 recollection is that for real estate secured, the criteria is

19 you could only be re-aged once every 12 months. So for your

20 example, I don't think it's possible for an account to have

21 been subsequently re-aged. If you picked a different example,

22 I think your example would be correct.

23 Q. So you think I'm right for auto finance, MasterCard/Visa,

24 private label and personal non-credit card?

25 A. I think that's true.

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 1 Q. Okay. And, sir, isn't it true that when you're talking

 2 about these loans that had been re-aged as of December 31,

 3 2000 -- December 31, 2000, for example, re-aged in the -- when

 4 you said re-aged in the last 12 months, they could have been

 5 re-aged more than a year ago, so they could have been re-aged

 6 again, couldn't they?

 7 A. Say that again.

 8 Q. Sure. What I'm telling you is, you're telling me if they

 9 got re-aged -- they couldn't be re-aged for 12 months, so they

10 couldn't have been recidivists again, is that right, for real

11 estate?

12 A. I think that's true.

13 Q. Let's take a look at what some of your people said. I'll

14 show you what's been marked as Plaintiffs' Exhibit 75.

15 (Tendered.)

16 BY MR. DOWD:

17 Q. Sir, Plaintiffs' Exhibit 75 is an e-mail from a Daniel

18 Pantelis to Steve McDonald with cc's to Mr. Makowski, among

19 others, dated June 11, 2002; is that right?

20 A. That's correct.

21 Q. Okay. And --

22 MR. DOWD: Your Honor, at this time I offer

23 Plaintiffs' 75.

24 THE COURT: It will be admitted.

25 BY MR. DOWD:

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 2002 

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 1 Q. Okay. And, sir, again, Mr. McDonald was the controller

 2 and Mr. Makowski was in charge of credit risk, right?

 3 A. That's correct.

 4 Q. And Mr. Pantelis was in credit risk and reported to

 5 Mr. Makowski; is that right?

 6 A. That's correct.

 7 Q. And Mr. Pantelis says, Per your request, we have restated

 8 our recidivism figures with classification of subsequently

 9 re-aged accounts as recidivists.

10 Do you see that?

11 A. I do see that.

12 Q. Okay. And what he was saying there is, now we're going to

13 include as people who are recidivists, people who did it

14 again, people that actually got re-aged; isn't that right?

15 A. If you could bear with me for one second.

16 Q. Sure.

17 (Brief pause.)

18 BY THE WITNESS:

19 A. I'm not -- I've not seen this e-mail or -- yeah, e-mail.

20 And the reason I'm hesitating is I'm not sure if this applies

21 to Household International in total or if it applies to the

22 bank. Because under the chart, it talks about "as discussed

23 with the OTS." So I'm not sure of the context in which

24 McDonald asked the question or Pantelis is responding to the

25 question.

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 1 BY MR. DOWD:

 2 Q. Okay. You agree with me here though that the recidivism

 3 figures are listed as -- for real estate secured -- 53.9

 4 percent, right?

 5 A. That's what they're listed as.

 6 Q. For auto finance, they're listed as 48.2 percent; is that

 7 right?

 8 A. Yes, sir.

 9 Q. Yes?

10 A. Yes.

11 Q. For MasterCard/Visa, 64.3 percent; is that right?

12 A. Yes.

13 Q. And for private label, 69 and a half percent; is that

14 right?

15 A. Yes.

16 Q. And then it goes on to include 78 percent for personal

17 non-credit card and 75 percent for personal homeowner loans;

18 is that right?

19 A. That's right.

20 Q. Okay. So it seems that Mr. Pantelis has much higher

21 recidivism rates than the ones you reported in April 2002;

22 does he not?

23 A. Mr. Pantelis is the one who generated the numbers we

24 disclosed in April 2002. And so I'm not -- again, I'm not

25 sure the context of this e-mail and how directly comparable it

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 1 is to the analysis that Pantelis did for the FRC.

 2 Q. Okay.

 3 A. Clearly 53 is higher than 13.

 4 Q. Okay. But you agree with me, sir, that when you presented

 5 those figures in April 2002 at the FRC, you didn't include

 6 people who had been re-aged in the last 12 months as

 7 recidivists, right?

 8 A. I didn't know that at the time, and I didn't say anything

 9 about that.

10 Q. Okay. But you didn't include those, did you?

11 A. The definition of recidivism at the FRC did not include

12 subsequent re-ages.

13 Q. And Mr. Pantelis in this document says, If we restate our

14 recidivism figures with classification of subsequently re-aged

15 accounts as recidivists; that's what he's figuring out here,

16 right?

17 A. That's what it says.

18 Q. He's saying, if we put back in as recidivists people who

19 did it again, guys that got re-aged another time, these are

20 the numbers?

21 A. That's what -- that's what this says.

22 Q. Okay. Let's look at one more if we could. I'll show you

23 Plaintiffs' 79.

24 (Tendered.)

25 (Brief pause.)

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 1 BY MR. DOWD:

 2 Q. Sir, have you had a chance to look at Plaintiffs' 79?

 3 A. I have.

 4 Q. And it appears to be an e-mail. It says to Daniel

 5 Pantelis, subject, DAS request OTS recidivists; is that right?

 6 A. That's what it says.

 7 Q. It says, Dan, based on what you said over the phone, I put

 8 together what DAS wants; is that right?

 9 A. That's what it says.

10 MR. DOWD: I offer Plaintiffs' Exhibit 79, your

11 Honor.

12 THE COURT: It will be admitted.

13 BY MR. DOWD:

14 Q. And looking at this e-mail, it has a note at the bottom

15 that says version 6-11-02.

16 Do you see that?

17 A. Correct.

18 Q. Okay. And on the second page of the exhibit, there are

19 two charts. One of them says at the top, Recidivism after 12

20 months, reporting two-plus and charge-off dollars.

21 Do you see that?

22 That's the chart on the top half of the page?

23 A. Right.

24 Q. Okay. And then on the bottom half of the page, there's an

25 entry that says, Recidivism after 12 months, reporting

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 1 two-plus and charge-off dollars. And then it says, Added back

 2 subsequently re-aged accounts to delinquency status.

 3 Do you see that?

 4 A. I do see that.

 5 Q. Okay. Do you recall asking Mr. Pantelis to gather this

 6 information?

 7 A. What -- I don't remember specifically asking him to do

 8 that. What I do generally remember is kind of in this time

 9 frame, the OTS had raised questions about recidivism and how

10 they looked at it and their definition. And I assume this is

11 what that refers to.

12 Q. Okay. And, again, when he says -- when they say DAS,

13 that's David A. Schoenholz, isn't it?

14 A. Yeah, I'm sure that's me.

15 Q. Sir, I'm looking at these numbers in the top half where he

16 talks about recidivism after 12 months; and for auto, credit

17 card, retail services and real estate total, they look pretty

18 similar to the numbers that you gave in April 2002, don't

19 they?

20 A. Correct.

21 Q. Okay. And, for example, I guess we have another blow-up

22 of that one page.

23 Ask Mr. Brooks to hold that up again.

24 So, for example, this was the chart that you used on

25 April 9, 2002, right, sir?

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 1 A. Can you hold that up a little higher?

 2 Yes. Thank you.

 3 Q. And you said for real estate secured, 13.1 percent were

 4 people who had gone bad; is that right?

 5 A. Yes, sir.

 6 Q. Okay. And that's the same number for real estate total

 7 listed in Exhibit 79, isn't that right, Plaintiffs' 79, 13.1

 8 percent?

 9 A. Yes.

10 Q. Okay. Then retail services, is that the same as private

11 label, sir?

12 A. Yes.

13 Q. Okay. And you told people back in April, 35.5 percent had

14 gone bad; and that's the same number listed on Plaintiffs' 79;

15 is that right?

16 A. Correct.

17 Q. Okay. And then on the auto finance, it says -- you told

18 people 36.9 percent; is that right?

19 A. Yes.

20 Q. And that's the same number reflected in Plaintiffs' 79,

21 the document from June of 2002; is that right?

22 A. Yes.

23 Q. I think the only one I skipped was -- it was

24 MasterCard/Visa, 41.5 percent is what you said back in April

25 of 2002; is that right?

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 1 A. Correct.

 2 Q. And for -- looking at Exhibit 79, Plaintiffs' 79, the

 3 document from June '02, it's also 41.5 percent; is that

 4 correct, sir?

 5 A. Correct.

 6 Q. Okay. But then below those numbers that appear to be

 7 consistent with what you said in April of 2002, on Plaintiffs'

 8 79, this document reports back in what those numbers would

 9 look like if you included subsequently re-aged accounts; is

10 that right?

11 A. So you're not looking where it talks about defining it as

12 cash collected or principal reduction?

13 Q. At the bottom -- no, I'm looking at the second entry where

14 it says recidivism after 12 months, reporting two-plus and

15 charge-off, except this time adding back subsequently re-aged

16 accounts to delinquency status.

17 Do you see that?

18 A. I do.

19 Q. And here, on Plaintiffs' 79, the number for auto, for

20 example, goes from 36.9 to 48.2; is that right?

21 A. That's what this document says.

22 Q. Okay. The number for real estate goes to 53.9 percent; is

23 that right?

24 A. That's what the document says.

25 Q. The number for card goes from 41 and a half to 64.3; is

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 1 that right?

 2 A. Correct.

 3 Q. And the number for private label or retail services goes

 4 from 35.5 to 69.5; is that right?

 5 A. That's what this analysis shows.

 6 Q. So, in other words, when you add back in people that got

 7 re-aged a second time, the recidivism rates go up, don't they,

 8 sir?

 9 A. That's what this says.

10 Q. Bear with me for a moment, Mr. Schoenholz.

11 (Brief pause.)

12 BY MR. DOWD:

13 Q. Sir, I'd like to show you what's been marked as

14 Plaintiffs' Exhibit 654.

15 (Tendered.)

16 MR. DOWD: And it's been received in evidence, your

17 Honor.

18 BY MR. DOWD:

19 Q. Sir, do you recognize Plaintiffs' Exhibit 654 as a series

20 of e-mails dated between August 30, 2001, and September the

21 4th, 2001?

22 A. I recognize this as a document that Ms. Ghiglieri

23 introduced as relevant to her testimony, yes.

24 Q. Okay. So you've seen it before in the last few days?

25 A. Yeah. I don't remember it outside of that context.

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 1 MR. DOWD: A copy for counsel.

 2 BY MR. DOWD:

 3 Q. Sir, do you recognize Plaintiffs' Exhibit 512 as a copy of

 4 a cover memo with an attached e-mail that you received from

 5 Mr. Aldinger on or about June 27, 2002?

 6 A. Could I just take a quick minute, please?

 7 Q. Sure.

 8 MR. DOWD: Your Honor, I'd offer Plaintiffs' 512 at

 9 this time.

10 THE COURT: Admitted.

11 (Brief pause.)

12 BY MR. DOWD:

13 Q. You've had a chance to look at Plaintiffs' 512, sir?

14 A. Yes, sir.

15 Q. And that's a copy of a cover memo from Mr. Aldinger to

16 yourself that you received on or about June 27, 2002; is that

17 right?

18 A. Appears to be.

19 Q. Okay. And Mr. Aldinger's cover memo says, Dave, let's

20 discuss; is that right?

21 A. Correct.

22 Q. And attached to his e-mail -- or attached to his cover

23 memo is an e-mail from Mr. Makowski that was dated June 21,

24 2002; is that right?

25 A. Correct.

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 1 Q. And among others, both yourself and Mr. Aldinger were cc'd

 2 on Mr. Makowski's June 21 e-mail, right?

 3 A. Yes, sir.

 4 Q. Okay. There's a bunch of handwriting on the right-hand

 5 side of the page. Do you recognize that handwriting?

 6 A. It's Mr. Aldinger's.

 7 Q. So, in other words, he sent you the e-mail after he had

 8 kind of written a bunch of stuff on there; is that right?

 9 A. It appears to be.

10 Q. The subject of Mr. Makowski's e-mail is Revised - New

11 Re-aging Policy; is that right?

12 A. Correct.

13 Q. And he goes on in the text of the e-mail to say, At the

14 senior management meeting this week, new policies for re-aging

15 delinquent accounts were approved; is that right?

16 A. That's what it says.

17 Q. What was your understanding of what Mr. Makowski referred

18 to when he talked about the senior management meeting?

19 A. We had -- Mr. Aldinger periodically would have an off-site

20 meeting with his senior team to go through kind of topics that

21 weren't just the day-to-day topics.

22 Q. Okay. And I take it you would have attended the senior

23 management meetings?

24 A. Yes, sir.

25 Q. Okay. And Mr. Makowski lists these new policy changes for

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 1 re-aging delinquent accounts, right?

 2 A. That's what he does.

 3 Q. Okay. And, for example, on the left-hand side, one of the

 4 policies relates to real estate secured; is that right?

 5 A. Correct.

 6 Q. And then it says BUs. I assume that's business units,

 7 right?

 8 A. Yes.

 9 Q. And it says MS. That would be mortgage services. CL, for

10 example, consumer lending, right?

11 A. Correct.

12 Q. And then he lists these new policies as requiring two

13 payments and a minimum of 12 months since prior re-age, for

14 example, for real estate secured; is that right?

15 A. That's correct.

16 Q. And then he goes on to say, Our immediate next steps are

17 to affirm any impacts on financial projections and identify

18 any outstanding transition issues by July 1, 2002; is that

19 right?

20 A. Correct.

21 Q. And he says, Detailed policies need to be finalized and

22 approved by July 15; is that right?

23 A. That's what he says.

24 Q. And he goes on to say, The new policy changes will be

25 announced in July, with implementation to take effect August

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 1 1; is that right?

 2 A. That's what he says.

 3 Q. Okay. And can you read Mr. Aldinger's handwriting?

 4 A. Pretty tough.

 5 Q. Okay. I take it you would -- got used to reading it

 6 during your time at the company though, right?

 7 A. Well, you know, that's why, if you notice, the bulk was

 8 typed. His secretary could translate it and would type it up

 9 for people.

10 Q. It looks like under number two there, he writes, Do we

11 have a better understand of the financial impact; is that

12 right?

13 A. I guess.

14 Q. That's what it looks like to you too?

15 A. Do we have a better understand of the something impact.

16 Q. Okay.

17 A. It could be financial. I don't know what it is actually.

18 Q. Okay. And these were questions directed at yourself, I

19 take it?

20 A. I think this is what he would have wanted to discuss.

21 Q. And so there was a management meeting where you talked

22 about changing your re-age policies in the summer of 2002; is

23 that right?

24 A. It was in June, I believe.

25 Q. Okay. And was the intention at that time with regard to

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 1 A. That's correct.

 2 Q. So the numbers were lower by those amounts in this new

 3 10-K, this amended 10-K, than they were in the original

 4 documents; is that right?

 5 A. That's correct.

 6 Q. I'd ask you to turn to the very next page that ends with

 7 the Bates range 035.

 8 At the very top, there's another chart. And it

 9 appears to show, sir, your -- how your earnings per share

10 numbers were affected by this restatement; is that correct?

11 A. That's what it says.

12 Q. Okay. And so, for example, looking at the diluted

13 earnings per share, in 2001, when you originally issued your

14 10-K in March of 2002, you told people that their earnings per

15 share was $4.08, right?

16 A. That's correct.

17 Q. And now you were telling them, well, we got it wrong; it's

18 $3.91; is that right?

19 A. I'm not sure I'd characterize it quite the way you did,

20 but it would certainly say it's 3.91.

21 Q. In other words, originally we told you $4.08; now we're

22 telling you $3.91; is that right?

23 A. I would agree with that.

24 Q. In 2000, you told people, in probably March of 2001 when

25 you issued your 10-K, you told people the EPS was $3.55; is

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 1 that right?

 2 A. Yes, sir.

 3 Q. And when you restated it, it was $3.40 per share; is that

 4 right?

 5 A. That's right.

 6 Q. And in 1999, you originally told people $3.07; and when

 7 you restated it, you told them $2.95; is that right?

 8 A. That's right.

 9 Q. Sir, I'd like to show you what's been marked as

10 Plaintiffs' Exhibit 759. Ask you to take a quick look at

11 that. I'm going to direct your attention to certain

12 particular pages.

13 (Tendered.)

14 BY MR. DOWD:

15 Q. And that's a document related to a compensation committee

16 meeting on January 29, 2001; is that correct?

17 A. That's what it says.

18 Q. Sir, I'd ask you to turn to the page that ends with the

19 Bates range 33 if you would.

20 Do you have that in front of you?

21 A. I do.

22 Q. And, sir, the --

23 MR. DOWD: Your Honor, I'd offer Plaintiffs' 759.

24 THE COURT: It will be admitted.

25 BY MR. DOWD:

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 1 Q. Okay. Sir, turning to the page that ends with the Bates

 2 range 33 -- I think you said you were already there -- there's

 3 a memo from you to Colin Kelly, dated January 16, 2001; is

 4 that right?

 5 A. That's correct.

 6 Q. And the subject is 2000 Goals; is that correct?

 7 A. Correct.

 8 Q. And you list below it, a number of goals that were to be

 9 considered by the compensation committee in awarding bonuses;

10 is that right?

11 A. That's correct.

12 Q. For example, there, sir, the first goal was increase

13 Household International EPS to $3.50; is that right?

14 A. That's correct.

15 Q. And you say earnings per share for 2000 was $3.55, and

16 that's five cents higher than the goal; is that right?

17 A. That's what it says.

18 Q. Now, when you restated a year and a half later, you

19 reduced your $3.55 EPS to $3.40; is that right?

20 You can take a look back or I can show it to you.

21 A. If that's what you said.

22 Q. I'm referring to Exhibit 231.

23 A. If that's what you said before, that's fine.

24 Q. So if you had reported the numbers that you -- in 2000,

25 beginning in 2001, that you later reported in August of 2002,

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 1 this goal wouldn't have been met, right, if you're at 3.40?

 2 A. The reason I'm hesitating is I think if -- if we had known

 3 in 2000 that we were to follow the accounting that we then

 4 adopted in 2002, the goal would have been set consistently

 5 with that new kind of accounting. So I don't know if it would

 6 have been 3.50. But mechanically, if the goal was 3.50 and

 7 stayed unchanged and you reported 3.40, that's less than 3.50.

 8 Q. Okay. And so, for example, that goal wouldn't have been

 9 achieved?

10 A. If the goal had not been adjusted to be consistent with

11 the new accounting, that would have been in place.

12 Q. Okay. Sir, I'll ask you to take a quick look, again

13 staying in Plaintiffs' Exhibit 759, and -- let's go to the

14 page that ends with the Bates range 52 if you could.

15 Sir, do you have that in front of you?

16 A. I do.

17 Q. And that reports certain information about your

18 compensation, as well as recommendations for bonuses for the

19 year 2000; is that correct?

20 A. That's what it says.

21 Q. Okay. And it's true, sir, that at the end of the year

22 2000, you were making a salary of $500,000 a year; is that

23 right?

24 A. Yes.

25 Q. Okay. And you made that same salary in the next year,

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 1 2001; is that correct?

 2 A. Yes.

 3 Q. And, sir, you got a bonus in 1999 of $1.5 million; is that

 4 right?

 5 A. Yes.

 6 Q. And do you recall, sir, there's a recommended bonus here

 7 of $2 million for the year 2000; and, in fact, that was the

 8 bonus you received in 2000; is that correct?

 9 A. Yes.

10 Q. Okay. And then in the next year, 2001, you received a

11 bonus of $2.5 million; is that correct, sir?

12 A. I did.

13 Q. And in addition to those, you were also granted stock

14 options in 1999, 2000 and 2001 by the company; is that

15 correct?

16 A. Yes.

17 Q. Sir, in the spring of 2002, Household and Wells Fargo

18 entered into merger discussions; is that correct?

19 A. There were preliminary discussions between the two

20 companies. And it progressed to the point where there was

21 some due diligence that was done.

22 Q. Okay. So, in other words, you met with people from Wells

23 Fargo to talk about a potential merger; is that right?

24 A. Yes.

25 Q. And after those meetings, late in the spring of 2002, the

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 1 companies undertook what's called due diligence; is that

 2 right?

 3 A. That's correct.

 4 Q. And due diligence, when you say that, in other words,

 5 Wells Fargo would have access to the internal books and

 6 records of Household; is that right?

 7 A. That's right.

 8 Q. Okay. And is that also true vice versa, did Household

 9 have access to Wells Fargo's books?

10 A. I believe we did -- I believe we did due diligence on

11 them, but I don't remember the extent of it.

12 Q. Okay. And certainly, Wells Fargo was talking about

13 acquiring Household, right?

14 A. That's correct.

15 Q. So you know they did due diligence on Household, right?

16 A. That's correct.

17 Q. Okay. And, in fact, you know that people that worked for

18 you, for example, gathered internal records and documents to

19 share with the Wells Fargo due diligence team; is that right?

20 A. I do know that.

21 Q. Okay. And the purpose of due diligence, sir, is for a

22 company to look at these internal books and records so that

23 they can basically look under the hood, right?

24 A. I think to look under the hood and also to figure out how

25 the companies would come together, and so how would you mana

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 1 the two companies if they were to combine. So it's more than

 2 just looking under the hood.

 3 Q. Okay. And -- but you agree with me that when Wells Fargo

 4 did this due diligence, they had access to Household books and

 5 records that were not available to the general public, right?

 6 A. I think that's true.

 7 Q. Okay. And, in fact, like these -- this -- these deals are

 8 done sort of on the hush-hush because you don't want people

 9 outside the two companies to find out about it, to the extent

10 that you can prevent it, right?

11 A. That's correct.

12 Q. In other words, like you had a code name for Wells Fargo;

13 you called them Whiskey, right?

14 A. That's correct.

15 Q. So, in other words, if somebody left like a file laying

16 around somewhere and it said Whiskey due diligence, they

17 wouldn't know that you were thinking about a merger with Wells

18 Fargo, right?

19 A. That would be the theory.

20 Q. Okay. And, sir, in there -- were you aware that Wells

21 Fargo referred to the merger and Household as Blazer?

22 A. I don't think I was.

23 Q. Okay. All right. But you know you called them Whiskey in

24 your internal stuff?

25 A. I do know that.

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 1 Q. And, sir, you had at this time -- in the spring of 2002,

 2 you had an employment contract with Household; is that right?

 3 A. I did.

 4 Q. And if the two companies had merged, if Wells Fargo and

 5 Household had merged, and it affected your position at

 6 Household, you'd be entitled to certain additional

 7 compensation, right?

 8 A. That's correct.

 9 Q. So, in other words, if the merger happened, it could

10 trigger these additional payments that you would be entitled

11 to under your employment agreement, right?

12 A. That's correct.

13 Q. And, sir, do you recall under that employment agreement,

14 you would have received somewhere in the neighborhood of 30 to

15 $35 million if Wells Fargo and Household had merged; is that

16 right?

17 A. I don't think so. That does not ring a bell to me.

18 Q. Okay. I'll show you what's been marked as Plaintiffs'

19 1038. I'd ask you to take a look at that if you would.

20 (Tendered.)

21 (Brief pause.)

22 BY MR. DOWD:

23 Q. Sir, that's a copy of an e-mail from a Susan Casey at

24 Household to a Michael Carlson at Household, subject Revised

25 Tier One and Two Spreadsheets.

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 1 Do you see that?

 2 A. That's what it says.

 3 Q. It's dated April 26, 2002; is that right?

 4 A. Correct.

 5 MR. DOWD: I'd offer Plaintiffs' 1038, your Honor.

 6 THE COURT: It's admitted.

 7 BY MR. DOWD:

 8 Q. And in this document, Ms. Casey says, Here's the current

 9 versions of the spreadsheets we worked on today for cash

10 distributions and parachute calculations.

11 Do you see that?

12 A. Correct.

13 Q. Have you ever heard the phrase "golden parachute"?

14 A. I have.

15 Q. And what does that mean?

16 A. I think that generally means -- or my understanding of

17 what it means is that in a change of control situation, it

18 would be a payment made to the people who -- or to the

19 executives who were not part of the surviving entity.

20 Q. So, in other words, the executives who were left out of

21 the new company after the merger would be entitled under

22 employment agreements to a parachute, in other words,

23 something to give them a safe landing; is that right?

24 A. They would be entitled to compensation, however their

25 contract was worded.

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 1 Q. Okay. And I'd ask you to turn to the second page of

 2 Exhibit 1038.

 3 At the top of the page, there's an entry, Highly-paid

 4 U.S. employees, tier one, approximate cash distributions

 5 assuming a May 31, 2002, termination.

 6 Do you see that?

 7 A. That's what it says.

 8 Q. Okay. And there's an entry there for you, Dave

 9 Schoenholz; is that right?

10 A. There is.

11 Q. And it's got, for example, your salary down there,

12 500,000; is that right?

13 A. Correct.

14 Q. And it's got your 2001 bonus, that 2.5 million; is that

15 right?

16 A. Correct.

17 Q. And then it lists a total number of $34,823,769 in the

18 right-hand column; is that right?

19 A. I see that.

20 Q. And did you have an understanding in May -- at the end of

21 April 2002 that there were internal calculations being done on

22 how much you would receive if you left the corporation May 31,

23 2002, as a result of a merger?

24 A. I don't remember -- I'm not surprised that there were

25 calculations being done. I don't remember specifically if I

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 1 knew that they were being done.

 2 Q. Okay. Sir, I'll show you what's been marked as

 3 Plaintiffs' Exhibit 1371. I'd ask you to take a look at that

 4 if you would.

 5 (Tendered.)

 6 MR. DOWD: For the record, your Honor, that's an

 7 e-mail from a Paula Roe to Todd May, dated April 22, 2002,

 8 regarding Project Blazer. And I'd offer Plaintiffs' 1371 at

 9 this time.

10 THE COURT: It will be admitted.

11 (Brief pause.)

12 BY MR. DOWD:

13 Q. Sir, have you had a brief chance to look at Plaintiffs'

14 1371?

15 A. Yes.

16 Q. Have you seen that document before?

17 A. I have not.

18 Q. Okay. And, sir, were you familiar with a gentleman named

19 Todd May that worked on the due diligence for Wells Fargo?

20 A. I was not.

21 Q. You don't recall meeting with him at any time?

22 A. I don't.

23 Q. Okay. In this e-mail, it says, Todd, an extremely rough

24 estimate of the liability under the contracts.

25 Do you see that?

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 1 A. Yes.

 2 Q. And under your name, it says Schoenholz, 9.0, then 27.0.

 3 Do you see that?

 4 A. I do.

 5 Q. On the second page of the exhibit, there's another e-mail

 6 from Paula Roe to Todd May and others, dated April 22, 2002.

 7 Do you see that?

 8 A. Yes.

 9 Q. It's the one entitled Project Blazer.

10 Do you see that?

11 A. I do.

12 Q. And she writes, John/Todd, I've reviewed the materials

13 forwarded to me and have the following comments. And it goes

14 on to say, Employment contracts are very rich. They were

15 rewritten March 1, 2002. Unclear to me why they were amended.

16 Do you see that?

17 A. I do.

18 Q. Do you know whether employment contracts for yourself or

19 any of the other executives at Household were rewritten on

20 March 1, 2002?

21 A. I don't remember. I know they were amended at some point

22 in time, but I don't remember when.

23 Q. Could it have been in March of 2002?

24 A. It could have been.

25 Q. And I think you've already said the employment contracts,

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 1 at least your employment contract, did have provisions related

 2 to what you would receive if you were terminated or if there

 3 was a change in control; is that right?

 4 A. It did.

 5 Q. And it goes on to say, However, in the case of a change of

 6 control where an executive position is adversely impacted, the

 7 payment is 300 percent.

 8 Do you see that?

 9 A. I do.

10 Q. Do you recall whether under your employment contract, you

11 received three times what you were entitled to receive

12 annually if there was a change in control?

13 A. I believe that's the way it always was.

14 Q. Sir, I'll show you what's been marked as Plaintiffs'

15 Exhibit 1359. I'd ask you to take a look at that if you

16 would.

17 (Tendered.)

18 MR. DOWD: And a copy for counsel. For the record,

19 your Honor, it's entitled Confidential, Household

20 International, Inc., Board of Directors, May XX, 2002. And

21 I'd offer Plaintiffs' 1359 at this time.

22 THE COURT: It will be admitted.

23 BY MR. DOWD:

24 Q. Sir, have you had a chance to briefly review that?

25 A. I have.

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 1 Q. And can I ask you, have you reviewed this document?

 2 A. I've never seen this document.

 3 Q. Okay. I'd ask you to turn to the third page of

 4 Plaintiffs' Exhibit 1359 if you would. And there's an entry

 5 there that says Recent Events.

 6 Do you see that?

 7 A. It does.

 8 Q. It says, Reached agreement on an exchange rate on May 1st.

 9 Do you see that?

10 A. It does say that.

11 Q. Do you know what an exchange rate means in the context of

12 a merger?

13 A. I do.

14 Q. What does that mean?

15 A. If you're going to have a stock-for-stock deal, it would

16 be how many shares of stock one company would exchange for th

17 shares of another company.

18 Q. Okay. And that number has to be arrived at so that a

19 merger can be consummated; is that right?

20 A. If it's a stock-for-stock deal, yes.

21 Q. Okay. And do you know, did you reach an agreement with

22 Wells Fargo on an exchange rate on or about May 1, 2002?

23 A. I don't think so.

24 Q. I'd ask you to turn to the last page of Exhibit 1359.

25 And there's a document there called Deal Comparison.

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 1 Do you see that?

 2 A. I do.

 3 Q. And it talks about, Structure on May 1st when exchange was

 4 fixed.

 5 Do you see that?

 6 A. I do.

 7 Q. Does that refresh your recollection at all as to whether

 8 exchange rates were reached between Household and Wells Farg

 9 on May 1 of 2002?

10 A. It doesn't. I'm not -- I'm not sure that this is

11 referring to -- I've never seen this document.

12 Q. All right.

13 A. But -- I've never seen this document, so I don't know. I

14 don't believe there was ever any exchange ratios -- exchange

15 rates agreed to, that the conversations ever got to that level

16 of detail.

17 Q. But you did know that due diligence took place?

18 A. I do know that.

19 Q. And that Wells Fargo came in and looked at your books and

20 records, right?

21 A. I do know that.

22 Q. Sir, I'll show you what's been marked as Plaintiffs'

23 Exhibit 1351. I'd ask you to take a look at that if you

24 would.

25 (Tendered.)

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 1 MR. DOWD: A copy for counsel.

 2 For the record, your Honor, it's entitled Consumer

 3 Finance. At the bottom it says, Highly Confidential. On the

 4 top of the second page, it says WFF Due Diligence, Blazer

 5 Executive Summary by the Business Team, May 9, 2002. And I'd

 6 offer Plaintiffs' 1351 at this time.

 7 THE COURT: It will be admitted.

 8 BY MR. DOWD:

 9 Q. Sir, have you had a chance to briefly review what's been

10 received as Plaintiffs' 1351?

11 A. I have.

12 Q. Okay. And on the top of the second page of the exhibit,

13 sir, you agree with me it says WFF Due Diligence, Blazer

14 Executive Summary by the Business Team, May 9, 2002; is that

15 right?

16 A. That's what it says.

17 Q. Okay. This was during the time period, May 9, 2002, that

18 Wells Fargo was doing due diligence?

19 A. I would assume so.

20 Q. Okay. Sir, looking at that second page of the exhibit,

21 the one that ends with the Bates range 220, there's an entry

22 there in the third paragraph that says, Unfortunately, our

23 investigation revealed some major systemic issues in Blazer's

24 policies and procedures.

25 Do you see that?

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 1 right?

 2 A. That's what this says.

 3 Q. And that's what you wrote in March of 2001, right?

 4 A. That's correct.

 5 Q. Okay.

 6 And you went on to say, "This has caused me to

 7 reflect on Andrew's work product with a fresh view," right?

 8 A. Correct.

 9 Q. Okay.

10 And what you meant by that is Providian had gotten

11 sued; their situation was much worse; and, you started to

12 think about it, in terms of how it could affect you, right?

13 A. I think that that was probably a triggering or a

14 triggering issue that led me to write this, although the more

15 I dealt with Mr. Kahr, the more uncomfortable I became with

16 Mr. Kahr.

17 Q. The more uncomfortable?

18 A. Uncomfortable.

19 Q. Okay.

20 And, sir, you talked -- you go on to talk in the memo

21 about how "some of his ideas have been adopted by one or

22 another of the businesses to help them grow their businesses

23 and better serve our customers"; is that right?

24 A. That's correct.

25 Q. So, you understood some of Mr. Car Kahr's initiatives had

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 1 been adopted at this point in time; did you not?

 2 A. Some of his initiatives were adopted after people

 3 internally vetted them and signed off on them, correct.

 4 Q. Okay.

 5 Some of his initiatives were adopted, right?

 6 A. That's correct.

 7 Q. And you go on to say in the last paragraph on the first

 8 page there, "In efforts to innovate, Andrew has, at times,

 9 suggested approaches that were inappropriate and/or would not

10 best serve our customer"; is that right?

11 A. That's correct.

12 Q. And you believed that in March of 2001; is that right?

13 A. Correct.

14 Q. And you said, "He is a very prolific writer of memoranda";

15 is that correct, sir?

16 A. I did say that.

17 Q. Okay.

18 And you meant he wrote a lot of memos, right?

19 A. I meant that.

20 Q. And you went on to say, "Moreover, Andrew's writing style

21 can be acerbic, intemperate and inflammatory when presenting

22 ideas of possible approaches"; is that right?

23 A. That's what I wrote.

24 Q. Okay.

25 And you went on to say that, "There exists in our

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 1 files a large quantity of Andrew Kahr memoranda, some of which

 2 contain ideas and comments about our products, customers and

 3 employees, expressed in language which is offensive and is

 4 inconsistent with our statement of business principles, our

 5 individual ethical standards and the way we conduct our

 6 business"; is that right, sir?

 7 A. That's what I wrote and that's what I believed.

 8 Q. Okay.

 9 And, sir, you knew he was a very prolific writer of

10 memoranda, right? We've established that?

11 A. Yes.

12 Q. And you understood, at the time that you wrote this memo,

13 that his memoranda that he had written at Providian had

14 exacerbated their situation, right?

15 A. Yes.

16 Q. So, you knew his memos Household put Providian in far more

17 legal difficulty than they would have otherwise been, right?

18 A. I don't know how to characterize "far more difficulty,"

19 but I certainly would have known they weren't helpful.

20 Q. Okay.

21 Well, you said they "exacerbated" the situation,

22 right?

23 A. That's what I said.

24 Q. Okay.

25 And, so, now you write this memo and you're thinking

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 1 about the fact that you have Kahr memoranda in your files,

 2 too, right?

 3 A. That is part of this memo.

 4 Q. And, so, you go on to talk about how you've spoken to

 5 Andrew about this and he has toned down his rhetoric, right?

 6 A. That's what it says.

 7 Q. And, again, you had meetings from time to time with

 8 Mr. Kahr between the end of '98 and 2001, right?

 9 A. Excuse me?

10 Q. You had meetings with Mr. Kahr between '98 and 2001,

11 right?

12 A. I did.

13 Q. And you go on to say that, "In order to avoid this

14 misinterpretation of history," do you see that?

15 A. I do.

16 Q. You say, "I'm instructing that all copies of all Andrew

17 Kahr memoranda, both paper and electronic versions, be

18 collected by the Office of General Counsel and thereafter

19 destroyed," right, sir?

20 A. That's what I said.

21 Q. Okay.

22 And, so, what you said was, "Destroy the Kahr memos";

23 is that right?

24 A. What I said was the Office of General Counsel should

25 collect them and destroy them.

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 1 Q. Okay.

 2 So, in other words, you were worried about somebody

 3 seeing these Kahr memoranda, the same type of memos that had

 4 gotten Providian in trouble and getting you in trouble; isn't

 5 that right, sir?

 6 A. I think what I say is that I was concerned that --

 7 Mr. Kahr -- it came -- I came to believe that Mr. Kahr did not

 8 represent the values that we had in his attitudes and his

 9 actions and his words. His memoranda were inconsistent with

10 that.

11 And I was concerned that operating people could take

12 and find these memoranda somewhere and come to the conclusio

13 that this is what Household management endorsed. And I

14 thought that was a risk we should not take, which is why I

15 asked them to be destroyed.

16 Q. Okay.

17 So, in other words, you wanted to get this Kahr

18 evidence out of your files, right?

19 A. We wanted to destroy it.

20 Q. Sir, did Mr. Kahr propose any initiatives that you thought

21 were unethical?

22 A. I guess I would answer it this way: There's nothing we

23 implemented after discussion with Mr. Kahr that was unethical

24 clearly.

25 Q. What I'm asking you is: Did he propose any initiatives

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 1 that you thought were unethical?

 2 A. I would -- I would -- say that things that -- Andrew

 3 bounced all sorts of ideas all over the place. I think there

 4 were things where he didn't respect the customers and I think

 5 there were things -- I guess I would come back and say I don't

 6 think there's anything that we implemented or that we

 7 discussed implementing as a result of Mr. Kahr was unethical.

 8 Q. But, just to make sure, you destroyed all the memos,

 9 right, sir?

10 A. Say that, again, please.

11 Q. Just to make sure, you destroyed all the memos, right?

12 A. I wanted the memos destroyed.

13 Q. Sir, I'll show you what's been marked as Plaintiffs'

14 Exhibit 1006 and ask you to take a look at that, if you would.

15 MR. DOWD: I hand a copy to counsel.

16 (Document tendered to counsel and the witness.)

17 BY MR. DOWD:

18 Q. Sir, this document is entitled, "Household International

19 General Ledger Purged Detail"; is that correct?

20 A. That's what it says.

21 Q. And, sir, taking a look at this --

22 MR. DOWD: Well, first of all, your Honor, I'd offer

23 Plaintiffs' 1006.

24 THE COURT: It will be admitted.

25 (Plaintiffs' Exhibit No. 1006 received in evidence.)

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 1 BY MR. DOWD:

 2 Q. Sir, do you recognize this document to be a record of the

 3 payments to Andrew Kahr by Household International?

 4 A. I don't.

 5 Q. Do you recall, sir, that eleven days after you wrote your

 6 May -- March -- 2001, memo, that you gave Andrew Kahr a check

 7 for $120,000?

 8 A. I don't remember that.

 9 Q. Okay.

10 I'd ask you to take a look at the page that ends with

11 the Bates range 594, if you would.

12 And do you see an entry there, sir, of a payment on

13 March 23rd, 2001, for $120,000?

14 A. I see it looks like there's an entry. I don't know who

15 it's to.

16 Q. Okay.

17 Well, sir, your lawyers have told us that these are

18 the payments to Mr. Kahr.

19 Has anybody talked to you about that?

20 A. No.

21 Q. So, do you know whether or not you paid Andrew Kahr

22 $120,000 just eleven days after you wrote your memo about

23 destroying his memoranda?

24 A. I don't know that.

25 Q. Did you know that you kept paying him until July of 2002,

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 1 sir?

 2 A. If that's what this represents. The last item on the page

 3 says July of '02.

 4 Q. And there's a payment on July 15th for $60,000; is that

 5 right?

 6 A. That's what it says.

 7 Q. And a payment on July 30th, 2002, for $120,000; is that

 8 right, sir?

 9 A. That's what it says.

10 Q. Sir, I'd like to show you what's been marked as

11 Plaintiffs' Exhibit 1388. And that's in evidence.

12 (Document tendered to counsel and the witness.)

13 BY MR. DOWD:

14 Q. Sir, is that a copy of an article dated May 5th, 2002,

15 regarding Providian?

16 A. Yes.

17 Q. And there's an article that, basically, talks about Andrew

18 Kahr and Providian; is that fair?

19 A. That's what it says.

20 Q. Okay.

21 For example, it says in the second paragraph there,

22 "In lending to the kinds of high-risk customers Providian

23 specialized in, Kahr wrote the 'Problem is to squeeze out

24 enough revenue and get customers to sit still for the

25 squeeze.'"

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 1 Right?

 2 A. That's what it says.

 3 Q. Okay.

 4 And, sir, you were aware of articles like this about

 5 Andrew Kahr and Providian in May of 2002, weren't you?

 6 A. I don't remember if I saw this memo or not.

 7 Q. Okay.

 8 A. I probably would have, but I can't testify to that.

 9 Q. Okay.

10 You were certainly keeping track of Providian's legal

11 difficulties back in March of 2001; is that right?

12 A. I was aware of them.

13 Q. Okay.

14 And I take it you kept yourself apprised of

15 Providian's problems, especially with regard to Mr. Kahr, over

16 the next year; isn't that fair?

17 A. I don't know if that's fair or not.

18 I mean, when I wrote the memo, I was aware of

19 Providian's difficulties. I don't remember one way or the

20 other if I read this newspaper article; and, I don't have any

21 recollection that I tracked what Providian was doing between

22 March of '01 and May of '02.

23 Q. Okay.

24 And this article, 1388, is May, 2002, right?

25 A. That's what it says.

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 1 Q. I'll show you what's been marked as Plaintiffs' Exhibit

 2 1026. I'd ask you to take a look at that, if you would.

 3 (Document tendered to counsel and the witness.)

 4 BY MR. DOWD:

 5 Q. Mr. Schoenholz, do you recognize Plaintiffs' Exhibit 1026

 6 to be a series of e-mails dated between June 24th, 2002, and

 7 June 28th, 2002?

 8 A. That's what it says.

 9 Q. Okay.

10 MR. DOWD: Your Honor, I'd offer Plaintiffs' 1026.

11 THE COURT: Admitted.

12 (Plaintiffs' Exhibit No. 1026 received in evidence.)

13 BY MR. DOWD:

14 Q. And, sir, the e-mail at the bottom of the page here is an

15 e-mail from Ken Harvey, and the subject is "Kahr Memos"; is

16 that right?

17 A. That's correct.

18 Q. And Ken Harvey works for Household; is that right?

19 A. Correct.

20 Q. Or he did at the time?

21 A. Right.

22 Q. And he goes on to say that -- he sends the e-mail to

23 yourself, Mr. Aldinger and Mr. Robin; is that right?

24 A. That's correct.

25 Q. And the title is "Kahr Memos," correct?

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 1 A. That's correct.

 2 Q. And he goes on to say that, "We will be deleting 620

 3 e-mails from over 90 employee mailboxes shortly."

 4 Do you see that?

 5 A. That's what it says.

 6 Q. And he says, "We'll also block all incoming memos from

 7 that e-mail account."

 8 Do you see that?

 9 A. That's what it says.

10 Q. And did that mean incoming e-mails from Mr. Kahr?

11 A. I would assume so.

12 Q. That's what you understood at the time, I take it, sir?

13 A. I don't remember this specific piece of paper, but that's

14 how I would read it.

15 Q. Okay.

16 And, then, you responded to Mr. Harvey's e-mail,

17 right?

18 A. I forwarded it to Mr. Robin.

19 Q. Okay.

20 And you said, "I think you should send out a note on

21 disposing of all memos," right?

22 A. That's what it says.

23 Q. Okay.

24 And this was the second time that you had ordered the

25 destruction of Andrew Kahr materials; is that right, sir?

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 1 A. The bottom part of Mr. Harvey's e-mail says, "We've

 2 created a database and will work with Ken Robin on the

 3 disposition."

 4 And I think what I'm telling is agreeing with that,

 5 that, yes, we should dispose of these memos.

 6 I don't think this is any inconsistent with the memo

 7 that I had written earlier.

 8 Q. Right.

 9 In March, 2001, you said, "Destroy the Kahr memos,"

10 right?

11 A. Correct.

12 Q. And in June of 2002, you said, "Destroy the Kahr memos and

13 e-mails," right?

14 A. Correct.

15 MR. DOWD: No further questions at this time, your

16 Honor.

17 THE COURT: Cross-examine.

18 MR. SLOANE: Yes, your Honor.

19 (Brief pause.)

20 MR. SLOANE: May I proceed, your Honor?

21 THE COURT: You may proceed.

22 MR. SLOANE: Thank you.

23 CROSS-EXAMINATION

24 BY MR. SLOANE:

25 Q. Let me stick with Andrew Kahr, Mr. Schoenholz, for a

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 Schoenholz - cross

 2103

 1 think, through all that time, our Information Technology Group

 2 reported to me. And I also had Investor Relations reported to

 3 me, as well as kind of the administrative responsibility for

 4 the internal audit function.

 5 Q. Did you view your responsibilities as being to the

 6 plaintiffs' investors in this case?

 7 A. Oh, of course.

 8 Q. Did you also view your responsibilities as including

 9 responsibilities to the borrowers -- to the people that

10 Household lent money to?

11 A. I mean, indirectly, as an officer of the company, I wanted

12 to make sure that we did what was the right thing for the

13 customers. Because if you didn't do the right thing for the

14 customers, you couldn't do the right thing for the

15 shareholders.

16 But I was not a front-end direct interface with the

17 customers, given my responsibilities.

18 Q. Let me show you a document.

19 MR. SLOANE: May I approach, your Honor?

20 THE COURT: Yes.

21 BY MR. SLOANE:

22 Q. It's been previously marked as Plaintiffs' Exhibit 1115.

23 (Document tendered to counsel and the witness.)

24 BY MR. SLOANE:

25 Q. Would you tell the Court and the jury what that document

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 Schoenholz - cross

 2104

 1 is?

 2 A. Say, again, please?

 3 Q. Tell the Court and the jury, please, what that is.

 4 A. This is an e-mail -- well, it's two e-mails. The first

 5 e-mail is November 19th of '01. And it's from me to Paul

 6 Makowski. And it says, "We should look at the economic and

 7 net present value analysis behind all of our re-age policy

 8 -- "

 9 Q. Before you read it, Mr. Schoenholz, let me just offer it

10 into evidence.

11 MR. SLOANE: Your Honor, I offer Plaintiffs' Exhibit

12 1115 into evidence. I don't believe there's an objection to

13 this.

14 THE COURT: It will be admitted.

15 (Plaintiffs' Exhibit No. 1115 received in evidence.)

16 MR. SLOANE: Can we publish that on the board,

17 please?

18 (Brief pause.)

19 BY MR. SLOANE:

20 Q. Now, you started to explain it. Please go ahead.

21 A. Well, in this time frame, I was asking Mr. Makowski to get

22 more involved with looking at our re-age policies, which has

23 traditionally been delegated and were the responsibilities of

24 the various business units.

25 And what I'm telling him to do is look at the

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 Schoenholz - cross

 2105

 1 economic and net present value analysis behind our re-age

 2 policies, and that our criteria is that we wanted to do the

 3 right thing for the customer and make a good economic

 4 decision.

 5 The re-age policies really benefitted both the

 6 customers and benefitted the investors.

 7 Q. So, your concern was, with what you wrote here -- "I want

 8 to make sure we're doing the right thing for the customer and

 9 making a good economic decision" -- is that right?

10 A. Of course.

11 Q. And when you said making -- or when you said -- "making a

12 good economic decision," what did you mean?

13 A. Well, I mean, we were responsible for increasing the

14 return to the shareholders. And if you did restructures or

15 re-ages correctly, you would increase cash flow; you would

16 reduce the ultimate credits losses the company would have; you

17 could reduce your cost of collections; you could improve

18 customer relationships, which would benefit investors over the

19 long-term.

20 And, so, we wanted to do the right thing for the

21 customer, but only in a way that made -- was also a right

22 business decision for the investors.

23 Q. The investors being the plaintiffs in this case; is that

24 right?

25 A. That's correct.

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 Schoenholz - cross

 2106

 1 Q. Now, counsel asked you about a big stack of documents that

 2 are piled up here (indicating) on the table -- various 10-Ks

 3 and 10-Qs and other public filings. Do you recall that?

 4 A. I do.

 5 Q. Now, would you explain to the jury and to the Court the

 6 process by which --

 7 MR. SLOANE: Let me withdraw that.

 8 BY MR. SLOANE:

 9 Q. Did you write those documents?

10 A. I did not.

11 Q. Would you explain to the Court and to the jury what was

12 the process by which those documents were created?

13 A. Let me start with the 10-K document because that's a more

14 comprehensive document.

15 Q. Let me interrupt you one second.

16 MR. SLOANE: Your Honor, we have a demonstrative

17 exhibit, 802-01. May we publish that on the board, please?

18 I don't believe there's any objection to it.

19 THE COURT: If there's no objection, yes.

20 BY MR. SLOANE:

21 Q. Perhaps this can serve as an aid to the jury and to you,

22 Mr. Schoenholz.

23 So, why don't you walk us through this document, if

24 you would.

25 A. Okay.

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 2107

 1 Well, in this time frame, what it means is that the

 2 10-K draft would have been initially prepared, generated by

 3 the Corporate Controller's group with input from Investor

 4 Relations, from the Treasury Department, from the Credit Risk

 5 Department, clearly on the types of disclosures we've been

 6 talking about would be drafted by the Credit Risk people; and,

 7 also, would include initial input from the external auditors.

 8 It would then be reviewed, after it was actually

 9 drafted, by other people in the Corporate Controller's group.

10 I think that says "Internal Audit."

11 A draft would then go to Mr. McDonald, who was the

12 Chief Accounting Officer.

13 Q. Mr. McDonald was the person that Mr. Dowd asked you about

14 in connection with certain of the exhibits you saw this

15 morning?

16 A. Yes, sir.

17 He would then review the draft thoroughly, provide

18 his input, his comments, his direction, at which time he would

19 then circulate a 10-K document to all of those people listed:

20 Basically, senior business unit, operating managers, as well

21 as financial managers and functional heads within the

22 corporate office.

23 They were charged with reviewing the 10-K,

24 particularly as it related to disclosures that they had

25 specific informed knowledge on. They provided their input

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 2108

 1 back to what we had was called a Disclosure Committee. And

 2 that Disclosure Committee consisted -- my recollection is it

 3 consisted -- of McDonald; the treasurer; representatives of

 4 the legal group that were, like, the SEC experts; as well as

 5 some people -- a couple business unit financial people -- I

 6 believe.

 7 They would take it, digest it, come up with a draft

 8 that they were happy with. There would be then kind of a

 9 summary meeting with Aldinger, myself, McDonald, and that says

10 Schwartz, who was kind of the SEC counsel in this time frame,

11 to talk about any issues, anything that we needed to revolve

12 at a higher level.

13 KPMG, the auditors, would then review that draft.

14 Although they had provided input at the very beginning part of

15 the process, but they would review it and, in essence, sign

16 off on that as part of their audit processes. That would

17 include reviewing the MD&A and all those types of disclosures,

18 as well.

19 I would then get a draft and I'd review it very

20 carefully; generally, kind of in the late December time frame

21 and, then, probably updated in the late January time frame.

22 It would go to Mr. Aldinger. Mr. Aldinger would take

23 and review it and provide whatever comments he had. Then we

24 provided a draft of the 10-K to the Audit Committee generally

25 at the end of January for a meeting when the auditors would

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 2109

 1 present the results of their audit.

 2 Mr. McDonald would take and talk about the financial

 3 statements.

 4 Prior to the meeting with the Audit Committee, we had

 5 a separate advanced meeting -- this is pre-Audit Committee

 6 meeting -- with Mr. Levy, who was the Chairman of the of Audit

 7 Committee.

 8 Mr. Levy was a retired senior technical partner with

 9 KPMG and was a very -- truly an expert in this area of

10 financial reporting and disclosures.

11 He wanted to have a -- he wanted to have a -- private

12 advanced meeting with myself, McDonald, the internal auditors,

13 the external auditors. And then he would meet privately just

14 with the internal auditors and privately just with the

15 external auditors, would get his input and then present it to

16 the Audit Committee and then get their input.

17 Q. Let me be sure I understand this.

18 Did all of the 10-Ks and 10-Qs, after July 30, 2002,

19 go through this same process?

20 A. That's correct.

21 Q. Now, what was the process -- what's the significance of

22 the July 30, 2002, date, in your mind?

23 A. That was when Sarbanes-Oxley came in.

24 Q. What does that mean?

25 A. Sarbanes-Oxley was legislation introduced on creating a

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 2110

 1 requirement for the Senior Chief Executive Officer and

 2 principal Financial Officer. So, in essence, certify

 3 financial statements that were filed with the SEC.

 4 And in response to that requirement to have that

 5 certification, we created a sub-certification process that, in

 6 essence, that had everybody in the business -- and there were,

 7 I don't know, 40 or 50 people -- had to certify, in essence,

 8 to Mr. Aldinger and myself the same things that we would have

 9 to certify to the outside world.

10 That's why July -- that's the significance of July

11 30.

12 Q. So, that was after July 30th, after this law got passed;

13 is that right?

14 A. Right.

15 Q. What was the process like before this law got passed?

16 A. It was, essentially, the same process. The difference

17 would be there wasn't a formal certification process and we

18 didn't have a formal disclosure committee. So, it was more

19 like McDonald -- it would be the same where he would send it

20 out to the different business units and the functional heads,

21 but he would get the input back himself and working with his

22 department, giving it to KPMG; and, then, really are the rest

23 of the process was the same.

24 Q. Now, when you signed these documents -- these 10-Ks or

25 10-Qs that Mr. Dowd showed you -- did you draw any comfort or

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 2111

 1 reliance on this process?

 2 A. Of course.

 3 I mean, I couldn't be aware of every detail or

 4 everything. So, I clearly reformed -- relied -- on kind of

 5 the informed -- the judgments of informed -- professionals;

 6 whether those were people internally or externally, I would

 7 have relied and taken comfort from the fact that the external

 8 auditors reviewed and signed off on things.

 9 Now, that doesn't -- we earlier talked about were

10 they the responsibility of management. Clearly, but --

11 Q. Let me stop you.

12 How many people would have been involved in reviewing

13 this document before it got to you -- internal, external? Can

14 you give us an order of magnitude?

15 A. Literally dozens -- multiple dozens -- of people.

16 Q. Now, did this apply both before and after July 30, 2002;

17 that is, literally dozens ands of people would have been

18 involved --

19 A. Yes.

20 Q. -- in the review of it?

21 A. Yes.

22 Q. And those -- that review -- would have gave you comfort as

23 to the accuracy of what was in there?

24 A. Absolutely.

25 Q. Now, you were responsible for what was in there because

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 2112

 1 you signed it; isn't that right?

 2 A. That's correct.

 3 Q. Now, Mr. Dowd showed you a document I'd like to put on the

 4 screen. It's Plaintiffs' Exhibit 1076 -- I'm sorry, it's 176.

 5 MR. SLOANE: 176.

 6 (Brief pause.)

 7 BY MR. SLOANE:

 8 Q. Now, this was a document, I think you testified, was

 9 something that was prepared -- when Mr. Dowd asked you -- I

10 think you said by Mr. McDonald?

11 A. It was a combination of Mr. McDonald and the outside

12 auditors.

13 Q. Okay.

14 And Mr. McDonald --

15 MR. SLOANE: Going back to that chart, again, for a

16 second, Brian.

17 (Brief pause.)

18 BY MR. SLOANE:

19 Q. -- Mr. McDonald, again, was one of the people who reviewed

20 the final version of these public disclosures before they were

21 issued to the public; isn't that right?

22 A. Without question.

23 Q. And that's him right there in the middle (indicating)?

24 MR. SLOANE: Brian, if you can highlight "Steve

25 McDonald" right there (indicating) at the top. It's over

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 2113

 1 there in the middle.

 2 Thank you.

 3 BY MR. SLOANE:

 4 Q. Now, Mr. Dowd showed you a couple of the pages -- one of

 5 the pages I don't think he showed you, but let me show you.

 6 It's Page 802018102.

 7 Can you find that document?

 8 I can give you another copy, but it's Plaintiffs'

 9 Exhibit 176. It's a November 13th, 2000, "Quality of

10 Accounting Policies Applied in Financial Reporting"?

11 You can look actually on your screen there,

12 Mr. Schoenholz, if it's easier.

13 A. Unfortunately, with my bifocals, I can't read that.

14 Q. Okay.

15 Let me hand you another copy of it.

16 MR. SLOANE: May I approach, your Honor?

17 THE COURT: Yes.

18 BY MR. SLOANE:

19 Q. Just ignore the highlighting of the front page. I'm not

20 asking you about that.

21 A. Okay.

22 (Document tendered.)

23 BY MR. SLOANE:

24 Q. If you would turn to Page 8102.

25 Now, Mr. Dowd asked you about the top. It says,

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 2114

 1 "Below is a summary of the significant accounting policies

 2 which are applied in our financial reporting and will be

 3 disclosed in Household's 2000 Annual Report."

 4 Do you see that?

 5 A. I do.

 6 Q. And it refers to accounting -- "significant accounting

 7 policies" -- right?

 8 A. (No response.)

 9 Q. That first sentence.

10 A. Yes.

11 Q. And, then, later, the next sentence says, "For each of

12 these policies, a Comment section is included to discuss

13 specific items relating to the items covered by such policies,

14 peer group comparisons and the level of judgment involved in

15 carrying out those policies."

16 Do you see that?

17 A. I do.

18 Q. Now, would you turn to Page 8107.

19 I'm sorry, go to 8106 first.

20 A. Yes.

21 Q. Now, do you see there is -- at the top it says, "Provision

22 and Credit Loss Reserves"?

23 A. Yes.

24 Q. And, then, it says "Comments."

25 Do you see that, right under it?

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 2119

 1 Q. Now, you've heard some testimony sitting back here from

 2 Public Relations people, Megan and others?

 3 Did you ever tell any of the Public Relations people

 4 to conceal anything or to hide anything from the investment

 5 community or the investors?

 6 A. Absolutely not.

 7 Q. Mr. Dowd showed you some articles or an article -- one

 8 article -- from a newspaper about some allegations of lending

 9 practices.

10 Did you ever conceal the existence of a pervasive

11 nationwide, widespread predatory lending scheme, sir?

12 A. I never did.

13 Q. Did you believe -- did you believe -- that such a scheme

14 existed?

15 A. Absolutely not.

16 Q. Now, we've talked about re-age. Did you ever conceal or

17 urge anyone to conceal that Household used re-age or

18 restructuring to hide the true credit quality of Household's

19 loans?

20 A. I never did that.

21 Q. Did Household do that, sir?

22 A. Absolutely not.

23 Q. Did you ever think or did you ever believe they did that?

24 A. No.

25 Q. Now, we've heard some stuff about internal and external

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 2120

 1 auditors.

 2 Could you explain to the Court and the jury what did

 3 the Internal Audit Group at Household do?

 4 A. Well, their focus was more on internal controls and

 5 internal processes, whether those processes or controls were

 6 in the corporate office or within the business units.

 7 The internal auditors also audited within the branch

 8 network and audited control processes and internal controls

 9 within the branch network.

10 Q. Who did the Internal Audit function report to?

11 A. Well, it always reported solid line into the Chairman of

12 the Audit Committee, to ensure that it was independent and

13 properly funded and so forth.

14 Q. Let me interrupt you for a second, if I may.

15 There was a Board of Directors of Household; is that

16 right?

17 A. Correct.

18 Q. How many employees of Household sat on the Board of

19 Directors?

20 A. One.

21 Q. And who was that?

22 A. Mr. Aldinger.

23 Q. How many directors were there during the relevant time

24 period; if you remember?

25 A. I think it was probably in the 12-to-14-type range.

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 2121

 1 Q. You weren't a director?

 2 A. I was not a director.

 3 Q. So, the 12 to 14, there was one company representative; is

 4 that your testimony?

 5 A. That's my testimony.

 6 Q. And tell me how did the Audit Committee happen?

 7 A. Well, large public companies have Audit Committees

 8 consisting only of independent directors.

 9 Today, there are rules that the Audit Committee

10 members have to have certain financial expertise and

11 credentials; and, that the Chairman of the Audit Committee had

12 to have even more financial -- even more experience in areas

13 of financial -- accounting, financial management and so forth.

14 Q. Who was the Chairman of the Audit Committee of Household?

15 A. In this time period, it was Louis Levy.

16 Q. Who was he?

17 What was his background?

18 A. Lou was the retired -- he was -- he grew up -- or worked

19 his career at KPMG. He was the retired senior-most technical

20 partner within KPMG. So, he set up -- he oversaw all of

21 KPMG's accounting/auditing/technical practices.

22 Q. Now, tell me about -- or tell the jury about -- the

23 external auditors -- the independent auditors.

24 How did they happen?

25 A. Well --

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 2122

 1 MR. DOWD: Objection, your Honor. It's vague and

 2 ambiguous.

 3 MR. SLOANE: Well, I'll agree with that.

 4 (Laughter.)

 5 BY MR. SLOANE:

 6 Q. How did the independent auditors come to be independent

 7 auditors for Household?

 8 A. Well, the Audit Committee of the Board was responsible for

 9 reviewing the credentials and the qualifications of the

10 external auditors.

11 I think the way the process technically works is they

12 then recommended to the full Board that those auditors be

13 appointed; and, then, the full Board recommended that those

14 auditors be appointed. And that had to be subject to a

15 shareholder vote annually, which was done in connection with

16 the annual meeting.

17 Q. So, the investors had to approve every year who the

18 independent auditors were; is that right?

19 A. That's true.

20 Q. Now, let's turn to re-age for a few minutes because it was

21 a topic, I believe, Mr. Dowd spent a fair amount of time on.

22 Would you explain how re-age relates to reserves?

23 How does the re-age process and that process relate

24 to reserves?

25 A. Well, let me -- let me say first what reserves are.

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 2123

 1 Q. Okay.

 2 A. If you're a lending company and you make a bunch of loans,

 3 you know that not all of those loans will be collected. Some

 4 customers just won't pay you back.

 5 So, what you have -- but the problem with that is you

 6 don't know which ones and you don't know that they won't pay

 7 you back for several years. So, you have to make an estimate.

 8 And you have to make an estimate before you have all that

 9 knowledge.

10 So, what you do is you have various procedures and

11 techniques to make those estimates; and, then, you would set

12 aside a certain amount of money at the end of a period with a

13 charge against your profits. And that money would be set

14 aside to cover those losses in the future when those loans

15 prove to be uncollectible.

16 Now, in setting those reserves, you had to take and

17 consider all of the operating policies associated with the

18 loan portfolio.

19 So, how you underwrote loans -- you know, in other

20 words, how you qualified them to get on the books -- was

21 important. How you collected loans would be important.

22 Re-aging, to the extent that it was an operating

23 policy, would factor into that.

24 The reserves were calculated based on a detailed

25 statistical calculation done within each of the business

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 2124

 1 units.

 2 Those statistical calculations were reviewed and

 3 consolidated at the corporate level. And, then, there was

 4 another layer of reserves added to that called "Judgmental

 5 Reserves."

 6 Those "Judgmental Reserves" were intended to cover

 7 things that would not have been captured in the statistical

 8 model, such as recent changes in the environment; you know,

 9 the economic situation; housing prices. It would include

10 things such as rapid growth of the portfolio. It would

11 include things like the portfolio mix, so if you had a

12 different mix of receivable coming into the portfolio.

13 It would take into effect the account re-aging

14 practices that might not be reflected in the statistical

15 models.

16 And it also -- those "Judgmental Reserves" also --

17 were set with an eye toward certain reserve ratios --

18 aggregate reserve ratios.

19 Q. Now, you heard Mr. Dowd. You were sitting here when he

20 made his opening and he said that -- and I'm paraphrasing; I'm

21 sure he'll correct me if I got it wrong -- that re-aging and a

22 bunch of other techniques like rewrites, forbearance and grace

23 periods, were used by Household to conceal the quality of its

24 loans.

25 Do you believe that to be true, sir?

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 2125

 1 A. Absolutely not.

 2 Q. Now, you've said, I believe in response to a question from

 3 Mr. Dowd earlier today, that -- he asked you about something

 4 called two-plus delinquencies. And you said -- and I'm

 5 quoting, I wrote it down -- "Delinquency is not meaningful in

 6 and of itself. It has to be looked at in the context of loss

 7 reserves?"

 8 What did you mean by that?

 9 A. Well, investors value stocks based on estimates of future

10 earnings. And those future earnings will be impacted by the

11 adequacy of credit loss reserves.

12 Now, in looking at those credit loss reserves,

13 delinquency would be a relevant statistic, as would

14 charge-off, as would be reserve levels or portfolio mix.

15 So, I wasn't trying to say delinquency was not

16 relevant; but, in and of itself, these stocks aren't priced on

17 a price-to-delinquency ratio. They're priced on a price-to18 earnings ratio. And the only way that that gets into that

19 equation is through the concept of: Are their loss reserves

20 adequate, given the underlying credit quality of your

21 portfolio?

22 I'd make one other point, though. I do think

23 delinquency, in and of itself, can be relevant to operators of

24 the company. Because, there, you're not really worried about

25 accounting for it. You're worried about managing it and

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 2126

 1 running the business.

 2 And delinquency would be something that you would

 3 want to reduce or minimize, in order to reduce loans rolling

 4 to charge-off or rolling to foreclosure.

 5 It's something you'd want to manage, as relates to

 6 managing your costs of collections; and, it would also relate

 7 to, you know, how do you take and maintain those customer

 8 relationships over time?

 9 Q. Was re-aging something new to Household during the

10 relevant time period, '99 to 2002?

11 A. Absolutely not.

12 Q. It had been going on a long time?

13 A. I think it had been going on a long time; and, I think it

14 is a practice that is widespread in the financial services

15 industry and within the banking industry.

16 I mean, there's been a lot of talk about Household

17 versus a bank; but, clearly within the bank regulations

18 specifically allow for re-aging and restructures under

19 their -- under their -- guidelines.

20 Q. Something that investors would be aware of -- familiar

21 with?

22 A. It certainly should be.

23 Q. Now, what was the goal of re-aging --

24 MR. SLOANE: And let me put back on the screen, if

25 you would, Brian, 1115.

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 2127

 1 (Brief pause.)

 2 BY MR. SLOANE:

 3 Q. -- as you understood it?

 4 A. Well, I said before, I think re-aging benefitted both

 5 customers and investors.

 6 As it related to customers, if an account -- if

 7 somebody got themselves in trouble and fell behind and our

 8 customer base was such that, you know, you could make one

 9 payment or maybe two payments at a time, but if you started to

10 get behind, you couldn't come up with enough money to make

11 three or four payments.

12 So, if a customer got himself or herself in a

13 difficult situation, they would start to slide though

14 delinquency, start to slide to foreclosure, and re-aging would

15 help prevent that. So, that was one benefit to the customer.

16 Another benefit is that the company wouldn't charge

17 them late fees. So, in essence, even if you were delinquent,

18 it wasn't like the company was trying to rack up late fees

19 each month on the customer.

20 The third benefit to the customer was that they

21 didn't get reported late to the Credit Bureau. So, it was a

22 way of helping the customer manage their credit scores or

23 their credit files, which would be important to them, as well.

24 Q. And is that what you meant on 1115 when you said, "I want

25 to make sure we're doing the right thing for the customer and

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 2128

 1 making a good economic decision"?

 2 A. That's absolutely right; and, particularly, for the type

 3 of customer that you've heard about within Consumer Lending.

 4 You know, there's been testimony about 11 out of 12

 5 payments and all that kind of stuff. And I think most of

 6 Household's customers made 12 out of 12 payments, but some di

 7 not.

 8 And, so, that re-age process was an inherent part of

 9 that value proposition to those customers -- that you

10 originated a certain type of customer at the front end,

11 recognizing they might need that flexibility in the collection

12 process.

13 So, it would be foolish to originate that kind of

14 customer and, then, not afford them that flexibility in the

15 collection process. That wouldn't make any sense at all.

16 But the other part of the re-age issue is really it's

17 good for investors.

18 By re-aging properly, you reduce the ultimate loss,

19 in terms of charge-offs. You don't let the person get so far

20 down the scale they can't recover. It helps you kind of

21 manage your collection work force, so that you can take and

22 put your collection dollars on the customers that are most

23 difficult; and, for the customers that are less difficult, you

24 can deal with it in a more cost-efficient factor.

25 A re-age improves cash flow out of loans. Even if

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 2129

 1 that loan ultimately charged off, you could improve the net

 2 present value of that loan.

 3 And I think from an investor point of view, too --

 4 particularly, in this kind of business -- if you were taking

 5 and cementing in longer-term customer relationships, that's

 6 obviously good for the investors over time.

 7 The one other point I would make, though, is there is

 8 kind of this -- or could be an assumption that you were doing

 9 re-aging to defer credit losses. But that's just not the

10 case. I mean, because you reserved for those accounts.

11 So, if an account was re-aged, it would have a

12 reserve against it and it would have a higher reserve against

13 it than if it had not been re-aged, such that from a financial

14 point of view and from the earnings that investors would see,

15 that was irrelevant.

16 The earnings were properly stated because the

17 reserves were properly stated.

18 Q. How do you know they were properly stated?

19 A. Well, we had a lot of detailed procedures. We had a lot

20 of people looking at it. We had a lot of people -- we did

21 reserves with statistical models adding a judgmental

22 component. We had the Credit Risk people then compare those

23 models to their projections of future credit losses. And,

24 then, finally, we had the external auditors audit them. And I

25 can tell you in this time frame -- by "time frame" I mean the

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 2130

 1 class period in particularly --

 2 Q. '99 to 2002?

 3 A. '99 to 2002, and particularly as it related to '99, 2000

 4 and 2001. We had Andersen audit the reserves; and, then, as

 5 we talked about earlier -- that there was this restatement and

 6 KPMG came in, and KPMG re-audited all the reserves and they

 7 thought they were fine.

 8 And not only did KPMG re-audit the reserves, KPMG

 9 brought in their own Credit Risk specialists to re-audit what

10 the auditors audited.

11 So, throughout this time period, there was a lot of

12 scrutiny on the credit loss reserves. Everyone concluded they

13 were right.

14 And I guess the final point is that even with

15 hindsight, we never had a blow-up. We never had a credit

16 surprise.

17 Q. What does that mean?

18 A. Well, as I said earlier, you know some losses aren't --

19 you aren't -- going to collect all these things, but you don't

20 know which ones and how much. So, you have to make an

21 estimate.

22 But if you didn't make a correct estimate

23 consistently, eventually the fact that you had been

24 underestimated these things would catch up with you; and, at

25 some future period, you'd have to have some kind of charge

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 2131

 1 against your profits related to the fact that you had

 2 under-reserved in prior years. And we never had that.

 3 Q. Mr. Dowd referred to -- we'll get back to in a few

 4 minutes -- this restatement.

 5 Did that have anything to do with the credit blow-up

 6 -- or whatever the phrase you used was?

 7 A. Absolutely not.

 8 MR. DOWD: Objection, your Honor. It's unclear which

 9 restatement --

10 THE COURT: Hold on a second, sir.

11 I'm sorry, your objection, again?

12 MR. DOWD: Yes, your Honor.

13 Which restatement?

14 It's vague and ambiguous.

15 THE COURT: Why don't you specify what particular

16 document you're referring to, please.

17 BY MR. SLOANE:

18 Q. Mr. Schoenholz, Mr. Dowd asked you some questions about a

19 restatement involving credit card contracts.

20 Do you recall that testimony?

21 A. I do.

22 Q. And did that have anything to do with a credit blow-up or

23 whatever you referred to before?

24 A. The restatement that investors' counsel asked me about had

25 nothing to do with credit loss reserves, re-aging,

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 1 delinquency, charge-off or anything, in terms of credit

 2 account management.

 3 Q. Now, Mr. Brooks was kind enough to show that board up here

 4 to the jury before and it had a percentage of loans that were

 5 re-aged at Household.

 6 Do you know what percentage of Household's total loan

 7 portfolio was re-aged?

 8 A. We disclosed, as of the end of 2001, it was just under 17

 9 percent, was never re-aged -- or excuse me was re-aged, which

10 means 83 percent was never re-aged.

11 Q. Say that, again.

12 I'm sorry, I got lost in the numbers.

13 A. What we disclosed on that one chart was that I think it

14 was 16.9 percent -- 17 percent -- had been re-aged. That

15 means 83 percent of our customers had never been re-aged.

16 Q. Now, was this re-aging that we're talking about, was that

17 an accounting policy?

18 A. I'd just like to add one other point, if I could.

19 Q. Feel free.

20 A. That chart also showed it was a split between those that

21 had been re-aged once or re-aged more than once. And we

22 talked about the error and so forth.

23 Even after the error, what that said was that the

24 percentage of the portfolio that had never been re-aged or had

25 been re-aged once, was about 93 percent of the receivables of

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 1 Household, to put that in context.

 2 Q. Now, was re-aging an accounting policy or an operational

 3 policy?

 4 A. It was absolutely an operation policy. It was delegated

 5 to the Business Units. It was set by the detail -- the

 6 Business Unit Collection people and the Business Unit Credit

 7 risk people.

 8 Q. It's been a while for everybody.

 9 How many Business Units did Household have?

10 A. I think seven major ones.

11 Q. Okay.

12 And, so, were the Business Units -- is what you're

13 saying the Business Units were responsible for the operational

14 policies of re-aging? Is that your statement?

15 A. Absolutely.

16 Q. Now, you mentioned about disclosure about the re-aging

17 policies. Would you give us a little background about when

18 and how that came about?

19 A. I think I would start that discussion with -- in the

20 context of the 2001 10-K.

21 We had never previously disclosed in our 10-K filings

22 the existence of re-age policies, although I believe that we

23 had some types of disclosures in our asset-backed filings.

24 But when we were looking at the 2001 10-K, we were

25 aware that there were questions among the financial press --

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 1 analysts, investors, and so forth -- about, I think, the core

 2 question, quite honestly, was: In a recession, were

 3 Household's credit loss reserves going to be adequate, given

 4 the underlying credit quality portfolio; or, would there be

 5 one of these surprises coming later? Which there never was.

 6 But there was -- we were aware that there was -- this

 7 general question about account management practices and the

 8 underlying credit quality in the portfolio.

 9 We had also received, as comments from the Corporate

10 Finance Division of the SEC, as did about 200 other companies.

11 So, this was not unique to Household. This was a broad, broad

12 directive sent out, advising companies in future filings to be

13 more granular about what they disclosed about their business.

14 Q. What does that mean, "be more granular"?

15 A. To provide more details about operating policies-types of

16 things.

17 So, Mr. McDonald approached me and said he thought we

18 should include a disclosure on re-aging policies in the 2001

19 10-K.

20 Q. Prior to that time -- let me just interrupt you.

21 Had there been disclosure of the re-age policies in

22 the prior 10-Ks, as you understood it?

23 A. I don't believe we did.

24 Q. And was it common, based upon your knowledge, for

25 companies -- businesses similar to Household -- to disclose

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 1 re-age policies at that time?

 2 MR. DOWD: Objection. Lack of foundation.

 3 BY MR. SLOANE:

 4 Q. Do you know --

 5 THE COURT: The objection is sustained. Lay a

 6 foundation.

 7 BY MR. SLOANE:

 8 Q. Do you know, Mr. Schoenholz, whether other companies in

 9 that time period disclosed re-age policies?

10 A. One of the conclusions -- we had talked --

11 MR. DOWD: Objection, your Honor. Lack of

12 foundation.

13 Lack of foundation. Still, what company?

14 THE COURT: Sustained.

15 MR. DOWD: Sorry, your Honor.

16 THE COURT: Sustained.

17 BY MR. SLOANE:

18 Q. Are you aware of other companies that existed in the

19 financial services business or the business that Household was

20 in at or about this time period: '99 to 2002?

21 A. Am I aware of other companies?

22 Q. Yes.

23 A. Yes.

24 Q. Could you tell us some of the names?

25 A. Well, initially, you had finance companies that acted

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 1 independently, which were Associates, AFCO, Beneficial.

 2 Trans-America was a subsidiary of Trans-America Financial.

 3 American General, you had a subsidiary. Bank One had a

 4 finance company. Wells Fargo had a finance company.

 5 Q. Now, were you aware of, sir, in this time period -- '99 to

 6 2002 -- of what disclosure those companies that you've

 7 identified made with respect to their re-age policies?

 8 A. I believe they did not disclose re-age policies.

 9 Q. Okay.

10 Now, you started to tell us about this period 2001

11 10-K, and I interrupted you and asked you whether --

12 A. Right.

13 Q. -- you had disclosed that before.

14 So, why don't you continue.

15 A. So, Mr. McDonald approached me in January of 2001 and said

16 he thought we should include something on re-aging in the 2001

17 10-K.

18 I initially was reluctant to do it. But, then --

19 because I didn't think -- first of all, I thought it was an

20 operating policy, and we didn't disclose other operating

21 policies like how many collectors we used or what day of the

22 month they called or what our underwriting criteria were.

23 Q. Why not?

24 A. Because it wasn't relevant.

25 I mean, it was a level of detail that was not

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 1 material for an investor to understand the company taken as a

 2 whole. So, I didn't think it was a particularly material

 3 disclosure; and, I think the facts that investors didn't view

 4 the detail of that proved out to be correct.

 5 But what we did decide to do was to have a

 6 two-pronged disclosure approach in that in the 10-K we would

 7 have a general disclosure, and it would consist of an

 8 acknowledgment that we reset contractual delinquency to

 9 current, based on account management practices; that it would

10 have criteria; and, as I've indicated before, I don't think we

11 worded that as well as we should have. But it was a payment

12 criteria and, then, a criteria about evidence of the reason

13 for delinquency being resolved.

14 And, then, the third thing we disclosed is that these

15 things -- practices -- vary by business. So, that's what we

16 put in the 10-K.

17 At the same time we knew they were going to have this

18 Financial Relations Conference that we talked about.

19 Q. All right. We'll get to the Financial Relations

20 Conference in a second.

21 Anything else you want to add to the history how all

22 that happened? How all the re-aging started to get into the

23 public reports of Household?

24 A. No, that was really the thought process for putting it

25 into the 10-K.

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 1 Q. And was re-aging something that was a secret to the

 2 investors, the plaintiffs in this case?

 3 MR. DOWD: Objection. It calls for speculation.

 4 Lack of foundation.

 5 BY MR. SLOANE:

 6 Q. Was it --

 7 MR. SLOANE: I'm sorry, your Honor.

 8 THE COURT: Sustained.

 9 MR. SLOANE: I'll rephrase it.

10 BY MR. SLOANE:

11 Q. Was that something that was commented on -- re-aging and

12 the practices of various companies generally -- during the

13 time period 2001-2002?

14 MR. DOWD: Objection. Vague and ambiguous, your

15 Honor.

16 THE COURT: Overruled.

17 BY THE WITNESS:

18 A. Can you repeat the question?

19 BY MR. SLOANE:

20 Q. Yeah.

21 Was it something that was the subject of discussion

22 and comment by analysts and others during the time period

23 2001-2002?

24 A. Well, as I've testified earlier, I think the general

25 question that investors had about Household in that time

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 1 period was: Were the reserves for credit losses going to be

 2 adequate, given the underlying credit quality of the portfolio

 3 and given the downturn in the economy?

 4 There was some discussion raised about accounting

 5 policies, based on an analyst's article, an analyst report in

 6 the fall of 2001; and, then, there was an article in Barron's

 7 which raised some questions about account management practice

 8 generally.

 9 So, there was some interest in that.

10 Q. Now, I think you used the phrase in Mr. Dowd's examination

11 of you "test and learn." What did that mean?

12 A. Well, we tried to continue to improve our management

13 practices across the board; and, you wanted to do it in a

14 thoughtful, controlled fashion. So, you didn't want to just

15 say, "Well, we'll try this. Roll the dice. If it works out,

16 great, fine. If not, we'll try something else."

17 So, what did you is you set up tests and you would

18 test one assumption versus another assumption. And that was

19 done in Underwriting.

20 So, if we wanted to have this type of product for

21 this type of credit score, it was done in collection

22 strategies.

23 Is it better to call a delinquent customer on Day

24 Five versus Day Seven?

25 You know, is it better to call him at 4:00 in the

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 1 afternoon versus 6:00 in the after- -- 6:00 in the evening?

 2 And it was done in some of the re-aging things, too.

 3 Is it better to do it at a four-month interval or a six-month

 4 interval?

 5 So, throughout the company, we were trying to improve

 6 our processes, but to do it in a controlled fashion.

 7 Q. And I think you saw a document earlier, Mr. Dowd showed

 8 you about something that happened in Brandon, in the -- in one

 9 of the Business Units.

10 What was that all about?

11 A. That was in March of 2002, that the operating

12 management -- and it was -- the business was Mortgage

13 Services. So, that's not the same business as Consumer

14 Lending. And the business wanted to adopt the policy that

15 relied less on restructure or re-aging accounts. And they

16 hired a new collections manager, a name -- a woman named --

17 Elaine Merkel, who came in and didn't -- either didn't --

18 follow instructions, couldn't follow instructions, I don't

19 know.

20 But the planned approach of trying to have a test21 and-learn evolution of that portfolio just did not work well.

22 And, so, the results of that first effort were reversed; and,

23 then, they began a series over several months of trying to

24 adopt -- trying to test different strategies, to optimize

25 collections and optimize re-ages.

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 1 MR. SLOANE: Your Honor, would this be a convenient

 2 time to take the afternoon break?

 3 THE COURT: No, let's keep going.

 4 MR. SLOANE: Okay.

 5 THE COURT: It's better we keep going.

 6 BY MR. SLOANE:

 7 Q. You mentioned that investors didn't want to know the

 8 details. What did you mean by that?

 9 A. Well, I think what investors -- I go back to -- the

10 question is: They wanted to know were your reserves adequate.

11 I think what else investors wanted to know was: What was the

12 business purpose of re-aging? Because it wasn't entirely

13 clear what this was. And, so, people wanted to understand the

14 business purpose and the philosophy behind it.

15 And, then, I think what people wanted to know was:

16 Well, how much is there of this? How prevalent is it?

17 And, so, the detail of a policy -- whether it was one

18 payment, two payment, whatever -- however you described that,

19 the numbers that we disclosed were correct. The two-plus

20 numbers were what they were. The stock of restructured

21 accounts were what they were. Charge-offs were what they

22 were.

23 And, so, when we -- at this Financial Relations

24 Conference, we included an Appendix which had in there that

25 there were re-aged policies for some products that had one

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 1 payment.

 2 You know, my feeling was if that was going to be a

 3 sensitive material disclosure to investors, you'd have had an

 4 outroar. All of a sudden they'd say, "Well, wait a minute.

 5 We just found out they did one payment."

 6 Well, it was a yawn. People -- the investor response

 7 to that in the analyst reports is generally very positive. I

 8 don't remember seeing any reports saying, "Gee, this is a bad

 9 thing because it's only one payment."

10 And, so, what it led me to conclude or reaffirm my

11 belief is what investors wanted to understand was: Were your

12 reserves adequate; what was the business purpose of

13 restructuring; how did it fit into your operating model; and,

14 how much was it?

15 Q. Now, you mentioned you Financial Relations Conference.

16 There was some discussion about that earlier with Mr. Dowd.

17 Let me show you a document that's been previously

18 marked as Plaintiffs' Exhibit 725.

19 (Document tendered to counsel and the witness.)

20 BY MR. SLOANE:

21 Q. Would you tell us what that document is, sir?

22 A. This is a copy of a presentation that I made at the

23 Financial Relations Conference on April 9th, 2002, and it

24 looks like it has my handwritten notes on it.

25 MR. SLOANE: Your Honor, we offer Plaintiffs' Exhibit

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 1 A. Right. That was the document.

 2 And we talked about sub-certifications.

 3 BY MR. SLOANE:

 4 Q. Yes.

 5 A. That's what this is.

 6 And, so, this would have been received --

 7 MR. SLOANE: Brian, let's put this back up now,

 8 please.

 9 (Brief pause.)

10 BY MR. SLOANE:

11 Q. Go ahead, please. I'm sorry.

12 A. It's not dated, but this would have been received in that

13 time frame of either July or August.

14 Q. July or August of what year?

15 A. 2002. Excuse me.

16 And in it, because we had people when they reviewed

17 the 10-K document or the 10-Q document, they had to certify

18 that they were not aware of any errors or any misstatements or

19 anything else.

20 And, so, Mr. Makowski, I think -- because he knew

21 that the FR -- that the FRC presentation, this document --

22 Q. "This document" being -- for the record, being --

23 Plaintiffs' Exhibit 725?

24 A. I don't know what --

25 Q. It's the one with your handwriting on it?

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 1 A. It's -- correct, that one (indicating).

 2 Q. Okay.

 3 A. That he knew that that had been filed with the SEC -- not

 4 with my handwriting on it, of course, but the clean copy -- I

 5 think he felt that he needed to certify the fact that there

 6 was an error on this -- in this document.

 7 Q. Who made the error?

 8 A. A guy named Dan Pantelis.

 9 Q. Did he admit to making the error?

10 A. Oh, yeah. Dan --

11 MR. DOWD: Objection.

12 Hearsay, your Honor.

13 MR. SLOANE: It's a little late, Judge.

14 MR. DOWD: It's not, your Honor.

15 THE COURT: Well, overruled. It's late. It's

16 overruled.

17 Proceed.

18 BY MR. SLOANE:

19 Q. Now --

20 A. Your question -- what was your question?

21 Q. Well, I asked you a question: Did he admit to making the

22 error? You said "Yes."

23 Let me move on to another issue.

24 Can you just explain to the jury what was the error

25 that Mr. Makowski is explaining had been made by Mr. Pantelis

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 1 or by Mr. Makowski's group in this document, which is

 2 Plaintiffs' Exhibit 188?

 3 A. I'm not sure exactly how it arose, but what you can see is

 4 that if you look at the "As Prepared" and "As Corrected" --

 5 Q. Why don't you --

 6 MR. SLOANE: Brian, maybe you can follow along and --

 7 (Brief pause.)

 8 BY THE WITNESS:

 9 A. If you look at those two columns and you go down to the

10 row that says, "Re-Aged Multiple Times," what we told

11 people -- what we disclosed based on what we thought was

12 correct at the time, at the April 9th Financial Relations

13 Conference -- was that 4.3 percent of the portfolio was

14 re-aged more than one time. That's what we told people.

15 Conversely, what that would have meant is that 83

16 percent of the people had never been re-aged.

17 You know, if you look, that's the difference

18 between -- by the fact that it's 16.9 percent for the total.

19 So, if you do the arithmetic, what that means is we told

20 people that about 95 or 96 percent of the people had never

21 been re-aged or had been re-aged one time. That's what we

22 told people on April 9th.

23 What we found out, then, was that that was wrong;

24 that the people who had been re-aged more than once was

25 seven-and-a-half percent.

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 1 So, said another way, that would have meant instead

 2 of 90 -- 96 -- percent of the people who had never been

 3 re-aged or re-aged once, it was only 90- -- about 93 --

 4 percent.

 5 Q. Mr. Pantelis made a mistake, right?

 6 A. Yeah. He made a mistake.

 7 Q. Go on.

 8 A. That's really what it is. I mean --

 9 Q. Did the 16.9 percent change?

10 A. That was --

11 Q. Total re-age?

12 A. That was all the same.

13 The two-plus delinquency was all the same; the

14 charge-offs were the same; our reserves were the same; our

15 reserve ratios were the same; and, so, we concluded that that

16 was not -- I mean, it was unfortunate. We certainly didn't

17 want it to happen. But it was an unintentional error on his

18 part and we concluded it wasn't -- wasn't -- material.

19 Q. You concluded it wasn't material. Is that a conclusion

20 you reached after the error was discovered?

21 A. Correct.

22 Q. And that was discussed internally?

23 A. We got everybody together -- this came to my attention

24 probably -- I don't remember exactly, but within weeks. I

25 knew about this long before Makowski did it in his

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 1 certification. And we got all the right people together to

 2 talk about it. And that was our conclusion -- is that it was

 3 an error.

 4 Q. When you said you knew about it before the his

 5 certification, did you know about it before you told the

 6 investor community?

 7 A. Absolutely not.

 8 Q. You're sure about that?

 9 A. I'm positive about that. I'm positive -- I can't remember

10 the exact date that Pantelis and Makowski came into my office,

11 but it was two to three weeks after we did this presentation

12 and they came in and said they had bad news.

13 Q. Bad news?

14 A. Yeah.

15 They wanted -- they realized they had made a clerical

16 error and needed to tell me about it.

17 Q. What was your reaction?

18 A. I was not pleased; but, you know, it was what it was. And

19 once I concluded that it was an error, I got the right people

20 involved to figure out what to do about it.

21 Q. Now, you mentioned -- or actually, Mr. Dowd had a

22 transcript of a -- I guess it's Plaintiffs' Exhibit 183.

23 Can you find that in front of you? It's a big

24 thick --

25 A. What was it?

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 1 Q. 183.

 2 A. I got it.

 3 Q. Okay.

 4 Now, I think it was described earlier as a transcript

 5 of your conversations or your points that you made at the

 6 Financial Relations Conference; is that right?

 7 A. That's what -- yes.

 8 Q. And it was transcribed by somebody; is that right?

 9 A. Correct.

10 Q. Now, would you look at Page 301 of this?

11 It's 02028301.

12 A. Okay.

13 Q. Now, if you look down at the bottom, the last paragraph --

14 MR. SLOANE: If you could highlight that, Brian.

15 (Brief pause.)

16 BY MR. SLOANE:

17 Q. This says that, "There's some internal benefits in that it

18 allows you to work at higher risk accounts. And I think a key

19 point is that it has been done consistently, and they vary by

20 product, as we'll see."

21 Did you use the phrase "done consistently"?

22 A. If this is a transcript, I would have said that.

23 Q. And what did you mean by that?

24 A. Well, I knew that these were operating policies. And, so,

25 that they could be subject to -- let me back up.

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 1 These operating policies had lots of different

 2 criteria. So, there would be a number of payment criteria.

 3 There would be a time between re-ages.

 4 So, if you had re-aged somebody, how many months you

 5 had to wait.

 6 There would be a credit score criteria in some cases.

 7 So, if you were a higher credit score, it would be easier to

 8 be re-aged than if you were a lower credit score.

 9 There were also some exceptions to these policies.

10 So, for instance, I learned that if you had a

11 bankruptcy filing, that that could -- an approved bankruptcy

12 plan could take the place of a payment. But -- so, you knew

13 you were going to have modifications of those criteria.

14 In my mind, though, from -- what we're talking about

15 here is really financial types of disclosures and consistency.

16 The criteria in my mind was: Is it the same basic approach?

17 Is it --

18 Q. Is what the same basic approach?

19 A. How you would have applied your re-aging practices or

20 policies.

21 Q. Okay.

22 A. So, did you apply them in the same basic approach? Was

23 your philosophy about re-aging and how it fit into your

24 collection strategies the same basic approach? And, then,

25 thirdly, was the degree of reliance on it, essentially,

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 1 consistent?

 2 So, I mean, if you had never done this before ever,

 3 and all of a sudden you did 30 percent of the portfolio, that

 4 wouldn't be consistent under those criteria. And, in my mind,

 5 it was done consistently.

 6 Now, the other point I would make, these comments tie

 7 into a chart in this exhibit, Exhibit --

 8 Q. 725?

 9 A. -- 725.

10 And that document was prepared by Corporate Credit

11 Risk people and Business Unit Credit Risk people. And they

12 opined that those practices had been consistently applied.

13 Q. When you say "opined," what does that mean?

14 A. I shouldn't say "opined." That's not the correct -- the

15 way they drafted, it they drafted it that they were

16 consistently applied.

17 So, it was their opinion, from a Credit Risk point of

18 view, that they had been consistently applied.

19 Q. Now, if you turn to Page 303 of this presentation --

20 MR. SLOANE: And, Brian, if you'd highlight the

21 fourth paragraph down.

22 (Brief pause.)

23 MR. SLOANE: It's actually the next one, Brian. I

24 must have counted wrong.

25 (Brief pause.)

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 1 BY MR. SLOANE:

 2 Q. Now, this talks about -- we're not going to go through

 3 those, but there are certain criteria.

 4 "We also have a kind of statistical test-and-learn

 5 environment to see what's the best way to navigate through

 6 that Decision Tree."

 7 What did you mean by that?

 8 A. Well, that's really -- the "Decision Tree" is the document

 9 that we looked at before.

10 Q. I'm focusing, I'm sorry, on the "test and learn."

11 A. Well, what -- I think what -- I had testified was as we

12 went -- as you had that mental framework, you would come up

13 with tests where you would take a sample of accounts in a

14 certain period of time and you would treat them in a certain

15 way, and you would compare that to another sample of accounts

16 which you would treat in a different way.

17 And, by that, you were trying to learn what was the

18 best way to make those decisions; when would you restructure;

19 when wouldn't you restructure; and, how might you fine tune

20 those criteria?

21 THE COURT: I think this is probably a good place to

22 break.

23 We'll break for the afternoon, take 15 minutes and,

24 then, resume testimony after that, ladies and gentlemen.

25 (Jury out.)

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 1 THE COURT: You may step down, sir.

 2 Anything we need to take up?

 3 MR. SLOANE: Nothing, your Honor.

 4 THE COURT: Okay.

 5 (Brief recess.)

 6 THE COURT: Are we ready?

 7 MR. SLOANE: Your Honor, is it all right if I put

 8 this up here?

 9 THE COURT: I don't know. What is it?

10 MR. SLOANE: It's an empty chart that I'm going to

11 write on.

12 I can put it anywhere else.

13 THE COURT: No, I'm trying to figure out. I don't

14 particularly need to see it unless there's an objection, in

15 which case then I won't be able to see it.

16 I guess that's better for me. I have no problem with

17 it. Do you have a problem with it?

18 MR. DOWD: No, your Honor.

19 THE COURT: Okay. Let's bring the jury out.

20 MR. SLOANE: Hold it.

21 MR. DOWD: That's another option.

22 (Laughter.)

23 (Jury enters courtroom.)

24 THE CLERK: Please be seated.

25 THE COURT: Counsel --

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 1 MR. SLOANE: May I proceed, your Honor?

 2 THE COURT: -- proceed.

 3 BY MR. SLOANE:

 4 Q. Mr. Schoenholz, we talked a little bit about reserves, and

 5 I'd like you to explain what the process was of setting

 6 reserves. I think you mentioned something about statistical

 7 reserves. Why don't you explain that.

 8 A. The business units each would calculate a statistical

 9 estimate of their loss reserve requirements using a consistent

10 methodology but unique to their product. And what they did is

11 they tried to track, or they didn't try, what they did do is

12 they tracked how loans would move among delinquency buckets o

13 the way to ultimately being charged off.

14 Q. What's that mean, moved between delinquency buckets?

15 A. So you might look at an account that's current in month

16 one, and the next month you'd see, well, what happened to it?

17 Did it stay current? Did it go to one month delinquent?

18 The next month you could say, well, what happened to

19 that account? Did it go to three months delinquent? Did it

20 stay at two months delinquent? Did it go back to current?

21 And you would get we called them roll rates. Some

22 people called it migration analysis; but in essence, it was a

23 detailed calculation of -- of your portfolio's potential loss

24 experience based on delinquency status and charge-off

25 experience, and each of the business units would do that kind

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 1 of model.

 2 They would then send them to the corporate office.

 3 The corporate office would look at those and then arrive at

 4 judgmental reserves.

 5 Q. Let's stick with the statistical reserves first.

 6 A. Okay.

 7 Q. So the statistical reserves were done by the business

 8 units, is that correct?

 9 A. Yes.

10 Q. And was -- if an account was re-aged, we heard all this

11 discussion about re-aged, if it was re-aged, was that

12 reflected in the statistical reserves?

13 A. Yes.

14 Q. How?

15 A. Well, however the -- if an account that was re-aged

16 performed worse over time, it would move through the buckets

17 more quickly, and so it would end up carrying a higher reserve

18 requirement.

19 Q. So if it moved from 30 days delinquent to 60 days

20 delinquent, would that somehow affect the statistical

21 reserves?

22 A. Sure. And -- and if it -- I don't know how really else to

23 explain it, but I mean you had huge numbers of accounts. And

24 so when you looked at how those accounts performed over time

25 and how they migrated from bucket to bucket, delinquency

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 1 bucket, delinquency status to delinquency status, you would

 2 come up with a reserve requirement for those types of

 3 reserves.

 4 We had refined a methodology to actually break down

 5 statistical requirements among -- for those accounts that had

 6 been re-aged, which would carry a higher reserve component

 7 because they were the weaker accounts, for accounts that

 8 declared bankruptcy, and then for accounts that had never been

 9 re-aged or gone bankrupt.

10 Q. So you started -- these are the statistical reserves.

11 Now, was there -- were there also another component

12 of the reserve-setting process?

13 A. The second component was called judgmental reserves.

14 Q. What's that mean?

15 A. Well, the statistical models were a historical average, so

16 you needed to take into account things that might not be

17 reflected in that historical average.

18 So, for instance, if the economy was getting worse,

19 you'd want to have more judgmental reserves. If you thought

20 housing values were getting worse, you'd want to have more.

21 You looked at unemployment. You looked at the mix of products

22 in the portfolio.

23 So if unsecured products were growing more quickly

24 than real estate secured and they had higher loss rates, you

25 might want to have more judgmental reserves for that.

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 1 If you had significant changes or if you had changes

 2 in your account management practices, you might have more

 3 judgmental reserves. And so it was an attempt to go through,

 4 in a fairly thoughtful fashion, to look at items that would

 5 give rise to reserve requirements that were not reflected in

 6 the statistical calculation.

 7 Q. Was it just plugging in numbers, or was there some science

 8 to this?

 9 A. Well, it wasn't -- the accounting rules don't have you

10 quantify each element of judgmental reserves, but there was a

11 thought process went through by the controller's group, by the

12 corporate risk people, that they discussed with me of what led

13 to those judgments on -- led to those estimates of judgmental

14 reserves.

15 The other piece of that is that we did look at high

16 level reserve metrics.

17 Q. What's that mean?

18 A. We looked at reserves to receivables, we looked at

19 reserves to charge-offs, and we looked at reserves to

20 non-performing loans, and you would take and come up with kind

21 of a sanity check of saying was the totality of the reserves,

22 did that make sense.

23 Q. Did you set these reserves on your own?

24 A. I did not.

25 Q. Did you review them?

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 1 A. I reviewed the -- I never reviewed the detailed models,

 2 but I would review the conclusions with the controller, the

 3 chief credit officer, and sometimes I would have discussions

 4 with the business unit financial people about reserving.

 5 Q. Why didn't you do the work yourself?

 6 A. Well, there's a lot of work involved. I had -- I mean, it

 7 was better for them to do the work. They could do it more

 8 thoughtfully, they had more detailed knowledge, and then they

 9 would discuss it with me, and I would review it.

10 Q. Were there meetings to discuss what the reserves should

11 be, internal meetings?

12 A. We met quarterly with that group to talk about that.

13 Q. Now, were the reserves also reviewed with the audit

14 committee?

15 A. Yes, they were.

16 Q. And, again, the audit committee was a committee of the

17 board?

18 A. A committee of the board chaired by the person who was the

19 senior technical person at KPMG.

20 Q. Did -- were the reserves discussed with the independent

21 auditors?

22 A. Oh, absolutely.

23 Q. Were they discussed with -- your first, the independent

24 auditors during the relevant time period were first Arthur

25 Andersen, is that right?

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 1 A. Correct.

 2 Q. And what was Arthur Andersen's view of the reserves?

 3 A. Their view --

 4 MR. DOWD: Objection, hearsay.

 5 BY THE WITNESS:

 6 A. -- was always --

 7 MR. DOWD: Objection, hearsay.

 8 THE COURT: Sustained.

 9 BY MR. SLOANE:

10 Q. Did you have an understanding of whether there was

11 agreement with the reserves established by the company?

12 A. Yes.

13 Q. And was that something that also gave you comfort about

14 the adequacy of the reserves?

15 A. Yes.

16 Q. And your understanding of the adequacy of the reserves,

17 was that informed by the views of your internal auditors as

18 well?

19 MR. DOWD: Objection, hearsay.

20 THE COURT: No, he can answer that question yes or

21 no.

22 BY THE WITNESS:

23 A. Yes.

24 BY MR. SLOANE:

25 Q. And was it informed by the views of your external

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 1 auditors; yes or no?

 2 MR. DOWD: Objection, hearsay.

 3 THE COURT: Overruled.

 4 BY THE WITNESS:

 5 A. Yes.

 6 BY MR. SLOANE:

 7 Q. Now, let me try to understand the reserves or ask you

 8 about the reserves on a very basic level.

 9 Suppose you have a thousand dollars or had a thousand

10 dollars of earnings.

11 All right, for the Court's record, I've written on

12 the board a thousand dollars of earnings.

13 Do you see that?

14 A. I do.

15 Q. And suppose you had a credit reserve of $100. Do you see

16 that?

17 A. I do.

18 Q. And what does that mean?

19 A. That means you would have set aside $100 to cover future

20 credit losses, to absorb future credit losses.

21 Q. Now, what if you had $200, twice as many, of bad loans,

22 loans that weren't repaid? What would that mean?

23 A. When did you know you had 200 bad?

24 Q. Let's assume you knew it after you had set the credit

25 reserve of 100?

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 1 A. Then you would have to take another expense to make up the

 2 shortfall between the 100 and the 200.

 3 Q. So you'd have to add to your reserves then or take an

 4 expense for the miscalculation or the missed expectation?

 5 A. Yes, sir.

 6 Q. Did that ever happen?

 7 A. Never.

 8 Q. Now, let me ask you, you mentioned something called FFIEC

 9 in your direct-examination, and I know that we've heard some

10 testimony about this. You were in the back of the room

11 before.

12 Without getting into what FFIEC stands for, did it

13 apply to household?

14 A. It applied to our credit card bank, but not to the other

15 parts of the company.

16 Q. What percentage, if you know, of Household's total

17 receivables did FFIEC apply to?

18 A. My guess is -- I don't remember exactly, but it was

19 relatively small.

20 Q. Relatively small.

21 So what was the concern about FFIEC and the FFIEC

22 rules that we have heard so much testimony about as you've

23 been sitting in the back of the courtroom, what was your

24 concern about FFIEC as it might apply to Household?

25 A. Well, FFIEC were rules set by banking regulators to apply

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 1 to banks, and they set standards on things such as re-age and

 2 charge-off.

 3 Q. Was Household International a bank?

 4 A. It was not a bank.

 5 And the concern was if you applied these standards

 6 which were meant to apply to a bank's customer base and you

 7 applied them to a consumer finance customer base, you would

 8 actually increase the amounts of ultimate credit losses within

 9 the finance company.

10 Q. What would it do to your business model in terms of your

11 dealings with your customers?

12 A. It would really throw the whole model upside down. I mean

13 the reason you had a consumer finance company customer was

14 that they really didn't normally qualify to go to a bank. So

15 it would make no sense to take that customer and now say,

16 well, now I'm going to treat you like a bank customer.

17 Q. Mr. Dowd and I asked you about a restatement that occurred

18 in connection with certain credit card agreements.

19 Would you describe the circumstances surrounding the

20 restatement?

21 A. In -- I think it was in the spring of 2002, the audit

22 committee of the board decided to replace Arthur Andersen and

23 to hire KPMG. KPMG was, therefore, engaged, and they had to

24 re-audit, issue their opinion, on 1991 -- 1999, 2000 and

25 2001 -- the financial statements in those 10-K documents.

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 1 Q. Before KPMG got involved, was Arthur Andersen involved?

 2 A. Arthur Andersen had done the original audit work of those

 3 financial statements and had valid audit opinions that were

 4 out -- that were in effect for 1999, 2000 and 2001.

 5 Q. What's a valid audit opinion?

 6 A. Well, in terms of financial statements included in the

 7 10-K, you have to have an auditor's report that is current,

 8 and there were rules about what current meant; but you had to

 9 have a set of audited financial statements on file with the

10 SEC in order to conduct transactions in the securities

11 markets, trading stock or, for us, going in to borrow money

12 which we would then lend to customers.

13 So you had to have a valid set of audited financial

14 statements on file with the SEC to conduct your business.

15 Q. Now, Mr. Dowd showed you a bunch of 10-Ks for various

16 years, 2000, 2001 and 2002. As best you understood it, did

17 those include opinions from your outside auditors?

18 A. Yes.

19 Q. Is that something that you drew comfort from --

20 A. Yes.

21 Q. -- in certifying the documents after the Sarbanes-Oxley

22 rules came into effect?

23 A. Well, and even before Sarbanes-Oxley came into effect.

24 The fact that I had to sign the documents.

25 Q. Now, we saw on the board, if you put up that demonstrative

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 1 exhibit, Brian, DX 180 -- I'm sorry -- it's the one about the

 2 process.

 3 That's it.

 4 This refers to the external auditors, does it not?

 5 If you look down the lower left-hand corner?

 6 A. Yes, sir.

 7 Q. And it also includes reference to the external auditors in

 8 the top, in the 10-K draft, is that right?

 9 A. It does.

10 Q. And that was Arthur Andersen first and then KPMG?

11 A. Correct.

12 Q. Now, I interrupted you. Arthur Andersen, you were telling

13 us about Arthur Andersen, and then you said KPMG came in, so

14 continue, please.

15 A. Okay. So the audit committee decided to replace Arthur

16 Andersen and hire KPMG. KPMG had to audit 1999, 2000 and

17 2001, even though they had previously been audited by Arthur

18 Andersen. And they did that in the summer, late spring and

19 summer of 2002.

20 KPMG's audit conclusions that they concurred with

21 everything, including loss reserves and disclosures on

22 re-aging, on the company's account credit policies, but they

23 did not, KPMG did not agree with the accounting on three

24 contracts that Household had regarding marketing credit cards.

25 And without going into a lot of detail, the issue was

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 1 kind of basically the same on all three. It was Household

 2 spent money to market credit cards or paid money to these

 3 partners to market credit cards and, therefore, got a benefit

 4 from that over a period of time, and what was the period of

 5 time to record that expense? Because you wouldn't record it

 6 all day one. You would record it over some period of time.

 7 And there were no specific accounting, hard-line accounting

 8 rules about that. So you had to use management judgment.

 9 When Household first established those contracts, one

10 of which went back I think to '93, I think it was '92 or '93,

11 we had consulted with Arthur Andersen at that time who were

12 our auditors to get their opinion --

13 MR. DOWD: Objection, lack of foundation and hearsay.

14 THE COURT: Sustained.

15 BY MR. SLOANE:

16 Q. Let me show you a document. Perhaps this will expedite

17 this. Can you put in front of you Plaintiffs' Exhibit 231.

18 I think you should have that right in front of you,

19 Mr. Schoenholz, in that maybe top of the pile.

20 A. 231?

21 Q. Yeah, it's the 10-K/A. Do you see that?

22 A. Not yet.

23 Q. Let me just see if I can put it up on the screen and

24 perhaps that will help.

25 A. Okay.

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 1 MR. SLOANE: If you could, Brian, put up page 5079,

 2 and highlight -- it's page 62 of the document. Highlight the

 3 last paragraph at the bottom. Maybe you can blow that up,

 4 Brian.

 5 BY MR. SLOANE:

 6 Q. Now, this says, "Household International has restated its

 7 consolidated financial statements for the years ended

 8 December 31, 1999, 2000 and 2001. This Form 10-K/A and the

 9 exhibits included herewith include all adjustments relating to

10 the statement -- restatement for all such prior periods. The

11 restatement relates to MasterCard and Visa co-branding and

12 Affinity credit card relationships and a marketing agreement

13 with a third-party credit card marketing company. All were

14 part of our credit card services segment. In consultation

15 with our prior auditors, Arthur Andersen, LLP, we treated

16 payments made in accordance with these agreements that were

17 entered into between 1992 and 1999 as prepaid assets and

18 amortized them in accordance with the underlying economics of

19 the agreements. Our current auditors, KPMG, LLP, have advised

20 us that in their view, these payments should have either been

21 charged against earnings at the time they were made or

22 amortized over a shorter period of time."

23 Do you see that?

24 A. I do.

25 Q. And does this accurately reflect what happened; that is,

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 1 that Arthur Andersen, as set forth in this document, had

 2 consulted with the company and had agreed with the accounting

 3 at that time?

 4 A. Yes.

 5 Q. And KPMG came in and it disagreed, is that what this says?

 6 A. That's what that says.

 7 Q. Now, there was also a different view, was there not?

 8 There was some view that the OTS had about this, is that

 9 right?

10 A. The OCC --

11 Q. OCC, I'm sorry.

12 A. -- yes, had a view on one of the -- one of the items.

13 Q. And had they changed their view over time?

14 MR. DOWD: Objection, hearsay.

15 BY MR. SLOANE:

16 Q. What was your understanding of their view?

17 A. They originally agreed with the accounting as Household

18 did it and subsequently went back and questioned their prior

19 opinion and were in the process of finalizing their opinion

20 when this matter arose.

21 Q. Was it correct to say, sir, that you first followed the

22 views of Arthur Andersen?

23 A. That's correct.

24 Q. And then KPMG came in, you followed their views.

25 A. That's correct.

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 1 MR. SLOANE: Nothing further, your Honor.

 2 THE COURT: Redirect?

 3 MR. DOWD: Thank you, your Honor.

 4 REDIRECT EXAMINATION

 5 BY MR. DOWD:

 6 Q. Mr. Schoenholz, just so I understand, the financial

 7 statements that got restated, sir, that you just talked about

 8 with Mr. Sloane, they were Household's financial statements,

 9 right?

10 A. That's correct.

11 Q. They weren't Andersen's financial statements, were they?

12 A. They were the financial statements of the company.

13 Q. They were your responsibility, right?

14 A. That's correct.

15 Q. Now, sir, you testified that these re-agings were done for

16 the customers, I think, on cross, is that right?

17 A. I think I testified they were done and benefited customers

18 and benefited investors.

19 Q. Okay. Sir, I'll ask you to look back at Plaintiffs'

20 Exhibit 654, which you looked at, I believe, yesterday or

21 today. Plaintiffs' 654.

22 MR. DOWD: Can we have the switch, your Honor?

23 THE COURT: Indeed.

24 BY MR. DOWD:

25 Q. Again, sir, this was an e-mail from Mr. Makowski in

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 1 September 2001, right?

 2 A. That's correct.

 3 Q. And if you look in the second full paragraph there, it

 4 says "for maximum benefit." Do you see that, sir?

 5 A. It does.

 6 Q. It says, "For maximum benefit to year end, retail services

 7 should perform the re-age between the customer cycle date and

 8 month end with a sweep at month end. This will ensure that

 9 all September re-ages will be unable to reach two-plus at year

10 end."

11 Do you see that, sir?

12 A. I do.

13 Q. So Mr. Makowski, or I guess it was Mr. Stockdale in this

14 e-mail is saying you should re-age everything in September so

15 it doesn't go two-plus by the end of the year, isn't that

16 right?

17 A. I'm not sure what Mr. Stockdale meant.

18 Q. Okay. You just know what he wrote right there, right?

19 A. I know what he wrote.

20 Q. Okay. He didn't say anything about doing this for the

21 customer, did he, sir?

22 A. Well, the whole change was in context of the customer,

23 making the policy more customer friendly.

24 Q. Sir, he said to sweep them all in the month of September,

25 didn't he?

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 1 A. He's talking about a change of policy.

 2 Q. He's talking about doing all the re-ages between the

 3 customer cycle date and month end so that all the September

 4 re-ages will be unable to reach two-plus at year end. Isn't

 5 that what he says?

 6 A. That's what that paragraph says. My only comment to you

 7 is that he prefaces it, saying the reason they're doing the

 8 re-age policy is to modify their policy which would have made

 9 it more customer friendly.

10 Q. Yeah. He was trying to make sure that two-plus number

11 didn't get larger by the end of the year. He was trying to

12 reduce the two-plus number by the end of the year, wasn't he?

13 A. I have no idea.

14 Q. Okay. That's what he wrote though, isn't it, sir?

15 A. I don't know -- I can't opine what he meant when he wrote

16 those words.

17 Q. Okay. But you got that, that e-mail.

18 A. I was copied on Makowski's approval of Stockdale's e-mail.

19 That's correct.

20 Q. Okay. And you didn't write back and say, gosh, no, we did

21 these for the customers. We shouldn't sweep everything in the

22 month of September, did you, sir?

23 A. I don't think I responded to this. I don't think I

24 remembered this.

25 Q. Okay. Sir, your counsel keeps showing a chart with a list

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 1 of banks and brokerage houses and keeps saying they're the

 2 investors, right?

 3 A. I've seen the chart.

 4 Q. Okay. You've seen the chart, so you must be familiar with

 5 who are the people who bought stock between July 30th, 1999

 6 and October 11, 2002, right?

 7 A. Say again, please?

 8 Q. You must be familiar with who the investors were who

 9 bought stock between July 30, '99 and October 11, 2002, right?

10 A. I don't know everyone who bought stock.

11 Q. Okay. You don't, and you don't know that because there

12 were thousands of individuals who bought stock during that

13 time. Isn't that right, sir?

14 A. I don't know who bought stock during that time.

15 Q. You know individuals bought stock during that time, didn't

16 you, sir?

17 A. Oh, clearly some individuals bought stock.

18 Q. Yeah, thousands of individuals bought stock, didn't they?

19 A. I can't quantify it for you.

20 Q. More than a thousand, sir?

21 A. I don't know.

22 Q. Okay. But you're pretty sure that there were some banks

23 that bought stock. You're happy to testify about that, am I

24 right, sir?

25 A. I'm sure banks bought our stock.

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 1 Q. Yeah. And you're sure that individuals bought that stock,

 2 too, right, sir?

 3 A. I'm sure individuals --

 4 Q. And you're sure that pension funds bought that stock,

 5 right, sir?

 6 A. I would think so.

 7 Q. Now, sir, you talked about these reserves, right? You

 8 talked about that a little bit on your cross.

 9 And a reserve is an estimate, is it not, sir? It's a

10 prediction of how many loans you expected to go two-plus or

11 charge-off in the future, is that right?

12 A. It would not be related to loans that would go two-plus.

13 It would be related to loans that would go charge-off.

14 Q. Okay. So in other words, it's a prediction based on

15 judgmental analysis of historical data of what you think will

16 get charged off in the future, is that right?

17 A. That's fair.

18 Q. Okay. And it depends on, like, how the economy is doing,

19 stuff is like that, right?

20 A. That could be a factor.

21 Q. Okay. Sir, the two-plus numbers that you reported in

22 every one of these 10-Qs and 10-Ks, they were a hard number,

23 weren't they, sir?

24 A. What do you mean by a hard number?

25 Q. By a hard number, I mean you were telling people on this

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 1 day when we ended this quarter, 4 percent of our loans were

 2 two-plus, right?

 3 A. It was a reported statistic.

 4 Q. Yeah. It wasn't a future prediction. It was a number

 5 saying this is where it is right now in terms of people that

 6 are two-plus delinquent, right?

 7 A. That's a statistic.

 8 Q. Right. It was current data, isn't that right, sir?

 9 A. Correct.

10 Q. It wasn't a future prediction, was it?

11 A. It's a statistic as of a point in time.

12 Q. Right.

13 Now, sir, you talked about this April 9, 2002

14 investor conference, right? And we looked at these boards

15 earlier today about some of the information that he gave to

16 these 400 people in this room who followed Household, is that

17 right, sir?

18 A. We did.

19 Q. Okay. And you said, oh, we gave them the wrong numbers,

20 but I did it by mistake, is that right?

21 A. That's what I said.

22 Q. Okay. And you understood, sir, that, in fact, the number

23 you gave for multiple re-ages was 4.3, and the actual number

24 was 7.5, isn't that right?

25 A. Not when I gave the presentation.

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 1 Q. No, but you later learned, within weeks, you said, is that

 2 right, sir?

 3 A. That's what I said.

 4 Q. Within weeks, you learned that the loans that had been

 5 re-aged multiple times wasn't 4.3 percent. It was

 6 7.5 percent, right?

 7 A. Correct.

 8 Q. Okay. You left out about $3 billion in loans, isn't that

 9 right?

10 A. That's what that says.

11 Q. Okay. And that's what you learned from Mr. Makowski and

12 Mr. Pantelis, is that right, sir?

13 A. Correct.

14 Q. Okay. So after giving those information, all that

15 information to the investors on April 9, 2002, as soon as you

16 found that out, within two weeks, you issued a big press

17 release and corrected those numbers, right?

18 A. I told you we concluded they weren't material and we

19 didn't correct them.

20 Q. Okay. So just so I understand, no press release went out

21 saying, oh, boy, the numbers we gave you about multiple

22 re-ages were wrong.

23 No press release like that went out, did it, sir?

24 A. That's correct.

25 Q. You didn't tell anybody about that mistake, did you, sir?

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 2186

 1 A. We didn't tell people about that mistake.

 2 Q. Okay. Was that the last time you gave those numbers

 3 between then and October 11, 2002?

 4 A. I don't recall.

 5 Q. Sir, did anyone ever tell you during 2002 that re-aging

 6 was being used to inappropriately mask the true two-plus

 7 delinquency numbers?

 8 A. Say that again, please?

 9 Q. Did anyone ever tell you during the year 2002 that

10 re-aging was being used to mask the true two-plus delinquency

11 number?

12 A. I'm not sure. Possibly in one case.

13 Q. Okay. Who told you that?

14 A. I -- I'm not sure, but there was a discussion regarding

15 mortgage services, and I'd referred earlier to this woman

16 Elaine Markell. And I think that was her view, and I'm not

17 sure if she expressed that view to me or not. I know she'd

18 expressed that view to other people.

19 Q. Okay. But you learned of it in 2002, didn't you?

20 A. I think I learned of that some -- at some point in time, I

21 think I heard that comment.

22 Q. Okay. Sir, Mortgage Services was the second largest of

23 Household's business units in 2001 and 2002, was it not?

24 A. I'm not sure.

25 Q. Okay. You had about 39 billion in loans in Consumer

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 2187

 1 Lending, and you had somewhere around 18 billion in loans in

 2 Mortgage Services, isn't that right?

 3 A. I don't remember, and I'm not sure what credit -- off the

 4 top of my head, I can't think of what Credit Card Services

 5 had.

 6 Q. It was bigger than Auto, right, sir?

 7 A. Clearly bigger than Auto.

 8 Q. It was bigger than Retail Services, wasn't it?

 9 A. It was.

10 Q. Now, sir, you said that you didn't conceal anything from

11 investors, is that right?

12 A. That's what I said.

13 Q. But you ordered the destruction of documents, isn't that

14 right, sir?

15 A. I ordered the destruction of Andrew Kahr documents.

16 MR. DOWD: No further questions.

17 THE COURT: Recross?

18 MR. SLOANE: Yes, your Honor.

19 RECROSS EXAMINATION

20 BY MR. SLOANE:

21 Q. Mr. Dowd asked you about this error, and your

22 determination was, I think your testimony was it wasn't

23 material. Why was that?

24 A. Well, the first point was the total re-ages were correct.

25 The 16.9 percent number on that chart, that was correct.

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 2188

 1 Delinquency was correct.

 2 Charge-offs were correct.

 3 Reserves were correct.

 4 What wasn't correct was that split within the re-aged

 5 category, and although we can say $3 billion is a lot of

 6 money -- I don't disagree with that -- the receivable

 7 portfolio was $100 billion, and it was 3 percent difference.

 8 MR. SLOANE: Nothing further, your Honor.

 9 MR. DOWD: Your Honor, just one question.

10 THE COURT: Sure.

11 FURTHER REDIRECT EXAMINATION

12 BY MR. DOWD:

13 Q. Sir, you understood that an account that had been re-aged

14 multiple times performed worse than an account that had never

15 been re-aged before and had performed worse than an account

16 that had been re-aged just once, isn't that right?

17 A. I believe that's true.

18 Q. So those $3 billion in loans were going to perform worse

19 than other loans, isn't that right?

20 A. Our credit loss reserves would have been taking that into

21 account and would have -- so there would not have been an

22 effect on that for the investors.

23 Q. Okay, sir, but you didn't tell anybody about that, did

24 you?

25 A. I think I've already testified I didn't.

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 2189

 1 MR. DOWD: Nothing further, your Honor.

 2 THE COURT: Anything else?

 3 MR. SLOANE: Nothing, your Honor.

 4 THE COURT: You may step down, sir.

 5 Call your next witness.

 6 MR. DROSMAN: Plaintiffs call Elaine Markell.

 7 THE COURT: Excuse me a second. Will you folks

 8 release these documents that you left here so that this lady

 9 has a place to stand and sit?

10 Thank you.

11 Step right up there, ma'am. Remain standing and

12 raise your right hand.

13 (Witness sworn.)

14 THE COURT: Be seated.

15 HELEN ELAINE MARKELL, PLAINTIFFS' WITNESS, DULY SW

16 DIRECT EXAMINATION

17 BY MR. DROSMAN:

18 Q. Good afternoon, Ms. Markell. Could you please state your

19 name and spell your last name for the record.

20 A. Helen Elaine Markell, M-A-R-K-E-L-L.

21 Q. Ms. Markell, have you ever worked for Household?

22 A. Yes.

23 Q. When?

24 A. From February of 2002 'til November 2002.

25 Q. What was your title at Household?

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 2190

 1 A. I was the vice president over Default Services.

 2 Q. And you left Household in November of 2002, is that right?

 3 A. That's correct.

 4 Q. Why did you leave Household?

 5 A. I went on an administrative leave of absence, paid leave

 6 of absence.

 7 Q. And why is that?

 8 A. Well, some issues had come up regarding some of the

 9 policies and procedures that they were doing, and I had been

10 asked to do things that I thought were improper, and some of

11 my functions and responsibilities had been taken away from me.

12 So I contacted an attorney in California to find out

13 what my rights would be, and he contacted Household. And then

14 it was determined that I would go on a paid leave of absence

15 until it was resolved.

16 Q. What issues came up that you thought were improper?

17 A. The primary reason -- the primary issues were the calling

18 of bankrupt accounts. Another one was the method in which

19 they re-aged delinquent loans in the two-plus buckets, and

20 the -- adjusting the delinquency ratios for purposes of a

21 Fitch review that was coming up.

22 Q. And you mentioned that one of the things you thought was

23 improper that Household was doing was using re-aging to affect

24 the two-plus delinquency number, is that right?

25 A. That's correct.

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 2191

 1 Q. What do you mean by that?

 2 A. Well, re-aging the accounts to meet a certain delinquency

 3 number that had been projected at some time before the month

 4 end, and what they would do would be to roll the accounts to a

 5 more current status, and that would move it out of the

 6 two-plus bucket and into a more current status so it wouldn't

 7 reflect as a delinquent loan.

 8 And that would be without the benefit sometimes of

 9 talking to the borrower, determining the reason for

10 delinquency, or collecting any cash payments.

11 Q. Why did you believe that was improper?

12 A. Because I felt that it was falsifying and minimizing the

13 delinquency numbers.

14 Q. Now, before you worked at Household -- we'll talk more

15 about that in a moment, but before you worked at Household,

16 had you worked for any other mortgage lending companies?

17 A. Yes. I had about 25 years of experience in mortgage

18 servicing.

19 Q. Let's go to the first mortgage lending position that you

20 held. What was that?

21 A. I was -- I actually was in collections at United First

22 Mortgage as my first job in mortgage servicing.

23 Q. And what was your next job?

24 A. From there, I went to a -- Crocker Mortgage for a short

25 period of time.

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 2192

 1 Q. Okay. How long were you at Crocker?

 2 A. About nine months.

 3 Q. And what was your next job?

 4 A. I was a servicing manager at a company called Real Estate

 5 Consultants.

 6 Q. Why did you leave Crocker?

 7 A. I got recruited for a management position at the other

 8 company.

 9 Q. Okay. And how long were you at this next company?

10 A. Approximately three years.

11 Q. Okay. And what was your next job?

12 A. I -- my husband had been transferred to Miami, Florida, so

13 I got a job at Washington Federal Savings in Miami Beach, and

14 I was a collections manager there.

15 Q. And how long were you at Washington Savings and Loan?

16 A. Two years.

17 Q. What was your next job?

18 A. I -- my husband again got transferred to Gaithersburg,

19 Maryland, and I went to work for Standard Federal Savings and

20 Loan where I was the manager of collections, foreclosures and

21 eventually customer service and acquisitions.

22 Q. How long were you there?

23 A. Three years.

24 Q. And why did you leave?

25 A. My husband again got transferred to Southern California,

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 2193

 1 and so I actually got hired back at United First Mortgage in a

 2 management position this time; and at that point, they had

 3 been purchased by Merrill Lynch, so it was now Merrill Lynch

 4 Mortgage, but I was hired back to manage collections and

 5 foreclosures.

 6 Q. How long were you there?

 7 A. I was there for about three years, I think.

 8 Q. And why did you leave?

 9 A. I -- I went to work at Wells Fargo.

10 Q. Okay. And what was your position at Wells Fargo?

11 A. At Wells Fargo, I was generally servicing, managing

12 general servicing areas; and during that time, I was promoted

13 to vice president over servicing.

14 Q. And how long did you stay at Wells Fargo?

15 A. Almost six years.

16 Q. And what was your next job?

17 A. I went to Norwest Mortgage as the servicing manager and

18 vice president over mortgage servicing at Norwest.

19 Q. Why did you leave Wells Fargo?

20 A. I got recruited to the position at Norwest Mortgage.

21 Q. And how long did you stay at Norwest?

22 A. Two years.

23 Q. What was your next job?

24 A. I went to work at Prudential Home Mortgage, and, again, I

25 was over default services and loss mitigation.

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 2194

 1 Q. And why did you leave Norwest?

 2 A. I was recruited to -- to a higher position.

 3 Q. And how long did you stay at Prudential?

 4 A. Two years.

 5 Q. What was your next job after that?

 6 A. Prudential sold its mortgage servicing operations, so I

 7 was contacted by Countrywide Home Loans in California, and

 8 they asked me to come out for an interview, and I was hired

 9 there.

10 Q. How long did you work at Countrywide?

11 A. Two years.

12 Q. And what was your next job after that?

13 A. I went to Ameriquest Mortgage as executive vice president

14 over mortgage loan servicing.

15 Q. And why did you leave Countrywide for Ameriquest?

16 A. I was recruited.

17 Q. Was it a better job?

18 A. Yes, it was a better job.

19 Q. Now, did Ameriquest have any subprime loans that it worked

20 with?

21 A. Ameriquest was 100 percent subprime loans.

22 Q. And how long were you at Ameriquest?

23 A. Three-and-a-half years.

24 Q. And what was your next job after Ameriquest?

25 A. Household.

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 2195

 1 Q. And why did you leave Ameriquest?

 2 A. I had been recruited in 2001 to take the position at

 3 Household, and that -- that position was filled by somebody

 4 else. And I had kept in contact with Doug Friedrich, as well

 5 as the recruiter that had contacted me about that position.

 6 And a year later I was interviewed again for a different

 7 position, over default services, and I elected to take that

 8 job and move to Household.

 9 Q. Now, you said you were contacted in 2001 by Household, is

10 that right?

11 A. That's correct.

12 Q. And you interviewed with Household at that time?

13 A. That's correct.

14 Q. What was the job for which you were interviewing at

15 Household in 2001?

16 A. COO.

17 Q. And that's COO of the Mortgage Services business unit?

18 A. Mortgage Services in Florida, yes.

19 Q. Who did you interview with when you interviewed for that

20 job?

21 A. I interviewed with Doug Friedrich, Mike Woodward, Dave

22 Schoenholz, and there was one other person and today I don't

23 recall who that was.

24 Q. And you mentioned Dave Schoenholz was one of the people

25 who interviewed you, is that right?

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 2196

 1 A. That's correct.

 2 Q. And you also mentioned a person named Doug Friedrich

 3 interviewed you, is that correct?

 4 A. That's correct.

 5 Q. And was he the managing director of the entire Mortgage

 6 Services business unit?

 7 A. Yes, he was.

 8 Q. Okay. So what happened with this COO position that you

 9 were interviewing for?

10 A. It was filled by Greg Gibson.

11 Q. And then you interviewed again with Household?

12 A. Yes. About -- you know, like I said, I kept in contact

13 with Mr. Friedrich and the recruiter that had initially

14 contacted me.

15 And then I was asked to come back and re-interview

16 for the position of default services, which I did, and I

17 ultimately accepted that position.

18 Q. Okay. So when did you actually begin working at Household

19 then as vice president of default services?

20 A. Early in February 2002.

21 Q. And as vice president of default services, what were your

22 job responsibilities?

23 A. I was the -- managing collections, foreclosures,

24 bankruptcies and loss mitigation.

25 Q. And where were you physically located?

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 2197

 1 A. Brandon, Florida.

 2 Q. Now, Household, their corporate headquarters are in

 3 Prospect Heights, Illinois, right?

 4 A. That's correct.

 5 Q. Why were you in Brandon, Florida?

 6 A. That's where the mortgage servicing center was.

 7 Q. What about the COO of the entire Mortgage Services

 8 business unit, Greg Gibson. Where was he located?

 9 A. He was in Brandon, Florida, as well.

10 Q. And how many people reported to you in your position as

11 vice president of default servicing?

12 A. Approximately 300.

13 Q. Were those direct reports or indirect reports?

14 A. Indirect reports.

15 Q. Okay. What about directly? How many directly reported to

16 you?

17 A. Five or six direct reports.

18 Q. And then you supervised about 300 people in that position?

19 A. Yes.

20 Q. All right. Now, did you -- did you meet every month with

21 Doug Friedrich, the managing director of Household Mortgage

22 Services, while you were the vice president?

23 A. Yes. Doug Friedrich had a monthly management meeting.

24 Greg Gibson would attend, and then I was also invited to

25 attend those meetings on a monthly basis until about August

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 2198

 1 of 2002.

 2 Q. Did you also meet periodically with the CFO of the entire

 3 company, David Schoenholz?

 4 A. I met with him on about three occasions, I think.

 5 Q. Okay. Now, let's turn to a discussion of sort of

 6 delinquency in general and that concept in general.

 7 What is a delinquent loan?

 8 A. A delinquent loan would be a loan whose payment had not

 9 been paid in the month that it was due.

10 Q. Now, what is a two-plus delinquent loan?

11 A. A loan that was due for at least two or more payments.

12 Q. Have you ever heard of the term re-age before?

13 A. I have, yes.

14 Q. Okay. What does it mean to re-age a loan?

15 A. They -- re-aging an account would be to -- to roll the due

16 date on the computer system to a more current status.

17 Q. So, for example, take it out of the two-plus bucket and

18 make it current?

19 A. Yeah.

20 Q. That would be re-aging?

21 A. That's correct.

22 Q. What about the term restructure? Have you ever heard that

23 before?

24 A. That would be the same as re-aging.

25 Q. So those terms were used interchangeably at Household, is

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 2199

 1 that right?

 2 A. That's correct.

 3 Q. Okay. Now, if you re-age more loans, all other things

 4 being equal, what happens to the two-plus delinquencies

 5 statistic?

 6 A. Well, the -- re-aging the accounts would bring down the

 7 two-plus delinquencies, so it would be a favorable -- a

 8 favorable result on the two-plus.

 9 Q. While you were at Household during 2002, did Household

10 Mortgage Services re-age its loans?

11 A. Yes, it did.

12 Q. Okay. Were you personally involved in re-aging loans at

13 Household Mortgage Services?

14 A. My staff was, yes.

15 Q. And you oversaw that process?

16 A. Yeah, that's correct.

17 Q. Now, is there anything inherently wrong with re-aging a

18 loan?

19 A. No.

20 Q. Did you believe that there was something wrong with the

21 way that Household Mortgage Services re-aged its loans?

22 A. Yes, I did.

23 Q. What was that?

24 A. Well, they re-aged the loans primarily to manage the

25 delinquency number that was forecast rather than -- rather

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 2200

 1 than collecting cash to bring the accounts current.

 2 Q. What do you mean when you say that they re-aged the loans

 3 primarily to affect the forecast two-plus delinquency number?

 4 A. They would re-age enough loans to favorably impact the

 5 two-plus delinquency to get to the resulted number that they

 6 had projected for month end.

 7 Q. So they had a target number for month end, and they would

 8 make sure to re-age just enough loans to get to that target?

 9 A. That's correct.

10 Q. Okay. Now, was there a greater focus on re-aging loans

11 during certain periods of time?

12 A. Yes. The -- the -- it was extremely critical at quarter

13 end.

14 Q. What -- what do you mean by quarter end? There are four

15 quarters.

16 A. At the end of March -- yeah, there's four quarters of the

17 year, so the March month-end figures would be important. The

18 June month-end figures would be important, September, et

19 cetera.

20 Q. And you said that re-aging received a special focus at

21 quarter end?

22 A. Yes.

23 Q. What do you mean by that?

24 A. Well, they wanted a more favorable result at quarter end

25 because I believe those numbers are published.

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 2201

 1 Q. And so what happened at Household at quarter end?

 2 A. They would -- they would put extreme emphasis on meeting

 3 the delinquency number that was projected for that quarter

 4 end.

 5 Q. And how would that be accomplished?

 6 A. Well, they did a lot of re-aging.

 7 Q. Right at quarter end there?

 8 A. Right at quarter end.

 9 Q. And you witnessed that?

10 A. Yes, I did.

11 Q. Were there -- you mentioned two-plus delinquency targets

12 that Household Mortgage Services was supposed to meet. Were

13 there such things?

14 A. Yes.

15 Q. Okay. Now, was there a time during 2002 that you re-aged

16 loan accounts at Household Mortgage Services solely to meet

17 the two-plus delinquency target that had been set?

18 A. Yes.

19 Q. Tell me about that. When was that?

20 A. It was in September for the September month-end number,

21 and starting very close to the end of the month, they --

22 Household began restructuring loans without contacting the

23 borrower, meaning that they would run reports of certain

24 loans, in this case they were bankruptcy 13 loans, and these

25 people had just filed for bankruptcy 13. They ran the report,

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 2202

 1 and all of those loans were -- were restructured.

 2 Q. So, for example, they'd say give me a report of all of our

 3 loan customers who just filed for bankruptcy, and we want to

 4 re-age those loans to current?

 5 MR. SLOANE: Objection, your Honor. He's leading the

 6 witness.

 7 THE COURT: Sustained.

 8 BY MR. DROSMAN:

 9 Q. Okay. Can you elaborate on what you mean by "they ran

10 reports"?

11 A. Yes. The -- they did say take all the loans that just

12 filed for bankruptcy, Chapter 13, run a report. They gave

13 those to my staff, and my staff made the restructure

14 adjustments to the due dates.

15 They also ran reports of any bankruptcy Chapter 13

16 loan that had made one payment in the last 60 days, and they

17 restructured all of those loans as well.

18 Q. Did they call these bankrupt customers before they

19 restructured them?

20 A. No, they did not.

21 Q. Did Household Mortgage Services use certain standards to

22 decide which loans it should re-age and which loans it

23 shouldn't re-age?

24 A. From time to time, there were policies that were put in

25 writing, but almost from the very beginning of my employment

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EXHIBIT 6 

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 Rybak - redirect

 2368

 1 your Honor. I don't believe there's an objection.

 2 THE COURT: It will be admitted.

 3 MR. BURKHOLZ: Thank you.

 4 (Plaintiff's Exhibit No. 102 received in evidence.)

 5 MR. BURKHOLZ: Can we highlight the part on the

 6 bottom under "Discussion Items."

 7 BY MR. BURKHOLZ:

 8 Q. It says, "EZ Pay. The issue was raised regarding EZ Pay

 9 and restructures. A strategic decision was made for the 2000

10 year to use restructures much more aggressively than before."

11 Do you see that?

12 A. Yes.

13 Q. "In general, the number of accounts restructured in

14 January and February of 2000 were two to three times greater

15 than in December, 1999."

16 Do you see that?

17 A. Yes.

18 Q. And, then, it says, "The resulting two-plus percentage for

19 January, 2000, and February, 2000, was positively impacted."

20 You see that, right?

21 A. Yes.

22 Q. By "positively impacted," that means the percentage of

23 accounts that were delinquent went down, right?

24 A. That's correct.

25 Q. Is there any reference at all in this discussion item to

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 2369

 1 doing the restructuring for customers? Do you see that at

 2 all?

 3 A. No.

 4 Q. Do you see any reference to taking the economy into

 5 account in this paragraph here as a reason to do restructures?

 6 A. No.

 7 Q. Now, let's turn to -- do you have Exhibit 1100 in front of

 8 you?

 9 MR. BURKHOLZ: Can we bring that doc up on the

10 screen?

11 BY THE WITNESS:

12 A. Yes.

13 MR. BURKHOLZ: Let's highlight the first part.

14 BY MR. BURKHOLZ:

15 Q. It says, "As you know, we have stated in real estate our

16 restructure policy is once every 12 months with two payments

17 received"?

18 A. Yes.

19 Q. Do you see that?

20 The "we" you were referring to was Household,

21 correct?

22 A. Yes.

23 Q. Okay.

24 And you understood --

25 MR. BURKHOLZ: Strike that.

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 2370

 1 BY MR. BURKHOLZ:

 2 Q. So, your testimony is that this was just a mistake, these

 3 two statements that were made regarding the restructure policy

 4 to investors and buy and sell side analysts, right? Two

 5 mistakes, right?

 6 A. Yes.

 7 Q. Two separate mistakes, right?

 8 A. Yes.

 9 Q. And what happened? You woke up on April 3rd or April 4th

10 and you realized, "We made two mistakes here"? Is that what

11 happened?

12 A. No.

13 Q. The date of the memorandum is April 4th, 2002, right?

14 A. Yes.

15 Q. And in the months leading up to the date of this

16 memorandum, you're aware, aren't you, that Barron's and

17 Business Week started raising issues regarding Household's

18 re-aging and charge-off policies?

19 A. I was aware of the Barron's article.

20 Q. Okay.

21 Not aware of the Business Week article?

22 A. I don't recall.

23 Q. And you remember that -- you do recall that the Barron's

24 article was very critical and raising questions about

25 Household's re-aging and charge-off policies, right?

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 2371

 1 A. Yes.

 2 Q. You were aware, also, weren't you, that there were

 3 analysts at this time starting to question Household's

 4 re-aging and charge-off policies, right?

 5 A. Yes.

 6 Q. And you read some of those analyst reports, didn't you?

 7 A. Yes.

 8 Q. And you're not aware of Household issuing a press release

 9 that day or the day after saying, "We made a mistake,

10 investors and analysts. We misled you regarding our

11 restructure policy in real estate. We made two mistakes"?

12 You didn't issue that kind of press release, did you?

13 A. I didn't issue any press release.

14 Q. And Household didn't, did they?

15 A. Not to the best of my knowledge, no.

16 Q. And regarding materiality, you're not an expert on

17 materiality with respect to the federal securities laws, are

18 you?

19 A. No.

20 MR. BURKHOLZ: No further questions, your Honor.

21 MR. SLOANE: A few questions, your Honor.

22 RECROSS EXAMINATION

23 BY MR. SLOANE:

24 Q. Would you look at what counsel's just shown you,

25 Plaintiffs' Exhibit 102?

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 2372

 1 MR. SLOANE: Put that back up on the screen.

 2 Your Honor, I think we need to switch.

 3 THE COURT: I'm sorry.

 4 MR. SLOANE: My fault.

 5 BY MR. SLOANE:

 6 Q. And if you go to the last page, it says, "Follow-Ups."

 7 You look at the second item, it says, "Accounting will report

 8 on their review of Risk's loss model."

 9 What was the loss model?

10 A. We had a model of -- to the best of my recollection, this

11 is for Household Mortgage Services. We had models which would

12 predict what the losses were based on the value of the home,

13 the lien position, probability of default and loss severities.

14 So, we were trying to forecast out what the losses

15 would be.

16 Q. And this is another one of those statistical methods used

17 at Household International to try to determine losses or

18 write-offs; is that right?

19 A. Yes, it was.

20 Q. Now, I think counsel asked you something about

21 restructures reducing two-plus. If you know, why did

22 restructures, in your view, reduce two-plus delinquencies?

23 A. Where there were -- well, if an account was six days or

24 past due, that account would no longer be delinquent. But

25 most of our restructures were on accounts that were 30 days

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 1 past due. And one thing that it did was that it would reduce

 2 the number of accounts that were in the collection queues.

 3 And, basically, what we wanted was to have the

 4 collectors work the accounts that were, indeed, going to roll

 5 to charge-off. And one of the reasons -- you know, if you run

 6 restructures and you bring the accounts current because they

 7 demonstrated payments, they're making payments, then you

 8 should not keep those accounts in the queues to collect

 9 past-due balances.

10 And, so, the fact that you could more efficiently

11 work the accounts that were not making payments also reduced

12 two-plus.

13 Q. What do you mean "work the accounts"?

14 A. Well, you had a -- at any point in time, you only had a

15 fixed number of collectors. And, so, they could only work so

16 many accounts per collector. And when you -- when you -- when

17 you -- re-aged an account because he made payments and you

18 took him out of the queue, he had fewer accounts to work and

19 he could focus on the people who were not making payments.

20 MR. SLOANE: Nothing further, your Honor.

21 MR. BURKHOLZ: No questions, your Honor.

22 THE COURT: You may step down.

23 (Witness excused.)

24 MR. DOWD: At this time, the plaintiffs would call

25 Harris Devor.

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 1 MS. BUCKLEY: Your Honor, we had some threshold

 2 issues about this witness.

 3 THE COURT: Okay. That is correct.

 4 Let's try to address those at a sidebar, see if that

 5 works.

 6 (Proceedings had at sidebar:)

 7 THE COURT: Refresh my recollection.

 8 MS. BUCKLEY: Yes, your Honor. This witness referred

 9 to the Attorney General settlement, settlement figure.

10 THE COURT: It's an expert witness, right?

11 MR. DOWD: Yes.

12 MS. BUCKLEY: Yes.

13 And in your opinion concerning Ms. Ghiglieri and our

14 request to voir dire her, you noted that there was a potential

15 tension between two of your rulings. First, that the Attorney

16 General settlement and negotiations were not to be referred to

17 except in the context of damages and loss causation; and,

18 then, here, again, with this witness who bases some of his

19 opinion on those things.

20 THE COURT: Okay.

21 MS. BUCKLEY: He is a liability witness.

22 THE COURT: Let me stop you here.

23 MS. BUCKLEY: Yes.

24 THE COURT: What's he going to say about the

25 settlement?

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 1 MR. DOWD: Your Honor, he's going to offer -- he has

 2 two quantifications. You know, he's allowed to testify to

 3 what was attributable to the illegal practices. The Court had

 4 said that in the opinion.

 5 First he's going to testify that he's seen internal

 6 calculations that put the number at $3.2 billion, about 2

 7 billion of --

 8 THE COURT: Does he have to say that they are as a

 9 result of the settlement?

10 MR. DOWD: Oh, no. That's the first part.

11 THE COURT: Okay.

12 MR. DOWD: Then I'm just going to ask him, your

13 Honor, "Did you perform a secondary analysis?"

14 And I'm going to ask him, "What is that?"

15 And if you want, I can try to lay the two of them out

16 -- I was going to have him say, "Was the secondary analysis

17 based on restitution that Household paid through the Attorney

18 Generals to consumers?"

19 Is that okay with you guys?

20 I mean, I think that -- was trying to not use the

21 word "settlement," not use "484."

22 And, then, I was just going to ask him if it

23 confirmed his earlier opinion.

24 MS. BUCKLEY: Your Honor, as I said, this is not a

25 damages expert. He's a liability person. But let me address

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 1 the first point.

 2 The $3.2 billion figure that counsel refers to comes

 3 from a document your Honor specifically excluded from evidence

 4 because of the Attorney General negotiation point. So, the

 5 $3.2 billion number is no more acceptable under the analysis

 6 of the Federal Rules of Evidence, at least in our view, than

 7 the $484 million number.

 8 So, that document, called Rodemoyer 17, has been

 9 excluded by your Honor on grounds that it's a settlement

10 document. It was prepared in the context of settlement

11 negotiations. So, I don't understand the legal distinction

12 counsel is making between those two figures.

13 MR. DOWD: Your Honor, because you said that's

14 exactly what I could do in the opinion. It's right there

15 (indicating). He can give his opinion about how much of the

16 revenue reported for '99 through the second quarter was

17 attributable to predatory lending practices.

18 MS. BUCKLEY: It doesn't say he can talk about the

19 settlement.

20 MR. DOWD: Defendants can explore on cross the extent

21 to which the document --

22 THE COURT: Okay.

23 The ruling is he can testify as to the bases for his

24 opinions, including the figures that he took into account. He

25 can testify as to the origin of those figures.

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 1 I don't see any need for him to testify as to -- to

 2 use the word "settlement" --

 3 MR. DOWD: No, he won't.

 4 THE COURT: -- or "settlement negotiations." The

 5 fact that there was an amount paid is going to come out as

 6 part of the damages. So, nothing new is going to be added

 7 there.

 8 But to the extent that his testimony goes beyond my

 9 ruling on the use of the settlement itself, I'm going to allow

10 it; and, if at any point in time you feel that that's

11 happened, you can ask the Court to instruct the jury with the

12 appropriate instruction and I will do that.

13 MR. DOWD: And I will try to lead him a little bit

14 through that part, your Honor, just to keep it safer.

15 THE COURT: That's the idea.

16 MS. BUCKLEY: I had one other smaller issue, your

17 Honor.

18 This witness testified in his deposition -- and I

19 have -- only counsel knows whether he'll try to testify, again

20 -- that an Attorney General settlement negotiations should

21 have been disclosed in three public filings that Household

22 filed in August of 2002. We will be objecting to that.

23 THE COURT: When you say "public filings," you're

24 talking about the --

25 MS. BUCKLEY: 10-Ks and 10-Qs.

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 1 THE COURT: Okay.

 2 MS. BUCKLEY: The 10-Ks and 10-Qs that this man is

 3 attacking are not listed on Plaintiffs' False Statements in

 4 This Case and, therefore --

 5 THE COURT: Is he going to testify to that?

 6 MR. DOWD: About the loss contingency on the

 7 negotiations, no, I'm not going to bring that out.

 8 In other words, you're talking about the August

 9 '02 --

10 MS. BUCKLEY: Yeah.

11 MR. DOWD: -- where they should have said that there

12 was a -- they should have disclosed the negotiations?

13 THE COURT: Right.

14 MS. BUCKLEY: Right.

15 MR. DOWD: No, I'm not going to ask about that.

16 MS. BUCKLEY: Great.

17 THE COURT: Okay.

18 MS. BUCKLEY: Thank you all.

19 (Proceedings had in open court:)

20 MR. DOWD: Plaintiffs call Harris Devor.

21 HARRIS DEVOR, PLAINTIFF'S WITNESS, SWORN

22 DIRECT EXAMINATION

23 BY MR. DOWD:

24 Q. Good afternoon, sir.

25 A. Good afternoon.

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 1 Q. Could you state your name for the record, please, and

 2 spell your last name?

 3 A. Sure. Harris L. Devor, D-e-v-o-r.

 4 Q. And have you been retained by the plaintiffs to reach an

 5 expert opinion in this case?

 6 A. I have.

 7 Q. Did you reach a conclusion as to whether Household failed

 8 to disclose required information about its improper or illegal

 9 lending practices in violation of SEC regulations and

10 accounting rules?

11 A. I did.

12 Q. Did you reach a conclusion as to whether Household used

13 re-aging and other loan quality concealment techniques to

14 manipulate its delinquency statistics?

15 A. I did.

16 Q. Did you reach a conclusion as to whether Household

17 improperly recorded revenue and expenses in connection with

18 certain agreements with General Motors, the AFL-CIO, Union

19 Privilege and a marketing company called Kessler?

20 A. I did.

21 Q. All right.

22 Before you explain your conclusions, I'd like to

23 begin with your qualifications, if I could. All right, sir?

24 A. Okay.

25 Q. And let's start with your educational background. Where

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 1 did you attend college?

 2 A. I went to Temple University.

 3 Q. And did you graduate from Temple?

 4 A. I did.

 5 Q. And did you receive a degree?

 6 A. I did.

 7 Q. And what was your degree in?

 8 A. Bachelor's of Business Administration with a Major in

 9 Accounting.

10 Q. And where did you go to work after graduating from Temple

11 University?

12 A. I joined Pricewaterhouse.

13 Q. And what was the business of Pricewaterhouse at that time?

14 A. Pricewaterhouse is an accounting firm then and now,

15 although now it's known as PricewaterhouseCoopers. It's a CPA

16 firm, an accounting firm.

17 Q. Okay.

18 And when you talk about an accounting firm, what type

19 of business, what type of work did you do at Pricewaterhouse?

20 A. I was an auditor. That was my specialty.

21 Q. And what is an auditor, sir?

22 A. An auditor is a person who basically goes into companies,

23 looks at what the companies have reported in the way usually

24 of financial information to the public, or to whomever they're

25 reporting to; and, then, goes into the company and determines

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 1 whether or not their records, the transactions, the events at

 2 the company really are represented fairly in what the company

 3 reported to the outside. That's what an auditor does.

 4 THE COURT: I'm going to ask you to step back from

 5 that microphone a little bit.

 6 THE WITNESS: Okay, sure.

 7 THE COURT: Every witness is different, but I think

 8 you need to have it a little bit further away from you.

 9 THE WITNESS: Okay.

10 MR. DOWD: You're the first witness that's had to

11 push it back.

12 (Laughter.)

13 BY MR. DOWD:

14 Q. What was your entry-level position with Pricewaterhouse?

15 A. I was a staff accountant.

16 Q. Did you receive any promotions during the time you were at

17 Pricewaterhouse?

18 A. Sure. I did.

19 Q. And tell us about that.

20 A. I was promoted to Senior Accountant, which was the next

21 level after Staff Accountant. I was, at some point later on,

22 promoted to Manager, which at the time, I believe, was the

23 last step before Partner. I reached the level of Manager

24 before I left.

25 Q. Okay.

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 1 And what year did you leave Pricewaterhouse?

 2 A. I left in 1981.

 3 Q. And how long were you there total?

 4 A. So, I was there eight years.

 5 Q. And at some point during that time, did you become a

 6 certified public accountant?

 7 A. I did.

 8 Q. And can you just tell us briefly what is a CPA, a

 9 certified public accountant?

10 A. Well, I became a certified public accountant in 1975,

11 which was two years after I joined the firm. And back then,

12 you couldn't become a certified public accountant or even sit

13 for the exam until you practiced for two years.

14 A certified public accountant is one who takes a

15 rigorous exam, some almost three days -- at least when I took

16 it, it was almost three days -- long in length, covering a

17 variety of accounting-related, auditing-related subjects. And

18 once you passed the exam, you are then licensed to operate as

19 a CPA.

20 Q. Okay.

21 And are you still a CPA today?

22 A. I am.

23 Q. And as a CPA, are there any continuing education

24 obligations that you have? Do you have to take courses every

25 year or anything like that?

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 1 A. Yes. In order to renew your license -- you have to renew

 2 it -- in my state at least, anyway -- every two years. And

 3 you renew it, in part, by taking 80 hours of continuing

 4 education credits relating to accounting subjects every two

 5 years or roughly 40 a year. It doesn't have to be 40 a year,

 6 but it has to be 80 in two years.

 7 Q. And, sir, you left Pricewaterhouse, you said, in about

 8 1981. Did you at that time join a firm called Laventhal

 9 Howarth?

10 A. Yes. I actually was given an offer I couldn't refuse.

11 Laventhal was a very large firm -- also an international

12 accounting firm, like Pricewaterhouse -- headquartered in

13 Philadelphia. Philadelphia was a major practice to that firm.

14 And I was, in essence, given an offer I couldn't refuse. I

15 left.

16 Q. Okay.

17 And how long did you stay with Laventhal?

18 A. I stayed at Laventhal nine years.

19 Q. Okay.

20 And what was your entry-level position at Laventhal?

21 A. I joined at the same level I left Pricewaterhouse at,

22 which was Audit Manager. And, again, that was the step prior

23 to being a partner.

24 Q. Okay.

25 And at some point did you become a partner at

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 1 Laventhal?

 2 A. I did, in 1984.

 3 Q. And can you tell me, just explain to us briefly, what type

 4 of audit work -- what type of industries did you audit during

 5 the time that you were an auditor, both at Pricewaterhouse and

 6 Laventhal?

 7 A. Well, they sort of ran the gamut, actually. Everything

 8 you can possibly think of. Both -- at both places, they were

 9 publicly-held companies. Pricewaterhouse, probably they were

10 larger clients. They were worldwide, international.

11 Laventhal, although still publicly held, they were a little

12 bit smaller. Also, just about in every industry you can think

13 of: Wholesaling, manufacturing, retailing, not-for-profits,

14 some finance entities. Different ones.

15 Q. And in performing audit work, do you rely on the

16 management's representations?

17 A. To some extent. I mean, it can't be the primary source of

18 your opinion -- basis for your opinion. It can't be. But,

19 certainly, during the course of an audit, you're -- you do

20 rely on management representations, sure, to some extent.

21 Q. And when I say "management," I mean management of the

22 company you're auditing.

23 A. Sure.

24 Q. And you left Laventhal in 1990; is that right?

25 A. I and everybody who worked at Laventhal left in 1990, yes.

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 1 Q. Okay.

 2 It closed down?

 3 A. Closed down.

 4 Q. Okay.

 5 And where did you go to work after that?

 6 A. Well, at that point, I had a chance -- I had a choice. I

 7 could -- I actually was given an offer to go back to

 8 Pricewaterhouse, but I decided for the first time in my life I

 9 wanted to work in a small firm where I just had more control

10 of what I was doing, as opposed to working in a large

11 organization.

12 Q. Okay.

13 And where did you go at that time?

14 A. I joined a firm -- smaller firm -- in Philadelphia by the

15 name -- at the time, the name of the firm was Shechtman Marks,

16 and after I joined it, it became Shechtman Marks Devor.

17 Q. And what's the business of Shechtman Marks Devor? What

18 kind of work do you do?

19 A. Also a CPA firm, an accounting firm; and, you know, do

20 very similar work that I did at Laventhal and Pricewaterhouse

21 in terms of being an auditor, amongst other things.

22 Q. Okay.

23 And, approximately, how many times have you been

24 retained as an expert witness or consultant in connection with

25 litigation matters?

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 1 A. Well, when you say "and consultant," I would say probably

 2 too numerous to mention. In terms of actually ultimately

 3 opining, given that the cases sometimes settle before they go

 4 to trial or whatever, I would say -- I don't know -- 30, 40,

 5 50. Something like that.

 6 Q. Okay.

 7 And on those occasions, have you been retained to

 8 render opinions about accounting and financial reporting

 9 issues?

10 A. Yes. I mean, in some of the largest cases that I'm sure

11 many people in this room have heard of over the last ten

12 years. Large cases that involve financial statements that are

13 allegedly misreported. One that I recall being in Chicago on

14 was something called Waste Management about ten years ago,

15 which at the time was a fairly large one.

16 But, yes, that's the kind of work I do.

17 Q. Have you been hired by both plaintiffs and defendants in

18 connection with expert witness work?

19 A. Yes, but certainly much more by plaintiffs than

20 defendants.

21 Q. Okay.

22 And have you been retained by any government agencies

23 over the years to provide consulting and auditing, accounting

24 and financial disclosure?

25 A. I have. I've been retained by the Department of Justice

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 1 in a case in Pennsylvania against a large company which I'm

 2 sure everybody has heard of called Rite-Aid. That was a

 3 criminal trial, and I testified at trial.

 4 I've also been retained by various state Attorneys

 5 General around the country in certain cases relating to other

 6 damage issues or accounting and auditing issues.

 7 Q. Have you been qualified as an expert witness in the

 8 federal courts?

 9 A. Yes, of course.

10 Q. Okay.

11 Have you been qualified to testify as an expert

12 witness in any state courts?

13 A. Of course, yes.

14 Q. Have you ever taught courses in accounting or auditing?

15 A. I have.

16 Q. Tell us about that.

17 A. I taught in Temple's graduate program -- MBA program -- at

18 night for a semester or two. I've taught various courses

19 within the firms that I've worked at, both Pricewaterhouse,

20 Laventhal and, of course, my firm -- my current firm. And

21 I've also taught professionally -- well, in a professional

22 manner. As I said before, CPAs have to get certain credits

23 during the year and they run courses, and I've been asked to

24 teach on a bunch of those occasions to other professionals,

25 other CPAs, about certain subjects.

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 1 Q. And, sir, in your professional career, either as an

 2 auditor or in connection with your litigation work, have you

 3 had any experience with the banking or lending industries?

 4 A. Sure.

 5 Q. Okay.

 6 And tell us a little bit about that.

 7 A. Well, I've audited a couple banks. I've -- I audited a

 8 finance company. And much of the litigation work I've done

 9 over the last year-and-a-half has related to lenders, subprime

10 lenders, a couple of whom have very similar issues to this

11 case regarding loan quality deception, which I guess we'll

12 talk about later, but those kinds of things.

13 And many of the banks that are now the subject of the

14 banking crisis over the last six months to a year, that

15 everybody's read about from Wall Street, I've been retained in

16 at least five or six of those very large bank cases, all

17 alleging misreporting of financial information.

18 Q. And, sir, let me ask you, when did you start working on

19 this case?

20 A. It's a long time ago, but I would say about four years

21 ago.

22 Q. Okay.

23 And do you work on it alone at Shechtman Marks Devor?

24 A. I don't, no. I have a team.

25 Q. Okay.

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 1 And what type of work have you and your team done?

 2 A. Well, just to explain that, I mean, you cannot do an

 3 engagement like this on your own. I mean, the size of this

 4 engagement, as well as some of the other ones I've worked,

 5 necessitates having a team of people to obviously assist you.

 6 And I apologize, but I lost your question.

 7 Q. Sure.

 8 I just wanted to know what type of work you and your

 9 team have done since you started in 2005, I guess.

10 A. Okay.

11 Well, we have reviewed boxes and boxes of documents,

12 perhaps in excess of 150.

13 I believe, in addition to that, all the documents in

14 this case remain available to us on the computer in a data

15 system. And we were able to access that system. So, we've

16 run searches for terms on that system, to be able to pull out

17 documents that may be relevant to the issues we're looking at.

18 We have read, I don't know, I would say somewhere

19 around 50 or so depositions, as well as the exhibits to the

20 depositions.

21 We have looked at some SEC transcripts. We have

22 looked at the auditor work papers of both the original auditor

23 of Household, which was Arthur Andersen, as well as the

24 successor auditor of Household, which was KPMG.

25 And I'm sure I've left something out, but that's a

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 1 pretty good start.

 2 Q. Okay.

 3 Can you tell me approximately how many hours you and

 4 your staff have worked on this case?

 5 A. I believe it's somewhere around 6,000.

 6 Q. And I take it you don't do this for free?

 7 A. Well, I -- my firm doesn't do it for free. I -- I -- I'm

 8 just a salaried employee; but, the firm, obviously, has not

 9 done it for free, no. They've billed my time, as well as my

10 team's time, as we have gone through the engagement.

11 Q. Okay.

12 And how much do you charge per hour for your work?

13 A. My billing rate is $550 an hour.

14 It wasn't for the whole four-year period; but, at

15 this point, it's 550.

16 Q. Okay.

17 And what was your assignment, as you understood it?

18 What were you asked to do by plaintiffs?

19 A. Well, in a nutshell, we were asked to review the 10-Ks and

20 10-Qs that were issued by Household during the relevant time

21 period in this case, and determine whether or not the

22 disclosures that were -- the financial statements and the

23 disclosures that were -- included therein were, in fact,

24 fairly stated.

25 Q. Okay.

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 1 And you testified earlier that you had reached

 2 certain conclusions with regard to Household's financial

 3 statements and disclosures included in the 10-Qs and the

 4 10-Ks; is that right?

 5 A. That is correct.

 6 Q. Okay.

 7 And have you prepared -- or had a demonstrative

 8 exhibit prepared -- to assist you in explaining your

 9 conclusion to the jury?

10 A. I have.

11 Q. Okay.

12 MR. DOWD: I'd ask that we pull up what's been marked

13 as Plaintiffs' Demonstrative Exhibit 107.

14 MS. BUCKLEY: Objection, your Honor.

15 THE COURT: The basis?

16 MS. BUCKLEY: The third bullet point is the subject

17 of your order of earlier this week.

18 MR. DOWD: I think that's a different issue.

19 MS. BUCKLEY: Withdrawn, your Honor. Sorry.

20 THE COURT: I'm sorry, you're withdrawing your

21 objection?

22 MS. BUCKLEY: I am, your Honor.

23 THE COURT: Okay.

24 MR. DOWD: Do we have Plaintiffs' Demonstrative 106?

25 Oh, your Honor, we need to switch. Sorry.

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 1 THE WITNESS: Sorry.

 2 THE COURT: Wait, sir. There's an objection.

 3 What's the objection, again?

 4 MS. BUCKLEY: Beyond the class period, your Honor.

 5 MR. DOWD: It would relate to events during the class

 6 period, your Honor.

 7 THE COURT: I will sustain the objection.

 8 BY MR. DOWD:

 9 Q. Sir, your opinion, if you could, limit it to the 13 Qs and

10 Ks that were filed in connection with the end of these periods

11 originally. All right?

12 A. That is correct.

13 Q. Okay.

14 And do these 10-Qs and 10-Ks, do they report

15 information about Household's income, for example?

16 A. They do.

17 Q. Do they report information about revenues?

18 A. They do.

19 Q. And do they report information about earnings per share?

20 A. They also do, sure.

21 Q. And, sir, do these -- this type of information, where in

22 the 10-Q or 10-K is it presented?

23 What's that document called?

24 A. Well, "Financial Statements," in essence. The company --

25 10-Qs and 10-Ks include the financial statements of the

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 1 company, which consists maybe of three, four, five pages. It

 2 can certainly vary.

 3 And, then, over and beyond the financial statements,

 4 there's a whole section called the "Footnotes" to the

 5 financial statements, which are actually part of the financial

 6 statements, which is a long narrative that explains the

 7 financial statements.

 8 And, beyond that, there's a whole other section of

 9 the 10-K that also discusses the financial information, called

10 "Management's Discussion and Analysis," also known as "MD&A.

11 Q. What type of information is provided in the footnotes and

12 MD&A?

13 A. Well, basically, the footnotes and MD&A -- the narrative

14 part of the document -- basically is there to explain the

15 financial statements. They sort of give the story behind the

16 numbers, in essence: How the numbers were prepared; what

17 procedures, policies the company followed to arrive at these

18 numbers; and, they're very important to an understanding of

19 how the financial statements came to be what they are.

20 Q. And have you prepared a demonstrative exhibit to explain

21 the concept of the disclosures in these footnotes and MD&As?

22 A. I have.

23 Q. Okay.

24 MR. DOWD: I'd ask to bring up Plaintiffs'

25 Demonstrative Exhibit 101.

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 1 (Brief pause.)

 2 BY MR. DOWD:

 3 Q. Sir, you can you see Plaintiffs' Exhibit 101 there?

 4 A. I can.

 5 Q. And is that the demonstrative you've prepared?

 6 A. It is.

 7 Q. Okay.

 8 And can you tell us what this demonstrative shows?

 9 A. Well, in the background of the demonstrative, you'll see

10 what looks like a bunch of numbers and captions.

11 That's one of Household's financial statements. It's

12 the Statement of Income, also commonly referred to as a

13 "Profit and Loss Statement."

14 And, then, what's in front of that -- if you actually

15 go to the bottom of the financial statements, you'll see a

16 little red box right there (indicating) that's been blown up.

17 And what that says is, "The accompanying notes are an integral

18 part of these consolidated financial statements."

19 So, that refers the reader or the user of the

20 financial statements to this narrative -- the footnotes --

21 that I explained before, so that one can understand what the

22 numbers mean.

23 And, as you can see, it indicates that it's actually

24 part of the financial statements. The footnotes and financial

25 statements are considered one item.

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 1 Q. Okay.

 2 And, sir, have you also prepared --

 3 A. I'm sorry, right below it is an example of that, taken out

 4 of Household's -- one small example.

 5 Q. In other words, that's a part of the footnotes that's

 6 blown up there?

 7 A. Right.

 8 Q. Okay.

 9 And that goes on, I take it, for pages and pages?

10 A. Pages and pages.

11 Q. Okay.

12 And, sir, have you also prepared a demonstrative to

13 assist you in explaining this testimony about the MD&A -- the

14 Management Discussion and Analysis?

15 A. I have.

16 Q. Okay.

17 MR. DOWD: And could we please bring up Plaintiffs'

18 Demonstrative 102.

19 (Brief pause.)

20 BY MR. DOWD:

21 Q. And, sir, what is depicted in Plaintiffs' Demonstrative

22 Exhibit 102?

23 A. Well, again, in the background is the same income

24 statement -- the same financial statement -- that was on the

25 prior slide; and, in the foreground of the demonstrative is a

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 1 section out of this other section of the 10-K called the

 2 "Management's Discussion and Analysis." And it provides

 3 certain analysis of the numbers required by the SEC.

 4 And this is an example right out of, I think, the 201

 5 10-K of Household.

 6 Q. And that's been received in evidence as Defendants' 852.

 7 Now, sir, are there rules? I mean, you said

 8 something about SEC rules. Are there rules about what's

 9 supposed to be in these financial disclosures -- this MD&A and

10 the footnotes?

11 A. Yes, there are rules.

12 Q. Okay.

13 And have you prepared another demonstrative to assist

14 you in explaining that concept?

15 A. I have.

16 Q. Okay.

17 MR. DOWD: And could we please have up Plaintiffs'

18 Demonstrative Exhibit 109.

19 (Brief pause.)

20 BY MR. DOWD:

21 Q. And, sir, what is shown on Plaintiffs' Demonstrative

22 Exhibit 109?

23 A. Really, the two sets of rules that would govern how a

24 public company would, in fact, report.

25 So, the first one -- the upper left-hand corner -- is

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 1 something known as "Generally Accepted Accounting Principles."

 2 That's one set of rules.

 3 And, basically, any set of financial statements --

 4 public companies, small company, whatever -- unless it's

 5 indicated otherwise, has to be in accordance with generally

 6 accepted accounting principles, which is also known by its

 7 acronym, usually -- at least by accountants -- as GAAP,

 8 G-A-A-P.

 9 Q. So, in other words, anybody who is doing financial

10 statements has to make sure that those financial statements

11 are presented under these GAAP rules; is that fair?

12 A. That's correct.

13 Q. Okay.

14 And can you tell us about any other requirements that

15 public companies face in connection with preparing their

16 financial statements?

17 A. Sure.

18 Well, public companies -- first of all, public

19 companies -- also have to follow GAAP. But, over and beyond

20 that, the SEC has certain requirements over and beyond GAAP,

21 such that public companies have to follow GAAP and maybe som

22 other requirements.

23 And, in fact, engrained in the SEC regulations is a

24 statement that says, in essence -- I'm not quoting, but -- any

25 financial statements not presented in accordance with GAAP are

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 1 considered to be false and misleading. Something like that.

 2 Q. Now, sir, who is responsible for preparing the financial

 3 statements at a company like Household?

 4 A. The company, specifically; and, more specifically than

 5 that, the senior management of the company is ultimately

 6 responsible.

 7 Q. Okay.

 8 And have you prepared a demonstrative to show us that

 9 concept, as well?

10 A. I have.

11 Q. Okay.

12 And could we please pull up Plaintiffs' Demonstrative

13 Exhibit 110.

14 (Brief pause.)

15 BY MR. DOWD:

16 Q. And, sir, do you recognize Plaintiffs' Exhibit 110?

17 A. I do.

18 Q. And what does that show us?

19 A. Well, this is, also, I believe, right out of Household's

20 10-K, although I don't remember precisely what year. I

21 believe it's the '01 10-K, also.

22 And it's a -- the paragraph on the top is blown up;

23 it's actually a -- letter to the shareholders that goes, at

24 that point in time went in, the 10-Ks. And I'll just read it.

25 "Household International's management is responsible

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 1 for the preparation, integrity and fair presentation of its

 2 published financial statements."

 3 So, it's saying management's responsible for the

 4 financial statements.

 5 And, then, the second line is, "The consolidated

 6 financial statements have been prepared in accordance with

 7 GAAP."

 8 That's that thing I mentioned before.

 9 Q. Okay.

10 And, then, sir, is this something that gets signed

11 off by the officers of the company?

12 A. It does.

13 Q. And have you included an example of that, as well, within

14 Plaintiffs' Demonstrative 110?

15 A. Yes.

16 Again, blown up the bottom part of that sheet in the

17 background, and it's signed by the CEO, Mr. Aldinger in this

18 case and Mr. Schoenholz, who is the CFO. So, they're the ones

19 that they're referring to above where it says, "Management has

20 responsibilities."

21 Q. All right.

22 And now, sir, let's go back to your three opinions,

23 if we could.

24 MR. DOWD: And I'd ask that we pull up, again,

25 Plaintiffs' Demonstrative 107.

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 1 perform a secondary analysis, as well?

 2 A. I did.

 3 Q. And was that based on amounts that Household agreed to

 4 make restitution of, to consumers through their states?

 5 A. That's correct.

 6 Q. Okay.

 7 And did that confirm your opinion as to whether these

 8 amounts attributable to improper lending practices were

 9 material?

10 A. It did.

11 Q. Okay.

12 And do you have an opinion about materiality of those

13 amounts?

14 A. Yes. I believe they were material.

15 Q. Was Household management required to disclose what it was

16 doing with respect to predatory lending, assuming they engaged

17 in it?

18 A. Absolutely, both under GAAP and SEC rules.

19 Q. And why is that?

20 A. I mean, in general -- I mean, I've prepared some slides

21 for that; but, in general, it's required by the accounting

22 rules to disclose information that is useful to investors and

23 any other users of the financial statements -- lenders,

24 whatever -- and the SEC has similar rules around disclosure.

25 In essence, it really -- a reader cannot have a full

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 1 understanding of the numbers unless they understand what's in

 2 the numbers. And -- plus, users use financial statements

 3 generally to really gauge the prospects for the future of a

 4 company.

 5 So, when a company reports historical financial

 6 statements, they're generally used by the public or the

 7 users -- whoever they are -- to gauge the prospects going

 8 forward of this company.

 9 And this would be important information for someone

10 to know, I guess, because it could very well cease at some

11 point in time.

12 Q. Okay.

13 And you said you prepared some demonstratives to

14 explain this concept, as well; is that right, sir?

15 A. I have, yes.

16 Q. Okay.

17 I'd ask to bring up Plaintiffs' Demonstrative Exhibit

18 90.

19 (Brief pause.)

20 BY MR. DOWD:

21 Q. And can you explain to us what is Plaintiffs'

22 Demonstrative Exhibit 90?

23 A. This is -- remember the two sets of rules that I was

24 talking about before, GAAP -- which everybody's got to

25 follow -- and SEC rules, which over and beyond GAAP public

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 1 companies have to file. This is GAAP.

 2 You might even recognize the cover of the book that

 3 was on the other slide.

 4 But -- so, that's what this is. This is something

 5 called "Financial Accounting Concepts No. 5," and part of what

 6 is constituted as GAAP.

 7 Q. And how is FAC Con 5 relevant to your opinions here today?

 8 A. Well, if you read some of this, it says, "Information

 9 disclosed in notes -- " remember the footnotes to the

10 financial statements, which technically is part of the

11 financial statements -- "amplifies or explains information

12 recognized in the financial statements."

13 So, you need these notes to be able to understand

14 better what is in the financial statements.

15 And the next line goes on, "That sort of information

16 is essential to understanding the information recognized in

17 financials," which is really what I just said.

18 And these footnotes, once again, are -- these

19 disclosures and footnotes are -- considered integral,

20 important to the understanding of the financial statements.

21 Q. Okay.

22 And is that the only thing that GAAP says about this

23 disclosure concept in this context?

24 A. No.

25 Q. All right.

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 1 MR. DOWD: Could we please pull up Plaintiffs'

 2 Demonstrative Exhibit 91?

 3 (Brief pause.)

 4 BY MR. DOWD:

 5 Q. Is that another demonstrative that you prepared to assist

 6 you in explaining your testimony?

 7 A. It is.

 8 Q. Okay.

 9 And what is this FAS Con 1 that you have up here

10 (indicating)?

11 A. FAS Con 1 is just another part of GAAP. And it's

12 contained in that book there on the left. And the thing

13 that's significant to me about this is, obviously, "Financial

14 reporting should provide information about an enterprise's

15 financial performance during a period. Investors and

16 creditors often use information about the past to help in

17 assessing the prospects of an enterprise."

18 And I just really talked about why this information

19 that we were talking about before -- about improper lending --

20 would need to be disclosed because it would be important to

21 assess the prospects of this company going forward, to know

22 that there might be a piece of revenue that, for instance,

23 might disappear some day if they are not able to do it

24 anymore.

25 Q. And, in your opinion, did Household follow these

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 1 accounting rules that you've just mentioned?

 2 A. I don't believe so.

 3 And, by the way, this isn't -- there are other

 4 references to footnotes being "accurate" and "reliable" and

 5 "complete," which are not even on this slide; but, there are

 6 numerous references to that sort of thing in the accounting

 7 literature.

 8 Q. All right.

 9 Sir, do the SEC rules say anything about disclosure?

10 A. Yes. They are more concerned about the Management's

11 Discussion and Analysis section, although, as I said before,

12 this is all incorporated into the SEC rules because first and

13 foremost you have to follow GAAP. So, the SEC rules are over

14 and beyond that.

15 But the SEC also has rules about disclosure of this

16 sort of thing in the MD&A section -- the Management's

17 Discussion and Analysis.

18 Q. Okay.

19 And have you prepared two demonstratives to assist

20 new explaining that concept?

21 A. I have.

22 MR. DOWD: I'd ask that we pull up Plaintiffs'

23 Demonstrative Exhibit 94.

24 (Brief pause.)

25 BY MR. DOWD:

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 1 Q. And can you tell us, sir, how is Plaintiffs' Demonstrative

 2 Exhibit 94 significant to your opinion?

 3 A. Sure.

 4 This is from Regulation S-K.

 5 "S-K" is the -- amongst other things, indicates the

 6 requirements by the SEC of what goes in Management's

 7 Discussion and Analysis and how to present these things.

 8 Q. And why is that significant to your opinion?

 9 A. Well, it's the section also of the 10-K where the company,

10 I believe, should have disclosed this, assuming that these

11 things were improper; and, the thing of significance in this,

12 if you look at it, I mean, it goes --

13 THE COURT: Especially when you're looking away from

14 the jury, which is fine, you've got to speak even louder.

15 THE WITNESS: Okay.

16 I apologize, your Honor.

17 I apologize to the jury, too.

18 THE COURT: Just take a deep breath and let it out.

19 (Laughter.)

20 BY THE WITNESS:

21 A. What's significant to me about this is -- and the reason I

22 put the slide together is -- and I'll read it, "Describe any

23 other significant components of revenues -- " it also says and

24 expenses -- or "our core expenses" -- "that the registrant's

25 judgment," the registrant in this case, that's Household --

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 1 "should be described in order to understand the registrant's

 2 results of operations."

 3 So, again, components of revenue -- if there is this

 4 piece of revenue and it's significant -- relating to improper

 5 lending, Regulation S-K would say, "You've got to say that in

 6 your MD&A."

 7 That's it why this is significant to me.

 8 MR. DOWD: Could we pull up Plaintiffs' Demonstrative

 9 Exhibit 95?

10 (Brief pause.)

11 BY MR. DOWD:

12 Q. And, sir, this is, again, Regulation S-K; is that correct?

13 A. It is.

14 Q. Can you explain the significance of this portion of the

15 regulation?

16 A. Sure.

17 Again, in the context of improper lending, "Describe

18 any known trends or uncertainties that have had or that the

19 registrant reasonably expects will have a material, favorable

20 or unfavorable impact on net sales or revenues -- " and it

21 goes on -- "or income from continuing operations."

22 And, again, this is if there are items included in

23 the financial statements, for instance, that could likely not

24 continue; and, therefore, when users look at the financial

25 statements, they don't know that, "Oh, going forward they're

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 1 not going to have this piece." And I would think that's

 2 certainly a possibility when you're talking about improper

 3 lending.

 4 As a result of that, that's exactly what S-K requires

 5 in the Management Discussion and Analysis section. So, that's

 6 another thing.

 7 So people can, again, gauge the prospects of a

 8 company going forward, which is really the main purpose of

 9 presenting financial statements to begin with.

10 Q. Okay.

11 And do you believe that Household complied with these

12 GAAP and, then, SEC regulations with regard to predatory

13 lending practices?

14 A. I do not.

15 Q. And why is that?

16 A. Well, they really failed to disclose the items in the

17 nature of the disclosures that are required in -- you know, in

18 -- their 10-Ks or 10-Qs during the period.

19 Q. Now, sir, you had three opinions, I believe.

20 MR. DOWD: Could we go back to Plaintiffs'

21 Demonstrative Exhibit 107.

22 (Brief pause.)

23 BY THE WITNESS:

24 A. If I just, maybe on the last answer, I want to be clear;

25 and, that is, that there were significant amounts of revenue

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 1 Q. And, sir, what is contained in Plaintiffs' Demonstrative

 2 Exhibit 39?

 3 A. Well, these are, I guess, six examples of the kinds of

 4 practices that I've called "loan quality concealment

 5 techniques" that the company used during the relevant period

 6 of this case, that had the impact of moving things out of the

 7 two-plus category; and, in effect, therefore, not reporting it

 8 in the 10-Ks and 10-Qs.

 9 Q. And, just for the record, sir, what were those six types

10 of loan quality concealment techniques that you identified?

11 A. Okay. Re-ages and restructures; late stage re-ages;

12 forbearance; skip-a-pay; re-writes; and, grace periods.

13 MR. DOWD: Do you want to stop there, your Honor?

14 THE COURT: Yes.

15 Let's take our 15-minute break, ladies and gentlemen.

16 (Jury out.)

17 THE COURT: You may step down, sir.

18 Okay. We'll take a 15-minute break.

19 MR. DOWD: Thank you, your Honor.

20 MR. KAVALER: Your Honor, can I ask you a question?

21 THE COURT: I'm sorry, go back on the record.

22 MR. KAVALER: I just want to know if you had a time

23 chosen for Friday yet.

24 THE COURT: No, I haven't. Why don't you folks tell

25 me when you think you want to meet.

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 1 MR. KAVALER: Are you available at all times?

 2 THE COURT: The morning there's going to be a call

 3 for sure.

 4 About what time, Carol? Noon, probably?

 5 THE CLERK: Yes.

 6 We have a sentencing at 10:30 and some statuses. So,

 7 that's a good hour usually.

 8 THE COURT: The sentencing will go until 11:30.

 9 So, it will be probably around 12:30.

10 MR. KAVALER: Is that what you want us to do?

11 Whatever you want, your Honor.

12 THE COURT: Why don't we count on that now: 12:30.

13 MR. KAVALER: Is that all right with you guys?

14 MR. DOWD: Fine.

15 THE COURT: Now, we're in recess.

16 (Brief recess.)

17 THE COURT: Let's bring the jury out.

18 (Jury enters courtroom.)

19 THE CLERK: Please be seated.

20 THE COURT: Proceed.

21 MR. DOWD: Thank you, your Honor.

22 BY MR. DOWD:

23 Q. Mr. Devor, when we left off, you were talking about these

24 re-aging and other loan quality concealment techniques, is

25 that right?

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 1 A. Yes.

 2 Q. Have you seen any evidence that would suggest to you that

 3 these techniques were used extensively?

 4 A. Yes.

 5 Q. And can you tell us about that.

 6 A. Well, the -- first of all, there was a lot of company

 7 documents that -- during the time period that indicate they

 8 were.

 9 MS. BUCKLEY: Objection, your Honor.

10 THE COURT: Basis?

11 MS. BUCKLEY: The witness has conceded he's not an

12 expert in predatory lending.

13 THE COURT: Overruled.

14 BY THE WITNESS:

15 A. So that's one -- do I keep talking?

16 BY MR. DOWD:

17 Q. Yes. Go ahead.

18 A. So that's one.

19 I think the company actually at some point used a

20 number like 17 billion in its proxy statement to also indicate

21 that at least for '01 they had used re-aging and other

22 techniques of close to $17 billion, so that's a pretty

23 significant number.

24 Q. Okay. And, sir, have you prepared an animation or a

25 series of demonstratives that will explain how these different

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 1 loan quality concealment techniques work for the jurors'

 2 benefit?

 3 A. I have.

 4 MR. DOWD: All right. And at this time, I'd ask to

 5 pull up, they're actually marked between Plaintiffs'

 6 Demonstrative 54 to 72, your Honor, counsel has a copy of the

 7 CD they're on.

 8 BY MR. DOWD:

 9 Q. And, sir, we start out here with -- can you explain to us

10 what this first demonstrative is?

11 A. Sure.

12 I guess to understand how this works, the first thing

13 we ought to talk about is something called aging buckets. And

14 basically what that is and for these examples I have, I use

15 four or five customers. What happens is a company monitors

16 how current each loan and customer is so that if a customer,

17 for instance, has paid whatever loan payments are due, their

18 loan -- and they're current, then their loan is shown as

19 current.

20 If they've missed a payment, the loan would be shown

21 in the middle column, which is 31 to 60 days past due.

22 And then if they miss a second payment, they're more

23 than 60 days past due, and that would fall into the third

24 column. It's a way for companies to basically manage their

25 business, to figure out, you know, how their loans are

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 1 performing and in this case also used to be able to report

 2 two-plus statistics.

 3 Q. Okay. And have you prepared the next slide to show us

 4 what would happen in month one with these examples of

 5 customers?

 6 A. Right. And keep in mind in that prior slide, the last

 7 column over, the more than 60 days is what we've been

 8 referring to as the two-plus delinquencies, and that's that

 9 number that was reported in that chart in the 10-K, but -- so

10 this is month one for my example.

11 We start off with five mythical customers and assume

12 that their loans are all $100, and let's also assume that at

13 first they're all current. They've all paid. You know, in

14 the beginning they're all -- you know, they're not past due at

15 this point in time.

16 Q. Okay, and in your example, what happens in month two?

17 A. So you go to month two, and let's assume that three

18 customers -- two customers actually pay, you know, so they

19 continue to be current. Their loans are classified as

20 current, and that's B and D.

21 But assume three customers, A, C and E, fall behind

22 and they are not. They don't pay their -- their payment, and,

23 therefore, they're now in the -- they move over to the second

24 bucket, the 31-to-60-day past-due column.

25 Q. Okay. And does your example continue with the third

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 1 month?

 2 A. Yes. In month three, let's assume for the moment that one

 3 customer, Customer E, actually pays and pays not only the

 4 current amount but the amount that was past due, so that whole

 5 loan gets pushed back into the current column because the

 6 customer's current.

 7 But let's also assume A and C are not current. They

 8 again miss a payment, so they move to the next category, which

 9 is more than 60 days past due. So in this example, $200 is in

10 more than 60 days past due and 300 is in current.

11 Q. Okay. And more than 60 days past due, that's -- that's

12 two-plus, is that right?

13 A. Right. The company has referred to that as two-plus. And

14 the two, of course, means two months, and two-plus means

15 greater than two months or greater -- 61 days or over.

16 Q. And that would be reported then in the financial

17 disclosures that the company has, is that correct, sir?

18 A. That's correct. That is expressed in -- that number is

19 expressed in these charts we talked about.

20 Now, the company elects to report it as a percentage

21 of the portfolio, so you see percentages there, but in the

22 chart we just looked at, I'm expressing it just in gross

23 dollars, but you could easily compute a percentage of the

24 portfolio.

25 Q. Okay. And, sir, you -- you testified that you believe the

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 1 company manipulated this two-plus information through these

 2 re-aging and loan concealment techniques, is that right?

 3 A. That's -- that is correct.

 4 Q. And did you prepare demonstratives that explain each of

 5 these loan quality concealment techniques as you've called

 6 them?

 7 A. I did.

 8 Q. Okay. And the first technique I believe you had was

 9 re-ages and restructures, is that correct?

10 A. That is correct.

11 Q. Okay. And just explain to us quickly what is re-aging or

12 restructuring?

13 A. Well, re-aging and restructuring is taking an account that

14 is just about to fall into the two-plus category or is already

15 in the two-plus category and just re-aging it, reclassifying

16 it back to current, notwithstanding the fact that the

17 company -- that the customer hasn't paid anything.

18 Q. Okay.

19 A. So even though it is more than two months past due, it's

20 not reflected as that.

21 Q. And did you prepare a demonstrative to explain how that

22 works?

23 A. I did.

24 Q. All right. And this one is entitled Re-Ages and

25 Restructures, is that right?

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 1 A. It is.

 2 Q. Okay. And could you walk us through how a re-age or a

 3 restructure works with respect to a two-plus account?

 4 A. Sure.

 5 Assume for the moment that these accounts are either

 6 just about to go -- the two accounts are just about to go into

 7 the two-plus column, or they're already there, as this slide

 8 indicates. What happens is the company comes along,

 9 reclassifies them back to current, notwithstanding that

10 payment hasn't been received and that it's still greater than

11 60 days old, and moves it back to current. And obviously it

12 has the impact of reducing two-plus in that example by 200 and

13 now showing zero instead of 200.

14 Q. Okay. And then I take it these re-aged loans wouldn't

15 show up in that percentage column of two-plus in the financial

16 statements during this period, is that right?

17 A. That is correct. They would also reduce the percentage of

18 loans shown as two-plus because they got moved to current.

19 Q. Okay. And I think the next concealment technique that you

20 identified was called late stage restructures, is that right?

21 A. That is correct.

22 Q. Okay. And have you prepared a demonstrative to explain

23 how that works?

24 A. I have.

25 Q. Okay. And why don't you go ahead and explain the late

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 1 stage re-age.

 2 A. Well, late stage re-ages are really not much different

 3 than the re-age, restructure concept that I just explained

 4 other than it's used to -- and Household used it actually to

 5 describe something that's even greater than two months old.

 6 So instead of being 60 days old or 61 days old, it might be

 7 90 days old or 120 days old, 150 days old.

 8 And, again, the company takes it and just re-ages or

 9 restructures it and reclassifies it back to the current column

10 so that it's not included in two-plus. Keep in mind that the

11 two-plus column is not just the greater-than-60-day column,

12 but that also includes everything greater than 60, which means

13 90, 120, whatever. The company combines those and reports

14 those as one statistic.

15 Q. And, again then, once this late stage restructure or

16 re-age was done, these loans that we just saw move, they would

17 not show up in those two-plus statistics, is that right?

18 A. That is correct.

19 Q. And have you seen evidence that the company did perform

20 late stage re-ages or restructures?

21 A. Yes.

22 Q. Now, let's go back to your list, if we could. The next --

23 the next loan quality concealment technique is called

24 forbearance, is that right?

25 A. That's correct.

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 1 Q. Okay. And what is forbearance? What does that mean?

 2 A. Forbearance is basically the company agreeing to sort of

 3 lay off for a period of time on a customer that might be

 4 delinquent until that -- and cease collection efforts during

 5 some small period of time, a month or two months, whatever it

 6 is, in order to give the customer a chance to, you know, sort

 7 of work out whatever the problems are that have caused them to

 8 become delinquent.

 9 Q. And have you prepared a demonstrative to demonstrate how

10 forbearance works?

11 A. I have.

12 Q. Okay. And can you walk us through that.

13 A. So, again, in this column, the accounts of in this case

14 Customer F and Customer I are shown in the far right column,

15 the two-plus column, and the company agrees to forbear

16 collection efforts. And in this case what happens is they

17 just disappear. They don't get re-aged going back to current,

18 but they are just adjusted out of the two-plus statistic

19 column which has the same impact on two-plus of, you know,

20 whether you re-age it or just eliminate it altogether. So in

21 this case, it disappeared. It just disappears.

22 Q. So in other words, if the accounts were two-plus months

23 delinquent when this forbearance was done, they would still be

24 two-plus delinquent, but it wouldn't show up in the company's

25 Qs and Ks as being two-plus?

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 1 A. Right. The company would actually adjust that out before

 2 reporting the number in their 10-Ks and 10-Qs.

 3 Q. Okay. And let's go back to your list. I think the next

 4 one that you had was called Skip-A-Pay, is that right?

 5 A. That's correct.

 6 Q. And have you prepared a demonstrative to explain how

 7 Skip-A-Pay works?

 8 A. Yes, I have.

 9 Q. And is that it?

10 A. That is it.

11 Q. All right. Could you walk us through that, please.

12 A. Sure.

13 So let's assume that two accounts, Customer K and

14 Customer N, are sort of in the middle column, about to move

15 into the two-plus column. And what happens is maybe they're

16 in day 59 or day 60 and what happens is the company says, hey,

17 you don't have to pay this payment. You know, skip this

18 payment. You know, pay next month, but you don't have to pay

19 this month.

20 And, of course, ultimately they have to pay it. It

21 just gets added on, I believe, to the end of the loan. It has

22 to get paid at some point. The company's not forgiving the

23 loan; but, in essence, they're still more than 60 days past

24 due, and it never gets to the two-plus column because it just

25 sort of bounces off and comes back.

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 1 Q. Okay. And is that another way that the company was able

 2 to artificially reduce its two-plus number in the Qs and Ks

 3 during the relevant time period?

 4 A. Yes.

 5 Q. Okay. And I believe the next loan quality concealment

 6 technique that you had is called rewrites, is that correct,

 7 sir?

 8 A. That's correct.

 9 Q. And have you prepared a demonstrative to explain how

10 rewrites worked generally?

11 A. I have.

12 Q. And can we take a look at that? Is that the demonstrative

13 regarding rewrites?

14 A. It is.

15 Q. And can you explain how that works.

16 A. Sure.

17 In this case, Customer U is in the two-plus category,

18 more than 60 days, and the company, in essence, cancels the

19 loan and rewrites a new loan. And because now the old loan is

20 gone and the company would exclude that from the two-plus, and

21 since it's now a new loan, even though it's, in essence, the

22 same loan, the customer is now -- is now shown as current

23 because it's "a new loan." And as a result of that, the

24 account is classified as current and, of course, is eliminated

25 from the two-plus column.

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 1 Q. So in other words, you take a guy that's 60 days plus late

 2 on his loan, you then just give him a new loan, cancel the old

 3 loan, and he disappears from the two-plus statistics, too.

 4 A. That's correct.

 5 Q. Okay. And I believe you had another category of what you

 6 referred to as loan quality concealment techniques called

 7 grace periods, is that right?

 8 A. I did.

 9 Q. And have you prepared a demonstrative to explain how the

10 grace periods worked?

11 A. Yes, I have.

12 Q. And is that it?

13 A. That is it.

14 Q. Okay. Can you walk us through how the grace period issue

15 worked.

16 A. Sure.

17 So the company would extend, as the account was

18 becoming close to 60 days old, the company would grant the

19 customer, say, an additional 15-day period to pay the bill.

20 And, again, there's nothing wrong with that, in essence. It

21 just has to be reported correctly.

22 And what would happen was -- so now as the account

23 gets over 60 days and 61 days, 62 days, whatever, because

24 they're still within this grace period, the company chose not

25 to include those items, at least in part during the period, in

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 1 the two-plus statistic column but included that in the

 2 31-to-60-day column even though it might be being paid on,

 3 say, day 74 or something, or even 75, but nonetheless it

 4 would -- if it was paid at all, but it was -- but it was

 5 included in the middle column as opposed to the far column.

 6 Q. Okay. So in other words, it didn't show up as two-plus in

 7 the Qs and Ks, is that right?

 8 A. That's correct.

 9 Q. Okay. You just went through a number of these loan

10 quality concealment techniques.

11 Have you seen evidence that each of these was used by

12 Household during the relevant time period?

13 A. I have.

14 Q. Okay. And have you prepared a slide that demonstrates how

15 all these different things work in conjunction in your

16 example?

17 A. I have.

18 Q. Okay. And can we take a look at that, please.

19 A. Sure.

20 So these are -- these are all the accounts that we've

21 really spoken about if you put them all up there, and if I can

22 just summarize. So the first one we talked about was

23 automatic re-age, where they just take it out of 60 days plus

24 and move it over to current, notwithstanding nobody's paid.

25 Forbearance, they've agreed to lay off, but the

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 1 account is still over 60 days, and it just disappears because

 2 it's been eliminated from the two-plus column.

 3 The next one we talked about was Skip-A-Pay. It's in

 4 the middle column, and it's about to get to the final column

 5 but doesn't quite get there because the company has offered

 6 them a chance to skip the pay.

 7 Late stage re-age is really, you know, similar to the

 8 first category only a little bit older than 60 days, maybe

 9 much older, and the account gets reclassified and just

10 disappears out of the more-than-60-day column over. And you

11 see, by the way, we started out, I think the first slide

12 before we went into the animation set, on the right-hand

13 column something like 1,100 hours or something, and it's

14 already down to 300 by virtue of this.

15 So the last one was rewrite. That's where they

16 basically canceled the old loan and rewrite a new one and

17 somehow it gets put back in -- the company puts it back into

18 current from the two-plus category, notwithstanding the fact

19 that, again, the customer hasn't paid.

20 And then I think the final one we talked about was

21 grace period and that's, remember, it's in the middle column,

22 but because of a 15-day grace period, they have the ability to

23 pay a little later; but, nonetheless, it's still more than

24 60 days past due, and as a result of that, it's not shown in

25 the two-plus column.

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 1 As you can see, the impact of all these in my example

 2 was to reduce the whole thing to zero.

 3 Q. Okay. And now, sir, you're not saying that Household

 4 reported zero under the two-plus column in their Qs and Ks

 5 during the relevant time period, are you?

 6 A. No, of course not. That's just my example. No, it's just

 7 for simplicity sake to try to explain it.

 8 Of course, they didn't report zero. We saw the

 9 chart. They actually reported some percentages.

10 Q. Okay. And I believe you said, though, that you've seen

11 evidence that the company had essentially re-aged and used

12 loan quality concealment techniques on approximately

13 $17 billion of their portfolio during the relevant time

14 period, is that right?

15 A. Yes. I believe the company disclosed that in a proxy

16 statement in '03, I believe.

17 Q. Okay. The use of these practices, these loan quality

18 concealment techniques, why do you believe they made

19 Household's financial statements during the relevant time

20 period, the 13 we talked about, why did they make those false

21 and misleading, in your mind?

22 A. Well, first of all, as you can see, the numbers are

23 misleading. They're false. I mean all these items that we

24 just talked about are excluded from the chart that's disclosed

25 to people in the 10-K.

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 1 So the first thing is that the accounts, you know,

 2 the two-plus numbers are false, they're misleading, and

 3 there's no disclosure with respect to how much they're being

 4 used or how to come up with the right number in the two-plus

 5 chart.

 6 Q. Okay.

 7 A. That's the first reason.

 8 The second reason is that the company, during this

 9 time period, changed how they were doing these different

10 things. They would have a program where they would do a grace

11 period for a short time, and then they would stop during the

12 grace period.

13 They would do re-ages based on certain criteria, then

14 change the criteria. And this had the impact of -- of

15 increasing and decreasing all of these items from period to

16 period which rendered the financial statistics that are being

17 disclosed in these things almost useless. I mean a user

18 wouldn't know all this and wouldn't know -- you know, just

19 wouldn't know how to compare numbers. They would almost be

20 like comparing apples and oranges.

21 Q. Sir, let me ask you, in its 10-Ks and 10-Qs during the

22 relevant time period, did Household tell people what it was

23 doing with regard to these practices?

24 A. Not really. I mean -- they really did not. I mean in

25 1999 certainly and 2000, there was basically nothing that

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 1 related to the extent this was being used, the

 2 inconsistencies, how significant they were, so there was

 3 nothing.

 4 And in 2001, there was some disclosure, but it was --

 5 it was also problematic, as I'm sure I'll explain.

 6 Q. Okay. And when you talk about the 2001 disclosure, are

 7 you talking about certain information that Household provided

 8 in its 10-K for the period ended December 31st, 2001?

 9 A. I am.

10 Q. Okay. And that 10-K would have been filed with the SEC

11 sometime around March of 2002, is that right?

12 A. That's correct. A 10-K is required to be filed in the

13 first couple months of the new year -- of the next year.

14 Q. And was that disclosure sufficient, in your mind, to

15 identify re-aging practices?

16 A. It was not.

17 Q. Okay. And perhaps we could take a look at the disclosure

18 itself. I'll show you what's been marked as Plaintiffs'

19 Demonstrative Exhibit 121.

20 And, sir, is Plaintiffs' Demonstrative Exhibit 121 a

21 demonstrative that you prepared taken from the company's 10-K,

22 original 10-K, for the period ended December 31st, 2001?

23 A. It is.

24 Q. Okay. And I believe that's been received in evidence as

25 Defendants' Exhibit 852.

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 1 And can you tell us first what does the disclosure

 2 say?

 3 A. And I point out this is the first time they actually make

 4 this disclosure. In '99 and 2000, there is -- this disclosure

 5 does not exist.

 6 Just if I can take you through this step-by-step, in

 7 2001, they make this disclosure, and it says, "Our policies

 8 for consumer receivables permit reset of the contractual

 9 delinquency status of an account to current..."

10 Now, that's pretty much what we were just talking

11 about, so they're disclosing that they actually take stuff

12 that's in delinquent and move it over to current.

13 "... subject to certain limits. If a" -- and now

14 they go into the circumstances under which they actually do

15 it. Number one, "If a predetermined number of consecutive

16 payments has been received," so there's got to be --

17 consecutive means at least two, I guess, two or more payments

18 received in a row; and, number two, "there is evidence that

19 the reason for the delinquency," the reason that it got to

20 become two-plus, "has been cured."

21 So the company is saying that, hey, look, at times we

22 re-age, we reclassify, but we only do it if two things occur:

23 Number one, we get at least two payments in a row, if not

24 more; and, number two, this also has to happen, whatever gave

25 rise to the delinquency, we have evidence that that's been

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 1 cured.

 2 Q. Okay.

 3 A. So that's a disclosure that the company makes in the 2001

 4 10-K, which is somewhere in March of '02.

 5 Q. And, sir, in your opinion, why was that disclosure false?

 6 A. Well, it was false because it, in essence -- it's just

 7 false. I mean that statement is not true.

 8 Q. Okay.

 9 A. That statement is not true.

10 Q. In what respect?

11 A. It is not true basically in every respect, if I may.

12 If you -- number one, there were -- there were a

13 predetermined -- the company actually re-aged and reclassified

14 in circumstances where it only received one payment or

15 sometimes no payments, so that's certainly not what

16 consecutive payments means.

17 And, number two, the company utilized automatic

18 restructures; that is, they just had a system that

19 automatically re-aged these things without customer contact.

20 I mean if, in fact, there is -- if they're automatically

21 re-aging, then it's hard to say, well, I've got evidence that

22 this customer and this customer have cured their delinquency

23 problems. Whatever it was, the person was out of work or, you

24 know, or was ill or whatever it was, how could the company

25 have evidence of that if they're automatically re-aging these

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 1 re-aging policies are aggressive. These issues appear to be

 2 pervasive in the businesses we reviewed.

 3 And then it goes on to some scenarios in the next

 4 paragraph of what would happen if they converted Blazer's

 5 policies to something more in line with acceptable industry

 6 standards.

 7 And if you go to -- if you go to that paragraph, The

 8 impact of converting Blazer's policies to something more in

 9 line with acceptable industry standards is hard to predict

10 with precision but is estimated as a one-time charge of $2

11 billion and an ongoing annual charge of $500 million, compared

12 to historical loss rates. Their re-aging and write-off

13 policies coupled with their rate of receivable growth,

14 approximately 14 percent in '01, mask the true run rate of

15 Blazer's losses.

16 Q. And why is that significant to you?

17 A. Well, it's significant because, again, it goes to what my

18 conclusions were; that is, when one looks at the disclosures

19 and the statistics that were, in fact, reported by Household,

20 that it -- those -- it's really been masked by these re-aging

21 techniques.

22 Q. Okay. Is there anything else in that paragraph that you

23 considered in reaching your conclusions?

24 A. Yes. I guess the last sentence, which is quite lengthy --

25 it's really the last part of the sentence, but I guess in

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 1 order to get the context, Blazer's financial maneuvering over

 2 the past few years -- just the word maneuvering to me is

 3 somewhat troubling -- past few years has resulted in a clear

 4 disconnect between the field approach to management and the

 5 policies created by the finance group which were espoused to

 6 be a solution to the issues created by the Beneficial

 7 acquisition.

 8 And here's really what's key to me. But it is hard

 9 to imagine that they are not also being employed to boost

10 earnings.

11 Q. And what does earnings mean?

12 A. Earnings is that thing on the income statement that shows

13 the net profit, how much the company earned during a period of

14 time. And it's probably the number that most users, be they

15 investors, banks, whatever, would look at to gauge the

16 performance of the company more than any other.

17 Q. Is there anything else about this document that you

18 considered significant in reaching your conclusions?

19 A. I believe the rest of the document just gets into more

20 details, and there's other e-mails attached, but I think

21 that's the highlights of at least what I found significant.

22 Q. Fair enough.

23 Now, sir, do you have an understanding as to what

24 happened to the proposed Household/Wells Fargo merger?

25 A. Yeah, my understanding is that after the due diligence

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 1 procedures -- my understanding, based on the testimony, is

 2 that Wells Fargo decided not to continue with the acquisition.

 3 Q. Now, sir, I think we've covered your first two conclusions

 4 or opinions. You also had a third conclusion overall, and I'd

 5 ask that we pull up Plaintiffs' Demonstrative 107.

 6 And, sir, could you briefly walk us through your

 7 third conclusion?

 8 A. Yes. Household improperly recorded revenue and expenses

 9 resulting in a restatement and, that is, originally issued

10 financial statements had to be restated or corrected.

11 Q. And, sir, I'll show you what's been received in evidence

12 as Plaintiffs' Exhibit 231.

13 (Tendered.)

14 BY MR. DOWD:

15 Q. Sir, is Plaintiffs' Exhibit 231 a copy of a restated 10-K

16 for the period ended December 31, 2001?

17 A. It is.

18 Q. Okay. Now, first I'll ask you, did you prepare a

19 demonstrative to assist you in describing this restatement?

20 A. I did.

21 Q. And when did this restatement take place?

22 A. I believe in August of '02, the company actually filed

23 this -- this restatement and restated a whole bunch of years

24 and -- including the first quarter, I believe.

25 Q. And so initially, sir, Household had issued those 10-Qs

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 1 and 10-Ks that we saw, the ones from -- for the period ended

 2 June 30th, 1999, through the first quarter of 2002, right?

 3 A. That's correct.

 4 Q. Okay. And included within that was in March of 2002, the

 5 company filed what we've looked at as Defendants' Exhibit 852,

 6 which was the 10-K for the period ended December 31, 2001; is

 7 that correct?

 8 A. That's correct.

 9 Q. And now in August, they come out and say we're going to do

10 this restatement; is that right?

11 A. That's correct.

12 Q. Okay. Let's pull up Plaintiffs' Demonstrative Exhibit

13 127.

14 Sir, can you explain to us what is shown in

15 Plaintiffs' Demonstrative Exhibit 127?

16 A. Yes. Well, this is the disclosure that was made within

17 the restated, the amended 10-K -- that's why it says 10-K/A --

18 in 2001 which again was filed for 2001, which was filed in

19 August of 2002 correcting the '01 one as well as other

20 periods.

21 And it's just a blowup, I think, of, you know, the

22 first couple of lines of the paragraph in the 10-K that the

23 company -- where the company described in their footnotes the

24 disclosure to the numbers, what happened with the numbers.

25 Again, remember, going back to yesterday, the footnotes

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 1 explain what's in the numbers.

 2 Q. Okay. And, sir, is the blowup basically just a blowup of

 3 the language that's in Plaintiffs' 231?

 4 A. Yes.

 5 Q. And could you walk us through a brief description of the

 6 restatement and how -- what the company said about it.

 7 A. Well, with the slide up there for one more second at

 8 least. The 386, I believe, was the impact on net income for

 9 all the periods restated. And the company restated, I

10 believe, back to 1994. So they restated the earnings from '94

11 to the first or second quarter of 2002.

12 The restatement related to -- just briefly, to the

13 company's contracts that it had entered into relating to

14 credit card arrangements with four entities, General Motors,

15 the AFL-CIO, something called UP, a company called UP, as well

16 as a marketing company called Kessler.

17 And it basically in its most basic form related to,

18 for the most part, expenses that were, for the most part, not

19 being written off over a shorter -- short enough period of

20 time which, of course, had the impact of overstating income

21 and in one case actually booking revenue that should not have

22 been booked.

23 So in a nutshell, that's what it was. All four of

24 them -- all four contracts, the accounting for it, overstated

25 net income for all those periods.

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 1 Q. Okay. Now, sir, you said that for that entire period, I

 2 think you said '94 through sometime in 2002, they restated 386

 3 million of net income; is that right?

 4 A. That's correct.

 5 Q. Okay. And have you also prepared a demonstrative to show

 6 what the effect was on the relevant time periods that we're

 7 talking about from 1999 through 2002?

 8 A. Yes, which of course was my focus. I have.

 9 Q. Okay. And I'd ask to pull up what's been marked as

10 Plaintiffs' Demonstrative 128.

11 All right. Can you walk us through what's been

12 marked as Plaintiff's Demonstrative 128?

13 A. Yes. The -- I mean, this demonstrative is just put

14 together to show what the company's reported historical net

15 income was for '99 through '02.

16 And the restated net income is what it was changed to

17 in that 10-K/A that we -- you know, that we referred to

18 before -- that I referred to before. And the difference

19 between those two columns is the impact on net income, and

20 we've expressed it as -- or I've expressed it as percentage of

21 reported net income. And you can see it goes from -- you

22 know, from 1 percent at the end to as high as 6 percent in

23 different periods.

24 Q. All right. Sir, I hate to do this, but just so it's in

25 the record, in other words, for year-end 1999, the company in

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 1 its 10-K reported 1 billion 486 million in net income; is that

 2 correct?

 3 A. That is correct.

 4 Q. That's what they put in originally back at the end of '99

 5 in their Q -- K that they would have filed in the beginning of

 6 2000; is that right?

 7 A. That is correct.

 8 Q. Okay. And at this point in time in August of 2002, they

 9 say, we have to change our accounting and the number that we

10 should have reported at that time was 1.428 million; is that

11 right?

12 A. That's correct.

13 Q. Okay. And then that -- what you did is just try to figure

14 out how much of it was overstated, and that's the difference

15 between the 1486 and the 1428 and that's 4.1 percent of their

16 net income; is that right?

17 A. That's correct.

18 Q. Okay. And then walking through these columns, sir, they

19 reported 372 million in the first quarter of 2000 and they

20 should have reported 351; is that right?

21 A. That's correct.

22 Q. And that's 6.1 percent overstated; is that right?

23 A. That's correct.

24 Q. Similarly, in the second quarter of 2000, they reported

25 383.9 million, and they should have reported 368.3 million; is

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 1 that right?

 2 A. That's right.

 3 Q. And that's an overstatement of 4.2 percent; is that

 4 correct?

 5 A. That's correct.

 6 Q. The third quarter of 2000, they reported 451 million, they

 7 should have reported 434; is that right?

 8 A. That's correct.

 9 Q. And that's an overstatement of 3.8 percent?

10 A. That's right.

11 Q. The same thing in the fourth quarter of 2000, 492 reported

12 versus 476 restated; is that right?

13 A. That's correct.

14 Q. And that's 3.5 percent, correct?

15 A. That's right.

16 Q. Okay. And then looking through the four quarters of 2001,

17 in the first quarter they reported 431 in net income; it

18 should have said 405, right?

19 A. That's right.

20 Q. And that's 6.5 percent; is that correct?

21 A. That's right.

22 Q. Q2, 2001, we have 439 versus 423.3, and that's an

23 overstatement of 3.7 percent; is that right?

24 A. That is right.

25 Q. Q3, 2001, 503 versus 485.6; is that correct?

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 2493

 1 A. That's right.

 2 Q. And that's 3.8 percent?

 3 A. That's right.

 4 Q. Then Q4, 2001, we have 548.9, and they should have

 5 reported and did report restated in August 2002, 533 million;

 6 is that right?

 7 A. That's right.

 8 Q. And that's 2.9 percent; is that correct?

 9 A. That's correct.

10 Q. First quarter 2002, they originally had reported in their

11 Q 511 in net income, and in their restatement they say the

12 number should have been 491; is that right?

13 A. That's right.

14 Q. And that's 4.1 percent; is that right?

15 A. That's right.

16 Q. Second quarter of 2002, 513 million versus 507 million; is

17 that right?

18 A. That's right.

19 Q. And that was 1.2 percent; is that right?

20 A. That is right.

21 Q. Can you just explain to us what exactly is a restatement?

22 A. A restatement is when a company realizes there's something

23 wrong with financial statements that are on the street, so to

24 say, and there's something materially wrong. And, of course,

25 under -- you know, to not mislead any users of those financial

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 2494

 1 statements anymore, they need to pull them back and put out

 2 the new numbers. That's what a misstatement is.

 3 It's a -- a restatement, rather. It has to be

 4 material and it's an admission that it was wrong. You can't

 5 restate for a change in estimate later on. I mean, if you do

 6 change your estimate to a better estimate, that's something

 7 that gets recorded currently, prospectively, as opposed to

 8 going back.

 9 Basically the only time you restate is for

10 companies -- is when you know your numbers are materially

11 wrong. So it's an admission that the numbers were wrong and

12 materially wrong.

13 Q. Is a restatement a common event?

14 A. It is not a common event. I mean, it occurs occasionally.

15 But as you can imagine, you know, the -- you can imagine how

16 troubling it is for a company to restate, I mean, to go to

17 whoever the users are and say, hey, you know those financial

18 statements I gave you, they're wrong, I need them back, I'll

19 give you new ones. So it's not done very commonly.

20 Q. When a company restates, whose decision is it to restate?

21 A. It's, you know, I believe -- by the way, just to finish

22 that last question, I think back in 2000, there was some kind

23 of study as I recall. And in 2000, something like 2 percent

24 or so of all public companies and all filings had actually

25 restated, which means 98 percent did not. I'm sorry.

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 2495

 1 Q. Okay. And whose decision is it to restate ultimately?

 2 A. Well, it has to be the company's. Remember, as we said

 3 yesterday, these financial statements belong to the company.

 4 They don't belong to the auditors. They don't belong to

 5 anybody else. They're the company's.

 6 And remember, the company's management signs off on

 7 those financial statements; and if the company restates, it's

 8 the company's -- it's the company's place to do it. They're

 9 the only ones that can restate.

10 Q. Okay. And, sir, did you perform an analysis, look at the

11 underlying documents and materials produced in this litigation

12 and independently conclude as to whether the company should

13 have restated?

14 A. Yes. You know, this was vetted extensively by KPMG in the

15 2002 time frame. And I read everything they did. I looked at

16 the documents they referred to that were in the record. I

17 read deposition testimony.

18 I also looked at the original accounting, read memos

19 and read the testimony that related to the original decisions

20 to record these transactions. I looked at Arthur Andersen,

21 who was the predecessor auditor at the time. I looked at

22 their testimony and whatever documents we had. I looked at

23 the contracts. And, you know, I reached my own conclusion.

24 Q. Okay. And did you agree with the company's decision that

25 it needed to restate these financial statements?

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 2496

 1 A. I did.

 2 Q. Now, sir, I'd just like to conclude briefly with a sort of

 3 summary of your opinions. And I'd ask that we pull up

 4 Plaintiffs' 126.

 5 Sir, do you have that there on the screen?

 6 A. I do.

 7 Q. So, sir, you -- your first conclusion that you testified

 8 to, could you just remind us of that, that we talked about

 9 yesterday briefly?

10 A. Yes. That is Household failed to disclose required

11 information about improper lending practices. And, again,

12 this goes to the fact that the 10-Ks and 10-Qs were false and

13 misleading because the information in there did not contain

14 disclosures that were in accordance with those GAAP

15 requirements that I indicated in footnote disclosure, as well

16 as the SEC MD&A disclosure requirements, management's

17 discussion and analysis with respect to significantly -- a

18 significant amount of revenue -- the company earning a

19 significant amount of revenue relating to the improper lending

20 practices, assuming that they are considered -- I was asked to

21 assume that those lending practices were considered improper.

22 Q. Okay. And, sir, I'd like to go back to one demonstrative

23 that we looked at yesterday. It's Plaintiffs' Demonstrative

24 40. If we can pull that up briefly.

25 Sir, this was -- you explained it to the jury -- a

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 1 Q. That's your opinion, correct?

 2 A. It is my opinion, KPMG's opinion --

 3 MS. BUCKLEY: Move to strike, your Honor.

 4 BY THE WITNESS:

 5 A. And it's also the company's opinion.

 6 THE COURT: You can just answer her question

 7 directly.

 8 THE WITNESS: Okay.

 9 BY MS. BUCKLEY:

10 Q. When Household originally accounted -- chose an accounting

11 treatment for this contract -- strike that.

12 Arthur Andersen disagrees with your opinion, correct?

13 A. I think Mr. Mizialko actually in his testimony and some of

14 the things I've read, I don't know that he disagrees. I

15 thought he actually -- I think at some point, he may have

16 agreed with that.

17 Q. Are you under the impression Mr. Mizialko works for Arthur

18 Andersen now?

19 A. No, but I believe he did work for Mr. -- for Arthur

20 Andersen.

21 Q. Do you now understand that Arthur Andersen disagree --

22 Arthur Andersen's opinion issued at Household when the

23 contract was initially entered into is not consistent with

24 yours? That's just what I'm trying to find out. You disagree

25 with Arthur Andersen, correct?

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 2522

 1 A. Arthur Andersen allowed that accounting, so I would say

 2 the -- you know, from an auditor's standpoint, they agreed to

 3 issue a clean opinion. Whether they agreed with me or didn't

 4 agree with me, I guess sort of goes to state of mind. I don't

 5 know what they thought.

 6 Q. So Household has one view of how the contract should be

 7 treated and Arthur Andersen agreed with it, correct?

 8 A. That's not necessarily what the documents I've looked at

 9 indicate.

10 Q. You don't know whether Arthur Andersen agreed with

11 Household's accounting treatment for the original contract; is

12 that right?

13 A. There's testimony and things that indicate the way this

14 was accounted for, that Arthur Andersen was not comfortable

15 with the accounting.

16 Q. You're sure about that, Mr. Devor?

17 A. I'm absolutely sure, especially where they're talking

18 about bifurcating the upfront payment and where Arthur

19 Andersen says there's no way that you can do that.

20 Q. That's your testimony?

21 A. I believe I read in memos that Arthur Andersen, you know,

22 actually went to the -- the board, the emerging issues task

23 force that put together this GAAP and asked them about would

24 you accept if the bifur- -- if they actually took the upfront

25 payment and bifurcated, divided it into two parts, and I

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 2523

 1 believe the response was, no, you can't do that. And that was

 2 documented, I believe, in a company e-mail, but I think it

 3 represented a discussion they had with Arthur Andersen.

 4 Q. So what was Arthur Andersen's view -- how was Arthur

 5 Andersen's view different from Household's?

 6 A. You know, Arthur -- Arthur Andersen's view different from

 7 Household's? I believe, number one, they were uncomfortable

 8 with the bifurcation. Ultimately, they agreed to sign a clean

 9 opinion.

10 Q. So ultimately, they agreed with Household?

11 A. Well, I -- they agreed. I believe in my report I look

12 at -- I actually quote testimony or a document that indicates

13 they were trying to find a way for these guys to hang up on

14 their balance sheet this thing. And they even talked about

15 different strategies so that they wouldn't have to do this.

16 So I don't know how independent or objective really

17 Arthur Andersen was back then. I mean, there's evidence to me

18 that maybe they weren't so objective or independent.

19 Q. But you don't know sitting here today that Arthur Andersen

20 approved Household's accounting treatment for the GM contract;

21 is that what you're saying, yes or no?

22 A. Auditors don't approve a company's accounting. They

23 either issue a clean opinion or they issue something other.

24 The accounting is the responsibility of the company and

25 management.

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 1 Q. Mr. Devor, sitting here today, is it your testimony that

 2 Arthur Andersen did not concur with Household's original

 3 accounting for the General Motors contract, yes or no?

 4 A. I can only --

 5 Q. Yes or no, Mr. Devor?

 6 A. I can't answer that.

 7 MS. BUCKLEY: Your Honor, move to strike.

 8 THE WITNESS: I didn't even say anything.

 9 THE COURT: He's not required to answer yes or no.

10 If he can't answer yes or no, he can say so.

11 BY MS. BUCKLEY:

12 Q. You can't answer yes or no?

13 A. I cannot answer that they concurred.

14 Q. Let's turn to the AFL-CIO contract, Mr. Devor.

15 A. Sure.

16 Q. You'll agree that one of the key issues concerning the

17 AFL-CIO contract was whether the accounting provided for a

18 systematic and rational recognition of expense in premium

19 amortization over the life of the contract; is that right?

20 A. Amongst other things.

21 Q. And your view was that Household and Arthur Andersen's

22 approved accounting for the contract did not provide for

23 systematic and rational recognition; is that right?

24 A. I don't think I said anything about Arthur Andersen. I

25 said the company's accounting was wrong. That's what I said.

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 1 systematic and rational approach is one that recognizes

 2 periodic expense in relationship to the average revolving

 3 receivable balances in the corresponding period. Based on the

 4 bank projections, the OCC determined that an amortization rate

 5 of between 1.1 and 1.3 percent of average revolving balances

 6 would provide this level relationship.

 7 And then it goes on.

 8 If you skip down to the next paragraph "when

 9 considering." When -- it reads, When considering the criteria

10 of systematic and rational, the bank applied a concept that

11 mirrored the economics of an arm's length contract between two

12 independent parties.

13 And then it goes on to describe the bank, namely here

14 the Household bank's position.

15 And finally we get to the resolution of the -- or the

16 comments by the ombudsman on the point, which is in the

17 paragraph beginning "the accounting standards."

18 Do you see that?

19 A. Yes.

20 Q. The accounting standards and principles relevant to this

21 transaction are not specific. Therefore, when considering the

22 bank's and OCC's methods, I believe that there exists a

23 legitimate difference of opinion regarding a systematic and

24 rational approach to accounting for this very complex

25 transaction.

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 2538

 1 Do you agree with that sentence, Mr. Devor?

 2 A. Let me just reread it one more time.

 3 Q. Okay.

 4 (Brief pause.)

 5 BY THE WITNESS:

 6 A. I believe that there is GAAP, which is just discussed

 7 above by this -- by this ombudsman, that relates and is very

 8 much on point. So I believe actually that -- I don't

 9 necessarily agree. The systematic and rational expensing of

10 this asset is covered very clearly by FASB Con. 5. Remember,

11 this company was not amortizing this asset at all.

12 BY MS. BUCKLEY:

13 Q. So you're disagreeing with the OCC ombudsman; am I right?

14 A. I mean, my testimony is exactly as I just stated. You

15 know, I didn't meet with the ombudsman, so I don't know what

16 he was considering.

17 But I will tell you that just above, if you look at

18 the second paragraph, they are very explicit in saying FASB

19 Statement of Financial Accounting Concept No. 5 requires that

20 expenses be allocated in a systematic, rational manner to the

21 period in which the related assets are expected to provide

22 benefits. This asset wasn't being amortized at all.

23 Q. So you don't think it was systematic and rational?

24 A. Leaving an asset on the balance sheet, no, I do not.

25 Q. And the OCC ombudsman thought it was, correct?

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 2539

 1 A. Well, wait a minute. I'm not sure it says that. Let me

 2 read it again. I don't think they're saying that it is

 3 systematic.

 4 They're saying they believe there's a legitimate

 5 difference of opinion regarding what a systematic and rational

 6 approach to accounting this is. I don't agree with that.

 7 Q. You don't agree that there's even a -- I want to quote him

 8 correctly -- a legitimate difference of opinion?

 9 A. I think, you know, if they were amortizing this asset over

10 four years instead of two years or seven years instead of five

11 years, I would say there might be a difference of opinion.

12 But they weren't amortizing this asset at all. They were

13 leaving this asset on the balance sheet and they weren't

14 amortizing it at all. You know, that, to me, is not

15 necessarily a difference of opinion. I don't agree with that.

16 Q. You don't agree with the ombudsman?

17 A. I don't, in my humble opinion.

18 Q. Do you consider him an expert in accounting?

19 A. Never met the man before.

20 Q. Wouldn't know if the OCC's ombudsman is an expert in

21 accounting?

22 A. We're talking about Mr. Golden specifically? I don't

23 know.

24 Q. All right. Let's go on, Mr. Devor, the same paragraph,

25 beginning, The accounting standards and principles relevant to

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 2540

 1 this transaction are not specific.

 2 And then we just talked about the next sentence,

 3 right, Mr. Devor?

 4 A. Right, we did.

 5 Q. All right. And it goes on, I clearly respect that there

 6 could be different judgments made and different conclusions

 7 reached on the asset valuations.

 8 Do you agree with the ombudsman on that point?

 9 A. That he respects it? I don't understand. He says it

10 respects it.

11 Q. That there could be different conclusions reached on the

12 asset valuations.

13 A. I agree with it except that the asset valuation isn't the

14 issue. The issue is, this is a prepaid amount that has to be

15 systematically allocated to expense over the period of

16 benefit. It can't just remain there, no matter what it's

17 worth.

18 Q. Okay.

19 A. That's -- that's the issue. I mean, agree that there can

20 be differences amongst people as to what the value of an asset

21 is; but that's not the issue. I believe it misses the issue.

22 Q. And then he goes on, the ombudsman, Mr. Devor, to say, I

23 have no reason to believe that the bank's method, particularly

24 considering the time element, was not systematic and rational.

25 Do you see that?

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 1 A. I do.

 2 Q. Do you see it?

 3 A. I do.

 4 Q. Do you agree with it?

 5 A. Not with respect to this piece. It was not amortized.

 6 Q. All right. Fair enough.

 7 And he goes on to say, Therefore, I believe that the

 8 most appropriate resolution of this difference of opinion

 9 rests with the SEC accounting division.

10 Do you see that?

11 A. I do see that, yes.

12 Q. By the way, Mr. Devor, do you think the accountants in the

13 SEC accounting division are experts?

14 A. I would not answer that any way different than when you

15 asked me if the people at Andersen or KPMG are experts. I

16 mean, everybody has individual talents. I've met some of the

17 most brightest people in the world from Andersen and KPMG, and

18 I've met people who I would not consider so bright from

19 Andersen and KPMG.

20 Q. Okay.

21 A. And the same goes, by the way, with the SEC.

22 Q. Okay. Let's move on to the Kessler agreement, if you

23 would. Can you tell me who the parties were -- who the

24 parties were who were involved in the Kessler transaction?

25 A. I've just got to switch gears here from AFL-CIO to

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 2542

 1 Kessler.

 2 Kessler was -- I believe the parties, as I recall,

 3 were Kessler and Household; and there may have been a third

 4 party. There was. A separate company that I believe fell

 5 under the Kessler umbrella. And my -- you know, so those were

 6 the parties, to answer your question, as I recall.

 7 Q. Do you know the names of the two Kessler entities?

 8 A. Kessler one and Kessler two. I can't -- I just -- you

 9 know, it's in my report. I don't remember the specific name

10 of the entity. They were both Kessler entities, as I recall.

11 Q. You call them, shorthand, Kessler one and Kessler two?

12 A. That's fine.

13 Q. I mean, that's fine with me. I'm just asking you if

14 you're comfortable with that?

15 A. It doesn't matter. Yeah.

16 Q. What were the obligations of Kessler one under the

17 contract?

18 A. Well, in general, the way the contract worked in --

19 Kessler was to do -- was -- in essence, there was some

20 marketing services that needed to be done. And, in essence,

21 Household -- one of the Kessler entities was, in essence,

22 helping to front some of those expenses by paying Household,

23 in essence, financing them.

24 Q. Which one?

25 A. I believe the second one.

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 2543

 1 Q. Okay.

 2 A. It's set forth in my report. Overall it's not -- it's not

 3 important as to which one did what.

 4 Q. In your opinion?

 5 A. That's correct.

 6 Q. Go ahead.

 7 A. But -- so what happened was, in essence, these payments --

 8 because there was very little risk to Kessler of getting paid

 9 back and, in essence, wasn't a sales transaction or a revenue

10 transaction to be recorded on -- on Household's books, but

11 instead was really a fronting of money by Kessler to Household

12 to cover some of these expenses early on; and then later on, a

13 payback with some return going back to Kessler. And in that

14 transaction, it was really, in essence, a financing

15 transaction. And that's what the company decided -- they

16 restated -- as well as KPMG concurred with it and so do I.

17 Q. Well, that wasn't the company's original accounting

18 treatment for the Kessler transaction, was it?

19 A. No, they recorded those payments that I just described as

20 revenue as opposed to just advances going back and forth.

21 Q. And Arthur Andersen's position was that Household's

22 accounting treatment was correct; is that right?

23 A. To be honest with you, I don't recall Andersen looking at

24 whether revenue recognition in the Kessler transaction was

25 appropriate. I believe they tested it for other issues,

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 2544

 1 whether the payments were appropriate and, you know, they

 2 agreed to the agreement. That kind of thing. But I don't

 3 think -- I think they were silent on the issue of whether the

 4 revenue recognition by Kessler was actually appropriate. I

 5 don't recall seeing anything where they actually touched on

 6 that. I could be wrong -- and please refresh my memory with a

 7 document -- but I don't believe they went to the revenue

 8 recognition issue.

 9 Q. So you're not entirely clear as to where AA was on this;

10 is that fair?

11 A. On "this"? What do you mean?

12 Q. Kessler.

13 A. It looks like it's an issue that Andersen missed or

14 just -- you know, flew by Andersen. It doesn't look like they

15 looked at the revenue recognition issue that ultimately

16 resulted in the company restating.

17 Q. You understand that Arthur Andersen looked at this

18 transaction at the time; do you not?

19 A. Vague recollection, yes.

20 Q. And you understand that Arthur Andersen approved

21 Household's accounting treatment for this contract at the

22 time, correct?

23 A. Again, I don't specifically recall that they did and

24 looked at the revenue recognition issue. I don't recall them

25 overtly doing that.

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 1 Q. Do you recall what KPMG's position was when they reviewed

 2 this contract?

 3 A. I believe KPMG's position ultimately was that --

 4 consistent with what I said -- was that these payments going

 5 back and forth are nothing really more than advances, upfront

 6 advances, to help finance the costs that Household has to

 7 incur on the contract. And then Household's payments back are

 8 merely repayment, in essence, of those, with some rate of

 9 return, as I recall.

10 Q. One more question on Kessler, Mr. Devor. You understand

11 that this was a contract to encourage the development of

12 credit card relationships; is that right?

13 A. I believe so, yes.

14 Q. Now -- and it was designed to market and service private

15 label credit cards, sort of like the GM card; isn't that

16 right?

17 A. I believe so, in essence.

18 Q. And if the parties, namely Kessler and Household, decided

19 to pursue a credit card marketing agreement, do you know who

20 the risk of loss would land on if the effort was unsuccessful?

21 A. I don't understand the question.

22 Q. All right. Did you examine whether or not Kessler or

23 Household bore the risk of loss if a particular credit card

24 marketing project went bust?

25 A. What I recall was that based on the way the deal was

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 2546

 1 structured, Kessler had very little, in the overall

 2 transaction, risk of loss. The payments back to Kessler were

 3 based on a bare minimum of signups, I guess they were, for

 4 credit cards. And it was, as I recall from my report,

 5 something like -- the bare minimum was something like

 6 one-third or something of what Household ended up every year

 7 entering into. And as a result of that, there was very little

 8 risk. I mean, the benchmark was set so low that Kessler had

 9 almost no risk in the deal and was getting a return. So

10 appropriately, that's not a sale. That's a financing

11 transaction.

12 Q. In your opinion, right?

13 A. And the company's and KPMG's.

14 Q. No, sir. We've already established that Household's

15 initial treatment of the Kessler contract was different from

16 what you recommend; isn't that right?

17 A. The initial contract accounting was different but was

18 ultimately restated by the company, which is an admission that

19 it was wrong.

20 Q. In your opinion, correct?

21 A. And the company's when they restate.

22 Q. In your opinion, correct?

23 A. As I said, in my opinion and the company's and KPMG's.

24 Q. All of this is your opinion, isn't it, Mr. Devor?

25 A. If you're asking if I concur with that opinion, the answer

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 2547

 1 is yes.

 2 Q. No, that wasn't my question.

 3 All of what we're hearing from you yesterday and

 4 today is your opinion, isn't it, Mr. Devor?

 5 A. As opposed to what? I mean, I don't understand the

 6 question.

 7 Q. As opposed to facts, Mr. Devor.

 8 A. I think my opinion is based on reviewing the facts.

 9 Q. Okay. But --

10 A. That's what -- that's what experts do. They read

11 depositions of people who were there at the time. They look

12 at the accounting literature, in my case, and see what the

13 facts -- what the requirements are. They look at documents

14 that were put together at the time. And then they give their

15 opinions as to how that needs to be trans- -- how that

16 transaction needs to be accounted for, of course. Of course

17 it's my opinion. It's my best opinion.

18 Q. Thank you.

19 All right. Moving on to the issue of re-aging.

20 A. Okay.

21 Q. We've already established that you're not an expert in how

22 to re-age, right?

23 A. Again, if I understand how you're using that --

24 Q. Do you want me to play the clip again, Mr. Devor?

25 A. I mean, if you would like to, that's your call. But I

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 2548

 1 think I understand what you're asking. The answer is, what

 2 accounts to re-age, to make the decision to re-age, if that's

 3 what your question includes, which is the follow-up question I

 4 gave on that tape, my answer is, I am not an expert in making

 5 those decisions. I am an expert in accounting for the

 6 ramifications of those decisions, I would say.

 7 Q. All right. And you agree, Mr. Devor, do you not, that

 8 re-aging is a common practice in the banking and lending

 9 industries?

10 A. I have read in the record in this case, it certainly

11 references to -- that other banks do the -- they also re-age.

12 Maybe not to the same extent or using the same

13 inconsistencies, but my understanding is that they also

14 re-age, other companies re-age too.

15 Q. Banks re-age, don't they?

16 A. I believe they do. I've seen reference to that. I

17 haven't studied other banks, but my focus has been on

18 Household, but --

19 Q. And you understand that banks have different standards

20 that apply to them when they re-age, don't you?

21 A. They may very well have regulatory standards.

22 Q. That's my question. You do understand that they do have

23 different standards, don't you?

24 A. They may.

25 Q. Do you know one way or the other?

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 2549

 1 A. Well, I know banks are regulated. And I know there may be

 2 standards that relate specifically to re-aging.

 3 Q. So they do? Or you don't know? Just tell me.

 4 A. Well, I am not -- wait a minute. I am not -- first of

 5 all, I'm not a regulatory expert. Okay. I'm an accounting

 6 expert. It certainly sounds reasonable that banks would

 7 have -- that regulatory authority for banks would, in fact,

 8 have rules and requirements regarding this. So it's certainly

 9 logical. But if you're asking -- I mean, I'm an accounting

10 expert. I don't know why you would ask me that question,

11 but --

12 Q. So it's logical that banks might have different

13 regulations, but you don't know because you're an accounting

14 expert, correct?

15 A. It's very logical. I don't know for sure, but I would

16 think that they do.

17 Q. Okay. And you agree that re-aging is sometimes a very all

18 right practice, don't you?

19 You agree that re-aging is an all right practice,

20 don't you?

21 A. I don't understand the question. It's an all right

22 practice? I don't know what that means.

23 Q. Do you agree that re-aging is all right? It's all right

24 to do it?

25 A. It's okay to do it as long as it's not something that's

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 2550

 1 meant to mislead the public or to manage numbers that you're

 2 trying to report to the public.

 3 Also, my opinion doesn't go to whether re-aging is

 4 good or bad or -- inherently. My opinion goes to disclosing

 5 how much and how inconsistent the re-aging was. I don't have

 6 an opinion on whether re-aging was good or bad. I mean, there

 7 may be very good business reasons, as we said yesterday, why

 8 companies would re-age and give their customers a break and

 9 give them time, you know, to get their -- to cure whatever

10 problem it is that has caused them to go delinquent. But

11 that's not inconsistent with disclosing to the public when you

12 publish statistics, like two-plus statistics, to indicate to

13 the public what you did.

14 Q. So you have no quarrel with re-aging as a practice

15 generally; is that right?

16 A. I have a quarrel with how it was disclosed --

17 Q. You have --

18 A. -- and accounted for in that chart.

19 Q. You have no quarrel with the practice of re-aging

20 generally, correct?

21 A. I have -- I have a quarrel with the way -- I don't know

22 what you mean by generally. What is -- I don't --

23 Q. Do you have any quarrel with the practice of re-aging per

24 se, Mr. Devor? Does that make it easier for you?

25 A. I have a quarrel with not disclosing it or --

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 1 Q. But you've testified to that three times.

 2 A. Or using that to manipulate delinquency statistics. I

 3 have a big problem with that. I think it violates the

 4 securities --

 5 MS. BUCKLEY: Motion to strike, your Honor.

 6 THE COURT: That will be stricken. I think he's

 7 answered the question as best he can answer. Time to move on.

 8 MS. BUCKLEY: Okay, your Honor.

 9 BY MS. BUCKLEY:

10 Q. And you just said you understand that re-aging can have a

11 benefit to the customer, don't you?

12 A. It hypothetically can.

13 Q. Hypothetically?

14 A. Sure.

15 Q. You haven't seen in your travels through all the documents

16 in this case that re-aging can benefit a customer?

17 A. Household made millions and millions and millions of

18 loans. I'm sure some of the re-aging did benefit a customer.

19 And, again, I don't quarrel with the re-aging necessarily at

20 all. I quarrel with the disclosure -- with the lack of

21 disclosure with respect to re-aging and ultimately a

22 disclosure that was made late that was, in fact, false and

23 misleading.

24 Q. Yes. Well, you've told us that, haven't you, Mr. Devor?

25 But that wasn't my question, was it?

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 2552

 1 A. You asked me if I had a problem with re-aging. You keep

 2 asking me that.

 3 Q. Let's start over again. Maybe you didn't hear me.

 4 I asked you whether in your travels through the

 5 documents you had ever come across evidence that re-aging

 6 assisted customers, yes or no?

 7 A. I haven't seen a specific instance of that; but I am sure

 8 in a company as big as Household, given how many re-ages were

 9 done, that some of them actually helped customers or even were

10 intended to help customers. I'm sure that's the case. I

11 would be shocked if it wasn't the case, given how big

12 Household was.

13 Q. Mr. Devor, you testified that you believed that you had

14 found evidence that Household used re-aging practices to

15 manipulate its delinquency numbers, right? That's kind of the

16 gist of what you said yesterday, right?

17 A. I believe the documents -- I believe -- I believe that

18 does accurately summarize.

19 Q. Okay. Are you -- and you are familiar with the KPMG

20 benchmarking study; are you not?

21 A. I am.

22 Q. And you put it in -- I think we discussed it yesterday,

23 didn't we? Did you discuss it yesterday?

24 A. I believe it came up briefly, yes.

25 Q. Okay. I'm going to hand you what I think is in evidence

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 1 correct?

 2 A. When you say I don't understand, I don't know specifically

 3 what the requirements are. I mean, I would understand what

 4 they are, the substance of them. But I don't know exactly

 5 what they are in terms of they require these aspects of a

 6 customer before you re-age. You know, I don't know what those

 7 require.

 8 Q. That's fair enough. You just don't know what those

 9 requirements are, right?

10 A. That's correct.

11 Q. And you know as to Household, they're not governed by any

12 such requirements, correct?

13 A. That's correct.

14 Q. All right.

15 A. I believe though this was referring though for the most

16 part to the consumer lending business, but not the banking

17 part. As I recall, these documents -- I thought they were for

18 the most part referring not to the banking business of

19 Household but to the consumer lending arm of --

20 Q. Mr. Devor, Household isn't the bank. Wells Fargo is the

21 bank.

22 A. No, I understand that.

23 Q. I don't understand what you just said.

24 A. What I'm saying is Wells Fargo would have known in looking

25 at Household that the consumer lending policies that they had

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 2562

 1 wouldn't -- of course, they would not have to follow banking

 2 standards; but this doesn't say that. This -- this doesn't

 3 say, hey, because of the banking requirements that we have,

 4 our regulatory requirements, there's this latent bubble. It

 5 just talks about the fact that there's this bubble of latent

 6 credit losses. It doesn't attribute it to our accounting is

 7 different because we're a bank and Household's different

 8 because they're not. You know, that does not -- and, in fact,

 9 I think it went to GAAP when it said it's hard to imagine

10 they're not doing this stuff -- I'm paraphrasing the document

11 we had. It's hard to imagine they're not doing this stuff for

12 reasons other than deferring losses and managing earnings,

13 something like that. I can't remember exactly what it said.

14 We looked at it this morning.

15 Q. But you understand that if Wells Fargo acquired Household,

16 that Household would have to comply with FFIEC because it was

17 being acquired by a bank, no?

18 A. Yes, but -- I do understand that.

19 Q. Okay. Let's see document No. 1351, which was discussed by

20 Mr. Devor earlier today. And let's go to Bates number 228.

21 There's a chart on the bottom that says, Ongoing

22 impact of complying with FFIEC as illustrated below.

23 Do you see that that, Mr. Devor?

24 A. Yes, I do.

25 Q. Do you understand what that chart means?

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 1 A. Give me a second to study it.

 2 (Brief pause.)

 3 BY THE WITNESS:

 4 A. It's somehow charting, you know, the impact going forward

 5 of complying with FFIEC requirements.

 6 BY MS. BUCKLEY:

 7 Q. Okay. You think it was important in commenting on the --

 8 the due diligence of Wells Fargo into Household for you

 9 to -- strike that.

10 You think it was important to note, Mr. Devor, that

11 we had this FFIEC issue vis-a-vis Wells Fargo and Household?

12 A. I wasn't referring before in these documents to the fact

13 that they needed this to meet regulatory requirements. I

14 know, for instance, that Wells Fargo said that they needed to

15 take a $600 million hit in the consumer lending division,

16 which was not to comply with regulatory requirements. That

17 was GAAP.

18 Q. You don't understand that when -- if Household had been

19 acquired by Wells Fargo, that certain costs would have been

20 incurred for Household to be FFIEC compliant as Wells Fargo --

21 because Wells Fargo was a bank?

22 You don't understand that?

23 A. I do understand that, but I guess what I'm trying to say

24 is a bad loan is a bad loan. Under GAAP, you have to record

25 the charge also, not just for regulatory.

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 2564

 1 Q. You don't think it was important when presenting the issue

 2 of Wells Fargo acquisition that the -- your opinion also

 3 include the notion that there was a different regulatory

 4 environment?

 5 A. I was not commenting on the need to book anything that the

 6 company had with respect to -- first of all, I wasn't talking

 7 about reserves. I was talking about the fact that their

 8 re-aging was so significant and aggressive, which I think they

 9 say. And, secondly, I wasn't taking issue with the regulatory

10 requirements. So why would I comment on it? I wasn't at all

11 taking issue with that.

12 Q. You just mentioned reserves, Mr. Devor. You'll agree,

13 will you not, that Household's loan loss reserves were not

14 inadequate during this period, correct?

15 A. I would not -- I would not agree with that statement. I

16 would not agree with that statement at all.

17 Q. You don't agree that Household's loan loss reserves were

18 not inadequate during the relevant period?

19 A. I believe I concluded in my report that the method that

20 the company used to estimate its reserves, to come up with its

21 reserve number, was unreliable. And, furthermore, there were

22 significant indications in the record that it was also

23 understated. So when you asked me if I would agree that it

24 was fine, of course, I wouldn't agree that it's fine.

25 Q. You have not offered an opinion in this case that

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 1 Household's loan loss reserves are inadequate, have you?

 2 A. I just gave my opinion. The answer is no, I have not

 3 given that opinion. Instead I've said it's unreliable the way

 4 they did, and there are indications that it is understated. I

 5 can't quantify it because I don't have enough information.

 6 Q. As a matter of fact, you told us, didn't you, Mr. Devor,

 7 that the issue of Household's loan loss reserves was way

 8 beyond the scope of your retention in this case, right?

 9 A. I -- if you're referring to deposition testimony, you

10 know, it was a year and a half ago. I don't remember if I

11 said that or not.

12 Q. Was --

13 A. Again, the focus of my attention was on the reporting of

14 the two-plus delinquency numbers, the improper lending and the

15 revenue issues with respect to that and the restatement.

16 Those are my opinions.

17 Q. I understand your opinions, Mr. Devor. I'm asking if the

18 issue of the adequacy of Household's loan loss reserves was

19 way beyond the scope of your engagement in this case, yes or

20 no?

21 A. I don't -- I mean, I would think you would not mislead the

22 Court by saying that I said that without me saying it. So I'm

23 sure if I looked at my testimony, I may have said it. But,

24 again, it doesn't --

25 Q. Is it true or false, Mr. Devor?

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 2566

 1 A. Well, it doesn't -- it doesn't enter into any of my

 2 conclusions. We looked at it. And in my report, it is very

 3 apparent that we looked at it. And it was part of the scope

 4 because we comment on it for pages and pages in my report. I

 5 commented on it.

 6 Q. Was the adequacy of Household's loan loss reserves way

 7 beyond the scope of your report, yes or no, please?

 8 MR. DOWD: Objection, your Honor, asked and answered.

 9 THE COURT: Overruled. You can answer that yes or

10 no.

11 BY THE WITNESS:

12 A. The answer is, it wasn't beyond the scope because I didn't

13 look at it. And I -- and I actually gave conclusions in my

14 report on it. In the end, did it impact my decisions and

15 conclusions surrounding those three items that I indicated

16 were my conclusions? The answer is, it didn't have any impact

17 on those.

18 BY MS. BUCKLEY:

19 Q. Let's play --

20 A. I --

21 Q. I'm sorry. I thought you were finished.

22 A. So, I mean, obviously if you look at my report, my report

23 indicates that, of course, I looked at it. You know, whether

24 it was within the scope or not, it ended up -- I ended up

25 looking at it, of course. I opined -- I have a lot of

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 1 deposition testimony where I talked about it. And,

 2 furthermore, as I said before, it's not part of my ultimate

 3 opinions other than what I just indicated to you, which is, I

 4 believe, contained in my report.

 5 MS. BUCKLEY: Can we play Devor deposition 283, Line

 6 6 to 13, please.

 7 (Whereupon said tape was played in open court.)

 8 BY MS. BUCKLEY:

 9 Q. Way beyond the scope of my engagement, right?

10 A. To compute whether or not the reserves were inadequate.

11 But my -- that answer is exactly what I just said.

12 Q. Well, we'll let the jury decide that, Mr. Devor.

13 A. Okay.

14 Q. Your first opinion, which you offered yesterday, was on

15 the issue of predatory lending.

16 Do you remember that?

17 A. Yes.

18 Q. And yesterday Mr. Dowd asked you to address two issues

19 relating to predatory lending.

20 Do you remember that?

21 A. I have no idea what the two issues are you're referring

22 to.

23 Q. Okay. We'll help you out.

24 Do you remember Mr. Dowd asking you about your first

25 opinion in the case, relating to Household's failure to

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 2568

 1 disclose certain information?

 2 Do you remember that?

 3 A. I remember questions as related to that issue, yes.

 4 Q. Okay. And Mr. Dowd said -- asked you what your first

 5 opinion was. And you said that Household failed to disclose

 6 certain information that was required about improper lending

 7 practices, if the company had engaged in such; is that

 8 correct?

 9 A. That's my general remembrance of what I said yesterday,

10 yeah.

11 Q. Okay. Let's see if we can put up on the screen the

12 passage of your testimony from yesterday. It's Page 2408,

13 Lines 4 to 2409 --

14 MR. DOWD: Objection, your Honor. I believe this is

15 improper impeachment. He just agreed with --

16 MS. BUCKLEY: I thought he didn't remember.

17 THE COURT: No, I'll overrule the objection.

18 MS. BUCKLEY: Thank you, your Honor.

19 You want to make that bigger, Brian.

20 BY MS. BUCKLEY:

21 Q. Focusing on Lines 9 to 11, Mr. Devor, do you see that?

22 Maybe you can highlight that, Brian.

23 This is what --

24 A. Yes, I read it; and I remember saying it.

25 Q. And your opinion is that Household failed to disclose

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 1 (Proceedings heard in open court:)

 2 THE COURT: I would like to raise an issue that, it

 3 seems to me, we should probably address sooner rather than

 4 later.

 5 I think it was during -- I think it was during the

 6 testimony of David Schoenholz that he was asked a series of

 7 questions about what information regarding -- I will use the

 8 term as a catchall -- predatory lending practices was included

 9 in the 10-K disclosures.

10 And the day after that series of questions and

11 answers, the issue was raised by defense counsel -- and I

12 can't remember which counsel it was.

13 MR. SLOANE: It was me, your Honor.

14 THE COURT: Okay. You're the guilty party, then, I

15 guess.

16 -- regarding the propriety of those questions. I

17 think the objection was phrased in terms of the ruling we had

18 made with respect to this expert's testimony, if I am not

19 mistaken, regarding the revenue -- implications of the

20 statement of -- our ruling indicating that it could not be

21 argued that merely because information regarding the alleged

22 predatory lending practices wasn't included in the 10-K that

23 it could not be argued that the revenue information was

24 therefore false or misleading.

25 And unless I am mistaken -- and I am pretty sure I am

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 2578

 1 not -- the consensus was that we didn't have to address the

 2 issue at that time, that we could wait until this Friday, I

 3 believe, during the jury instruction conference to address the

 4 issue.

 5 MR. SLOANE: I think that's right, your Honor.

 6 THE COURT: Well, it seems to me the issue is now

 7 here, and it's not yet Friday.

 8 I mean, unless I am mistaken, and this witness has

 9 testified that the disclosures regarding revenue were required

10 to be accompanied by explanations regarding the predatory

11 lending practices in order not to be misleading, which I think

12 is the same way as saying in order not to be false.

13 There hasn't been an objection to any of those

14 questions, either on his -- so far in his testimony. But as I

15 read the testimony -- and I started to go back over it again

16 last night; it makes for a fun ride on the train -- it

17 occurred to me that we really have the same issue before us

18 that you had raised, which was not resolved. It was reserved

19 until Friday.

20 And the question is, do we want to reserve that issue

21 until Friday, or do we need to resolve it now, given that we

22 are now on cross-examination of this witness, and I assume the

23 cross-examination is going to go over, because it was part of

24 his direct testimony, his assertions that the GAAP and the SEC

25 rules require disclosure of those practices in relation to the

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 2579

 1 statement of revenues, which I think was pretty clearly the

 2 testimony that was given.

 3 MR. SLOANE: Your Honor, let me just say one thing.

 4 I think the context in which it was raised when

 5 Mr. Dowd and I were arguing about Mr. Schoenholz's testimony

 6 was some questions Mr. Dowd had asked. And I think the

 7 request -- the application at that time was threefold.

 8 One was to not have the questions asked in that way

 9 again, which I think Mr. Dowd said he wasn't going to ask them

10 that way or something like that. Perhaps I am misstating it.

11 And the other was a curative instruction. And your

12 Honor said, consistent with your prior rulings, since I didn't

13 object at the time, no curative instruction then, but then we

14 would take it up on Friday in the context of the bigger issue.

15 I think that was the way it developed at that point.

16 I am not disagreeing with anything your Honor is

17 saying about whether it's right --

18 THE COURT: Assuming that's so, why was there no

19 objection to the testimony given by this witness?

20 MS. BUCKLEY: Your Honor, it was my understanding --

21 and perhaps it was my usual lack of clarity -- that that was

22 precisely what we discussed in the sidebar before he began.

23 And then, again -- and maybe your Honor and I are not

24 on the same page as to what the issue is.

25 THE COURT: I think the ruling at the sidebar was

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 2580

 1 that -- was with regard to his ability to contrast -- or to

 2 determine the magnitude of the revenues resulting from the

 3 alleged predatory lending practices by comparing that number

 4 to the amount of total revenues disclosed in the 10-K.

 5 And my ruling then was, as it was previously, that he

 6 can do that. That goes to the question of the pervasiveness

 7 and the -- if you will, the materiality of the alleged

 8 wrongful predatory lending practices, but that he would not be

 9 allowed to, either by the questions or by argument of any

10 sort, imply that the mere statement of the revenues, without

11 explanation, made the statement of revenues false or

12 misleading. I mean, that's what I ruled before the trial

13 started, and that's what I said at the conference.

14 It occurs to me that late in the day yesterday those

15 were the very questions that were asked.

16 MR. DOWD: I don't think so, your Honor. I suspect

17 the reason there is no objections is because -- I mean, I

18 think you have to take a step back.

19 This witness, his original opinion that the Court

20 ruled on in the Daubert motions, one of his opinions was that

21 this revenue, this income, should never have been booked in

22 the first instance.

23 Now, the Court has made a determination that, under a

24 legal standard, the Court believes that's incorrect. If you

25 ask Mr. Devor, I know what he would say. He would say you

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 1 have to have -- you know, you have to earn the revenue. And

 2 if it's illegal, you can't earn it. So under GAAP, it should

 3 never have been booked in the first instance.

 4 That said, the Court said, legally I don't accept

 5 that. And I have never asked him a question about that. I

 6 mean, I have never said, should that revenue or net income be

 7 booked in the first instance? He hasn't testified to that,

 8 and I assume that's why there is no objections because we are

 9 going along then.

10 But one of the witness' other opinions from the

11 get-go in this case, that the defendants didn't challenge on

12 Daubert, was the issue of, if you are engaged in practices

13 that are generating revenue, whether you could book it or not,

14 if you know that in the future those revenues could be stopped

15 because they are illegal or improper or whatever word we want

16 to use, then you have to disclose that. It's a disclosure

17 obligation. That's in his report. The defendants didn't

18 challenge it.

19 It's different from, can he say that number is wrong?

20 I never asked him that because the Court says he can't say it.

21 If I ask Mr. Devor, I know what he would say. He would say,

22 yeah, that number is wrong. In the 10-Ks and 10-Qs, you can't

23 book that.

24 So we have stayed completely away from that.

25 The issue is an issue of disclosure in terms of going

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 2582

 1 forward because investors are going to consider the future

 2 growth. And if you know that there is this risk that these

 3 practices are improper or illegal, that that could be lost in

 4 the future, it's going to affect the growth rate.

 5 So I think that's why there has been no objection. I

 6 mean, we are doing exactly what the Court said in the opinion,

 7 which is that he can't say that number is wrong. I mean, and

 8 he hasn't said that. And I don't think he has come close to

 9 saying that in his testimony.

10 And the witness and I have talked about that. He has

11 obviously read the in limine ruling as well. He may disagree

12 from a GAAP perspective, but you are the person who decides

13 the law, so we stayed completely away from that.

14 So I think we have done what we are supposed to do.

15 THE COURT: Okay.

16 MS. BUCKLEY: Your Honor, it was my understanding

17 that to the extent that Mr. Devor tried to link the

18 quantification to the falsity of a 10-K or a 10-Q, he was not

19 permitted to do that. He was not permitted to imply that the

20 number or the size of the number had any impact on the true

21 financial statements of the 10-Ks and the 10-Qs. That's what

22 I had thought where we were and why I sought clarification

23 yesterday.

24 And I thought I understood your Honor's distinction

25 that if he wanted to quantify what he claims the amount the

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 2583

 1 company got -- I won't use loaded words -- from the allegedly

 2 predatory lending practices --

 3 THE COURT: Right.

 4 MS. BUCKLEY: -- that he was allowed to do that.

 5 I think the second time I objected yesterday it was

 6 when they put a demonstrative up on the screen which had the

 7 quantification amounts juxtaposed against the 10-Ks, which I

 8 at least had thought was not where your Honor's head was. And

 9 we did have a sidebar on that, and we proceeded.

10 That, if it is of any use to the Court, is what I

11 understood the Court's ruling to be and abided by it

12 throughout the rest of the examination.

13 MR. DOWD: I think, your Honor -- and I apologize to

14 Ms. Buckley. I am sure she is right. I don't remember an

15 objection to that. I remember an objection to the third

16 opinion slot.

17 But the demonstrative I used was a demonstrative that

18 the Court ruled on in limine and said I could use.

19 THE COURT: I don't think that was the objection that

20 was made to it in the ruling in limine, was it?

21 MR. DOWD: Yeah. No. They -- I mean, they tried to

22 tie it into this opinion, and we went through the language the

23 Court had about attributable and said I could use that one.

24 Now, I will tell you, your Honor, I had three more.

25 And because of the Court's comments the other day, I just went

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 2584

 1 with the one to try to keep it as simple as I could.

 2 THE COURT: I don't have any problem with the

 3 testimony comparing or quantifying the amount of revenue that

 4 was gained from the -- his opinion as to the amount of revenue

 5 that was gained from the alleged predatory lending acts. We

 6 ruled that that could be done, and I think it's perfectly

 7 proper. It's an accounting issue. He can view the records,

 8 view the books and see how they quantify this. I don't have a

 9 problem with that.

10 I do have a problem with it slipping into the

11 argument that because information as to predatory lending

12 wasn't included in the 10-K, specifically wasn't a footnote or

13 an amplification of the revenue statement, that the revenue

14 statement is misleading.

15 That's the problem with me. And we seem to be

16 sliding into that, which would be the back end of our original

17 ruling really.

18 MR. DOWD: Well, with all due respect, your Honor,

19 that's in his report. There is no question about it. I mean,

20 that was one of his opinions. And they didn't even move on

21 that on Daubert.

22 The issue that I thought the Court had was, he cannot

23 say the numbers are false. But he should be able to testify

24 that under GAAP and SEC rules, that if you think there is --

25 the future trends are not going to be the same. I think under

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 2601

 1 Q. Have you ever testified as an expert in cases involving

 2 allegations of securities fraud?

 3 A. Yes, many times.

 4 Q. And have you testified on behalf of plaintiffs and

 5 defendants in those type of cases, the cases involving

 6 allegations of securities fraud?

 7 A. Yes, I have.

 8 Q. And have you testified more times for the plaintiffs or

 9 for the defendants?

10 A. Far more times for defendants.

11 Q. Let me start by asking you some basic background

12 information about this case.

13 What is your understanding of who the plaintiffs are

14 in this case?

15 A. My understanding of who the plaintiffs are is all

16 purchasers of Household stock from the period beginning

17 July 30th, 1999 through October 11th, 2002.

18 Q. And what is your understanding of who these purchasers

19 are?

20 A. A wide variety of different types of entities,

21 institutional investors, retirement funds, public pension

22 funds, money managers of various types, as well as many

23 individuals.

24 Q. And were these purchasers always buying stock on their own

25 behalf?

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 1 A. No. Even institutional purchases frequently are on behalf

 2 of individual investors who entrust their money to

 3 professional money managers who then purchase stock, but

 4 purchases are on behalf of the individuals.

 5 Q. Would an example be a mutual fund at Fidelity?

 6 A. A mutual fund would be a perfect example.

 7 Q. Now, what's your understanding of plaintiffs' allegations

 8 in this case?

 9 A. My understanding is that plaintiffs claim that Household

10 made inaccurate disclosures concerning its lending practices,

11 its predatory lending; as well as the way that it treated its

12 loans, the so-called reaging issue; and another accounting

13 issue relating to the proper accounting for its credit card

14 unit, which ultimately led to a restatement.

15 My understanding is that the plaintiffs claim that

16 Household's disclosures were not accurate in all three of

17 those areas.

18 Q. Now, did you make any assumptions as to whether or not the

19 defendants made false statements or disclosures during the

20 relevant period?

21 A. Yes, I did. I assumed that the defendants did make false

22 statements during the relevant period in order to perform my

23 quantifications.

24 Q. Is that a common assumption to make in estimating

25 inflation and damages in one of these cases?

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 1 A. Yes. I would say it's a necessary assumption to make

 2 that's always made because the job of determining whether or

 3 not statements are false or misleading, that's an issue for

 4 the Court and the jury. That's not an economic question.

 5 So any economist who has the role of quantifying the

 6 effect of inaccurate disclosures or misstatements has to begin

 7 with an assumption that the Court and/or the jury would

 8 conclude that there is something to quantify; namely, the

 9 statements were misleading.

10 Q. Now, given that assumption, what did you do in this case?

11 A. What I did was, obviously, first familiarize myself with

12 the background of the case, looking at the allegations, the

13 pleadings, the responses, a set of legal issues that formed

14 the background of the case.

15 And then I looked at a massive amount of information,

16 documents about Household disclosures, analyst commentary

17 about those disclosures.

18 I also looked very carefully at Household's stock

19 price movements during the relevant period, the stock --

20 comparable stock price performance of competitors of

21 Household, various indexes that Household identified as the

22 way its performance should be judged against.

23 I performed a statistical analysis of stock price

24 movements relating the information that became known to

25 investors during the class period to Household's stock price.

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 1 And I measured the amount of inflation on every day during the

 2 relevant period using two different methods, which is a way to

 3 calculate the amount of loss that any individual investor

 4 suffered during the relevant period, depending on what day

 5 they purchased and what day they sold.

 6 Q. Based on the analysis that you described, did you form any

 7 opinions in this case?

 8 A. Yes. I formed the opinion that Household's disclosure

 9 defects, its inaccurate disclosures, caused there to be

10 significant inflation in Household stock price for much of the

11 relevant period. And as a result, again depending on when

12 investors purchased and when they sold, investors in Household

13 stock suffered very significant losses as a result of

14 Household's defective disclosures.

15 Q. You mentioned the term stock price inflation. What did

16 you mean by that?

17 A. What I meant by that is that the stock price on any given

18 day for any company reflects the information that is known

19 about that company. And if there is a situation where a

20 company is not disclosing accurate information about itself,

21 the stock price will reflect not only the accurate information

22 about the company but also the inaccurate, or the false

23 information, about the company.

24 And what inflation is, is a measure of how much the

25 stock price has been affected by the false information that's

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 1 been disclosed by a particular company.

 2 Q. Can a misrepresentation and an omission both cause the

 3 stock price to be inflated?

 4 A. Yes. You can have -- there are two classic situations

 5 where inflation can exist.

 6 One situation is where a company makes a false

 7 statement and the stock price rises to a level that's higher

 8 than it would have been in the absence of the false statement.

 9 That would be a classic misrepresentation situation.

10 There is also an equally equivalent way that

11 inflation can occur if a company discloses information but

12 fails to disclose something negative about itself that it

13 knows about but investors in the marketplace do not know

14 about. In that situation the stock is inflated because the

15 stock is prevented from falling to a lower level, which is the

16 level that the stock would have fallen to had the company

17 disclosed the additional negative information that it failed

18 to disclose. That's a traditional omission type of situation

19 causing inflation.

20 Q. In your opinion, how could the wrongdoing that the

21 plaintiffs allege in this case have caused inflation in

22 Household stock?

23 A. Well, first of all, I would say, in any situation where a

24 company does not accurately reflect its financial condition

25 and its growth prospects, that potentially could be very

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 1 important for investors. And in this case, it's really no

 2 exception.

 3 But more specifically, in this case Household, during

 4 the relevant period, was embarking on a very significant

 5 growth strategy to try and grow their earnings, to try and

 6 grow their revenue, to try and grow their size. That was

 7 really the key component -- or one of the key components of

 8 their business plan.

 9 In order to convince investors that this growth plan

10 was a reason that they should pay more and more for Household

11 stock, it was necessary to communicate to investors that

12 Household could not only report increasing revenues,

13 increasing earnings, but that these increasing revenues and

14 earnings would continue into the future.

15 And if it were the case, as the plaintiffs allege in

16 this case and as many analysts and commentators concluded,

17 that those revenues could not be sustained in the long-term

18 because they were the function of improper lending practices,

19 which would cause Household to get into a lot of trouble,

20 ultimately force it to change its business practices, lower

21 its growth targets, making it a less-profitable company than

22 what investors believed at the beginning of the relevant

23 period, that could certainly lead to inflation.

24 MR. KAVALER: Objection. Move to strike and ask for

25 a sidebar.

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 1 THE COURT: Why don't we take a break and have the

 2 jury go back to the jury room, and then we will have the

 3 sidebar out here.

 4 (Jury out.)

 5 THE COURT: Okay, Mr. Kavaler. Your objection.

 6 MR. KAVALER: Yes, your Honor.

 7 Your Honor, I move to strike the answer. In his

 8 answer the witness, echoing the opening statement of the

 9 plaintiffs in this case, talked about growth. And he talked

10 about growth being the cause. He used the word "cause" and he

11 used the word "growth."

12 My specific objection is, the whole concept of growth

13 is not in his expert report. If you look at his expert

14 report, in Paragraph 10 he talks about what he says the

15 allegations of the complaint are. In other words, the format

16 of the expert report is exactly the same format --

17 THE COURT: Refresh my recollection since I didn't

18 have the feed here. What was the question he was answering?

19 MR. KAVALER: Your Honor, there were a series of

20 questions. The first one was --

21 MR. BURKHOLZ: Your Honor, I have the question.

22 THE COURT: Okay.

23 MR. BURKHOLZ: "In your opinion, how could the

24 wrongdoing that the plaintiffs allege in this case have caused

25 inflation in Household stock?"

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 1 MR. KAVALER: And I have two objections, your Honor.

 2 One is to the word "cause" and the other is as to the word

 3 "growth."

 4 The objection to "growth" is, in Paragraph 10 of his

 5 expert report he says -- he says what he says. It's a lengthy

 6 paragraph. I'd be happy to read it to you.

 7 What he doesn't mention at all is growth. The notion

 8 that growth is a key fact here comes from plaintiffs' opening

 9 statement. It was not disclosed by Professor Fischel in his

10 report and, therefore, not pursued by us in the depositions.

11 Secondly --

12 THE COURT: His answer was that growth was a key

13 element how? What did he say?

14 MR. BURKHOLZ: "First of all, I would say, in any

15 situation where a company does not accurately reflect" --

16 THE COURT REPORTER: I'm sorry. I can't hear you.

17 THE COURT: A little bit louder.

18 THE COURT REPORTER: You have got a microphone the

19 MR. BURKHOLZ: "First of all, I would say, in any

20 situation where a company does not accurately reflect its

21 financial condition and its growth prospects, that potentially

22 could be very important for" -- I think, its investors. "And

23 in this case, it's relevant.

24 "But more specifically in this case, Household,

25 during the relevant period, was embarking on a very

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 1 S&P 500 went up by a little over 4 percent that day,

 2 4.01 percent.

 3 And the next column, the S&P financials index, which

 4 is the index that Household itself compared itself to, that

 5 went up by 3.74 percent.

 6 So in the same way that I just described about the

 7 stock market going down in the past year by 50 percent, going

 8 up in the last month by 25 percent, you can't just look at

 9 that .77 percent increase in a vacuum. You have to compare it

10 to how the overall market did and how the industry did.

11 And you see the overall market did -- let's see --

12 more than five times better than Household did on that day.

13 And the industry, looks like it did also about five times

14 better than Household on that day.

15 So if we go to the next column, the predicted return,

16 this is the -- where the statistical analysis gives you the

17 ability to say with some precision, given what happened in the

18 overall market and given what happened in the overall

19 industry, knowing how much they went up that day, how much

20 would you predict -- given Household's relationship with the

21 market and the industry -- Household would have gone up on

22 that day, August 14th?

23 And if we go to the -- it's 3.26 percent.

24 And if we go to the next column, residual return,

25 2.49 percent -- that's simply the difference between

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 1 3.26 percent -- what you would predict. You would predict

 2 that Household would go up by a lot. Instead it went up by

 3 just a little. That's just like my example of the stock

 4 market going up by 25 percent in the last month but a

 5 particular stock going up by only 5 percent. 5 percent sounds

 6 good, but it's not as good as what you would expect,

 7 25 percent.

 8 And the same thing is true for Household.

 9 So applying that statistical method, you see that the

10 residual return for Household on that day is actually

11 negative, negative by a fairly large amount because Household

12 so far underperformed the market and the industry which have a

13 big influence on its performance.

14 And the next column, the residual price change, that

15 is just -- that's simply a multiplication of this

16 minus 2.49 percent times what Household's closing price was

17 the previous day, $37.80.

18 So when you look at Household stock price

19 analytically, precisely, scientifically, you see that

20 Household stock price, measured against the market and the

21 industry of which it's a part, actually declined by 94 cents

22 as opposed to the initial appearance that it looks like the

23 price went up on that day.

24 And then, if you go to the last two columns, the

25 T statistic and whether the T statistic is greater than 1.65,

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 1 that is simply a measure of whether the negative performance

 2 of Household on that day is sufficiently large to be

 3 considered significant using this particular regression

 4 analysis and event study.

 5 Any time there is three stars on a particular date,

 6 the conclusion is that, based on this particular event study,

 7 this particular regression analysis, Household stock price

 8 underperformed by a statistically significant amount on this

 9 particular day.

10 And that's how an event study works, basically.

11 Q. What was the -- what is the relationship between this

12 event study and your quantification of inflation?

13 A. I used two methods of quantification. An event study is

14 basically used in both of them.

15 But with respect to the first method, what I did was,

16 I selected those disclosures which I considered to be

17 fraud-related during the relevant period where there was a

18 statistically significant price movement, where I was also

19 reasonably confident that the fraud-related disclosure on a

20 particular day was responsible for a particular statistically

21 significant price movement.

22 Q. And how many dates did you find during this period?

23 A. Using under my first method, 14 dates.

24 Q. What was the first date that you found one of these

25 events -- one of the dates that you are testifying about?

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 1 A. November 15th, 2001.

 2 Q. Why were these 14 dates selected?

 3 A. They were selected because I wanted to isolate the

 4 fraud-related disclosures that were important to investors.

 5 So I had to make a series of judgments based on the event

 6 study in order to do that. I had to isolate disclosures. I

 7 had to determine whether those disclosures occurred at a time

 8 when there was a statistically significant stock price

 9 movement. And I had to be reasonably confident that the

10 fraud-related disclosure was responsible for the price

11 movement.

12 Q. And have you prepared a demonstrative that summarizes the

13 relationship between your analysis of the 14 dates and

14 inflation?

15 A. I have.

16 MR. BURKHOLZ: Can we bring up Plaintiffs'

17 Demonstrative 150.

18 BY MR. BURKHOLZ:

19 Q. Now, before we look at -- is this the demonstrative that

20 you prepared?

21 A. Yes.

22 Q. Before looking at these 14 dates, was there another set of

23 dates that you could have picked?

24 A. Yes. I believe this particular analysis focuses on

25 14 dates. I have seen an analysis by Household that

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 1 as I said, those disclosures were criticized later as well.

 2 Q. So is it your opinion that the investors that bought stock

 3 during the relevant period up until approximately the last

 4 month suffered harm, but the investors in the last month did

 5 not suffer?

 6 A. Correct.

 7 And I wanted to be careful in excluding investors who

 8 suffered no harm in this particular calculation, which is why

 9 I indicate that for a certain period, the blue line is above

10 the red line.

11 Q. Okay. And did you prepare an exhibit that displays the

12 actual amount of artificial inflation on every day during the

13 relevant period?

14 A. I did. Under this method and the second method that we

15 haven't gotten to yet.

16 Q. Let me show you what we've marked as Plaintiffs' 1397.

17 What is Plaintiffs' 1397?

18 A. This is an exhibit which basically takes this graph that

19 is currently on the screen and reports for every day what the

20 actual price was of Household in the real world and what the

21 amount of inflation was in Household's stock price on every

22 day during the relevant period with the amount of inflation

23 defined as the difference between the red line, the actual

24 price, and the blue line, the uninflated true value line. And

25 you can see it's positive for the entire period until the end

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 1 when it turns negative.

 2 MR. BURKHOLZ: I'd like to show the jury some of

 3 these dates if we can. Your Honor, can we move in 1397? I

 4 don't believe there's any objection.

 5 THE COURT: 1397 is admitted.

 6 (Plaintiffs' Exhibit 1397 received in evidence.)

 7 BY MR. BURKHOLZ:

 8 Q. So why don't we just highlight August 16th, 1999.

 9 A. Okay.

10 Q. Can you just describe what -- what your demonstrative --

11 what your exhibit, I'm sorry, shows for that date?

12 A. All right. On August 16th, 1999, which is, I believe, the

13 date of Household's -- when it reported its second quarter

14 results in its 10-Q filing, the closing price that day was

15 $39.75.

16 My calculations indicate that that stock price was

17 inflated by $7.97, the effect of the 14 fraud-related

18 disclosures, so that the true value on that date, what

19 investors should have paid, was $31.78.

20 Q. Okay. Can we turn to the next page? I'm sorry, and focus

21 on October 19th, 1999.

22 Now, I think that's the date of another press release

23 by Household of its quarterly results. You have inflation of

24 7.97 on that date?

25 A. Correct.

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 1 Q. Would there be inflation on that date if there was no

 2 finding that the August 16th, 1999 10-Q was false or

 3 misleading?

 4 A. No, no, that the -- well, it would depend, I guess, on

 5 whether it was an earlier disclosure that was found to be

 6 false and misleading. It's hard to separate one from the

 7 other.

 8 But so long as there is a disclosure that Household

 9 made that was false and misleading because it did not provide

10 accurate information about its predatory lending practices,

11 its re-aging policies, its credit card accounting, the ability

12 to sustain its growth strategy in the future, the inflation

13 would be this particular amount based on my calculations.

14 Q. Okay. Now, in your opinion, the $7.97 of inflation that

15 you calculated, does that capture, in your opinion, the amount

16 of inflation that was in Household's stock price?

17 A. No.

18 Q. And why not?

19 A. Because what I did was I focused on individual

20 disclosures, but that's in some sense not a completely

21 realistic analysis because it's not as if there was only 14

22 disclosures during the relevant period.

23 There was a cascade of negative information that came

24 out about Household, particularly after negative --

25 particularly after November 15th, 2001, when market

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 1 participants, investors, analysts became to increasingly doubt

 2 Household's denials and started to really question whether or

 3 not Household's disclosures were accurate, whether its

 4 accounting was accurate, whether its lending practices were

 5 consistent with governing regulations.

 6 There was, as we get a little bit later in the

 7 period, tremendous amount of leakage of information about the

 8 Washington Department of Financial Institutions report, about

 9 the possibility of a settlement, about the need for Household

10 to reform its sales practices and the possible effect that

11 would have on Household's profitability, and I believe that

12 cascade of negative information had an effect, a negative

13 effect, on Household's stock price in addition to the effect

14 of the 14 disclosures that I originally quantified that we

15 just went through.

16 Q. Do you have the Bellingham Herald article, that

17 Exhibit 1429?

18 A. Probably better if you give me another copy of it because

19 I have so many documents. I could search for it, but if you

20 have another copy, that would be better.

21 What's the date of it?

22 Q. I have a copy.

23 A. Thank you.

24 I have it.

25 Q. Okay. Is this an example of the type of leakage that you

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 1 were talking about?

 2 A. Yes. In fact, the article discusses the very leakage that

 3 I just described.

 4 Q. Okay. And what in the article is significant to your

 5 opinion regarding leakage?

 6 A. Well, if we just highlight the first half of the page on

 7 the first page of the article. The first paragraph talks

 8 about the Washington report, the state investigative report on

 9 Household.

10 Then it talks about how it's been suppressed by --

11 for three months as a result of a court order that Household

12 obtained; then describes, because the article's been now

13 leaked, a -- what the article refers to as a blistering

14 assessment of the Household's loan practices in Washington and

15 elsewhere in the state.

16 And then it goes on to talk about what the report

17 accuses the company of, misrepresentations and dishonest

18 statements, failure to provide customers with accurate

19 disclosures, coaxing borrowers into signing without reading

20 the documents that they're signing, talking borrowers into

21 refinancing at disadvantageous interest rates based on

22 misleading them, adding costly insurance premiums.

23 But then the next paragraph is really what is

24 supportive of what I said a minute ago. It talks about how

25 Household's attorneys went to court to obtain a restraining

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 1 order blocking release of the report; but in recent weeks,

 2 copies of the report have been leaked to every news

 3 organization that has followed the HFC story, including the

 4 New York Times, Forbes Magazine, American Banker Magazine, 

 5 the Bellingham Herald.

 6 And the point is that my 14 specific disclosures

 7 don't pick up all this leakage going on behind the scenes to

 8 all of these news organizations about the consequences to

 9 Household of this report.

10 And, again, the same is true with respect to rumors

11 about the settlement, about rumors about the effect of sales

12 practice reform on Household's profitability and its growth

13 strategy, and that's why I think that my first quantification

14 doesn't fully capture the inflation in Household's stock

15 price.

16 Q. Okay. Before we get a little further into leakage and

17 your leakage analysis, did you prepare a demonstrative that

18 compared how Household's stock price went down from your first

19 date, November 15, 2001, until the end of the relevant period,

20 October 11, 2002, to the inflation that you found, the $7.97?

21 A. I did.

22 MR. BURKHOLZ: Okay. Can we look at -- bring up 152,

23 please.

24 BY MR. BURKHOLZ:

25 Q. Is this a demonstrative that you prepared?

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 1 A. Yes.

 2 Q. And can you explain the demonstrative to the jury?

 3 A. Yes. This is a comparison of Household's stock price

 4 decline from November 15th, 2001, my first fraud-related

 5 disclosure, the date of the California Department of

 6 Corporations suit, to October 11th, 2002, when the settlement

 7 and the reform of sales practices is announced, and the red

 8 bar is the amount of the decline in Household's stock price.

 9 $32.70 was the decline from I think it's, you know, somewhere

10 around 60 to somewhere in the 20s, but the exact amount of the

11 decline is $32.70.

12 And I compare that with the amount of inflation that

13 I calculated based on my 14 specific disclosures, which is the

14 blue bar, $7.97, and obviously $7.97 is a much smaller number

15 than $32.70. So in my first method of the decline in price of

16 $32.70, only $7.97 of that $32.70 decline I attribute to

17 improper inflation, and the rest is attributable to other

18 factors under this first method.

19 So you can see the vast majority of the stock price

20 decline I do not count as inflation under my first method.

21 Q. And it's your opinion that the $7.97 is -- doesn't fully

22 capture the inflation that was in Household's stock price

23 before this time period?

24 A. Correct. It captures the 14 specific disclosures, but it

25 doesn't capture the pervasive leakage of all of the

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 1 accusations and the findings in the Washington report,

 2 consumer groups, the possibility of more regulatory

 3 investigations, the effect on Household's -- rumors about the

 4 effect on Household's lower profitability as a result of

 5 reform of its sales practices, any analysis of specific

 6 disclosures in a situation where there's so much leakage, the

 7 specific disclosures can't fully capture all of the decline

 8 that's attributable to fraud-related information.

 9 Q. And did you prepare -- compare Household's stock price

10 decline during this period we're looking at to what it

11 identified as its peer group?

12 A. I did.

13 MR. BURKHOLZ: Okay. And can we look at -- bring up

14 demonstrative 136, please?

15 Let's highlight that.

16 BY MR. BURKHOLZ:

17 Q. Is this a demonstrative that you prepared?

18 A. Yes.

19 Q. Can you explain it to the jury?

20 A. Yeah.

21 Again, this is very important because, as I indicated

22 earlier, you can't really analyze a stock price in the

23 abstract. You have to know how it compares to how the market

24 did and how the industry that it's a part of did.

25 And what I did was I looked at Household's

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 1 disclosures to see what benchmark Household itself identified

 2 as the market index and the industry index that its

 3 performance should be compared against.

 4 And Household identified the Standard & Poor's

 5 Financial Index and the Standard & Poor's 500 Index, a much

 6 broader index of the overall market.

 7 So during this period when Household declined by

 8 $32.70, I wanted to compare how Household performed versus th

 9 indexes that Household itself said it should be compared

10 against, and this is what this graph indicates.

11 First of all, the full red bar is Household's

12 performance during this period. The $32.70 decline translate

13 into a decline of 53 percent in Household's stock price during

14 this period.

15 But, again, I wanted to see how that compared with

16 the market and the industry to be consistent with my overall

17 analysis that you can't ever analyze stock prices in

18 isolation, you have to compare them to the market in the

19 industry.

20 So if you look at the two lines going across, they

21 represent the performance of the S&P Financials Index and the

22 S&P 500 Index, which, again, I did not choose those.

23 Household itself chose them as the relevant benchmarks to

24 assess its performance against.

25 And you can see that the Household -- the S&P

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 1 Financials Index declined by approximately 20 percent. The

 2 S&P 500 Index declined by approximately 25 percent, but

 3 Household declined by more than twice that amount. It

 4 declined by 53 percent during this period, which, again, gave

 5 me confidence that Household's decline was not just

 6 attributable to normal market and industry fluctuations, but

 7 was attributable to new negative information coming out about

 8 Household that is easily understandable in light of the

 9 cascade of negative information that was coming out during

10 this period.

11 Q. And was the $7.97 inflation that you found -- what was the

12 relationship between that and what you were finding in this

13 analysis?

14 A. The $7.97 number is smaller than the amount of the -- of

15 Household's decline that exceeded the decline of the indexes

16 that Household itself compared itself to. So my analysis was

17 conservative again in that respect.

18 Q. And I want to show you the proxy that Household filed, 14A

19 proxy. It's Exhibit 1275 dated May 14, 2002.

20 Is this a document that you used in preparing this

21 demonstrative?

22 A. Yes. Again, I didn't want to perform any comparisons of

23 Household to indexes that Household itself didn't compare

24 itself to, so under the governing regulations of the

25 Securities and Exchange Commission, companies have to identify

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 Fischel - direct

 2679

 1 which stocks and which stock indexes their performance should

 2 be compared against so investors can assess whether their

 3 performance is good or bad, not just in isolation, but

 4 relative to the companies or the indexes that they themselves

 5 compare themselves to.

 6 MR. BURKHOLZ: Okay. Let's look at 1275. Before we

 7 bring it up, your Honor, can we move this in. It's Household

 8 SEC filing, 1275.

 9 THE COURT: No objection, it will be admitted.

10 (Plaintiffs' Exhibit 1275 received in evidence.)

11 MR. BURKHOLZ: Thank you.

12 BY MR. BURKHOLZ:

13 Q. Let's turn -- it's on page 31 of the proxy filing, and we

14 can highlight that paragraph that starts "The above chart."

15 A. Yeah, actually if you highlight the panel right above

16 that.

17 Q. Okay.

18 A. And this is -- Household is reporting its performance

19 relative to the S&P Financials Index and the S&P 500 Index,

20 exactly the indexes that my exhibit just compared Household's

21 performance to. And, in fact, the reason why I chose those

22 indexes is because Household itself identified those indexes

23 as what its performance should be compared against.

24 And then after the panel, Household's disclosure

25 states that "The above chart compares total returns (assuming

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 2680

 1 all dividends are reinvested) of Household to Standard &

 2 Poor's Composite Financial Stock Price Index and Standard &

 3 Poor's 500 Composite Stock Price Index. Our common stock is

 4 included in both of these indices. The chart assumes $100 was

 5 invested in Household common stock on December 31, 1996 and

 6 that all dividends are reinvested. We are required to publish

 7 the five-year return chart so you could compare our

 8 performance to other stocks."

 9 So Household demonstrated in this document what they

10 considered the relevant comparison was. I used the exact same

11 comparison that Household itself stated was the right

12 comparison to use.

13 Q. And did you prepare an exhibit that shows the amount of

14 artificial inflation, taking into account the leakage that

15 you've discussed?

16 A. I did.

17 Q. Before we get to that, did you prepare a demonstrative

18 that shows the inflation taking into account the leakage?

19 A. Yes, I -- yes, I did.

20 MR. BURKHOLZ: Okay. Let's bring up 154, the next

21 demonstrative, 154.

22 BY MR. BURKHOLZ:

23 Q. And what does this show?

24 A. This is analogous to the document that we've already

25 looked at, the graph focusing on the 14 specific disclosures.

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 2681

 1 But here instead of 14 specific disclosures, this method again

 2 uses an event study, uses a regression analysis and attempts

 3 to calculate the amount of inflation on every day during the

 4 relevant period, again, taking into account the effect of the

 5 market and the industry on Household's stock prices on every

 6 day.

 7 You can see that the difference between the red line,

 8 the price, and the blue line is wider. The blue line, the

 9 true value line, the uninflated price, that's wider than in my

10 first method focusing on 14 disclosures, and the reason is

11 obvious, that you have so many more negative disclosures that

12 are leaking out that are not captured in my 14 specific

13 disclosures.

14 The result of that is that a greater percentage, a

15 greater proportion of Household's decline in price is

16 attributable to fraud-related disclosures and the correction

17 of fraud-related information in this exhibit than the previous

18 exhibit; but you can see again at the very end, the blue line

19 goes above the red line.

20 So even in this exhibit, I want to be careful that

21 investors who suffered no loss because they purchased at

22 particularly low prices are not entitled to recover because

23 they haven't suffered any harm.

24 Q. And that's the investors in the last 30, approximately

25 30 days of the relevant period?

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 2682

 1 A. Correct. When the leakage resulted in a much lower stock

 2 price than what ultimately occurred on October 10th and 11th.

 3 Q. And you prepared an exhibit that shows the amount of

 4 inflation on every day during the relevant period for your

 5 leakage model, right?

 6 A. Correct.

 7 Q. Let me show you Exhibit 1395.

 8 A. Thank you.

 9 Q. And is that your quantification of the inflation under

10 your leakage model?

11 A. Yes. If you can put it on the screen maybe.

12 Q. Did you prepare this document?

13 A. I did.

14 MR. BURKHOLZ: Your Honor, I don't believe there's an

15 objection to 1395 if we can move it into evidence.

16 THE COURT: It will be admitted.

17 (Plaintiffs' Exhibit 1395 received in evidence.)

18 BY MR. BURKHOLZ:

19 Q. Can you explain what this exhibit is?

20 A. This exhibit, again, is analogous to the previous exhibit

21 which focused on the 14 specific disclosures; but this exhibit

22 takes leakage into account and, once again, has a calculation

23 of the stock price on every day, what the true value is, which

24 is what my calculation is of the uninflated price, what the

25 price should have been had there been no fraudulent

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 2683

 1 disclosures or omissions in the various Household statements

 2 and disclosures during the relevant period. That's the second

 3 column, true value.

 4 And the artificial inflation is the number in the

 5 last column. And, again, you'll see that it's different from

 6 7.97 at the beginning because this calculation doesn't just

 7 focus on 14 disclosures. It focuses on all the negative

 8 disclosures that came out, particularly after November 15th

 9 when the market started to, in a much more systematic way,

10 disbelieve Household's denials that it was engaging in

11 predatory lending and that it was engaging in improperly

12 aggressive accounting.

13 Q. Like your specific disclosure model, does this

14 quantification use statistical methods to account for the

15 market and industry influences on Household's stock prices?

16 A. Yes, it does.

17 Q. And did you also analyze whether company-specific factors

18 unrelated to the alleged fraud can explain Household's stock

19 price decline during this latter part of the relevant period?

20 A. Yes, I did. I looked at that carefully.

21 I noticed that there were a lot of disclosures that

22 had some fraud-related information in it and some other

23 disclose -- and part of the disclosure did not have -- dealt

24 with something other that was fraud related.

25 There were some -- some of those disclosures that had

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 2684

 1 a positive effect, some had a negative effect; but overall it

 2 was impossible to conclude that the difference between the

 3 true value line and the actual price would have been any

 4 different had there been no disclosures about

 5 non-fraud-related information during this particular period.

 6 Some positive, some negative. They cancel each other out.

 7 Q. Okay. Now, reaching your opinion about inflation, did you

 8 consider whether investors during the relevant period were

 9 fully informed about Household's accounting and lending

10 practices?

11 A. I did.

12 Q. And what did you find?

13 A. I found that they were not fully informed for a number of

14 different reasons.

15 Q. And what were the reasons?

16 A. Well, first, the disclosures coming out criticizing

17 Household's practices didn't come from Household; and if a

18 company is disclosing information about itself, it's one thing

19 for third parties to comment, but it's another thing for the

20 information to come directly from the company itself.

21 Since the company was not disclosing what the

22 analysts and the critics were saying, market participants did

23 not have full information.

24 Q. Okay. So you had your analysts' reaction or commentary,

25 some of -- the Barron's article and the analysts' reports, the

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 2689

 1 They knew that wasn't true. Mr. Schoenholz got

 2 e-mails that said they were using one payment. There were

 3 other documents that showed they were using one payment. He

 4 knew that wasn't true when he signed the 10-K.

 5 And then the reason for the delinquency is cured when

 6 you're doing some of them automatically, when you're not

 7 contacting the customer.

 8 Ladies and gentlemen, he admitted the statement was

 9 false. That's why they had to re-issue that 10-K a year later

10 and change all the language because it was false.

11 He admitted that he had this huge financial relations

12 conference on April 9th, 2002, 400 people there, broadcast all

13 over the United States to other people that were interested.

14 And what kind of numbers did he give them? He gave them false

15 numbers, ladies and gentlemen.

16 He forgot to tell them about $3 billion in loans that

17 had been re-aged more than once. 3 billion. Then he didn't

18 tell them -- he didn't tell them about the recidivism

19 statistics. He didn't tell them how much of these re-aged

20 loans get re-aged again and again. And he tells you, oh, gee,

21 I didn't know that. Somebody made a mistake.

22 You're talking to 400 people all across the country

23 and you make a mistake? This is no mistake, ladies and

24 gentlemen. Just like it was no mistake when he said

25 consecutive payments and he knew it was one payment a month

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 2690

 1 before that. It was no mistake.

 2 And what happens in his story? He has to say

 3 eventually we found out about it, he says a couple weeks

 4 later, because we got Mr. Makowski's certification where

 5 Makowski said the numbers were wrong, okay? So he has to

 6 admit I found out.

 7 So what did he do about it, ladies and gentlemen?

 8 After he told 400 people all these numbers, does he issue a

 9 press release? Does he call these 400 people back and say,

10 you know what? I gave you the wrong numbers. I misled you.

11 No. He says it didn't matter. It didn't matter. It

12 was immaterial, so I never told anybody anything again, and I

13 never put those numbers out there again.

14 That, ladies and gentlemen, was a false and

15 misleading statement, just like --

16 THE COURT: 30 seconds.

17 MR. DOWD: Thank you, your Honor.

18 MR. KAVALER: May I have the switch, your Honor?

19 May we have the switch?

20 Thank you, your Honor.

21 Good afternoon, ladies and gentlemen. Nice to be

22 able to talk to you again.

23 Last week, I discussed with you Household investors

24 knew. That was our theme last week. Today I want to touch

25 briefly on the second of our themes. I'll touch on the third

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 2691

 1 one next week.

 2 Today's theme is there was no intent to deceive

 3 anyone. What counsel told you, what the evidence this week

 4 showed is mistakes. There were mistakes made. Mr. Schoenholz

 5 was on the stand. Counsel went after him for making a

 6 mistake.

 7 Actually, it turns out Mr. Pantelis made a mistake,

 8 and then he went and told Mr. Schoenholz he'd made a mistake,

 9 and Mr. Schoenholz admitted that, as a result, he realized he

10 had made a mistake, and he made it in front of a lot of

11 people. There's no question about that, all right?

12 That's how mistakes work. You make them by accident,

13 and sometimes you make them in front of a lot of people.

14 Sometimes I make them in the courtroom. Things like that

15 happen. There's no intent to make the mistake. It's just a

16 mistake.

17 Well, then what happened next? Mr. Schoenholz,

18 recognizing a mistake had been made, you heard what he said,

19 he called together all the right people. Remember that

20 phrase? And they discussed it, and they came to the

21 conclusion, ladies and gentlemen, that it was not material.

22 Yes, there's no question it was $3 billion. That's a

23 lot of money by anybody's account. But it was a $3 billion

24 mistake on a $100 billion number. Ladies and gentlemen, in

25 this case, all the numbers are gigantic. They are

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 2692

 1 mind-boggling. But you always have to look at everything in

 2 context.

 3 A $3 billion mistake on a $100 million,

 4 Mr. Schoenholz told you, is not material. It's also not

 5 material for another reason.

 6 Remember there was a chart, and there were several

 7 lines on the chart, and the mistake was in one of those lines,

 8 all right? The mistake was not in the bottom line. When you

 9 went back and looked at the mistake, it didn't change the

10 bottom line.

11 There was no change in re-age. There was no change

12 in charge-off. There was no change in delinquency. The

13 bottom line was right. It was one of the other lines.

14 In other words, at the end of the day, it didn't make

15 a material difference to the point Mr. Schoenholz was talking

16 about. And you will hear in this case, you've already started

17 to hear, you don't disclose every single thing. You disclose

18 things that make a difference, all right?

19 And what the plaintiffs need to show in this case is

20 that people lied on purpose. That's fraud. Not that they

21 made mistakes. That's a mistake. And that's what we heard

22 this week.

23 We also were introduced to the concept of

24 materiality. Not every mistake is material; and if it's not

25 material, it's not a problem under the securities laws, all

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 1 And he says, "What drove this stock down is the fact

 2 that analysts and others -- " you know, the media -- financial

 3 media -- "were reporting that the company couldn't sustain

 4 that growth because there were predatory practices; they now

 5 have to change those practices; and, the growth estimates have

 6 to be reduced."

 7 So, the false statements and the omissions relating

 8 to the predatory lending tie precisely into the disclosures

 9 that drive the stock price down.

10 THE COURT: Well, the problem I have with that

11 argument is that I don't see in your designated false

12 statements regarding the 10-Qs and the 10-Ks any statement

13 regarding growth --

14 MR. DOWD: Well, your Honor.

15 THE COURT: -- that you've alleged is false.

16 MR. DOWD: WELL, your Honor --

17 THE COURT: In fact, give me a second. Let me go get

18 the -- I didn't bring out that -- the rulings where I have

19 that. Let me bring that out. Just give me a second.

20 MR. DOWD: Sure.

21 (Brief pause.)

22 THE COURT: It took longer to find than I thought it

23 would, which is undoubtedly why I didn't bring it out in the

24 first place.

25 Okay. Go ahead.

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4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 MR. DOWD: Yes, your Honor.

 2 Well, I think there's two issues. And I know the

 3 Court just said the statements -- I'll get to that in a

 4 second -- but in the Pretrial Order, there's also alleged

 5 omissions.

 6 And the omissions -- for example, "During the class

 7 period, defendants failed to disclose to the market that

 8 Household engaged in predatory lending practices and the

 9 impact of those predatory lending practices on Household's

10 financial statements."

11 THE COURT: Well, I mean, let's stick with the

12 concrete example of the 10-Ks and the 10-Qs, because my

13 understanding of an omission is that it only comes into play

14 relative to a statement made. An omission is only misleading

15 as it attaches to the statement. You make a statement. You

16 fail to include facts that need to be included. That's a

17 material omission, which may be a cause for liability.

18 So, we've got to start out with the predicate in the

19 10-Ks: Where is the statement that this omission, with

20 respect to future growth, relates to?

21 MR. DOWD: Okay.

22 THE COURT: And I don't see it.

23 MR. DOWD: I would say first, your Honor, as

24 Mr. Devor testified to, you have an obligation to provide

25 information about these numbers -- I mean, under both SEC

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 2709 

4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 rules and GAAP -- and that's what governs financial

 2 statements.

 3 THE COURT: No, I don't -- I mean, if that's the

 4 premise of your arguments, I disagree with it. I mean, I

 5 think all the case law that I've seen indicates there is no

 6 independent duty --

 7 MR. DOWD: Well, we can --

 8 THE COURT: -- to disclose predatory lending

 9 practices or even illegal practices.

10 MR. DOWD: Well, I can address those cases in a

11 moment, but I'll walk the Court, you know, through the chart.

12 THE COURT: Go ahead.

13 MR. DOWD: At the same time that you have these Qs

14 and Ks being issued, you have the press release, your Honor,

15 that accompany them.

16 THE COURT: I think that the press releases are fair

17 game for that argument.

18 MR. DOWD: And -- all right.

19 THE COURT: I think the law is pretty clear: If they

20 undertake to make statements, that's precisely where this

21 material omissions issue comes in.

22 MR. DOWD: Well --

23 THE COURT: They make the statement. They omit an

24 important fact. They could be held liable.

25 MR. DOWD: Right.

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4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 THE COURT: And many of the press statements where

 2 they say, "We don't do this," or, "Our practices are clean;

 3 our practices are legal; it was a rogue office," all of those

 4 statements, it seems to me, are argument for, "They omitted a

 5 material fact."

 6 But that's not the testimony I'm concerned with.

 7 MR. DOWD: Well -- but I think, your Honor, let's

 8 take an example. If you look at False Statements 4 and 5, I

 9 mean, there you have a press release -- all right? -- that

10 announces, basically, the year-end results.

11 THE COURT: Well, number one, it was objected to and

12 sustained. So, that's no longer a false statements that's at

13 issue here.

14 MR. DOWD: The January 19th, 2000, Household press

15 release? January 19th?

16 THE COURT: No, we have different numberings, then.

17 No. 1 on my False Statements list was what you folks

18 gave me at the motion in limine hearing; and, that was their

19 July 22nd, 1999.

20 But you're talking about January, what?

21 MR. DOWD: January 19th, the Household press release.

22 THE COURT: Of what year?

23 MR. DOWD: 2000.

24 THE COURT: I will try to find it.

25 Here it is.

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4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 where in the 10-K statements or the 10-Q statements that you

 2 cite in this 40 -- I think we're down to, what 43 statements

 3 now?

 4 MR. DOWD: I believe so.

 5 THE COURT: -- where you have representations as to

 6 the basis for the success of the revenues, such as that case

 7 just talked about.

 8 I find only two. I find there is -- I'll tell you

 9 which two, actually.

10 I think the March 28th, 2001, 10-K is one where you

11 can allege, you can offer evidence and you can argue to the

12 jury that failure to include in that 10-K evidence of its

13 predatory lending practices is a material omission. Because

14 they talk about, "We have a process which we believe gives us

15 a reasonable basis for predicting the credit quality of new

16 accounts. This process is based on our experience with

17 numerous marketing, credit and risk management tests."

18 They're talking about the process they used to

19 determine the creditworthiness of their accounts. And if

20 they're going to assert that they have a good process in doing

21 that, then I think they've got to tell you, "Oh, by the way,

22 there's this other aspect of our creditworthiness management

23 principles, which is that we're packing and we're lying and

24 we're cheating."

25 So, I think you can do that. I think there's one

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4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 other in here -- I'm trying to remember where I found it --

 2 where there's similar language.

 3 Oh, yeah, there's the direct statement, actually,

 4 regarding predatory lending practices in the -- I can't find

 5 it now. I thought there was one other one.

 6 Here it is, yeah: The March 13th, 2002, 10-K:

 7 "Management has long recognized its responsibility for

 8 conducting the company's affairs in a manner which is

 9 responsive to the interest of employees, shareholders,

10 investors and society, in general."

11 Well, when you open that door, you better include all

12 of the evidence that relates to it.

13 But I do not see -- and I'd be happy for you to show

14 me -- in any of the other 10-K or 10-Q Asserted False

15 Statements anything other than language like, "Household's

16 10-Q for Quarter Ending 6-30-99, Household Reported Net Income

17 of $326.9 million."

18 That is not an assertion which, it seems -- I mean,

19 that's a historical statement of what they earned, period.

20 And it doesn't go to the issue of going forward. And it

21 doesn't require them to disclose the material aspects of their

22 going-forward predictions.

23 MR. DOWD: Your Honor, but you're basically -- when

24 you say that -- you're throwing out all of the SEC and GAAP

25 requirements. Those financial statements have to be in

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4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 accordance with GAAP.

 2 THE COURT: I mean, I disagree.

 3 The only cases that I've seen regarding GAAP and the

 4 assertion of GAAP requirements in the 10-Ks and the 10-Qs

 5 relate to how you're to report what you have to report.

 6 But the GAAP requirements do not indicate what the

 7 duty to report is. The duty to report doesn't come from GAAP.

 8 The duty to report comes from case law and statutory law in

 9 some occasions. Insider trading, you've got a duty to

10 disclose.

11 And the cases that I have seen regarding duty to

12 disclose are very clear.

13 Well, all but, I think, one -- which is an old case

14 going back, I don't know, how far -- make it clear there's no

15 general duty to disclose in the 10-K or the 10-Q improper

16 conduct.

17 MR. DOWD: Well, we have -- your Honor, we have --

18 the expert testified about SEC regulations and GAAP; that you

19 have to explain significant trends that could affect future --

20 THE COURT: And that tells you how you are to

21 disclose what you have a duty to disclose. It doesn't

22 establish the duty -- it doesn't establish the duty -- to

23 disclose that.

24 MR. DOWD: I understand what you are saying, your

25 Honor, but they're speaking -- they're speaking -- every

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4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 quarter during the class period; and, every time they issue a

 2 Q or a K, they issue a press release that describes how that

 3 revenue is generated. And I don't think you can distinguish

 4 those two when you speak and say, "This is what our earnings

 5 and income are going to be, and this is how we arrived at

 6 them," because of synergies with Beneficial. And the reality

 7 is that you're engaging in improper practices.

 8 You just spoke. And you didn't tell the truth.

 9 THE COURT: Well --

10 MR. DOWD: And I understand the Court saying -- at

11 least I understand it -- the press release is actionable, but

12 you are not sure about the Qs and Ks that accompanying it.

13 THE COURT: Well, what I'm telling you is that I

14 don't believe that the press releases trigger an obligation to

15 disclose in the 10-Ks and the 10-Qs. I think you have to talk

16 about the statement made in the 10-K or the 10-Q; and, if that

17 statement triggers an obligation to disclose, then you can

18 argue omission of material fact.

19 But if the statement is nothing more than, "The

20 revenue for this year was $5 trillion dollars," that doesn't

21 trigger an obligation.

22 MR. DOWD: So, in other words, your Honor, I can

23 issue a press release and I can say, "Our growth was driven by

24 these tremendous -- " you know, whatever -- whatever lie they

25 told in each one of these press releases. And they say, "That

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4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 is what generated our numbers in year-end 2000."

 2 And, then, a month later, they issue a Q and K with

 3 those same numbers in them and they don't say, "By the way, we

 4 lied the last time" or "This is the basis for these numbers.

 5 They include predatory practices," I don't see how that can

 6 be.

 7 THE COURT: Well, I think that's the law.

 8 I mean, if you find me a case that says otherwise,

 9 that's fine, but the cases I've read -- I mean, geez, there

10 are just too many.

11 MR. DOWD: Well, your Honor, could I have an

12 opportunity to do that, because --

13 THE COURT: Sure.

14 MR. DOWD: -- I do feel somewhat at a loss because

15 the defendants have never raised this issue, I don't believe.

16 THE COURT: Well, here's the problem: I think that

17 the defendants have failed to raise the issue at the

18 appropriate times during the course of the trial.

19 I think, in some respects, they may have raised some

20 portion of this issue belatedly, when they come back the next

21 day and ask for a ruling as to, you know, five hours of

22 testimony the prior day, when no objection was made that prior

23 day when the testimony was coming in.

24 I think with regard to your expert testimony, it's

25 the same.

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4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 The problem is that we're going to get to the point

 2 where we're going to have to instruct the jury on what the law

 3 is.

 4 So, the fact that the testimony comes in doesn't end

 5 the issue. We still have to determine what the appropriate

 6 instructions are for the jury.

 7 And that set of instructions can impact the entire

 8 case, whatever verdict comes.

 9 MR. DOWD: No, I understand that, your Honor.

10 And could I submit something by Monday?

11 THE COURT: You can.

12 I'll give you a couple cases to look at, which I

13 found -- and this is just a couple of them which I found --

14 rather --

15 MR. DOWD: Sure.

16 THE COURT: -- surprising, frankly, but telling.

17 Roeder -- R-o-e-d-e-r -- vs. Alpha Industries

18 Incorporated, 814 Federal Second 22, First Circuit, 1987 case.

19 Galati -- G-a-l-a-t-i -- vs. Commerce Bank Corp,

20 Incorporated, a 2007. I think that's a Third Circuit.

21 MR. DOWD: I have Galati, your Honor.

22 THE COURT: Okay.

23 MR. DOWD: I mean, Galati, the court says, "The

24 factual recitations that defendants made were not challenged

25 by the plaintiffs." The other statements were mere puffery

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 2721 

4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 and says, "Defendants have alleged" -- "Plaintiffs have

 2 alleged no statements that were rendered misleading by

 3 defendant's scheme."

 4 I think that is distinguishable, but I'll be happy to

 5 address it in writing, if we can.

 6 THE COURT: Well, I mean, okay. If you want to -- it

 7 seems to me that they talk about statements made in their

 8 filings to the SEC; statements like "The strong performance

 9 was led by the Public Finance Division," "The unique commerce

10 business model."

11 You know, I'm not too sure I would find that to be

12 mere puffery because that's getting pretty specific. But, I

13 mean, they're clearly addressing the very same types of things

14 we're talking about.

15 And wherever statements have been made like that --

16 in the 10-Ks and the 10-Qs that I've looked through here --

17 the two instances I found are the ones I gave to you, in which

18 those statements were made. And I think in those situations,

19 those statements were not mere puffery. They went directly to

20 the issues that we're concerned with. And disclosure was

21 required -- or you can considering that disclosure was

22 required -- to the jury.

23 But, as to the other statements, where all you have

24 is -- in your list, all you have is -- the recitation of what

25 the net income was for the quarter, I don't think you can

Household Unsigned Page 2720 - 2723

 2722 

4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 bootstrap the prior press statements and other statements into

 2 that 10-Q and say that those trigger a requirement in the 10-Q

 3 to make statements that wouldn't otherwise be required.

 4 MR. DOWD: When I talked about puffery, your Honor,

 5 that's what the Galati court, itself, said.

 6 THE COURT: I know.

 7 MR. DOWD: Oh, sorry.

 8 THE COURT: I've got it here in front of me, too.

 9 That's what they said. I'm telling you I'm not sure I would

10 have found that one statement to be puffery. I think that,

11 given all the circumstances, I don't know that that statement

12 would have been puffery in this case.

13 But, at any rate, what I'm telling you is that where

14 you've made those statements -- where those statements have

15 been made here -- in the two occasions that I find them, I

16 find them to be not puffery, but actual statements which could

17 trigger the requirement for full disclosure.

18 And I think once you have that, then your expert's

19 testimony with regard to the use of the GAAP -- that is, how

20 they disclose what they have a duty to disclose -- becomes

21 applicable.

22 If they didn't disclose it the way the GAAP

23 principles would require them to, in a meaningful way, then --

24 and you can convince the jury of that -- then I think you've

25 got a cause of action there.

Household Unsigned Page 2720 - 2723

 2723 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 146 of 245
4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 MR. KAVALER: -- what follows, in terms of loss

 2 causation.

 3 And I think it will be very interesting to see what

 4 he says when he comes back on Monday because I -- well, we'll

 5 see what happens. We'll see what he says.

 6 But I agree with your Honor, it's a threshold

 7 question. But that's exactly my point. I have trouble

 8 putting it in that pigeonhole and leaving it there because it

 9 seeps into all the rest of this.

10 And the very question you and Mr. Dowd are discussing

11 comes out completely differently if you assume the company is

12 a predatory lender and if you assume the company is not a

13 predatory lender.

14 If you assume, as the defendants did -- and we

15 believe justifiably --

16 THE COURT: Sure.

17 MR. KAVALER: -- that it's not a predatory lender,

18 then there's no disclosure issue here at all. Indeed, it's

19 Alice in Wonderland to say, "In publishing -- " as your Honor

20 said, what they put out quarterly is their routine, everyday,

21 run-of-the-mill, historical numbers: "We earned a dollar."

22 It would never occur to them to say, "And in earning

23 this dollar, somebody" -- some individual account executive

24 somewhere -- "misbehaved." I mean, it doesn't make any sense,

25 your Honor.

Household Unsigned Page 2732 - 2735

 2732 

4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 THE COURT: I think that I don't quarrel with

 2 anything you said, if they can't establish the basic

 3 predicates then.

 4 But when we talk about how we're going to instruct

 5 the jury, you know, we have to instruct them in terms of,

 6 "What happens if you find these things." At what point is

 7 there liability?

 8 They, then, are free to determine whether they found

 9 those elements or not, but I think we have to give them the

10 appropriate instructions.

11 And, as it turns out -- luckily for your client --

12 it's my impression at this point -- it's my opinion -- that

13 with respect to all but two of the 10-K filings, that there

14 was no -- 10-K or 10-Q filings; that there was no --

15 explanation of predatory lending practices, assuming such

16 existed and assuming your clients knew about them, is not an

17 issue that's even going to get to the jury because I don't

18 believe there was a duty in regard to those 10-Ks -- the other

19 10-Ks -- and 10-Qs for them to disclose those facts, even if

20 it existed and even if they knew about it.

21 MR. KAVALER: And, your Honor, just so you don't look

22 book at the transcript later and say, "Mr. Kavaler had a duty

23 to speak at this point," let me echo something Mr. Dowd said.

24 I'm very reluctant to say what I'm thinking right now

25 because we're still in the middle of the plaintiffs' case.

Household Unsigned Page 2732 - 2735

 2733 

4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 THE COURT REPORTER: Slow down.

 2 MR. KAVALER: I'm sorry.

 3 I'm very reluctant to say what I'm thinking, which

 4 would only encourage you to think what you are thinking,

 5 because we're still in the middle of the plaintiffs' case, and

 6 we are letting them put on their case as they wish and we will

 7 respond.

 8 But there is a -- there are, we think, fatal defects

 9 in this case, which we will point out to your Honor once

10 they've rested.

11 Rule 50 talks about when a party --

12 THE COURT: You have been telling me that for a

13 while. I know.

14 MR. KAVALER: Your Honor, I believe we're there. I

15 believe we're going to be there. But I could be wrong.

16 But all I'm saying is I don't want you to read this

17 transcript later and say, "Well, why didn't you say that

18 then?"

19 I mean -- because it's not the right time to say

20 that, your Honor. But I do agree it's a question of

21 instructing the jury. I think, however -- much as I think

22 it's a great idea to have this conference today -- the

23 instructions conference -- some things will not be clear until

24 closer to the end of the plaintiffs' case, as to what the

25 instruction needs to be.

Household Unsigned Page 2732 - 2735

 2734 

4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 THE COURT: Indeed. I agree.

 2 MR. KAVALER: It's a big frustration for us, your

 3 Honor.

 4 Let me just add one last thing.

 5 I don't at all disagree with your Honor's observation

 6 about the timing of objections. I fully appreciate what

 7 you've said.

 8 Our view is we did raise certain things in the

 9 motions in limine. You addressed them and we accepted your

10 rulings for purposes of the trial.

11 Obviously, we don't agree. And I'm sure the

12 plaintiffs don't agree with the ones they lost. But we

13 understood you ruled. We understand you're final at the trial

14 level. And we've been conducting ourselves accordingly.

15 And we just find it sometimes tactically advantageous

16 to act the way we've been acting, but we certainly understand

17 your Honor's view of the consequences of doing that.

18 THE COURT: Okay.

19 MR. KAVALER: But we think, at the end of the day,

20 it's a legal question.

21 And, I mean, your Honor, just -- we seriously

22 considered not crossing any of these witnesses. We considered

23 it.

24 THE COURT: Now, you're breaking my heart.

25 (Laughter.)

Household Unsigned Page 2732 - 2735

 2735 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 147 of 245
4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 MR. DOWD: I disagree with that. That's a statement

 2 by Household as well, absolutely. And if you have other

 3 top-level officers who assisted in making that statement,

 4 preparing it, and they know it's false, they're liable.

 5 Whether somebody on the audit committee who signed it knew it

 6 was false or Schoenholz knew it was false, I think they're

 7 liable.

 8 THE COURT: You mean the corporation is liable?

 9 MR. DOWD: The corporation.

10 THE COURT: Do you agree with that?

11 MS. BEER: No, I don't. It sounds like Mr. Dowd

12 needs to look for some more cases.

13 THE COURT: I don't know. There's a certain --

14 there's a certain logic there, which is -- I think goes back

15 to what he said. He's essentially talking about passing

16 knowledge --

17 MS. BEER: But Mr. Makowski --

18 THE COURT: -- through individuals who didn't know

19 and out to the public and holding the corporation liable

20 because individuals who prepared rather than uttered the

21 statements did know.

22 MS. BEER: But I think it's not just the scienter --

23 not just as to the scienter that the corporation acts only

24 through individuals. It's the making of the statement as well

25 where they act only through individuals. And the individuals

Household Unsigned Page 2796 - 2799

 2796 

4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 who are making the statement --

 2 THE COURT: Well, I mean, I haven't researched that.

 3 Haven't researched that. So if you have a case -- either of

 4 you have a case that says one way or the other --

 5 MR. BURKHOLZ: I think the Tellabs case is the case

 6 that we cited, the Seventh Circuit case, in our authority

 7 for -- and it has a good discussion of how to keep -- what the

 8 corporate liability is and scienter for the corporation.

 9 THE COURT: Okay. That speaks -- actually speaks to

10 it?

11 MR. BURKHOLZ: It does. It's 513 F.3d 702.

12 THE COURT: I see what you've got here. Does it say

13 something other than a corporation may be held liable for

14 statements by employees who have apparent authority to make

15 them? Because if that's all it says, that's not going to do

16 it for me.

17 What you're talking about is what constitutes making

18 a statement, is it the end person who says it to the public or

19 does it include all the little whispering in his ear from

20 employees within the corporation?

21 MR. BURKHOLZ: I think it includes the other senior

22 executives.

23 THE COURT: Okay. I'll read it. If you have --

24 whatever you have on it, I will read.

25 I think that's as far as we get today, folks.

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 2797 

4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 That leaves us essentially I think with -- we have to

 2 mop up 10b-5; but if we get past scienter, I think we're done

 3 with the worst of it.

 4 That's going to leave us with the controlling person

 5 cause of action. I would be curious to know from the

 6 plaintiffs' point of view what that adds to the case, but --

 7 MR. BURKHOLZ: You can ask Mr. Dowd that.

 8 THE COURT: I guess what I would be curious to know

 9 is a set of facts under which this jury could find no

10 liability under 10b-5 but find liability under controlling

11 person, given the facts of this case and what it adds to your

12 case; but that's just curiosity. I'm not telling you I need

13 to know that, but -- so that leaves us with mopping up 10b-5,

14 which shouldn't take very long. Then we've got the

15 controlling person instructions, which should take forever.

16 And then we --

17 MR. KAVALER: Under your hypothetical, by definition,

18 there would be no controlling personal liability -- if the

19 jury found no underlying 10b-5 claim, there would be nothing

20 for the controlling person to control.

21 THE COURT: That doesn't quite answer my question.

22 My question is, what person or act is brought into the net by

23 adding the controlling person liability.

24 MR. KAVALER: I wasn't attempting to answer your

25 question. I was pointing out your hypothetical --

Household Unsigned Page 2796 - 2799

 2798 

4-17-09 Jury Instructions Hearing Transcript 4/17/2009 10:32:00 AM

 1 THE COURT: My hypothetical was not good. I agree.

 2 My question wasn't good.

 3 But, at any rate -- and I think, you know, probably

 4 one more session, maybe one and a half, we can get that done,

 5 which would be -- we've got loss causation out there too as

 6 part of damages. But those two things are really the only two

 7 big ones left. So I suppose we're probably looking at doing

 8 this again next Friday, I warn you all.

 9 Okay. Thank you very much.

10 MR. KAVALER: Your Honor, I did have a mechanical

11 matter.

12 We have shown the plaintiffs earlier a jury notebook

13 we intend to hand out in connection with the cross of

14 Mr. Aldinger. They have no objection to the exhibits.

15 The only question is whether we can highlight or flag

16 in these multipage documents -- these are largely disclosure

17 documents -- the language we want to focus their attention on.

18 I thought it would be more convenient for the jury.

19 Mr. Burkholz objects.

20 MR. BURKHOLZ: Just that when I handed the jury my

21 binder of articles for Ms. Hayden-Hakes, I didn't highlight

22 them. Whatever the Court wants to do. It's --

23 MR. KAVALER: Well, his binder was this thick

24 (indicating) and contained a few two-page documents. This

25 contains 20- and 30- and 40-page documents. They'll be

Household Unsigned Page 2796 - 2799

 2799 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 148 of 245
Trial Day 14 4/20/2009 5:54:00 AM

 O'Han - direct

 2810

 1 A. Robert O'Han.

 2 Q. And we've never met before, have we, sir?

 3 A. No.

 4 Q. You work for Household currently; is that right?

 5 A. Correct.

 6 Q. HSBC?

 7 A. HSBC.

 8 Q. Okay. How long have you worked for the company?

 9 A. 19 years. Almost 20.

10 Q. You were deposed in this case; is that right, sir?

11 A. Correct.

12 Q. Back in May of 2006?

13 A. I don't recall the exact date.

14 Q. And the defendants -- counsel for the defendants

15 represented you at that deposition, didn't they?

16 A. Yes.

17 Q. And they represent you here today, don't they, sir?

18 A. Yes.

19 Q. Now, I'd like to talk to you a little bit about your

20 background at the company. Specifically starting in the late

21 '90s, you became a division general manager in 1998; is that

22 right?

23 A. I was promoted to a job called regional director of sales

24 in 1996, late '96. And then that position, that title, was

25 basically transferred to -- just renamed division general

Household Unsigned Page - - -

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Trial Day 14 4/20/2009 5:54:00 AM

 O'Han - direct

 2811

 1 manager I think in late '97, so very -- close enough.

 2 Q. So as of '98-'99, you were a division general manager?

 3 A. And 2000.

 4 Q. Okay. And as a division general manager, how many

 5 branches were you responsible for?

 6 A. Approximately 80 to a hundred.

 7 Q. And right below you on the hierarchy in that consumer

 8 lending unit were the district sales managers, correct, sir?

 9 A. Correct.

10 Q. And how many district sales managers did you have?

11 A. It varied. But approximately eight to ten.

12 Q. Eight to ten covering 80 to a hundred branches?

13 A. Right.

14 Q. And you were in the southeastern part of the country,

15 what's called the southeast division or the south central; is

16 that right, sir?

17 A. Yes.

18 Q. And where were your headquarters located then?

19 A. In Raleigh, North Carolina.

20 Q. Okay. And in January of 2001, you were promoted to

21 regional general manager, correct?

22 A. That's correct.

23 Q. Otherwise known as RGM?

24 A. Correct.

25 Q. Okay. And at that point, you were one of three regional

Household Unsigned Page - - -

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 O'Han - direct

 2812

 1 general managers in the consumer lending business; is that

 2 right?

 3 A. That's correct.

 4 Q. And you reported to Tom Detelich, correct?

 5 A. What time period are you speaking of?

 6 Q. January '01.

 7 A. Yes, sir.

 8 Q. And he was the managing director of consumer lending; is

 9 that right?

10 A. That's correct.

11 Q. And did you report to Mr. Detelich all the way through the

12 end of 2002?

13 A. Yes.

14 Q. Now, I want to take you back around to the 1999 time

15 frame, okay?

16 You knew a man named Lew Walter, correct?

17 A. Yes.

18 Q. And Mr. Walter in that time frame was a trainer at

19 Household; is that right?

20 A. That's my recollection, yes.

21 Q. And you attended a training given by Mr. Walter in 1999,

22 didn't you?

23 A. That's my recollection, yes.

24 Q. That was about the fall of '99, right, sir?

25 A. Yeah.

Household Unsigned Page - - -

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 O'Han - direct

 2813

 1 Q. Okay. And the training took place in the southeast

 2 division where you were the DGM, correct?

 3 A. Yes.

 4 Q. Was that in your office in Raleigh, North Carolina?

 5 A. I don't recall the location.

 6 Q. The training that you saw Mr. Walter give was a training

 7 on selling first mortgages, right?

 8 A. That's right.

 9 Q. And who attended that training, sir?

10 A. It would be district managers and some other support

11 staff.

12 Q. So you had about seven to ten district managers covering

13 80 to a hundred branches at that training; is that about

14 right?

15 A. That's about right, yeah.

16 Q. Okay. And one of the members of the support staff was the

17 human resources manager. Do you recall that?

18 A. I don't recall for certain, but it makes --

19 Q. It makes sense?

20 A. He may have been there; he may not have been there.

21 Q. It makes sense that the human resources manager would be

22 at a training like this, correct, sir?

23 A. Yes.

24 Q. And that's because the human resources department was

25 responsible in part for training at the company, right?

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Trial Day 14 4/20/2009 5:54:00 AM

 O'Han - direct

 2814

 1 A. Correct.

 2 Q. And at the time that you attended this training, you

 3 understood that Mr. Walter had given the training at other

 4 divisions before he came to the southeast, correct?

 5 A. That is my recollection.

 6 Q. This was something that Mr. Walter was going around to the

 7 various divisions and training on in the summer and fall of

 8 1999; isn't that right?

 9 A. That's my recollection.

10 Q. Okay. And when Mr. Walter gave the training, did you

11 raise any objections to the training, sir?

12 A. No.

13 Q. And did your human resources manager raise any objections?

14 A. No.

15 Q. I'd like to hand you a document, sir --

16 MR. BROOKS: May I approach, your Honor?

17 THE COURT: Yes.

18 MR. BROOKS: It's been marked as Plaintiffs' Exhibit

19 899. It's already in evidence.

20 (Tendered.)

21 BY MR. BROOKS:

22 Q. And this document is a May 21, 2002, fax from a Paul

23 Pichoske to you; is that correct, sir?

24 A. That's correct.

25 Q. And you received this fax back in May of 2002, didn't you,

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Trial Day 14 4/20/2009 5:54:00 AM

 O'Han - direct

 2815

 1 Mr. O'Han?

 2 A. Do I recall receiving this?

 3 Q. Well, you received it, right, sir?

 4 A. It's addressed to me. I would assume, yes.

 5 Q. And Mr. Pichoske worked for you, didn't he?

 6 He was one of your division general managers?

 7 A. I believe so. There was a time period where he was a

 8 district. I'm not sure if he had been promoted to DGM at that

 9 point in time or not. I believe so, though.

10 Q. Okay. And the subject of this fax is June/July 1999,

11 correct, sir?

12 MS. BUCKLEY: Objection, your Honor.

13 THE COURT: I'm sorry?

14 MS. BUCKLEY: Objection, your Honor.

15 THE COURT: What's the basis of the objection?

16 MS. BUCKLEY: The characterization of the document.

17 THE COURT: Reask your question.

18 BY MR. BROOKS:

19 Q. Do you see the re line there, sir?

20 A. Yes.

21 Q. Do you see that it says June/July 1999?

22 A. Yes.

23 Q. So that's the subject of this fax, right, sir?

24 A. That would make sense.

25 Q. I'd ask you to turn to the next page, Mr. O'Han, and flip

Household Unsigned Page - - -

 - 

Trial Day 14 4/20/2009 5:54:00 AM

 O'Han - direct

 2816

 1 through the booklet that's attached to the fax, if you would.

 2 MR. BURKHOLZ: Your Honor, could we get the switch?

 3 BY MR. BROOKS:

 4 Q. Have you taken a look at it, sir?

 5 A. Do you want me to go through the whole thing?

 6 Q. No, just so you familiarize yourself with it. You've seen

 7 this before, right, sir? This is the same booklet --

 8 A. I believe so.

 9 Q. This is the same booklet Mr. Walter handed out at the

10 training that you attended in the southeast, isn't it?

11 A. I don't know that for sure.

12 Q. It's very similar, isn't it?

13 A. Yes.

14 Q. Okay. And this one is entitled "First Mortgage Sales

15 HFC." And it says it's from the northeastern division. Do

16 you see that?

17 A. Yes, sir.

18 Q. And Mr. Pichoske was the DGM in the northeast division and

19 he was based out of Latham, New York, right, sir?

20 A. I would say that's right. Like I said, I was not positive

21 whether or not he had been promoted or not.

22 Q. So at some point --

23 A. But, yeah, I didn't see the Latham on there, so I believe

24 that would be right.

25 Q. So the Latham indicates to you that he had been promoted

Household Unsigned Page - - -

 - 

Trial Day 14 4/20/2009 5:54:00 AM

 O'Han - direct

 2817

 1 to DGM at that time?

 2 A. I believe so.

 3 Q. Okay. And there's a handwritten note here that says

 4 June/July 1999. Do you see that on the page ending 470?

 5 A. On that page right there?

 6 Q. Correct, sir.

 7 A. Yes.

 8 Q. And that's your handwriting, isn't it?

 9 A. Yeah, that's my handwriting.

10 Q. And June/July 1999, is that when Mr. Pichoske told you

11 that he had received this first mortgage sales training

12 booklet?

13 MS. BUCKLEY: Objection, hearsay.

14 THE COURT: I'm sorry. What?

15 MS. BUCKLEY: Objection, your Honor, hearsay.

16 MR. BROOKS: It's a party admission, your Honor.

17 THE COURT: Overruled.

18 BY THE WITNESS:

19 A. Could you ask the question again?

20 BY MR. BROOKS:

21 Q. June/July 1999, sir, that's when Mr. Pichoske told you he

22 had received this booklet, isn't it?

23 A. I would be assuming. I don't recall the conversation.

24 Q. Okay. That was right around the time that you had gotten

25 the same training in the southeast division, right, sir?

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 150 of 245
Trial Day 14 4/20/2009 5:54:00 AM

 O'Han - direct

 2818

 1 A. The fall of '99?

 2 Q. Yeah.

 3 A. Yes.

 4 Q. So just before that?

 5 A. This is before that, yes.

 6 Q. Okay. Mr. O'Han, if I could ask you to turn to the page

 7 ending 742. And included in this training booklet is a

 8 reference to a Tom Detelich HouseMail note dated January 4,

 9 1999.

10 Do you see that?

11 A. Could you ask the question again? I'm sorry.

12 Q. Included in this training booklet is reference to a Tom

13 Detelich HouseMail note dated January 4, 1999 --

14 A. Yes.

15 Q. -- do you see at the top there?

16 A. Yes.

17 Q. And there was some quotes from that e-mail.

18 Do you see that?

19 A. Yes.

20 Q. The first one reads, "New era for HFC. HFC is committed

21 to growth primarily through real estate loans."

22 Do you see that?

23 A. Yes.

24 Q. Is that your understanding of the business plan at the

25 time?

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 O'Han - direct

 2819

 1 A. I guess a vague recollection.

 2 Q. Okay. Then if you skip a couple down, it reads,

 3 "Marketing has been focused on finding new ways to support

 4 your sales efforts in first mortgage and biweekly mortgage

 5 lending."

 6 Do you see that?

 7 A. Yes.

 8 Q. That was part of the growth plan too, wasn't it, sir?

 9 A. I would say yes.

10 Q. Okay. Then if you look at the bottom two entries there,

11 there's a big growth. Starting there it says, "Growth was

12 mentioned 13 times in Mr. Detelich's HouseMail. We plan to

13 give you the tools that will make you successful in selling

14 first mortgages."

15 Do you see that?

16 A. Yes.

17 Q. So it's fair to say, Mr. O'Han, that this booklet that

18 Mr. Walter was handing out and training on in 1999 was part of

19 the plan to grow the first mortgage sales of the company,

20 correct?

21 A. Can you ask that question again?

22 Q. It's fair to say, sir, that this booklet that Mr. Walter

23 was handing out in the summer and fall of 1999 was part of the

24 plan to grow the first mortgage sales; isn't that right?

25 A. Yes.

Household Unsigned Page - - -

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Trial Day 14 4/20/2009 5:54:00 AM

 O'Han - direct

 2820

 1 Q. Now, if I could ask you, Mr. O'Han, to turn to the page

 2 ending 772. It's toward the back of this training manual.

 3 A. What was the number again?

 4 Q. 772.

 5 A. Got it.

 6 Q. You're there?

 7 A. Yeah.

 8 Q. Okay. The title of this worksheet is, "Biweekly versus 30

 9 years." You see that right at the top?

10 A. Yes.

11 Q. And it says, "Finding the 30-year equivalent of HFC's

12 biweekly program."

13 Do you see that, sir?

14 A. Yes.

15 Q. So this worksheet here shows the account executive or

16 branch sales manager how to calculate for the customers the

17 equivalent rate, right, sir?

18 A. Let me just take a second.

19 Q. Sure.

20 (Brief pause.)

21 BY THE WITNESS:

22 A. It calculates the interest rate you'd have to get on a

23 30-year loan paid monthly to equal the total payback of our

24 loan, in this case, paid biweekly. So it's comparing the

25 total payback of the interest.

Household Unsigned Page - - -

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 O'Han - direct

 2821

 1 BY MR. BROOKS:

 2 Q. Okay.

 3 A. Is that --

 4 Q. And in this particular example, the equivalent rate is

 5 7.33 percent, right? See that at the very bottom?

 6 A. Yes.

 7 Q. Okay. And, sir, if I could ask you to flip to the next

 8 two pages. These are the same worksheet. They're just not

 9 filled out, right? On 773 and then on 774. It says

10 "practice."

11 Do you see that?

12 A. Yes.

13 Q. Okay. So these are the same; they're just not filled out

14 like the first one, right?

15 A. Yes.

16 Q. And one is blank and the other one says practice, right,

17 sir?

18 A. Yes.

19 Q. Okay. So this is a copy of the training form for the

20 northeast division, correct?

21 A. Can you ask that again? I'm sorry.

22 Q. This is a copy of the training that Mr. Walter did in the

23 northeast division, correct, sir?

24 MS. BUCKLEY: Objection, foundation.

25 THE COURT: Overruled. You may answer.

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 2822

 1 BY THE WITNESS:

 2 A. Can you ask the question again?

 3 BY MR. BROOKS:

 4 Q. This is a copy of the training that Mr. Walter did in the

 5 northeast division; isn't that right, sir?

 6 A. I don't know.

 7 Q. It's the same as the one you saw him give in the

 8 southeast, correct?

 9 A. Similar. I don't know.

10 Q. These sheets, these three sheets we just looked at are the

11 same, aren't they, Mr. O'Han?

12 A. They may be. It's a long time ago. You're asking for me

13 to -- you know, I just don't want to make a statement of fact

14 if I'm not positive here.

15 Q. But you knew he had done trainings in divisions before

16 coming to yours, correct, sir?

17 A. That's my recollection.

18 Q. Okay. Showing you what's been marked as Exhibit 901.

19 (Tendered.)

20 BY MR. BROOKS:

21 Q. This document also has been admitted into evidence.

22 And, Mr. O'Han, this is a May 24, 2001, e-mail

23 forwarded to you by Mr. Pichoske.

24 Do you see that?

25 A. Yes.

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 O'Han - direct

 2823

 1 Q. And the e-mail that he's forwarding is from Philip Swetz

 2 to Paul Pichoske, right?

 3 A. Yes.

 4 Q. And the subject of the e-mail is effective rate; is that

 5 correct?

 6 A. Yes.

 7 Q. And, sir, I would just note that Mr. Pichoske here is a

 8 DSM in the northeastern division at that point back in 2001,

 9 right, sir? Do you see that right next to his name?

10 A. Yes.

11 Q. So this is a year before Mr. Pichoske faxed you what is

12 Exhibit 899, the exhibit we just looked at; is that correct?

13 A. It appears that way, yes.

14 Q. Okay. And in the top e-mail, Mr. Pichoske wrote, "Rob,

15 this is a scenario that my group has been using. They have

16 been terming it equivalent rate which I thought was okay.

17 Should we discontinue this?"

18 Do you see that, sir?

19 A. Yes.

20 Q. So in 2001, Mr. Pichoske's group is using the equivalent

21 rate presentation; is that right?

22 A. That's what it says.

23 Q. Now, did Mr. Pichoske receive any corrective action?

24 A. Not that I recall.

25 Q. So when he told you in 2001 that a scenario that his group

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 2824

 1 had been using, this equivalent rate scenario, he wasn't

 2 disciplined in any way, was he?

 3 A. Not that I recall.

 4 Q. And, in fact, in 2002 or sometime after that, he was

 5 promoted to district general manager, wasn't he, sir?

 6 A. Division general manager.

 7 Q. Division general manager?

 8 A. Correct.

 9 Q. And that's one bump up, right, sir?

10 A. Correct.

11 Q. Just under the RGM?

12 A. Correct.

13 Q. Okay. I'd like to show you another document, Mr. O'Han.

14 Plaintiffs' Exhibit 903.

15 (Tendered.)

16 BY MR. BROOKS:

17 Q. Sir, this is a fax from Mike Pinto to you dated May 22,

18 2001, correct?

19 A. That's correct.

20 Q. And you received this fax back in 2001?

21 A. I would assume.

22 MR. BROOKS: Your Honor, I'd move Exhibit 903 into

23 evidence.

24 THE COURT: It will be admitted.

25 BY MR. BROOKS:

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 2825

 1 Q. Now, Mr. Pinto, he was the division general manager of the

 2 mid-Atlantic region, right, Mr. O'Han?

 3 A. I believe so, yes.

 4 Q. And he was based out of Seven Fields, Pennsylvania?

 5 A. That's what it says.

 6 Q. And the subject of this fax is "1st mortgage."

 7 Do you see that?

 8 A. Yes.

 9 Q. And Mr. Pinto, just like you, as a DGM had about 80 to a

10 hundred branches under his control; is that right?

11 A. I would say the -- just put the range at 60 to a hundred

12 just because I'm not positive.

13 Q. It varies from division to division?

14 A. That's correct.

15 Q. And that would be the same for Mr. Pichoske when he was a

16 DGM?

17 A. Yes.

18 Q. So 60 to a hundred that Mr. Pinto is responsible for. And

19 as you can see if you flip to the next page and the page after

20 that, Mr. Pinto is sending to you from the mid-Atlantic region

21 the same forms that you received from Mr. Pichoske in the

22 northeast division, correct?

23 A. It looks that way, yes.

24 Q. Yeah. It's got the biweekly versus 30 years?

25 A. Yes. I didn't compare every line.

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 2826

 1 Q. It's the same 7.33 percent?

 2 A. Yes.

 3 Q. The same 7.33 percent there?

 4 A. Correct.

 5 Q. And was Mr. Pinto disciplined in any way?

 6 A. No.

 7 Q. So at this point, sir, we've talked about you've seen the

 8 Lew Walter presentation in the southeast and you've been faxed

 9 these forms from the northeast and the mid-Atlantic divisions,

10 correct, sir?

11 A. There's a time period in between there, but yes.

12 Q. And you knew around May of 2001 that Mr. Walter had given

13 this training up in the northwest division because you were

14 getting a lot of complaints out of there, right, sir?

15 A. That's my recollection.

16 Q. I'd like to show you another exhibit, Mr. O'Han,

17 Plaintiffs' Exhibit 926.

18 (Tendered.)

19 BY MR. BROOKS:

20 Q. Exhibit 926 is an e-mail from JoAnn Barnes to the witness,

21 Rob O'Han, and a couple of others, Krista Eads and Mandy

22 Bartels dated April 3, 2002.

23 Do you see that, Mr. O'Han?

24 A. Yes.

25 Q. And you received this e-mail back in April of 2002,

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 O'Han - direct

 2827

 1 correct?

 2 A. I would say so.

 3 Q. You have no reason to believe you didn't, do you, sir?

 4 A. No.

 5 MR. BROOKS: Plaintiffs move Exhibit 926 into

 6 evidence.

 7 THE COURT: It will be admitted.

 8 BY MR. BROOKS:

 9 Q. Ms. Barnes, who was sending you this e-mail at the time in

10 April of '02, was the district general -- the division general

11 manager in the HFC central division, correct, Mr. O'Han?

12 A. That appears to be correct, yes.

13 Q. So like the other division general managers, she was in

14 charge of 60 to a hundred branches; is that right, sir?

15 A. Correct.

16 Q. And the subject of this particular e-mail is customer

17 complaints.

18 Do you see that?

19 A. Yes.

20 Q. Flipping to the second page, sir, I would like to focus

21 your attention on the first paragraph there. Okay? And the

22 first sentence reads, "Majority of the complaints are

23 regarding the interest rate and all are around discussions of

24 effective rates with the biweekly payments."

25 Do you see that, sir?

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 O'Han - direct

 2828

 1 A. Yes.

 2 Q. And Ms. Barnes is telling you this in April of 2002,

 3 correct?

 4 A. Yes.

 5 Q. Ms. Barnes goes on to say, "As we are no longer actively

 6 discussing effective rates and disclosing them on HOLPs, this

 7 should subside."

 8 Do you see that, sir?

 9 A. Yes.

10 Q. And so the central division was also using the effective

11 rate presentation; isn't that right, Mr. O'Han?

12 A. At some point in time, some folks in that division were.

13 That's what it says, yes.

14 Q. The majority of the complaints they were getting were

15 regarding interest rates and were specifically regarding

16 discussions around effective rates, right, Mr. O'Han?

17 A. That's what it says, yes.

18 Q. So we've talked about the central division, the

19 mid-Atlantic, the northeast, the northwest and the southeast,

20 sir. We haven't yet talked about the southwest division. Who

21 is the division general manager there?

22 A. A gentleman by the name of -- what time period are we

23 talking about?

24 Q. The same time frame, '99 to 2002. Let's talk summer of

25 '01 specifically.

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 O'Han - direct

 2829

 1 A. Okay. That's better. That would be Dennis Hueman.

 2 Q. Dennis Hueman?

 3 A. Yeah.

 4 Q. And Mr. Hueman, like the rest, was responsible for 60 to a

 5 hundred branches, correct?

 6 A. Correct.

 7 Q. And he reported directly to you?

 8 A. Correct.

 9 Q. And in 2001, you learned that Mr. Hueman had created a

10 training video; is that right?

11 A. Correct.

12 Q. That was in June of 2001?

13 A. Summer of 2001.

14 Q. And you first learned of the video when Mr. Detelich and

15 Mr. Gilmer, your bosses, called you on the phone; is that

16 right?

17 A. That is my recollection, yes.

18 Q. And they called you in 2001. They were on the same call;

19 is that right, sir?

20 A. That's how I recall it, yes.

21 Q. And Mr. Gilmer and Mr. Detelich had seen the video and

22 they called to talk about it; isn't that right?

23 A. That's correct.

24 Q. So you talked to Mr. Gilmer and Mr. Detelich. They told

25 you about what was on the video because you hadn't seen it at

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 2830

 1 that time; is that right?

 2 A. That's my recollection, yes.

 3 Q. So you talked to them. They said they had seen it. They

 4 said they were concerned; is that right?

 5 A. Yes.

 6 Q. And so Mr. Gilmer instructed you to fire Mr. Hueman on the

 7 spot, right, Mr. O'Han?

 8 A. No.

 9 Q. He didn't?

10 A. No.

11 Q. I take it he didn't want to go around the chain of

12 command, so he let Mr. Detelich tell you to fire Mr. Hueman on

13 the spot; is that what happened?

14 A. No.

15 Q. Did you fire Mr. Hueman?

16 A. No.

17 Q. Even after you watched the video, you didn't fire him, did

18 you?

19 A. No.

20 Q. Mr. Hueman was never fired for this video, was he, sir?

21 A. No.

22 MR. BROOKS: No further questions, your Honor.

23 THE COURT: This may be a good time to break before

24 we start the cross. Why don't we take a 15-minute break,

25 ladies and gentlemen.

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 O'Han - cross

 2831

 1 (Jury out.)

 2 THE COURT: You may step down, sir.

 3 Anything we need to take up?

 4 MR. BURKHOLZ: No, your Honor.

 5 MR. KAVALER: No, your Honor.

 6 (Recess taken.)

 7 THE COURT: Bring out the jury? Yes? No? Leave

 8 them back there?

 9 MR. KAVALER: Yes, your Honor.

10 (Jury in.)

11 THE COURT: You may cross-examine.

12 MS. BUCKLEY: Thank you, your Honor.

13 CROSS-EXAMINATION

14 BY MS. BUCKLEY:

15 Q. Good morning, Mr. O'Han. I'd like to show you what's been

16 marked as Defendants' Exhibit 184.

17 MS. BUCKLEY: It's in evidence, your Honor.

18 May I approach?

19 THE COURT: Yes, you may.

20 (Tendered.)

21 MR. KAVALER: Can we have the switch, your Honor?

22 THE COURT: Indeed.

23 BY MS. BUCKLEY:

24 Q. Mr. O'Han, can you tell us what this document is?

25 A. It's a bulletin board message. It's one of the ways we

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 O'Han - cross

 2832

 1 communicate with all the employees within the company at that

 2 point in time.

 3 Q. And I take it you're the author of this bulletin board

 4 message; is that right?

 5 A. It's from me. The author would be the policy and

 6 compliance department.

 7 Q. And I see that it's dated May 24, 2001. Did you send this

 8 bulletin board to all HFC sales offices and HFCPS management

 9 on or about May 24, 2001?

10 A. That's my recollection.

11 Q. Why?

12 A. To clarify policy regarding the quoting of rates to

13 customers and also ensuring that branch offices -- indicating

14 that branch offices needed to utilize only authorized

15 materials, sales materials.

16 Q. Could you refer back to what you were asked about earlier

17 today, Mr. O'Han, Plaintiffs' Exhibit 901. Do you have that

18 handy?

19 A. I'm sorry. Say that again, please.

20 Q. Do you have Plaintiffs' 901, Exhibit 901, handy? You were

21 asked about it this morning, earlier this morning.

22 A. Yeah, I'm going to find it.

23 Q. Sure.

24 A. Yes, I do.

25 Q. And this was the e-mail from Paul Pichoske to you dated

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 O'Han - cross

 2833

 1 May 24, 2001?

 2 A. Yes.

 3 Q. Okay. At this time, were you trying to collect

 4 information concerning this effective rate issue?

 5 A. That is my recollection.

 6 Q. Why?

 7 A. We -- sometime in the first part of 2001, we had begun

 8 receiving customer complaints regarding confusion over

 9 interest rates. And we were trying to -- through -- through

10 the investigation of those, we wanted to understand what was

11 causing -- causing the influx of complaints.

12 Q. Did you -- do you know whether you responded to

13 Mr. Pichoske's e-mail of May 24, 2001? Do you recall?

14 A. I don't specifically recall.

15 Q. But that same day you sent out the bulletin board that

16 we've marked as Defendants' 184 in evidence; isn't that right?

17 A. That's correct.

18 Q. If you could pull out Plaintiffs' Exhibit 903 that you

19 were shown earlier today, Mr. O'Han.

20 A. I have it.

21 Q. You have that?

22 A. Yes, ma'am.

23 Q. Do you know the circumstances under which Mr. Pinto sent

24 you this document?

25 A. I would have a vague recollection.

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 2834

 1 Q. What's your recollection?

 2 A. Probably in response to the -- either the bulletin board

 3 or some other type of discussion around the customer

 4 complaints.

 5 Q. But this was about the time that you were looking into

 6 whether there were unauthorized sales material in branches,

 7 wasn't it?

 8 MR. BROOKS: Objection, leading.

 9 THE COURT: Sustained.

10 BY MS. BUCKLEY:

11 Q. Was this the time you were looking into whether there was

12 unauthorized sales material in branches, Mr. O'Han?

13 A. I believe so, yes.

14 Q. If you could pull out the document that plaintiffs'

15 counsel showed you this morning, which is Plaintiffs' Exhibit

16 926.

17 Do you have that?

18 A. I have it.

19 Q. Okay. And this is dated April '02; is that correct?

20 A. That's correct.

21 Q. April 3, '02, to be exact.

22 Could we -- it's already there. Pull this up on the

23 screen.

24 If you could turn to page two, which was the page

25 that Mr. Brooks was asking you about, Mr. O'Han --

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 O'Han - cross

 2835

 1 A. Yes, ma'am.

 2 Q. -- which kind of runs over from the bottom of page one.

 3 There's a heading which says -- at the bottom of page one,

 4 there's a heading "Term-specific issues." And then it lists

 5 complaints. Do you see that? One complaint regarding PPP,

 6 three complaints regarding monthly payment amount, six

 7 complaints regarding rate, two attorney general, three reg,

 8 two BBB, one complaint regarding fees on loan.

 9 Do you see that?

10 A. Yes.

11 Q. Then right after that is the sentence Mr. Brooks pointed

12 you to which is, The majority of the complaints are regarding

13 the interest rate and all-around discussions of effective

14 rates with the biweekly payments. Then it goes on, As we are

15 no longer actively discussing effective rates and disclosing

16 them on HOLPs, this should subside. In the meantime, the best

17 course of action is to teach the BSMs how to handle these

18 types of issues at the branch level by working with the

19 DSM/DGM for resolution versus the customer feeling no option

20 but to go to an agency/state, slash, an abbreviation for

21 attorney general.

22 And then we see three of these loans are in the

23 process of being rewritten to satisfy the customer. One we

24 have submitted an offer to the customer and two we have adjust

25 the rates on the account to resolve.

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 O'Han - cross

 2836

 1 Do you see that?

 2 A. Yes.

 3 Q. So we're talking about a total of six complaints here; is

 4 that right, Mr. O'Han?

 5 A. It appears that way, yes.

 6 Q. Mr. Brooks asked you a few questions about your

 7 conversation with Mr. Gilmer and Mr. Detelich concerning

 8 Dennis Hueman's videotape.

 9 Do you recall that?

10 A. Yes.

11 Q. I wrote down very carefully what he asked you and I wanted

12 to ask you about it. He asked, And Mr. Gilmer and

13 Mr. Detelich had seen the video and they called to talk about

14 it; isn't that right? And you answered, That's correct.

15 I'd like to break down the question because there's

16 actually two in there, Mr. O'Han.

17 You recall that Mr. Gilmer and Mr. Detelich called

18 you to talk about the tape, don't you?

19 A. Yes.

20 Q. Do you know whether or not Mr. Gilmer or Mr. Detelich saw

21 the tape?

22 MR. BROOKS: Objection, asked and answered.

23 THE COURT: Objection again?

24 MR. BROOKS: Asked and answered, your Honor.

25 THE COURT: Overruled.

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 Fischel - direct

 2837

 1 BY THE WITNESS:

 2 A. I know for -- my recollection is Tom Detelich definitely

 3 saw it. I cannot say for sure if Gary had seen it or not.

 4 BY MS. BUCKLEY:

 5 Q. Okay.

 6 A. He may have.

 7 Q. Okay. You just don't know one way or the other?

 8 A. As I sit here today, no.

 9 Q. Okay.

10 MS. BUCKLEY: No further questions, your Honor.

11 THE COURT: Redirect.

12 MR. BROOKS: No more questions, your Honor.

13 THE COURT: You may step down, sir.

14 MR. BURKHOLZ: Your Honor, plaintiffs call Daniel

15 Fischel back to the stand.

16 THE COURT: You understand, sir, that you're still

17 under oath?

18 THE WITNESS: I do, your Honor.

19 DANIEL FISCHEL, PLAINTIFFS' WITNESS, PREVIOUSLY SW

20 DIRECT EXAMINATION (Resumed)

21 BY MR. BURKHOLZ:

22 Q. When we left off Thursday, we were discussing the

23 disclosures by third parties, like analysts and media, in late

24 2001 and 2002; do you recall that?

25 A. I do.

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 Fischel - direct

 2838

 1 Q. How does that relate to your opinion that investors were

 2 not told the truth about Household?

 3 A. Well, Household is really the party in the best position

 4 to tell investors about its own practices. And to the extent

 5 that there are disclosures coming out by third parties who are

 6 increasingly critical, increasingly skeptical, increasingly

 7 disbelieving of Household's denials, that provides some

 8 information to investors, but it's not the same thing as

 9 Household itself telling investors about its own practices.

10 Q. And did you see evidence of criticism by analysts

11 increasing in late 2001 and throughout 2002 and denials by

12 management becoming less accepted by investors and analysts?

13 A. Yes, that was very much the pattern. The history during

14 the entire relevant period of this case was accusations

15 followed by denials. And for the first part of the period,

16 investors really didn't know what to believe, and the denials

17 were given some weight.

18 But by the end of the period, analysts and

19 third-party commentators were openly skeptical of management's

20 denials because there was so much evidence accumulating to the

21 contrary.

22 Q. Let me show you what we've marked as Plaintiffs' Exhibit

23 1446. It's already in evidence.

24 (Tendered.)

25 BY MR. BURKHOLZ:

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 Fischel - direct

 2839

 1 Q. What is Exhibit 1446?

 2 A. This is an American Banker article dated May 31, 2002.

 3 Q. And is this a denial by Household management that relates

 4 to your opinion?

 5 A. Yes, very much so. And, again, it's an indication by the

 6 analysts that they're not quite sure whether the denial is

 7 credible or there aren't going to be a lot more bad things to

 8 come.

 9 Q. Okay. Let's turn to the second page of the document. If

10 we can highlight the part that begins with, Ms. Hayden said

11 Household took full and prompt responsibility.

12 What is the significance of that statement and the

13 statement underneath it?

14 A. Well, this was a statement by a Household representative

15 that Household acknowledged there was a complaint that

16 customers -- some customers were confused about the rates that

17 they were paying on their loan. But then she said that

18 Household was satisfied that this was basically a localized

19 situation, an isolated situation in one particular branch, but

20 again consistent with the pattern that I just described a

21 minute ago because this is very late in the period, very late

22 in the relevant period.

23 The author of the article then says, But Wall Street

24 analysts wonder if this is the tip of an expensive iceberg,

25 meaning that they didn't believe it was localized. They

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 Fischel - direct

 2840

 1 didn't believe it was isolated. They believed this was just

 2 the beginning of a lot more bad information coming out about

 3 Household's predatory lending practices and its aggressive

 4 accounting which again is, in fact, exactly what happened.

 5 Q. And does this article relate to your leakage opinion?

 6 A. Yes, very much, that -- as I said, I have two methods for

 7 quantifying the amount of inflation. The first method focused

 8 on 14 specific disclosures, but I also explained that the 14

 9 specific disclosures don't fully capture the negative

10 information that was increasingly coming out about Household

11 that wasn't present at the beginning of the relevant period

12 but became increasingly present towards the end of the period.

13 And this statement about Wall Street analysts

14 speculating about how big and bad this problem was going to be

15 and increasingly so as Household's denials became less and

16 less credible, that's precisely what underlies the leakage

17 theory.

18 Q. And did you review an analyst's report by CFRA issued in

19 the summer of 2002 that was critical of Household's re-aging

20 practices?

21 A. I did.

22 Q. And did that relate to your leakage model?

23 A. Yes. Really the same thing, that Household had defended

24 its treatment of its re-aging practices. There are a series

25 of disclosures by Household on that issue. But then when this

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 Fischel - direct

 2841

 1 CFRA report comes out -- it's an independent organization as I

 2 understand it, and it concludes that basically all of

 3 Household's disclosures on re-aging that it had defended were,

 4 in fact, highly misleading.

 5 And, again, that's another situation where Household

 6 defended its practices, denied that there was a problem, and

 7 then a third-party commentator comes along and says we've now

 8 looked at this, we don't believe the denials, we think the

 9 re-aging practices and the treatment of the re-aging practices

10 in Household's financial statements were misleading and did

11 not provide an accurate picture for investors.

12 Q. Let me show you what we've marked as Plaintiffs' Exhibit

13 515.

14 (Tendered.)

15 MR. BURKHOLZ: A copy for counsel.

16 BY MR. BURKHOLZ:

17 Q. Is Exhibit 515 an e-mail from Mr. Aldinger to Mr. Streem

18 attaching the CFRA report that you reviewed?

19 A. Yes.

20 MR. BURKHOLZ: Your Honor, we move Exhibit 515 into

21 evidence. I don't believe there's any objection.

22 MR. KAVALER: Just the limiting instruction.

23 MR. BURKHOLZ: Subject to the limiting instruction.

24 THE COURT: It will be admitted subject to the

25 limiting instruction.

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 Fischel - direct

 2842

 1 BY MR. BURKHOLZ:

 2 Q. And if we can turn to the fourth page of the actual

 3 document and highlight the top part where it says, Account

 4 re-aging obscures true credit loss experience.

 5 What is the significance of that part of the report

 6 to your opinion?

 7 A. This is really the conclusion that I just described; that

 8 CFRA -- if we could highlight maybe the first sentence under

 9 the -- yeah. That CFRA notes that Household's account

10 re-aging may obscure its credit quality picture and that

11 account re-aging increased in 2001 versus 2000.

12 So not only is the accounting misleading, but the

13 amount of the practice that's subject to the misleading

14 accounting is increasing over time.

15 Q. And is this CFRA report in the summer of 2002 similar to

16 the Legg Mason report that we looked at from December of 2001

17 that was critical to Household's re-aging practices?

18 A. Yes. There's a big difference between the information

19 available to investors at the beginning of the relevant period

20 in 1999 and what comes out by the end of the relevant period.

21 There are accusations throughout, but what occurs, the big

22 change, is that Household's denials become less and less

23 credible, less and less believed by analysts and investors

24 and, as a result, negative information about Household's

25 practices and the effect on its securities, its stock price,

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 Fischel - direct

 2843

 1 increases towards the end of the relevant period as you go

 2 into 2001 and 2002.

 3 Q. Okay. I'd like to go back to the Legg Mason December 11,

 4 2001, report. If you have that in front of you. I think it's

 5 tab nine of your binder.

 6 If we can bring up the Plaintiffs' Demonstrative 140

 7 again.

 8 Plaintiffs' Demonstrative 140 is a demonstrative you

 9 prepared, correct?

10 A. Correct.

11 Q. And these are the highlights from the Legg Mason report of

12 December 12, 2001, correct?

13 A. Correct.

14 Q. December 11, 2001.

15 A. Correct.

16 Q. And if you can take a look at the actual report, Exhibit

17 1410, I'd like to just highlight a few other parts of the

18 report.

19 1410 is already in evidence. If we can bring that

20 up.

21 Start on the second page under delinquencies. Do you

22 see the reference to a securitization document and then in the

23 third paragraph it says, Beyond the tortured wording?

24 Do you see that?

25 A. Yes.

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 1 Q. And then a -- if we can go to the first page of the

 2 report.

 3 And if we can highlight where it says, Obviously a

 4 big surprise to many, including us, was the 570-day charge-off

 5 policy.

 6 Do you see that?

 7 A. I do.

 8 Q. Okay. And then if we can highlight -- if we can turn to

 9 the third page of the report, the top of that. If we can just

10 highlight where it says, Without this conventional disclosure,

11 we are left with many unanswered questions.

12 Do you see that at the top of the third page of the

13 report? We've highlighted it up on the screen.

14 A. Oh, I see. I had the wrong page. Yes, I see it.

15 Q. Okay. And then in the fourth paragraph of that page where

16 it says, Once again a few questions. Is it 300 days, ten

17 months, or 270 days, nine months, as stated in the annual

18 report.

19 Do you see that?

20 A. I do.

21 Q. And what is the significance of all these questions being

22 raised by the analysts with respect to a Household

23 securitization document?

24 A. Again, this is right after a defense by Household of -- by

25 Mr. Aldinger right after the Barron's article came out on

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 1 December 3. And this, again, is a situation where independent

 2 third parties are trying to assess whether management's denial

 3 is believable or, alternatively, whether the critics are right

 4 that there's something fundamentally wrong with Household's

 5 predatory lending practices as well as its accounting

 6 treatment.

 7 And what this particular analyst concludes, as I

 8 think is obvious from the language, is that looking at

 9 everything, looking at the disclosures in the financial

10 statements, the disclosures in the securitization

11 prospectuses, Household's defense of its re-aging practices,

12 the analyst is simply not convinced that investors are getting

13 an accurate picture of Household's true financial situation

14 and is raising all these doubts and all these questions that

15 remain unanswered, which the CFRA report that you just showed

16 me a minute ago, a little bit later reaches a more definitive

17 conclusion that Household's treatment of its re-aging

18 practices is affirmatively misleading for investors.

19 Q. And the market reacted negatively to Household's stock

20 when this analyst raised these concerns?

21 A. Correct.

22 Q. Now, I wanted to ask you a few questions about your

23 compensation and then finish up with one more topic.

24 How many professionals at Compass Lexecon worked with

25 you on this matter?

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 1 A. Altogether, you know, I'd estimate maybe 20.

 2 Q. And approximately how many hours did you and your team

 3 work on this matter?

 4 A. Well, as of the last go, I think I worked altogether a

 5 little over 200 hours. And I think with respect to the whole

 6 team, it would be thousands and thousands of hours for sure.

 7 Q. And what were the approximate range of hourly rates for

 8 the members of your team?

 9 A. You know, my guess, they'd range from about $200 an hour

10 to my rate, which is a thousand dollars an hour.

11 Q. And did you produce expert reports in this case?

12 A. Multiple expert reports.

13 Q. And did you respond to the defendants' experts' reports?

14 A. Yes, the defendants' expert reports I think totaled over

15 7,000 pages and obviously took a lot of work to respond to

16 them.

17 Q. Okay. I want to show you what we marked as Plaintiffs'

18 Exhibit 1473.

19 (Tendered.)

20 MR. BURKHOLZ: A copy for counsel.

21 Your Honor, this is a list of the statements that

22 plaintiffs allege are false or misleading that the other --

23 the defendants have stipulated are the statements in the case

24 or -- and the press releases will be admitted in through

25 Mr. Aldinger. We'd like to admit this into evidence at this

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 1 time.

 2 MR. KAVALER: Your Honor, could we have a moment?

 3 (Brief pause.)

 4 MR. KAVALER: Your Honor, could we have a sidebar?

 5 THE COURT: Sure. What's the exhibit number again?

 6 MR. BURKHOLZ: It's 1473.

 7 (Proceedings heard at sidebar:)

 8 THE COURT: Okay.

 9 MR. KAVALER: Your Honor, this is the same document

10 that's been the subject of the most recent conversation at the

11 jury trial -- charge conference last Friday, and this presents

12 the same issues that were raised there about what the jury is

13 being told about this compilation. And we do not agree this

14 compilation should be shown to the jury.

15 We have discussed at various times the limited

16 agreement that we had made as to who these statements were

17 issued by, who some of these statements were made by. We

18 don't agree to the format. We don't agree to the

19 presentation. We think the document is misleading in this

20 format as we said before. And you're constantly being told we

21 stipulated to this. That's not accurate. What we stipulated

22 to was an attachment to a document that --

23 THE COURT: Wait. I get your point. Now you're

24 offering this for what?

25 MR. BURKHOLZ: We want to put it into evidence before

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 1 we close our case. We can do it with, Mr. Aldinger.

 2 THE COURT: What's it being offered for, is what I

 3 want to know. What are you trying to prove with this thing?

 4 MR. BURKHOLZ: We're going to talk about one of the

 5 statements in there. I don't need to use the document with

 6 him.

 7 THE COURT: Then don't use it for now.

 8 (Proceedings heard in open court:)

 9 BY MR. BURKHOLZ:

10 Q. You testified Thursday that, I formed the opinion that

11 Household's disclosure defects, its inaccurate disclosures

12 caused there to be significant inflation in Household stock

13 price for much of the relevant period.

14 That is your opinion?

15 A. Correct.

16 Q. When you refer to disclosure defects causing inflation in

17 Household's stock, does that refer to statements plaintiffs

18 allege were false or misleading that were Household's public

19 statements to the media, press releases, 10-Qs and 10-Ks?

20 A. Yes, both misleading statements and things that were left

21 out that would have been necessary to provide a more correct

22 picture of Household's financial situation.

23 Q. Okay. Let's look at two of the statements Household

24 issued that plaintiffs allege were false or misleading. Let's

25 focus on your leakage model.

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 1 Can we bring up Exhibit 1395 that's been admitted

 2 into evidence, and if we can highlight August 16, 1999.

 3 Do you have Exhibit 1395?

 4 A. I can see it -- I do have it, but I can see it on the

 5 screen.

 6 Q. I think it's tab 28 of your binder.

 7 A. Okay. I have it now.

 8 Q. Okay. And this is your daily quantification of inflation

 9 under your leakage model?

10 A. Correct.

11 Q. Okay. Now, you assume, do you not, that plaintiffs can

12 prove that Household's statement on August 16, 1999, was false

13 or misleading?

14 A. Correct. All of my opinions are based on that assumption.

15 The issue of falsity is really one for the Court and the jury

16 to decide. It's not for me to decide.

17 Q. And that's a common assumption in your field in estimating

18 damages?

19 A. A necessary assumption because economists don't decide

20 truth or falsity. That's for the Court and the jury.

21 Q. Can you explain how you determined the inflation of $16.48

22 on August 16, 1999, as it relates to Household's 10-Q that was

23 issued on that day?

24 A. Yes. What -- the way the methodology works is that there

25 is an ending date on October 10 and 11 of 2002; and based on

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 1 that ending date, what the model -- what the methodology

 2 attempts to do is attempts to predict what Household's price

 3 would have been on any given day, which is the true value

 4 line -- the true value column rather, relative to the stock

 5 price, which is the first column, based on a statistical model

 6 of how Household's stock should behave in light of its

 7 statistical relationship between the overall market and the --

 8 the industry, the S&P Financials Index.

 9 Remember, those are the two indexes that Household

10 itself said its performance should be judged against. There's

11 a slightly different treatment before and after November 15,

12 2001, because remember that's the first date that I identified

13 that the market really started to become skeptical of

14 Household's denials.

15 But the basic idea is this statistical model trying

16 to adjust the actual stock price for how the stock price would

17 have behaved had there been no false and misleading

18 statements, had there been no continual leakage of negative

19 information, particularly after November 15, 2001.

20 Q. And if there is no false or misleading statement before

21 August 16, 1999, does that mean that there's zero inflation in

22 the stock?

23 A. No. So long as there is a false and misleading statement

24 on this particular date, inflation would begin on this date

25 going forward. But, again, I want to be careful because if

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 1 there's no false and misleading statement before this date,

 2 then any purchasers before this date wouldn't suffer any harm

 3 and wouldn't be entitled to any recovery.

 4 There would be no difference between the stock price

 5 and the true value the way there is on my exhibit because I

 6 assumed the false and misleading statements began on July 30,

 7 1999. But if it's more accurate, as I said in my report,

 8 actually to start on August 16, then anybody who purchased

 9 between July 30 and August 16, those columns in the exhibit,

10 would basically disappear and inflation would begin on August

11 16.

12 Q. Okay. Let's assume the Court and the jury doesn't find

13 the August 16, 1999, statement to be false or misleading. And

14 then let's look at the next public statement on the next page

15 of October 19, 1999.

16 If we can highlight that.

17 Is Household's stock now inflated by the next

18 statement, October 19, 1999, assuming the prior statement is

19 not false or misleading?

20 A. It's really the exact same point. Under what my analysis

21 does is it provides a method of quantifying the amount of

22 inflation on any given day and subsequent days, provided that

23 the jury finds that as of that date a false and misleading

24 statement has been made.

25 So if the jury were to conclude that there were no

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 2852

 1 statements that were made before October 19, 1999, that were

 2 false and misleading, then for all practical purpose, my

 3 exhibit should be read as beginning on that date. And there

 4 would be, again, for all dates before that no difference

 5 between the stock price and the true value line, no artificial

 6 inflation; any purchasers in any period before October 19,

 7 1999, would not suffer any harm.

 8 Q. And do each subsequent statement -- public statement by

 9 Household cause inflation to remain in a stock?

10 A. Yes, absolutely. And any increases or decreases depending

11 on misrepresentations, which occurred at the time of December

12 5 when there was the response to the Barron's article, another

13 misrepresentation with the best practices initiative in

14 February, those would be misrepresentations which affect the

15 amount of inflation.

16 There would be more inflation coming in to the stock

17 on those days. But basically, as of the first false and

18 misleading statement, there would be inflation on every single

19 day after that until the false and misleading information was

20 corrected.

21 Q. And does the -- as the truth comes out in late 2001 into

22 2002, what happens to the inflation in the stock until the end

23 of the relevant period?

24 A. For the most part, it declines. Because what's happening

25 is as more and more -- there are more and more criticisms of

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 1 Household's practices, which become believable -- more and

 2 more believable by investors, causing the stock price to

 3 decline.

 4 The effect of that is, in effect, to partially cure

 5 the false information that's existed from the beginning so the

 6 amount of inflation over time declines so that it's zero at

 7 the end when the truth is revealed.

 8 Q. And does a company like Household need to admit its prior

 9 statements were false in order for the truth to come out as

10 relates to those statements?

11 A. Well, in an ideal world, yes. But as a practical matter,

12 frequently what happens, as in this case, is that the denials

13 become less and less credible to the point that investors

14 learn the truth simply because the denials are not matched by

15 what occurs in reality in the real world.

16 And investors and analysts can see what happens in

17 the real world, and that can ultimately, in effect, constitute

18 the truth, although obviously it's better if the company

19 itself tells the truth.

20 Q. And let's take a look at your demonstrative, Plaintiffs'

21 Demonstrative 136. I think it's tab 24 of your binder.

22 A. I have it.

23 Q. And this is a demonstrative that you prepared, correct?

24 A. It is.

25 Q. And Household's stock declined from about $60 to $28 as

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 2854

 1 the truth leaked out from November 2001 to October 2002?

 2 A. Correct, from November 15, 2001, to October 11 of 2002. I

 3 should also say of these -- I think there's almost 70 firms in

 4 the S&P Financials Index. These are indexes which is a

 5 composite of firms.

 6 But if you look at the firms individually, Household

 7 was the fourth worst-performing firm out of 70 firms during

 8 this particular period. So they dramatically underperformed

 9 relative to the indexes that Household itself deemed to be

10 comparable. But if you look at the individual firms that

11 compose the index, Household is the fourth worst as compared

12 to the full 70 firm set.

13 Q. Now, your specific disclosure model estimates inflation of

14 only about $7.97 during this period, correct?

15 A. As the maximum amount, correct.

16 Q. And your opinion is that that understates the inflation in

17 Household's stock due to Household's public statements?

18 A. Yes, because it doesn't take into account the leakage that

19 we've been discussing and I've been describing.

20 Q. And your leakage model estimates daily inflation ranging

21 from $13 to approximately $23 for each day of the relevant

22 period?

23 A. Yes. And actually, let me just explain why there's a cap

24 of $23. Because what I did was I calculated the total

25 underperformance of Household on -- relative to these indexes

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 2855

 1 based on my statistical model and that number was, I think,

 2 $23.94 or something like that.

 3 So I made that the maximum possible inflation on any

 4 given day. So even when my model would predict or would

 5 indicate inflation of more than $23.94, I made $23.94 the cap

 6 because that's the amount that Household underperformed the

 7 S&P Financials Index and the S&P 500 Index.

 8 Q. So compared to the stock price decline of $32, you

 9 attribute anywhere from 13 to $23 due to disclosures related

10 to the fraud?

11 A. 13 to $23 based on leakage and $7.97 as the maximum under

12 the specific disclosure models.

13 Q. And it's your opinion that the leakage model is a better

14 estimate of the inflation in Household's stock price during

15 the relevant period due to the alleged false statements and

16 omissions?

17 A. Correct, because it takes into account the economic

18 reality in this case where negative information came out

19 slowly over time precisely because Household did not admit the

20 predatory lending practices that it was involved in or the

21 improper accounting as a result of re-aging, and the

22 restatement of the truth only became known gradually as a

23 result of real world events and commentary by third parties.

24 MR. BURKHOLZ: Nothing further at this time, your

25 Honor.

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 1 THE COURT: Cross-examine.

 2 MR. KAVALER: Thank you, your Honor.

 3 CROSS-EXAMINATION

 4 BY MR KAVALER:

 5 Q. Good morning, Professor Fischel.

 6 A. Good morning.

 7 Q. My name is Tom Kavaler. I represent the defendants.

 8 A. We met before actually.

 9 Q. Briefly, I think.

10 And I'm going to ask you some questions today. I'm

11 going to try to -- try to understand what you said on direct

12 and explore how it applies to some other aspects of the case

13 that I'm interested in. I would appreciate it if you would

14 answer the questions I ask you and just those questions.

15 Can you do that?

16 A. I will do my best, sir.

17 Q. Excellent.

18 Now, you have an extensive background in this area in

19 connection with disclosures and their impact on stock price,

20 don't you?

21 A. I do.

22 Q. You are widely regarded as if not the preeminent, one of

23 the preeminent experts in this field; are you not?

24 A. That's very kind of you to say. I hope that's the case,

25 but I accept your gracious compliment.

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Trial Day 14 4/20/2009 5:54:00 AM

 1 Q. And your work has been cited by the Supreme Court,

 2 correct?

 3 A. It has.

 4 Q. And, in fact, when we were looking for an expert, we

 5 contacted you to see if you were available, but you had

 6 already been hired by these folks, correct?

 7 A. You were nice enough to contact me to try and hire me in

 8 this case, but I was already retained, yes.

 9 Q. And you've conducted a substantial number of event studies

10 in connection with various cases over the years?

11 A. I have.

12 Q. An event study is a well-established methodology for

13 analyzing loss causation in securities fraud cases?

14 A. Correct.

15 Q. In fact, an event study is widely regarded as the gold

16 standard by both courts and economists for evaluating the

17 economic aspects of a case like this?

18 A. In connection with -- in combination with other economic

19 evidence, I would say that's correct.

20 Q. And you conducted an event study in this case?

21 A. We did.

22 Q. And, in fact, the results are one of the documents marked

23 in evidence?

24 A. Correct.

25 Q. And you used your event study to analyze and detail the

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 1 that I didn't understand that. Let me be sure we're precisely

 2 on the same page.

 3 In that time period starting November 15, 2001,

 4 basically the inflation is coming out, but there are a couple

 5 of days where new inflation comes in and the amount of

 6 inflation increases; but over the time period net/net, it's

 7 decreasing, correct?

 8 A. Net/net, that's correct; but on a daily basis, you need to

 9 look at the particular --

10 Q. And we're going to do that in a minute, sir. I just

11 wanted to be sure I understood.

12 So by November 15, 2001, the inflation was in there.

13 And then subject to the couple of days where it goes up, from

14 there to October 21, it's essentially coming out?

15 A. Again, I don't want to accept essentially coming out. But

16 under my analysis, inflation exists from the first time the

17 jury concludes that there is a false or misleading statement

18 either as a result of a misrepresentation or as a result of a

19 failure to disclose something about Household's lending

20 practices or accounting that should have been disclosed, and

21 then it continues throughout the relevant period.

22 The first under -- particularly under my first method

23 focusing on specific disclosures, the first time where

24 inflation decreases is on November 15, 2001, because of the

25 CDC lawsuit. And after that, it fluctuates on a day-by-day

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 2866 

Trial Day 14 4/20/2009 5:54:00 AM

 1 basis; but for the most part, I'm agreeing with you that it

 2 declines until October 10 and 11.

 3 Q. And I'm agreeing with you, sir. I'm just trying to find

 4 shorthand phrases so we don't spend the entire day speaking to

 5 each other in these lengthy sentences and wasting people's

 6 time.

 7 Would you prefer if I said inflation decreases

 8 instead of coming out?

 9 A. I really don't want to quibble. I think the point is

10 clear. Overall it decreases if you look at the beginning

11 point and the endpoint. But on a daily basis, it's not

12 necessarily correct.

13 Q. Understood. I think we're on the same page. Okay.

14 THE COURT: Let -- since you both understand each

15 other at this point, it may be a good time to stop for lunch.

16 MR. KAVALER: Maybe the high point of the day, your

17 Honor.

18 THE COURT: We will take an hour for lunch, ladies

19 and gentlemen. Return at 1:00 o'clock, please.

20 (Jury out.)

21 THE COURT: You may step down, sir.

22 We're recessed until 1:00 o'clock.

23 MR. KAVALER: Thank you, your Honor.

24 (Trial adjourned until April 20, 2009, at 1:00 p.m.)

25

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 2868

 1 IN THE UNITED STATES DISTRICT COURT

 FOR THE NORTHERN DISTRICT OF ILLINOIS

 2 EASTERN DIVISION

 3 LAWRENCE E. JAFFE PENSION PLAN, ) on behalf of itself and all ) 4 others similarly situated, ) ) 5 Plaintiff, ) ) 6 vs. ) No. 02 C 5893 ) 7 HOUSEHOLD INTERNATIONAL, INC., ) et al., ) Chicago, Illinois 8 ) April 20, 2009 Defendants. ) 1:00 o'clock p.m. 9

10 TRANSCRIPT OF TRIAL PROCEEDINGS

 BEFORE THE HONORABLE RONALD A. GUZMAN

11

12 APPEARANCES:

13 For the Plaintiff: COUGHLIN STOIA GELLER RUDMAN &

 ROBBINS LLP

14 BY: MR. SPENCER A. BURKHOLZ

 MR. MICHAEL J. DOWD

15 MR. DANIEL S. DROSMAN

 MS. MAUREEN E. MUELLER

16 655 West Broadway Suite 1900

17 San Diego, California 92101 (619) 231-1058 18

 COUGHLIN STOIA GELLER RUDMAN &

19 ROBBINS LLP

 BY: MR. DAVID CAMERON BAKER

20 MR. LUKE O. BROOKS

 MR. JASON C. DAVIS

21 MS. AZRA Z. MEHDI

 100 Pine Street

22 Suite 2600

 San Francisco, California 94111 23 (415) 288-4545

24

25

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 2869

 1 APPEARANCES: (Continued) 2 For the Plaintiff: MILLER LAW LLC

 BY: MR. MARVIN ALAN MILLER

 3 115 South LaSalle Street

 Suite 2910

 4 Chicago, Illinois 60603 (312) 332-3400 5

For the Defendants: CAHILL, GORDON & REINDEL LLP 6 BY: MR. THOMAS J. KAVALER

 MS. PATRICIA FARREN

 7 MR. DAVID R. OWEN

 MS. JANET A. BEER

 8 MR. JASON M. HALL

 MR. JOSHUA M. NEWVILLE

 9 MS. KIM A. SMITH

 MS. SUSAN BUCKLEY

10 MS. YAFIT COHN

 MR. MICHAEL WERNKE

11 80 Pine Street

 New York, New York 10005 12 (212) 701-3000

13

14

15

16

17

18

19

20

21

22 Court Reporter: NANCY C. LaBELLA, CSR, RMR, CRR JOSEPH RICKHOFF

23 Official Court Reporter 219 South Dearborn Street

24 Room 1222

 Chicago, Illinois 60604 25 (312) 435-6890 Nancy LaBella@ilnd.uscourts.gov

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 1 THE CLERK: 02 C 5893, Jaffe vs. Household

 2 International, Incorporated.

 3 THE COURT: Ready to resume?

 4 MR. KAVALER: Ready, your Honor.

 5 THE COURT: Bring out the jury, please.

 6 (Jury in.)

 7 THE COURT: Welcome back, ladies and gentlemen.

 8 Ready to resume?

 9 MR. KAVALER: Thank you.

10 DANIEL FISCHEL, PLAINTIFF'S WITNESS, PREVIOUSLY SW

11 CROSS-EXAMINATION - Resumed

12 BY MR. KAVALER:

13 Q. All right, Professor Fischel. Where I think we were was

14 we had talked about what you told us about last week. Today

15 I'd like to spend a little time -- hopefully, very little --

16 trying to understand how the inflation came into the price of

17 the stock.

18 In other words, I want to see if we can observe

19 together where it came from, when it got there and what it was

20 the effect of, to use the word -- the reason, why I'm trying

21 to avoid the "caused" word?

22 I take it your sophisticated analysis can do that, as

23 well?

24 A. Well, when the inflation comes into the stock, as I've

25 explained numerous times, is a function of what the jury

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Trial Day 14 4/20/2009 5:54:00 AM

 1 concludes as to when the first leading -- first misleading

 2 statement is.

 3 Q. That's the first time. I'm going to talk about a later

 4 period of time. In the post- -- I should have been clear. In

 5 the post-November 15 period.

 6 You told us this morning there are days when it comes

 7 in, days when it goes out?

 8 A. Correct.

 9 Q. That's what I want to talk about.

10 And I'm talking now specifically about your

11 quantification using specific disclosures. In other words,

12 your first method.

13 A. Okay.

14 Q. Okay?

15 A. Got it.

16 Q. I'll tell you when we switch to the second method.

17 A. All right. That's fine.

18 Q. Okay.

19 So, until I tell you that, we're talking about the

20 first method, all right?

21 A. I understand.

22 Q. Okay.

23 And in the quantification-using-specific-disclosures

24 model, what you attempted to do is based on the assumptions

25 you were asked to make by the plaintiffs about a false

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 2871 

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 1 statement, you attempted to quantify the amount of inflation

 2 that resulted and how that inflation varied over time as

 3 different disclosures occurred which either increased or

 4 decreased inflation during the relevant period, correct?

 5 A. Correct, although the quantification doesn't depend on any

 6 assumption.

 7 Q. Okay. I'll take out the assumption.

 8 But that's what you're trying to find. You're trying

 9 to see how you can quantify the amount of inflation and how it

10 varied over time as different disclosures occurred which

11 either increased or decreased inflation?

12 A. That's correct.

13 Q. Okay.

14 And you prepared some charts which plaintiffs'

15 counsel moved into evidence, and one of them is Exhibit 1397

16 in evidence.

17 Do you have a copy of that up there or do you need

18 one?

19 A. I do. Just give me a second to find it.

20 MR. KAVALER: Your Honor, may we publish this to the

21 jury? It might be easier for them to follow along if they

22 have their own copy.

23 MR. BURKHOLZ: It's fine.

24 THE WITNESS: I have it, sir.

25 MR. KAVALER: Okay. In a moment, everyone will have

Household Unsigned Page 2870 - 2873

 2872 

Trial Day 14 4/20/2009 5:54:00 AM

 1 it.

 2 (Document tendered to the jury.)

 3 MR. KAVALER: Pass them out.

 4 (Brief pause.)

 5 BY MR. KAVALER:

 6 Q. And what this exhibit shows us, Professor, it presents the

 7 quantification of total inflation on each day during the

 8 relevant time period using your first method?

 9 A. That's correct.

10 Q. And in this quantification using specific disclosures, you

11 only included those dates on which news --

12 MR. KAVALER: Withdrawn. That's not right.

13 BY MR. KAVALER:

14 Q. This is every day from July 30 -- every -- that's not

15 right, either.

16 This is every trading day from July 30, 1999, through

17 October 11, 2002?

18 A. Correct.

19 Q. Okay. Got it right on the third try.

20 Now, as you and I were discussing before lunch,

21 you've already shown us at least one example of inflation

22 going into the stock price; and, that was the December 5,

23 2001, event, correct?

24 A. Correct.

25 Q. Okay.

Household Unsigned Page 2870 - 2873

 2873 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 162 of 245
Trial Day 14 4/20/2009 5:54:00 AM

 1 A. Correct.

 2 Q. And the artificial inflation the day before was 7.97,

 3 correct?

 4 A. That's right.

 5 Q. And the artificial inflation the day after was 7.97?

 6 A. Correct.

 7 Q. In fact, to save time, the "Artificial Inflation" column

 8 on this entire page is 7.97?

 9 A. That's right.

10 Q. Okay.

11 So, that means, in the language we were just using --

12 we've just used -- the filing of the Household 10-K on August

13 16, 1999, had no effect on the amount of inflation in the

14 stock?

15 A. You know, you can't say that definitively. It depends.

16 Is this the -- what assumption am I making as to whether this

17 is the first false and misleading disclosure?

18 Q. I'll tell you what assumptions to make. Assume your chart

19 is accurate.

20 A. Okay.

21 Q. Assume I've read the numbers correctly.

22 A. Okay.

23 Q. And assume I'm trying to understand the process. So, I'm

24 looking at August 13, where I see the inflation is 7.97, okay?

25 A. Okay.

Household Unsigned Page 2886 - 2889

 2886 

Trial Day 14 4/20/2009 5:54:00 AM

 1 Q. And, then, I'm looking at August 16 or August 17 because

 2 we don't know what time of the day it was filed.

 3 A. Right.

 4 Q. And on both days I see "7.97."

 5 A. Okay.

 6 Q. So, the number hasn't changed?

 7 A. All right. And let me explain why that is, sir.

 8 Q. First, you agree with me?

 9 A. No, obviously, the number hasn't changed.

10 Q. Okay.

11 And you prepared these numbers?

12 A. I did.

13 Q. I had nothing to do with it?

14 A. No, that's right, you had nothing to do with it.

15 But --

16 Q. All right.

17 A. -- the reason is that this document, as I hopefully

18 explained earlier, is based on the assumption that the first

19 time where there is a false and misleading disclosure or the

20 failure to make an accurate disclosure is on July 30th, 1999,

21 which is why the exhibit begins on July 30th, 1999.

22 Based on my first method, the specific disclosure

23 method -- not the second method, the specific disclosure

24 method -- nothing changes between the time of the first

25 misleading disclosure or failure to disclose on July 30th and

Household Unsigned Page 2886 - 2889

 2887 

Trial Day 14 4/20/2009 5:54:00 AM

 1 August 16th. And that is why there was no change in inflation

 2 between August 15th, August 16th, August 17th.

 3 If, on the other hand -- and this is what I tried to

 4 explain in terms of how the exhibit should be interpreted, if

 5 -- the jury were to conclude that there was no misleading

 6 disclosure on July 30th or failure to disclose accurately on

 7 July 30th, but the first misleading disclosure was the second

 8 quarter result announcement on August 16th, then the right way

 9 to read the exhibit would be that the amount of artificial

10 inflation from July 30th to August 15th is zero; and, then, it

11 goes from zero to 7.97 on August 16th.

12 So, when inflation increases or decreases is a

13 function of what the jury concludes as to when the first

14 misleading disclosure that Household makes is. And the proper

15 number of inflation is zero on every day until the day that

16 the jury concludes, if they so conclude, that Household made a

17 misleading disclosure.

18 Q. But I'm looking at 1397 in the column headed "Artificial

19 Inflation." I don't see any zeros, right?

20 A. There's no zeros because of the assumption that -- I hope

21 I explained clearly, but if not, I'll try and explain it,

22 again.

23 Q. That's okay.

24 A. -- that the first time inflation entered Household's stock

25 price was July 30th. But that's a jury determination. It's

Household Unsigned Page 2886 - 2889

 2888 

Trial Day 14 4/20/2009 5:54:00 AM

 1 not a determination for me to make.

 2 So, any date later than that, if the jury concludes

 3 that's the first date of a misleading disclosure, the right

 4 way to read the exhibit is to substitute zero for 7.97 until

 5 the date -- the first date -- that the jury concludes there

 6 was a misleading disclosure.

 7 Q. For purposes of this question, I'll agree with you. Let's

 8 assume it starts on July 30, 1999, okay?

 9 A. Okay.

10 Q. So, then, we agree that if it starts on July 30, 1999,

11 whatever Household said on August 16 had no effect?

12 A. That's correct --

13 Q. Okay.

14 A. -- based on that assumption.

15 Q. A witness named Mr. Devor was here last week and he showe

16 us this chart (indicating). I don't know if you can see that.

17 It's just the cover sheets of a series of 10-Ks and -Qs. And

18 this is the one I just asked you about, the June 30, 1999 --

19 A. Okay.

20 Q. -- Q, which was filed on August 16, 1999.

21 So, based on what we just talked about, I'm going to

22 cross that off my list. I will not come back to it, again,

23 and I will not put it on that list over there (indicating).

24 Okay?

25 A. Okay.

Household Unsigned Page 2886 - 2889

 2889 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 163 of 245
Trial Day 14 4/20/2009 5:54:00 AM

 1 Q. Okay.

 2 If you look at your event study for this day --

 3 that's Exhibit 1391, and it's on Page 1 -- did you find a

 4 statistically-significant price increase that resulted in

 5 inflation on August 16, 1999?

 6 A. No, sir, I did not.

 7 Q. Okay.

 8 I should have asked you that before I put my X up

 9 there. I apologize. I'll get the hang of this.

10 All right. Let's look at the next one.

11 Plaintiffs may show you a press release that -- I'm

12 sorry, plaintiffs may show the jury a press release -- that

13 Household issued on October 19, 1999. I'm going in

14 chronological order. How much did you find that inflation

15 increased or decreased on that date when that press release

16 was issued?

17 And to do that, we're going to look, again, at

18 Plaintiffs' 1397. We're going to turn to Page 2, look at the

19 entry for October 19. And to save time, I will observe --

20 tell me if I'm right -- this whole page also has actual

21 inflation steady at 7.97 throughout, correct?

22 A. Correct.

23 And, again, I just want to make sure we're talking

24 about my -- the first method.

25 Q. The first method.

Household Unsigned Page 2890 - 2893

 2890 

Trial Day 14 4/20/2009 5:54:00 AM

 1 A. Okay.

 2 Q. Absolutely.

 3 A. Because the second method is different.

 4 Q. Understood.

 5 Your first method, 7.97 throughout the page, right?

 6 A. Correct.

 7 Q. So, therefore -- can I cut to the chase and eliminate all

 8 the interim steps, therefore -- you agree that the filing by

 9 Household -- the issuance by Household -- of the press release

10 on October 19, 1999, had no effect on the amount of inflation?

11 A. I would not agree with that for the reasons that I stated

12 before.

13 It would have no effect on the amount of inflation if

14 the jury were to conclude that Household made a false and

15 misleading disclosure prior to this date. If that were the

16 case, then there would be no change. But if the jury were

17 conclude that this was the first date where Household made a

18 false and misleading disclosure, again, then the proper way to

19 read the exhibit would be every day prior to this date would

20 have zero inflation and $7.97 of inflation would have entered

21 Household's stock price on this date.

22 Q. What I'm trying to avoid is me asking you the exact same

23 questions for every document and you giving me the exact same

24 answers. I'm accepting, for purposes of this series of

25 questions, what you said earlier, that your starting

Household Unsigned Page 2890 - 2893

 2891 

Trial Day 14 4/20/2009 5:54:00 AM

 1 assumption was the first false statement was July 30.

 2 A. Fine. It's just that I have to answer your question

 3 accurately as you ask it.

 4 Q. I appreciate that.

 5 But on those assumptions, just as we established with

 6 regard to the June 30 10-Q, so you would agree, would you not,

 7 that the -- let me ask you before I do that -- let's look at

 8 1391.

 9 And we're looking for October 19, which is on Page 3.

10 October 19, 1999.

11 Do you see that?

12 A. I do.

13 Q. Did you find any statistically-significant price increase

14 that resulted in inflation on October 19, 1999?

15 A. No, I did not.

16 Q. Okay.

17 So, based on those two answers, I'm going to cross

18 off this one (indicating), and I'm not going to list it on

19 that board following the methodology we're using?

20 A. Sir, what you decide to cross off or what you do with your

21 boards, I'm not going to give you any advice on that.

22 Q. Fair enough.

23 But we agreed that we would list over there on the

24 white board any disclosure that caused an increase in

25 inflation. Remember that?

Household Unsigned Page 2890 - 2893

 2892 

Trial Day 14 4/20/2009 5:54:00 AM

 1 A. Again, I'm not sure what decision rule you're using with

 2 respect to what you're writing down, what you're crossing off,

 3 what you're leaving alone. You know, that's however you

 4 decide to do it.

 5 Q. I'm sure the jury remembers what we said to each other.

 6 I'm going to cross off this one and not come back to it,

 7 again.

 8 Let's go to the next one.

 9 Plaintiffs have shown this jury the December 31st,

10 1999, 10-K that Household filed on March 28, 2000. Let's look

11 at first Exhibit No. 1397 for March 28, 2000. And that's on

12 Page 4.

13 And, again, we'll highlight it on the board there.

14 And to save time, you agree that the number in the

15 "Artificial Inflation" column on this page is $7.97 throughout

16 the page?

17 A. I do, sir.

18 Q. Okay.

19 Then let's go to your event study, which is

20 Plaintiffs' Exhibit 1391, and we'll find the same date, which

21 is 3-28-2000.

22 And that will be on Page 8.

23 A. Okay, I have it.

24 Q. Did you find any statistically-significant price increase

25 that resulted in inflation on March 28th, 2000?

Household Unsigned Page 2890 - 2893

 2893 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 164 of 245
Trial Day 14 4/20/2009 5:54:00 AM

 1 A. No, sir, I did not.

 2 Q. All right. I won't bother you about this one.

 3 MR. KAVALER: Don't have it? Plaintiffs'

 4 Demonstrative 99.

 5 Sorry. 99, 10-K.

 6 BY MR. KAVALER:

 7 Q. Plaintiffs have shown this jury the March 31, 2000, 10-K

 8 that Household filed on May 10, 2000. Let's do the same

 9 exercise. Let's look at your chart, which is 1397 in

10 evidence. Let's look at 5-10-2000, which is on Page 5.

11 Again, try to save time. Same result: No increase

12 in artificial inflation?

13 A. Correct.

14 Q. And now let's look at your event study, which is

15 Plaintiffs' 1391 for the same date. It's on Page 10. Did you

16 find a statistically-significant price increase that resulted

17 in inflation on May 10, 2000?

18 A. No, sir, I did not.

19 Q. Okay.

20 So, once again --

21 MR. KAVALER: I think I'm crossing the wrong thing

22 off. I'll fix it later. I'm confusing myself here.

23 BY MR. KAVALER:

24 Q. Plaintiffs have shown this jury the June 30 10-K -- 10-Q,

25 rather -- that Household filed on August 11, 2000. Let's look

Household Unsigned Page 2894 - 2897

 2894 

Trial Day 14 4/20/2009 5:54:00 AM

 1 at August 11, 2000, in the first document, which is 1397.

 2 It's on Page 6.

 3 Once again, no increase in artificial inflation,

 4 correct?

 5 A. Correct.

 6 Q. And let's look at it in your event study on Page 14.

 7 Did you find any statistically-significant price

 8 increase that resulted in inflation on August 11, 2000?

 9 A. No, sir, I did not.

10 Q. All right.

11 Plaintiffs have shown this jury a newspaper article

12 in the St. Louis Post-Dispatch on November 1, 2000, and that

13 one says something about, "Craig Streem says HFC never

14 pressures people to buy credit life insurance."

15 Let's do the same exercise. Look at Plaintiffs'

16 Exhibit 1397 for November 1, 2000, at Page 7.

17 A. I see it.

18 Q. Okay.

19 No increase in artificial inflation in connection

20 with that event, either, right?

21 A. That's correct.

22 Q. All right.

23 Now, let's look at your event study, which is

24 Plaintiffs' Exhibit 1391. I'm going to go to Page 17. And

25 you see the entry there for 11-1-2000?

Household Unsigned Page 2894 - 2897

 2895 

Trial Day 14 4/20/2009 5:54:00 AM

 1 A. I do, sir.

 2 Q. Did you find any statistically-significant price increase

 3 that resulted in inflation on 11-1-2000?

 4 A. No, sir, I did not.

 5 Q. Okay.

 6 MR. KAVALER: Plaintiffs' Demonstrative No. 12,

 7 please.

 8 BY MR. KAVALER:

 9 Q. Plaintiffs have shown this jury the Origination News

10 article that appeared on March 23, 2001, which says something

11 about Gary Gilmer saying the company's position on predatory

12 lending is perfectly clear.

13 I think we have the language up here. It's the

14 second one. This one here (indicating), down at the bottom.

15 A. I see it, sir.

16 Q. Okay. Thank you.

17 Let's look at your Plaintiffs' Exhibit 1397. We'll

18 go to Page 9. We'll look at 3-23-01. And let's look at

19 3-28-01. It's possible there might be a mistake in the

20 dating, possibly not; but, either way, there's no change in

21 the artificial inflation in that column?

22 A. That's correct, sir.

23 Q. Okay.

24 And, then, let's go to your event study. And I guess

25 we'll have to -- this is Exhibit No. 1391. It is the right

Household Unsigned Page 2894 - 2897

 2896 

Trial Day 14 4/20/2009 5:54:00 AM

 1 date.

 2 And we'll look at Page 21. Did you find a

 3 statistically-significant price increase that resulted in

 4 inflation in connection with either March 23 or March 28,

 5 2001?

 6 A. Let me just check something because -- it looks like March

 7 23rd is a statistically-significant price increase.

 8 Q. And the 28th is not?

 9 A. Correct.

10 Q. Okay.

11 This is plaintiffs' board. So, we'll see how we

12 resolve that.

13 Let me ask you this -- well, let me come back to

14 that. So, we'll leave this one open for the moment.

15 The plaintiffs have shown this jury the December 31,

16 2000, 10-K that Household filed on March 28th, '01. That's

17 one of the dates we just looked at and, in Exhibit 1397, we

18 found no change in artificial inflation, correct?

19 A. That's correct.

20 Q. And on your event study, which is Exhibit 1391, we found

21 no statistically-significant price increase that resulted in

22 inflation on March 28, correct?

23 A. That changed the amount of inflation, correct.

24 Q. Okay.

25 So, that's the December 31 10-K. Plaintiffs have

Household Unsigned Page 2894 - 2897

 2897 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 165 of 245
Trial Day 14 4/20/2009 5:54:00 AM

 1 shown this jury the Star Tribune article that appeared on July

 2 27, 2001 --

 3 MR. KAVALER: This is Plaintiff's Demonstrative 13.

 4 BY MR. KAVALER:

 5 Q. -- in which they say Household spokeswoman Megan Hayden

 6 said the terms of loans are disclosed to all customers?

 7 MR. KAVALER: You can put it right in front. Put it

 8 up -- sorry. Should have known you'd know what to do.

 9 BY MR. KAVALER:

10 Q. So, we're looking at July 27, '01. It's this one over

11 here (indicating).

12 It's Megan Hayden saying, "The terms of loans are

13 disclosed to all customers as required by state and federal

14 laws -- " and something has been left out on this board -- "so

15 I take exception to any characterization that we engaged in

16 predatory lending practices."

17 By the way, Professor, you understand these are

18 plaintiffs' boards, we just blew them up?

19 A. I don't have -- I don't have -- any understanding, one way

20 or the other.

21 Q. Do you see in the lower right-hand corner it says

22 "PDEM013"?

23 A. Actually, I can't really read it from here, but I'm sure

24 that's what it -- there's no need to show it to me. I'm sure

25 that's what it says.

Household Unsigned Page 2898 - 2901

 2898 

Trial Day 14 4/20/2009 5:54:00 AM

 1 Q. I was going to bring it over to you.

 2 A. No, I'm happy to --

 3 Q. And you know that means "plaintiffs' demonstrative"?

 4 A. That's fine.

 5 Q. So, I'm not the one who left whatever's left out of there,

 6 but I'm not suggesting anything follows from it.

 7 Okay. Let's look at that date in Exhibit 1397. It's

 8 on Page 11. And, again, we have an entire page where

 9 artificial inflation is 7.97, correct?

10 A. That's right.

11 Q. So, no change here, either?

12 A. Correct.

13 Q. All right.

14 Let's now look in your event study. This is at

15 Page -- this is Exhibit 1391. And we go to Page 26, it's the

16 second entry down.

17 Did you find any statistically-significant price

18 increase that resulted in inflation on July 27, 2001?

19 A. No, sir, I did not.

20 Q. Let me see if I can shorten this. In fact, you didn't

21 find any statistically-significant price increases that

22 resulted in inflation from July 30, 1999, through November 15,

23 2001; is that right?

24 A. Under the first method, that's correct.

25 Q. The first method. Absolutely.

Household Unsigned Page 2898 - 2901

 2899 

Trial Day 14 4/20/2009 5:54:00 AM

 1 A. Correct.

 2 Q. Right?

 3 Okay.

 4 MR. KAVALER: Let's put up everything we have that

 5 the plaintiffs were kind enough to furnish us that occurred

 6 before November 15, 2001.

 7 (Brief pause.)

 8 MR. KAVALER: January 19, 2000; April 19, 2000;

 9 August 11, 2000; October 18, 2000; January 17, 2001.

10 MR. BURKHOLZ: Your Honor, is there a question

11 pending or is this demonstrative --

12 MR. KAVALER: These are all following from the last

13 question, your Honor. He told me everything remains the same

14 through a certain date. I'm simply trying to expedite matters

15 so we don't waste all afternoon. This is the same process I

16 went through each of the other exhibits. I'd be happy to do

17 it piecemeal. It will just take forever.

18 THE COURT: Do you have an objection?

19 MR. BURKHOLZ: Is there a question pending?

20 THE COURT: Do you have an objection?

21 MR. BURKHOLZ: No. It's fine, your Honor.

22 THE COURT: Okay.

23 MR. KAVALER: Thank you.

24 THE COURT: Proceed.

25 MR. KAVALER: July 18, 2001.

Household Unsigned Page 2898 - 2901

 2900 

Trial Day 14 4/20/2009 5:54:00 AM

 1 BY MR. KAVALER:

 2 Q. Now, Professor, I may not have a board for every

 3 statement, but if the statement falls within the same time

 4 frame as my last question, you'd give me the same answer?

 5 A. If you're just asking me the mechanical question as to

 6 whether there's a change in the amount of inflation or whether

 7 there's a statistically-significant price increase --

 8 Q. Those are my only questions.

 9 A. If those are your only questions, as opposed to explaining

10 why the numbers are what they are, then I agree with you.

11 Q. All right.

12 Now let's look at some days after November 15.

13 A. Okay.

14 Q. We're not going to be able to expedite. We're going to

15 have to go day by day.

16 A. Okay.

17 Q. Okay. Plaintiffs may show this jury a December 4 -- I

18 think we did that already. We did Goldman Sachs. It's that

19 one (indicating).

20 MR. KAVALER: Plaintiffs' Demonstrative 23, please.

21 BY MR. KAVALER:

22 Q. Plaintiffs may show this jury a press release that

23 Household issued on January 16, 2002. It looks like this

24 (indicating). It's Mr. Aldinger in the photograph here and

25 talks about receivable and revenue growth exceeded our

Household Unsigned Page 2898 - 2901

 2901 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 166 of 245
Trial Day 14 4/20/2009 5:54:00 AM

 1 expectations, et cetera.

 2 Let's look at January 16, 2002, in your exhibit,

 3 Plaintiffs' Exhibit 1397. And that will be on Page 14.

 4 And you see that the inflation on January 15 is 3.66.

 5 On January 16, it's 3.66. On January 17, it's 3.66.

 6 So, although we no longer have a full page of 7.97,

 7 we still have the same phenomenon. The artificial inflation

 8 did not increase upon the issuance of this press release,

 9 correct?

10 A. That's correct.

11 Q. Okay.

12 And now let's go to your event study, which is

13 Plaintiffs' Exhibit 1391. And let's find the same date, which

14 is January 16, 2002, which will be on Page 32. And tell me

15 whether you found a statistically-significant price increase

16 that resulted in inflation on January 16, 2002.

17 A. No, sir, I did not.

18 Q. Plaintiffs have shown this jury the Copley News Service

19 article --

20 MR. KAVALER: This is Plaintiffs' Demonstrative 13,

21 please.

22 BY MR. KAVALER:

23 Q. Plaintiffs have shown this jury the Copley News Service

24 article which appeared on February 6th, 2002. I have it over

25 here (indicating): "We do the right thing for our borrowers.

Household Unsigned Page 2902 - 2905

 2902 

Trial Day 14 4/20/2009 5:54:00 AM

 1 We make good loans. They're not only legal loans, but are

 2 beneficial for our customers."

 3 Do you see that?

 4 A. I do, sir.

 5 Q. Okay.

 6 Let's look at our old friend Plaintiffs' 1397 for

 7 that date, February 6. I think we're on the same page, Page

 8 14.

 9 And you see the inflation there is -- it's a 3.66

10 number in a whole column of 3.66 numbers. Not the entire

11 page, but a bunch of them, right?

12 A. Correct.

13 Q. Again, inflation did not increase upon the release of this

14 press release, right?

15 A. That's right.

16 Again, we're talking only about the first method.

17 Q. Only the first model.

18 A. That's right.

19 Q. Absolutely. I promise you when I switch to the second

20 model, I'll tell you. I have it in my notes.

21 A. Okay.

22 Q. First model. I agree with you.

23 Now, let's look at your event study, Plaintiffs'

24 1391, for the same date, which is February 6, '02, which will

25 be Page 33.

Household Unsigned Page 2902 - 2905

 2903 

Trial Day 14 4/20/2009 5:54:00 AM

 1 Did you find any statistically-significant price

 2 increase that resulted in inflation from any disclosure on

 3 February 6th, 2002?

 4 A. Statistically it's giving price decrease, but not

 5 increase.

 6 Q. But not increase?

 7 A. Correct.

 8 Q. That's exactly my point. I'm asking about an increase.

 9 Not an increase?

10 A. Okay. Not an increase.

11 Q. In other words, whatever Ms. Hayden-Hakes said, it did not

12 artificially -- it did not increase the amount of artificial

13 inflation?

14 A. That's correct. Decreased it.

15 MR. KAVALER: Plaintiffs' Demonstrative 14.

16 BY MR. KAVALER:

17 Q. Plaintiffs have shown this jury the National Mortgage News

18 article which appeared on February 18, 2002. And that's --

19 what it says there is -- "Our first take on the allegations of

20 predatory lending raised in the ACORN action is that it is not

21 a significant issue, not indicative of any widespread problem

22 and certainly not a concern that it will spread elsewhere?"

23 It's attributed to David Schoenholz. Do you see

24 that?

25 A. Can I just -- in my previous answer, when I said it

Household Unsigned Page 2902 - 2905

 2904 

Trial Day 14 4/20/2009 5:54:00 AM

 1 decreased it in this first method, and no effect, I want to

 2 correct my previous answer.

 3 Q. Okay.

 4 I'll be clear with you. You be clear with me.

 5 Again, I'm not trying to trick you.

 6 A. You have been clear --

 7 Q. The first method.

 8 A. You have been clear --

 9 Q. The first method.

10 A. -- I misspoke. I wanted to correct it.

11 Q. Okay. And I appreciate that.

12 And, just, the point is previously you said it

13 decreased it. Now, you're saying it was flat. My question

14 was: It didn't increase it, correct?

15 A. Correct.

16 Q. All right.

17 So, from my point of view, both your answers are the

18 same. You've now made it more accurate, but it's still not an

19 increase --

20 A. Okay.

21 Q. -- correct?

22 A. Correct, yes.

23 Q. Thank you.

24 Okay. Let's look at this date (indicating). We'll

25 go to Plaintiffs' 1397. The date is February 18, 2002. We

Household Unsigned Page 2902 - 2905

 2905 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 167 of 245
Trial Day 14 4/20/2009 5:54:00 AM

 1 for the same date, which is August 14. It's on Page 42.

 2 Did you find a statistically-significant price

 3 increase that resulted in inflation on August 14, 2002?

 4 A. No, sir, I did not.

 5 Q. This is -- plaintiffs have shown this jury the Origination

 6 news article that appeared on August 23, 2002, down at the

 7 bottom here (indicating). It quotes Megan Hayden-Hakes

 8 saying, "We clearly follow all state and federal laws and

 9 regulations."

10 Let's look at your Exhibit 1397 for August 23, 2002.

11 It's on Page 17.

12 No change in artificial inflation there?

13 A. Correct.

14 Q. Let's look at your Event Study, which is Plaintiffs' 1391

15 for the same date, August 23, 2002, which is at Page 45.

16 Did you find any statistically-significant price

17 increase that resulted from inflation on August 23, 2002?

18 A. No, sir, I did not.

19 Q. Plaintiffs have shown this jury the National Mortgage News

20 article that appeared on September 2, 2002, in which they say,

21 "A Household spokeswoman said that she is not aware of any

22 pending enforcement actions or settlement talks."

23 Let's look at 1397 for September 2. That would be on

24 Page 17.

25 And, again, this is one of those where there is no

Household Unsigned Page 2918 - 2921

 2918 

Trial Day 14 4/20/2009 5:54:00 AM

 1 September 2, but there is a September 3.

 2 And you see the inflation is -- is that a negative

 3 number there, minus 209?

 4 A. Yes, that's a negative number.

 5 Q. And the day before is a minus number -- a minus 88?

 6 A. Correct.

 7 Q. All right.

 8 So, is this -- I'm not good with two negative

 9 numbers. Is that inflation increasing or decreasing?

10 A. That is inflation decreasing.

11 Q. Okay.

12 And let's look at your 1391, for the same date that's

13 your Event Study. And this is September 2 or September 3.

14 It's on Page 46.

15 Did you find a statistically-significant price

16 increase that resulted in inflation on September 2 or, in this

17 case, on September 3, 2002?

18 A. No, sir, I did not.

19 Q. Okay.

20 We're done with that.

21 Now, you told me something earlier about when the

22 inflation first came into the stock. Let's go back to 139 and

23 start on Page 1.

24 A. Okay.

25 Q. Okay?

Household Unsigned Page 2918 - 2921

 2919 

Trial Day 14 4/20/2009 5:54:00 AM

 1 A. I have it.

 2 Q. Okay.

 3 This chart was prepared by you?

 4 A. Correct.

 5 Q. You were retained by the plaintiffs' counsel?

 6 A. That's correct.

 7 Q. They instructed you in whatever manner they instructed

 8 you.

 9 They gave you whatever assignment they gave you?

10 A. I wouldn't really say they gave me an assignment, other

11 than to analyze the economic evidence of the case, in light of

12 their allegations and all the other relevant facts and

13 circumstances.

14 Q. You and I never discussed this case until this afternoon?

15 A. That's correct.

16 Q. Okay.

17 So, I had nothing to do with what date you picked

18 here to start on?

19 A. That's fair.

20 Q. All right.

21 You picked it or they picked it -- someone picked it?

22 A. Well, the only thing that they picked, I would say, is the

23 choice of the relevant period.

24 Q. Okay.

25 A. Beginning on July 30th, 1999.

Household Unsigned Page 2918 - 2921

 2920 

Trial Day 14 4/20/2009 5:54:00 AM

 1 Q. Okay.

 2 And the first day you put on here is July 30, 1999.

 3 A. Correct.

 4 Q. And you performed your various analytical processes and

 5 came up with artificial inflation of 7.97?

 6 A. That's right.

 7 Q. Okay.

 8 So, according to your analysis, it was there on July

 9 30th?

10 A. Well, I think I've explained this numerous times, sir. It

11 was there at the time that the jury concludes the first false

12 and misleading statement was made; the first time the jury

13 concludes that when Household was describing how it was

14 going -- it was committed to a growth strategy, it would

15 continued to grow; its lending and its accounting were proper.

16 The first time that they conclude that a statement of

17 that nature was false; the inflation, based on my calculation

18 of the effect of specific disclosures after November 15th,

19 based on this particular methodology; my calculation suggests

20 that the price would have fallen by $7.97, which is why the

21 inflation is listed at $7.97.

22 But the first date -- I want to emphasize, again --

23 is a function of what the jury concludes when the first false

24 statement occurred, if they conclude a false statement

25 occurred.

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 2921 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 168 of 245
Trial Day 14 4/20/2009 5:54:00 AM

 1 And I put "July 30th" on my exhibit because it's the

 2 first possible date.

 3 But if the jury concludes it's not July 30th, it's

 4 August 16th or October 19th -- or whatever date the jury

 5 picks -- the exhibit can be used. It's just that every date

 6 prior to the first date that the jury picks as the first false

 7 and misleading disclosure, there is no artificial inflation.

 8 And artificial inflation begins on whatever the jury decides

 9 the first date is of a false and misleading disclosure.

10 Q. I don't disagree with you, sir, that you've given that

11 answer before. I'm trying to find out if there's any other

12 answer I can get.

13 Let me try this: You said it was the first possible

14 date. There couldn't have been inflation before then?

15 A. Not as I understand the relevant period in this case,

16 correct.

17 Q. Okay.

18 But what causes inflation is a false statement by the

19 company?

20 A. Not just a false statement. A false statement that

21 investors have a right to recover on; and, as I understand the

22 allegations in this case currently, the first possible date

23 where that might be the case is July 30th, 1999.

24 Q. Well, was there any inflation on July 29th?

25 A. If there's no claim of any right to recover on July 29th,

Household Unsigned Page 2922 - 2925

 2922 

Trial Day 14 4/20/2009 5:54:00 AM

 1 then I would say, by definition, there's no inflation on July

 2 29th.

 3 Q. So, who makes the claim to recover, the plaintiffs?

 4 A. I think it's a combination of the plaintiffs, coupled with

 5 rulings by the Judge -- the Court -- as to what's a

 6 permissible claim that can go forward, that could be tried in

 7 a trial like this.

 8 Q. So, this is some legal concept?

 9 A. It's a -- I said a -- combination of what the plaintiffs

10 claim and what the Court allows.

11 So, it's a combination of the allegations in the

12 particular case; the facts and circumstances of the case; and,

13 the rulings of the Court -- of the Judge -- which, of course,

14 control everything.

15 Q. So, it's not driven by one of these documents here

16 (indicating)?

17 A. Well, that's not right, either. It's just the universe of

18 potential documents that could be false and misleading has to

19 be within the relevant period of the case.

20 And, as I understand it, the relevant period in this

21 case begins on July 30th, 1999. Whether that's the first date

22 on whether there's a false and misleading disclosure or a duty

23 to correct a prior disclosure, again, that's really for the

24 jury to decide, as instructed by the Court.

25 Q. You just said the false and misleading statement has to be

Household Unsigned Page 2922 - 2925

 2923 

Trial Day 14 4/20/2009 5:54:00 AM

 1 within the relevant period, correct?

 2 A. Correct.

 3 Q. And don't you agree that the defendants' alleged

 4 misrepresentations have to have artificially inflated the

 5 price of the stock also within the relevant period?

 6 A. Yes. In order for there to be a recovery, in order for

 7 investors to be harmed, that must be true. I agree.

 8 Q. Then there wasn't any inflation before Household made a

 9 false statement?

10 A. There cannot be any inflation before the jury concludes

11 that a statement that Household made was false or a time when

12 Household had an obligation to correct misstatements that were

13 made in the past, correct.

14 Q. It sounds like we're saying slightly different things.

15 I said there can't be any false statement -- any

16 inflation before Household makes a false statement; and, you

17 said there can't be any inflation before the jury concludes

18 Household made a false statement.

19 So, now in the last two minutes you've told me the

20 reason we can't figure out where the inflation came from or

21 when because it's either something the plaintiffs did, that

22 causes it, or something that his Honor did that causes it, or

23 something the jury's going to do that causes it.

24 What I'm trying to find out is: Is there anything

25 Household did that caused the inflation in the first place?

Household Unsigned Page 2922 - 2925

 2924 

Trial Day 14 4/20/2009 5:54:00 AM

 1 A. Yes, there's no inflation unless Household makes a false

 2 and misleading statement or has a duty to correct a false and

 3 misleading -- or a statement that became false and misleading

 4 as a result of new information.

 5 Q. What date did Household first make the false and

 6 misleading --

 7 MR. KAVALER: Withdrawn.

 8 BY MR. KAVALER:

 9 Q. What date did Household first make the false and

10 misleading statement that caused the inflation to go into the

11 stock?

12 A. I've tried to be very clear about this, sir. That's a

13 determination for the jury to make.

14 I know the claim that the plaintiffs have made is

15 that the first relevant date is July 30th, 1999; but, the

16 decision of when a state- -- when the first statement that

17 Household made was false, that's a determination for the jury,

18 that I expressed no opinion on.

19 Q. Understood.

20 Professor, you know I have the highest respect for

21 you personally and professionally. I mean no disrespect.

22 I take your last answer to have been, "I can't say"?

23 A. I can't -- you're correct. I do not have an opinion as to

24 when the first false and misleading statement was. That's a

25 determination for the jury.

Household Unsigned Page 2922 - 2925

 2925 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 169 of 245
Trial Day 14 4/20/2009 5:54:00 AM

 1 quoted in a dollar amount without this adjustment that you've

 2 shown on all these charts for what it really should be, right?

 3 A. Well, respectfully, sir, I'm not sure what you mean by

 4 what it really should be. That's really a mischaracterization

 5 of what I said.

 6 Q. Fair enough. Turn to Plaintiffs' Demonstrative 137, where

 7 you've got a residual price change of minus $1.86.

 8 Do you see that?

 9 MR. BURKHOLZ: Could you show him where it is?

10 MR. KAVALER: Sure.

11 BY MR. KAVALER:

12 Q. It's tab three, which just happens to be the first one

13 in --

14 A. I'm looking at it on the screen.

15 Q. If I were looking at the price of the stock, closing price

16 on the New York Stock Exchange, on November 15, 2001, I

17 wouldn't see minus $1.86, would I?

18 A. You would not, for the reasons that I explained at length.

19 Q. And if I were watching Bloomberg News, I wouldn't see

20 minus $1.86, would I?

21 A. Probably not.

22 Q. And if I were reading the Wall Street Journal in the

23 morning or the New York Times or the Chicago Tribune, I

24 wouldn't see minus $1.86?

25 A. I suspect you would not.

Household Unsigned Page 2958 - 2961

 2958 

Trial Day 14 4/20/2009 5:54:00 AM

 1 Q. And if I were looking at my brokerage statement if I owned

 2 Household stock, I wouldn't see minus $1.86?

 3 A. No. But in all those documents, you might see discussion

 4 of how the stock price movement compared with the overall

 5 market and movements of other firms in the industry. That's a

 6 very common measure that Household itself used in its proxy

 7 statements that's, in effect, required by SEC regulations.

 8 Q. I'm making --

 9 A. So this is just a quantification of what investors look at

10 all the time.

11 Q. I'm making a very small point, sir. Stocks are quoted in

12 a price which is the price usually that they close on the New

13 York Stock Exchange, right?

14 A. Correct. But there's also frequently comparisons of stock

15 prices and prices of the overall -- movement to the overall

16 market, movements in the industry. That's what Household

17 itself disclosed in its proxy statement. This is just a

18 quantification of that relationship.

19 Q. You've been very patient all afternoon while we talked

20 about your first model. I want to turn to your second model.

21 A. Okay.

22 Q. This is the model with the leakage, right?

23 A. Okay.

24 Q. Okay. And you agree there are a bunch of stock price

25 movements that were significant under your aggression analysis

Household Unsigned Page 2958 - 2961

 2959 

Trial Day 14 4/20/2009 5:54:00 AM

 1 that were not attributable to fraud-related disclosures, don't

 2 you?

 3 A. There were probably some, both positive and negative, but

 4 a lot of the significant movements were combined disclosures

 5 of -- they had some fraud-related aspect and then they had

 6 some other aspect in addition to the fraud-related aspect.

 7 Q. And were there some, any, that had no fraud-related

 8 aspect?

 9 A. It's a matter of judgment as to whether something has a

10 fraud-related aspect or not. I would say there were a few,

11 but there were also, I would say, a significant number of the

12 statistically significant movements that had this combined

13 aspect.

14 But just to be clear, under the leakage model,

15 whether they did -- whether they were purely fraud related,

16 combined fraud related or not at all fraud related, they were

17 all included in the leakage model.

18 Q. I understand. But my point is there was some of all

19 three?

20 A. You probably could -- that would probably be a fair

21 statement.

22 Q. Okay. Now, this is not on either model. This is a

23 general question.

24 A. Okay.

25 Q. You assumed that the defendants did make false statements

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 2960 

Trial Day 14 4/20/2009 5:54:00 AM

 1 during the relevant period, didn't you?

 2 A. That's correct.

 3 Q. Okay. Can you do this: Assume the opposite. Assume the

 4 defendants did not make any false statements during the

 5 relevant period.

 6 A. Okay.

 7 Q. Okay. The stock price still declined in the real world,

 8 didn't it?

 9 A. The stock price declined in the real world, that's

10 correct.

11 Q. Why?

12 A. I think the stock price declined for a variety of

13 different factors. I touched on this in my testimony. There

14 was a -- a big part of the stock price decline that's --

15 according to both of my calculations that's attributable to

16 some combination of market industry and non-fraud-related

17 effects. And also some percentage of the stock price decline

18 that's attributed -- attributable -- excuse me -- to the

19 market learning correct information about Household's

20 predatory lending practices, its re-aging policies and the

21 effect of the restatement.

22 Q. And giving the last part of that answer, you were still

23 holding to the assumption I asked you to make that there's no

24 fraud?

25 A. I'm sorry. Well, if there's no fraud, then obviously

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 2961 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 170 of 245
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 1 fraud played no role in the decline in Household's stock

 2 price.

 3 Q. Let me try it again. I want to be clear.

 4 I'm asking you to assume there is no fraud.

 5 Nevertheless, in the real world, there's no question, the

 6 price of Household's stock went down?

 7 A. No. But let me ask you a clarifying question, sir,

 8 because your question, at least to me, is a little bit

 9 confusing.

10 Are you assuming that the stock price would have been

11 the same in the real world, in addition to there being no

12 fraud? Because I would say if there's no fraud, the stock

13 price likely would have been different.

14 Q. Okay. This is where I always got in trouble in law school

15 because I don't know how to assume things that are different

16 than the real world very well.

17 I'm assuming there was never any fraud.

18 A. Never any fraud in the stock price is identical to the way

19 it was in the real world.

20 Q. Sure. It went down? It went down significantly?

21 A. Okay.

22 Q. Okay. Why?

23 A. Well, here's the problem: You're asking me a

24 hypothetical, to make assumptions in a hypothetical; and

25 you're asking me in the real world what happened in the

Household Unsigned Page 2962 - -

 2962 

Trial Day 14 4/20/2009 5:54:00 AM

 Fischel - redirect

 2963

 1 hypothetical. And there's sort of a contradiction in terms in

 2 the question.

 3 Q. All right. I take your point. Let me try it this way:

 4 What we know for a fact is the stock price went down, correct?

 5 A. Correct.

 6 Q. What you've done here yesterday and today is give us your

 7 opinion as to why?

 8 A. Based on the assumption that I've explained numerous

 9 times, correct.

10 Q. Exactly. And the assumption was -- the assumption -- you

11 assumed because these gentlemen here asked you to -- that

12 there was fraud?

13 A. Correct, because if there's no misstatements, then there's

14 no case, so there's nothing to quantify.

15 Q. Thank you, Professor Fischel. I couldn't have said it

16 better myself.

17 MR. KAVALER: No further questions, your Honor.

18 THE COURT: You may redirect.

19 REDIRECT EXAMINATION

20 BY MR. BURKHOLZ:

21 Q. Let me ask you a simple question. Counsel showed you all

22 these public statements that Household made. Do you need to

23 find a statistically significant price increase on the dates

24 of these public statements in order for there to be inflation

25 in Household's stock under your specific disclosure model?

Household Unsigned Page 2962 - -

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 Fischel - redirect

 2964

 1 A. No. That's really the whole point, that the reason why

 2 there's no statistically significant price increase in

 3 response to all those disclosures where there's big red Xs is

 4 because in each one of those disclosures, Household was

 5 reaffirming its growth strategy. It was denying any

 6 wrongdoing. It was defending its accounting.

 7 When it started later to say that there were

 8 problems, it was either because of a computer glitch or

 9 localized to a particular employee or a group of employees.

10 Because Household made all those statements and reiterated the

11 same statements from the beginning until later in the class

12 period, of course, the market didn't react because Household

13 is saying the same thing over and over and over again.

14 It was only when the truth began to come out when

15 market participants began to disbelieve the denials, when the

16 complaints from regulators started to pile up, the lawsuits

17 started to pile up, the complaints from customers started to

18 pile up, Household had to restate its accounting, had to

19 restate and provide a correct disclosure of its re-aging

20 practices and the effect of those re-aging practices, when

21 there was leakage of the very damaging Washington department

22 of financial insurance report, rumors of the effect of the

23 settlement and the combined effect of what that would mean for

24 Household's growth strategy, it was only then when you started

25 to see statistically significant price reactions because the

Household Unsigned Page 2962 - -

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Trial Day 14 4/20/2009 5:54:00 AM

 Fischel - redirect

 2965

 1 market was learning the truth.

 2 In fact, the market became so negative, as I

 3 indicated, that the price went below what my true value line

 4 indicated, demonstrating that investors who bought at the end

 5 basically bought at a bargain price and, at least under both

 6 of my quantifications, are not entitled to any compensation.

 7 Q. Is it a common method to focus on the disclosures later in

 8 the relevant period to quantify the inflation due to the

 9 statements Household made earlier in the relevant period?

10 A. It's completely standard because if what you're trying to

11 do is measure the value of the truth and the truth is not

12 provided early in the period, the only way to analyze the

13 effect of the truth is to see what the effect on investors and

14 market prices is when the truth comes out. And by doing that,

15 you're able to make a judgment, as I did, about what the,

16 quote, true value of the stock would have been at the

17 beginning had the truth been told the entire time.

18 Q. Now, counsel showed you the beginning of the relevant

19 period, July 30, 1999, and then the first statement on August

20 16, 1999, the 10-Q.

21 Do you remember that?

22 A. I do.

23 Q. And do you have an understanding that the beginning of the

24 relevant period, July 30, 1999, is due to a Court decision in

25 this case?

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 Fischel - redirect

 2966

 1 A. That's my understanding.

 2 Q. Okay. And if the first false statement that plaintiffs

 3 allege in this case is on August 16, 1999, how would you

 4 calculate inflation on that date?

 5 A. I would calculate inflation the same way as of August 16,

 6 but there would be no inflation from July 30 to August 15. So

 7 as I indicated, where I have an entry for artificial inflation

 8 from July 30 to August 15, the correct way to interpret the

 9 exhibit is just to replace the inflation number with a zero

10 for every day until August 16. And beginning on August 16, it

11 would then be $7.97 under the first method.

12 Q. And your assumption that plaintiffs will be able to prove

13 the various statements are false and misleading during the

14 relevant period is a common assumption that you make in your

15 field?

16 A. Again, it's a necessary assumption because the

17 responsibility of determining whether a statement is false or

18 not, that's not for an expert witness, for any expert witness.

19 It's not for an economist. It's really a function for the

20 jury to decide.

21 MR. BURKHOLZ: Can we bring up Plaintiffs' Exhibit

22 1391. Can we have the switch, your Honor.

23 If we can turn to the third page.

24 If we can highlight the last date on the bottom,

25 November 12, 1999.

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 Fischel - redirect

 2967

 1 BY MR. BURKHOLZ:

 2 Q. That's the date of a public statement by Household.

 3 Do you see the three bars on the right?

 4 A. I do.

 5 Q. What does that signify?

 6 A. That it's a statistically significant day.

 7 Q. And that was a statistically significant price increase on

 8 that date, correct?

 9 A. Correct.

10 Q. Why didn't you take, under your specific disclosure model,

11 the $7.97 and just add the dollar and two cent inflation on

12 that date?

13 A. Because, as I indicated, to be one of my 14 specific

14 disclosures, three criteria had to be met. There had to be an

15 event, there had to be a statistically significant stock price

16 reaction and I had to believe to a reasonable degree of

17 certainty that the event caused the stock price reaction.

18 So what I did with respect to dates like November 12

19 was that there was a statistically significant price increase.

20 I could have included that date to increase the amount of

21 inflation, but I didn't do it because I wasn't confident that

22 there was a fraud-related disclosure on that date that was

23 responsible for that price increase, which is why in my first

24 method of quantification I only had 14 dates, as opposed to

25 every date where there was a statistically significant price

Household Unsigned Page - - -

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 Fischel - redirect

 2968

 1 movement.

 2 Q. And under your leakage model, the inflation varies

 3 throughout the relevant period?

 4 A. Correct, from the first day to the last day. It varies

 5 every day.

 6 Q. And then counsel was quizzing you on some of the specific

 7 disclosure dates. I want you to go back to the September 23,

 8 2002, date, which is tab 16 in your binder.

 9 A. Okay. I have it.

10 Q. And he asked you whether or not that date related to

11 predatory lending. And I think you said it did. But you

12 didn't look at the actual report. Can you look at the second

13 page of the report?

14 A. I have it.

15 Q. Okay. Do you see the first paragraph -- at the end of the

16 first paragraph on the second page, Moreover, skepticism

17 regarding the company's rapid portfolio growth, particularly

18 within the auto business, and mounting credit quality concerns

19 related to Household's loan workout and re-aging practices

20 have also been a drag on the stock.

21 A. Correct, I see that. The correct answer would have been

22 this disclosure related both to predatory lending practices as

23 well as a re-aging, not just to predatory lending.

24 Q. And, finally, it's your opinion that the leakage model is

25 a better estimate of inflation from Household's false

Household Unsigned Page - - -

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 Fischel - recross

 2969

 1 statements as alleged by the plaintiffs than your specific

 2 disclosure model?

 3 A. Yes, because of all the evidence of the leakage of the

 4 Washington department of financial insurance report, as well

 5 as all the leakage of the settlements, the possible

 6 settlements, and all the criticism of Household's predatory

 7 lending practices, as well as its re-aging policies.

 8 MR. BURKHOLZ: Nothing further at this time, your

 9 Honor.

10 THE COURT: Recross.

11 MR. KAVALER: Briefly, your Honor.

12 (Brief pause.)

13 THE WITNESS: Be careful.

14 RECROSS EXAMINATION

15 BY MR. KAVALER:

16 Q. Anything happens a lot of lawyers that will throw their

17 cards at my body.

18 Let me just pursue what you just told Mr. Burkholz.

19 He directed your attention to November 12, 1999. Let's look

20 at Plaintiffs' Exhibit 1397, page two. That's your list

21 there.

22 A. 13 -- which --

23 Q. 1397 is this one, the one with the columns.

24 A. Okay. Let me find it. I've got 1395.

25 Q. The one you and I were looking at all day.

Household Unsigned Page - - -

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EXHIBIT 9 

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4-21-09 Trial Day 15 4/21/2009 5:47:00 AM

 Aldinger - direct

 3021

 1 Q. Okay.

 2 And that was for the third quarter of 1999; is that

 3 right? Household's results?

 4 A. I'm looking for it here, but I assume so.

 5 Q. Do you have the hard copy in front of you, sir?

 6 A. I do.

 7 Oh, it says third quarter. I see that.

 8 Q. And you were quoted in this press release; is that right?

 9 A. That's right.

10 Q. In the second paragraph of the press release, you're

11 quoted; is that correct?

12 A. That's correct.

13 Q. And you said, "Our quarter reflects excellent performance

14 in all our businesses, with the key drivers being accelerating

15 internal receivable and revenue growth," right?

16 A. Yes.

17 Q. Okay.

18 And this press release also contains financial

19 results; doesn't it, sir?

20 A. Yes, it does.

21 Q. In fact, there's a chart at the back of the press release

22 that sort of summarizes the financial results, correct?

23 A. There is one, yes.

24 Q. And your Chief Financial Officer, Mr. Schoenholz, would

25 have reviewed the press release before it was issued by

Household Unsigned Page - - -

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 Aldinger - direct

 3022

 1 Household International, correct?

 2 A. That's right.

 3 Q. And we also talked about how the press release contains

 4 Household International's two-plus delinquency statistics,

 5 correct?

 6 A. That's correct.

 7 Q. And you told me that the reason that the two-plus

 8 statistics are in the press release is because that was an

 9 important metric or number for investors, correct?

10 A. That's correct.

11 Q. And if you turn to -- do you have a document we looked at,

12 as well, it's Exhibit 461? It's a memo to you from Mr. Gilmer

13 dated January 18th, 1999.

14 Do you have that in front of you?

15 A. Yes, I do.

16 Q. Okay.

17 And this was a memo that Mr. Gilmer wrote to you

18 regarding the operating results at HFC, correct?

19 A. That's correct.

20 Q. A results memo, right?

21 A. Yes. A monthly memo.

22 Q. And this wasn't the only monthly memo that you received

23 from Mr. Gilmer, was it?

24 A. No, he would routinely send me monthly memos.

25 Q. In fact, you received them in 2000, correct?

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 Aldinger - direct

 3023

 1 A. Yes.

 2 Q. 2001, as well, right?

 3 A. Yes.

 4 Q. And if you'd turn to the page of that monthly memo that

 5 Mr. Gilmer sent you ending 333.

 6 And the heading on the top of that page -- are you

 7 there yet?

 8 A. I'm not there yet.

 9 Q. Just let me know when you get there.

10 A. I will.

11 (Brief pause.)

12 BY THE WITNESS:

13 A. I'm there.

14 BY MR. DROSMAN:

15 Q. And you see the heading? It's underlined in a larger font

16 at the top of the page?

17 A. I do.

18 Q. And it's entitled, "Key Performance Measures HFC Consumer

19 Credit Quality."

20 Do you see that?

21 A. Yes, I do.

22 Q. And, then, if you look, there's a box below that; and, at

23 the top of the box, there's a heading "Two-Plus

24 Delinquencies."

25 Do you see that?

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 3024

 1 A. Yes, I see that.

 2 Q. And you understood the two-plus delinquency was a key

 3 performance measure, don't you?

 4 A. It was a measure, yeah.

 5 Q. You don't understand it was a key performance measure?

 6 A. Well, it's important, but I don't know that I'd call it

 7 one of the key. The key for me would be reserves and revenues

 8 and expenses and things that hit the bottom line.

 9 Q. You understood that Mr. Gilmer entitled it a key

10 performance measure, right?

11 A. Well, yes, he did, you're right.

12 Q. Okay.

13 And this was a memo that you received, right?

14 A. Absolutely.

15 Q. You read, correct?

16 A. Yeah.

17 Q. And you saw the two-plus delinquency, at least according

18 to Mr. Gilmer, was a key performance measure, right, sir?

19 A. Yes.

20 Q. And Mr. Gilmer performed -- reported this key performance

21 measure, the two-plus delinquency number, in the other growth

22 memos that you received, right?

23 A. I don't know. I'd have to see that.

24 Q. Okay.

25 Why don't we take a look at some other memos that

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 3025

 1 Mr. Gilmer sent you. I'll show you what has been marked as

 2 Plaintiffs' Exhibit 482 for identification. I'll provide a

 3 copy to counsel.

 4 (Document tendered to counsel and the witness.)

 5 BY THE WITNESS:

 6 A. Thank you.

 7 BY MR. DROSMAN:

 8 Q. Plaintiffs' Exhibit 482 is a memo to you, right, sir?

 9 A. Yes, it is.

10 Q. And this is from Gary Gilmer, correct?

11 A. Correct.

12 Q. And it's dated August 14th, 2000, right, sir?

13 A. Correct.

14 Q. And it's entitled, "July Results," right?

15 A. Yes.

16 MR. DROSMAN: Plaintiffs offer Exhibit 482 into

17 evidence.

18 THE COURT: It's admitted.

19 (Plaintiffs' Exhibit No. 482 received in evidence.)

20 BY MR. DROSMAN:

21 Q. If you look at the first page of Mr. Gilmer's memo -- by

22 the way, you received this memo, right, sir?

23 A. Yes.

24 Q. You reviewed it when you received it, right?

25 A. Yes.

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 3026

 1 Q. Okay.

 2 And there's some bullet points. Do you see those?

 3 A. I do.

 4 Q. And if you look at the bullet point -- the sixth bullet

 5 point down, do you see that?

 6 A. Yes.

 7 Q. And it reads, "Two-plus delinquency was 13 million over

 8 our forecast, but our delinquency percentage was right on

 9 forecast due to higher than expected receivables."

10 Do you see that, sir?

11 A. I see that.

12 Q. So, you understood that Mr. Gilmer was reporting

13 delinquency numbers to you in July of 2000 -- or August of

14 2000, right, sir?

15 A. Yes.

16 Q. And if you go ahead and look at the page ending 780 --

17 A. Yes.

18 Q. -- there's a single heading on that page.

19 Do you see it, sir?

20 A. Yes.

21 Q. It's "Two-Plus Delinquency," right?

22 A. Correct.

23 Q. You reviewed that in August of 2000, right?

24 A. I would have skimmed it.

25 Q. You would have skimmed it?

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 3027

 1 A. Yeah.

 2 Q. Okay.

 3 And when you skimmed it, you would have seen that

 4 there were various Skip-a-Pay programs aimed at lowering

 5 delinquency, right, sir?

 6 A. I see that, yes.

 7 Q. Okay.

 8 And you understood that Mr. Gilmer reported the

 9 delinquency numbers to you in his results memo in 2001; don't

10 you, sir?

11 A. Are we back to the one over here?

12 Q. No. I'm just asking you a question.

13 A. Well -- I'm sorry, ask the question, again.

14 Q. Sure.

15 You understood that Mr. Gilmer reported the two-plus

16 delinquency number to you in the results memos in 2001, don't

17 you?

18 A. Oh, during 2001. Yes.

19 Q. Okay.

20 A. Okay.

21 Q. By the way, there's a series of headings on this page --

22 in this memo. Do you see them?

23 A. I do.

24 Q. Probably eight or nine of them, right, throughout this

25 memo?

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 3028

 1 A. You mean on other pages now, we're talking about?

 2 Q. Right.

 3 The memo is four or five pages long?

 4 A. Yes.

 5 Q. Probably eight or nine headings, right?

 6 A. Yeah.

 7 Q. One of them's two-plus delinquency, right, sir?

 8 A. Yes.

 9 Q. Is there a loss reserves heading on this page -- in this

10 memo?

11 A. No, I don't think there is.

12 Q. So, we've established that the two-plus delinquency number

13 was a key performance measure that Mr. Gilmer reported to you,

14 right, sir?

15 A. It's a key performance member -- number -- yeah.

16 Q. Let's take a look back at the press release that we were

17 discussing, the one dated October 19th, 1999.

18 A. I'm sorry, the first one?

19 Q. It's Plaintiffs' Exhibit 506.

20 Do you have it in front of you?

21 A. I've got three now. I'm reconciling.

22 I've got it.

23 Q. Okay.

24 And we talked about the two-plus delinquency

25 statistic that's reported in there, correct?

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 3041

 1 Q. I'll show you what's been marked as Plaintiffs' Exhibit

 2 503 for identification.

 3 (Document tendered to counsel and the witness.)

 4 BY MR. DROSMAN:

 5 Q. Plaintiffs' Exhibit 503 is a pres release issued by

 6 Household International, right?

 7 A. Yes.

 8 Q. A press release you reviewed before it was issued,

 9 correct?

10 A. Yes.

11 Q. It was issued on July 18th, 2001, right?

12 A. Yes.

13 Q. And it contains the second quarter 2001 results for

14 Household International, correct?

15 A. Yes.

16 MR. DROSMAN: Plaintiffs offer Exhibit 503 into

17 evidence.

18 THE COURT: It's admitted.

19 (Plaintiffs' Exhibit No. 503 received in evidence.)

20 BY MR. DROSMAN:

21 Q. I'll show you what's been marked as Plaintiffs' Exhibit

22 978 for identification.

23 (Document tendered to counsel and the witness.)

24 BY MR. DROSMAN:

25 Q. Plaintiffs' Exhibit 978 is a press release issued by

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 3042

 1 Household International, correct?

 2 A. Correct.

 3 Q. Issued on October 17th, 2001?

 4 A. Correct.

 5 Q. Containing the third quarter 2001 results for Household

 6 International?

 7 A. Yes.

 8 Q. You know, we've got a court reporter who is taking

 9 everything down. So, it's important that you wait until I

10 finish my question before you answer. Is that okay?

11 A. It is okay.

12 Q. Okay.

13 MR. DROSMAN: Plaintiffs offer Exhibit 978 into

14 evidence.

15 THE COURT: It's admitted.

16 (Plaintiffs' Exhibit No. 978 received in evidence.)

17 BY MR. DROSMAN:

18 Q. I'll show you what's been marked as Plaintiffs' Exhibit

19 706 for identification.

20 (Document tendered to counsel and the witness.)

21 BY MR. DROSMAN:

22 Q. Plaintiffs' Exhibit 706 is a press release issued by

23 Household International, correct?

24 A. Correct.

25 Q. And Exhibit 706 was issued by Household on January 16th,

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 3043

 1 2002, right?

 2 A. Yes.

 3 Q. And in this press release, Household provided investors

 4 with fourth quarter and yearend 2001 financial results,

 5 correct?

 6 A. Yes.

 7 Q. Now, let's take a look at the four -- you issued four

 8 press releases reporting quarterly results during -- or for --

 9 the year 2001, correct?

10 A. Yes.

11 Q. In those press releases, you included the two-plus

12 delinquency statistic in each one of them, didn't you?

13 A. Yes, we did.

14 Q. And when you reported this two-plus delinquency ratio, it

15 didn't include loans that had been re-aged and were current

16 because of that re-age, correct?

17 A. Correct.

18 Q. You didn't tell people in the press releases what

19 percentage of loans had been re-aged before arriving at the

20 two-plus statistic, did you?

21 A. No.

22 Q. You didn't tell people that Household misrepresented the

23 interest rate on the loans it gave to customers in the press

24 releases, did you?

25 A. No.

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 3044

 1 Q. You didn't tell people that Household's sales reps were

 2 quoting customers an effective rate in these press releases,

 3 did you?

 4 A. No.

 5 Q. You didn't tell people that sales reps from Household were

 6 giving a good faith estimate to customers with ranges from

 7 zero to more than $6,000 in these press releases, did you?

 8 A. No.

 9 Q. You didn't tell people that sales reps were misleading

10 borrowers about the amount of points and fees on their loans

11 in these press releases, did you?

12 A. No.

13 Q. And you didn't tell people in these press releases that

14 the sales reps misled borrowers into purchasing insurance, did

15 you?

16 A. No.

17 Q. I'll show you what's been marked as Plaintiffs' Exhibit

18 635 for identification.

19 MR. DROSMAN: Copy for counsel.

20 (Document tendered to counsel and the witness.)

21 MR. DROSMAN: Doctors.

22 Q. Plaintiffs' Exhibit 635 is a press release issued by

23 Household International, correct?

24 A. Yes.

25 Q. Issued on April 17th, 2002, right?

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 3045

 1 A. Yes.

 2 Q. In which Household reported the first quarter 2002

 3 financial results, correct?

 4 A. Yes.

 5 MR. DROSMAN: Plaintiffs move Exhibit 635 into

 6 evidence.

 7 THE COURT: Admitted.

 8 (Plaintiffs Exhibit No. 635 received in evidence.)

 9 BY MR. DROSMAN:

10 Q. I'll show you what's been marked as Plaintiffs' Exhibit

11 788 for identification.

12 MR. DROSMAN: Copy for counsel.

13 (Document tendered to counsel and the witness.)

14 BY MR. DROSMAN:

15 Q. Plaintiffs' Exhibit 788 is a press release that was issued

16 by Household International, correct?

17 A. Yes.

18 Q. Issued on July 17th, 2002, correct?

19 A. Yes.

20 Q. And it contained the second quarter 2002 results for

21 Household International; is that right?

22 A. Yes.

23 MR. DROSMAN: Plaintiffs offer Exhibit 788 into

24 evidence, your Honor.

25 THE COURT: Admitted.

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 3046

 1 (Plaintiffs' Exhibit No. 788 received in evidence.)

 2 BY MR. DROSMAN:

 3 Q. So, we've got now the first two quarters of 2002, press

 4 releases for those, right?

 5 A. That's correct.

 6 Q. And in each of those press releases, Household reported

 7 its two-plus delinquency statistic, correct?

 8 A. Yes.

 9 Q. And when you reported this two-plus delinquency ratio in

10 those press releases, it didn't include loans that had been

11 re-aged and were current because of that re-age, correct?

12 A. That's correct.

13 Q. You didn't tell people in those two press releases what

14 percentage of loans had been re-aged before arriving at the

15 two-plus statistic, did you?

16 A. No.

17 Q. You didn't tell people in those press releases that

18 Household misrepresented the interest rate on the loans it

19 gave to customers, did you?

20 A. No.

21 Q. You didn't tell people in those press releases that

22 Household sales reps were quoting customers an effective rate,

23 did you?

24 A. No.

25 Q. You didn't tell people in those press releases that

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 3047

 1 Household sales representatives were giving a good faith

 2 estimate to customers with ranges from zero to more than

 3 $6,000, did you?

 4 A. No.

 5 Q. You didn't tell people in those press releases that

 6 Household sales reps were misleading borrowers about the

 7 amount of points and fees on their loans, did you?

 8 A. No.

 9 Q. And you didn't tell people in those press releases that

10 Household sales reps were misleading borrowers into purchasing

11 insurance, did you?

12 A. No.

13 Q. Let me show you what's been marked as Plaintiffs' Exhibit

14 227 for identification.

15 (Document tendered to counsel and the witness.)

16 BY MR. DROSMAN:

17 Q. Plaintiffs' Exhibit 227 is a press release issued by

18 Household International, right?

19 A. Yes.

20 Q. Issued on August 14th, 2002?

21 A. That's right.

22 Q. And you reviewed this press release before it was issued,

23 correct, sir?

24 A. I did.

25 MR. DROSMAN: Plaintiffs move Exhibit 227 into

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 3048

 1 evidence.

 2 THE COURT: Admitted.

 3 (Plaintiffs' Exhibit No. 227 received in evidence.)

 4 BY MR. DROSMAN:

 5 Q. This press release isn't a press release reporting the

 6 quarterly results for Household, though, is it?

 7 A. No, it's not.

 8 Q. This is a different kind of press release, correct?

 9 A. That's correct.

10 Q. This is a press release in which Household reported that

11 it was restating its financials, correct?

12 A. That's correct.

13 Q. And, in fact, you're quoted in this press release

14 restating financials, correct?

15 A. Well, I'd like to look at that; but, yes, I believe so.

16 Is there a question?

17 Q. I asked you if you were quoted in the press release.

18 A. Yes.

19 Q. Okay.

20 And if you take a look at the third paragraph of the

21 press release, it reads, "Aldinger continued, 'Household has

22 undergone a thorough review of our financial statements and

23 related accounting policies in conjunction with our new

24 auditors, KPMG LLP. As part of this review, we have

25 determined to adopt certain revisions to the accounting

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 3049

 1 treatment of our Mastercard/Visa co-branding and affinity

 2 credit card relationships, and a credit card marketing

 3 agreement with a third party.'"

 4 Do you see that?

 5 A. I do.

 6 Q. So, you were aware of this restatement when it was issued,

 7 correct, sir?

 8 A. Yes, I was.

 9 Q. You knew about the circumstances, right?

10 A. I think they're described here.

11 Q. Well, you know what it involved, right? The restatement?

12 A. Yes.

13 Q. And you knew that, for example, the AFL-CIO credit card

14 agreement was one of those affinity credit card relationships,

15 correct?

16 A. That's right.

17 Q. And you knew that General Motors' credit card was one of

18 the affinity credit card relationships that was being

19 restated, correct?

20 A. Yes.

21 Q. And you knew that the affinity credit card relationship

22 involved a restatement for the Union Privilege credit card

23 agreement, correct?

24 A. Those were the contracts involved in the restatement.

25 Q. So, AFL, GM and Union Privilege or UP, correct?

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 3050

 1 A. Correct.

 2 Q. And, then, there was a third-party marketing agreement,

 3 right?

 4 A. That's correct.

 5 Q. And you knew that was with Kessler, right?

 6 A. Right.

 7 Q. And, then, you continued, "We are restating earnings to

 8 reflect the cumulative impact of the adjusted items over the

 9 period in which the adjustments are applicable as determined

10 in consultation with our new auditors at KPMG. The

11 restatement associated with these matters has the effect of

12 reducing second quarter earnings per share by one cent or

13 approximately one percent and EPS for the six months ended

14 June 30, 2002, by six cents or 2.8 percent, versus what was

15 reported in the company's earnings release of July 17, 2002."

16 Do you see that?

17 A. I do.

18 Q. And you understood that that was the case, right?

19 A. Yes.

20 Q. Okay.

21 Now, you understand that Household's management is

22 responsible for the accuracy of Household's financial

23 statements, correct?

24 A. I do.

25 Q. You understand that Household's management is also

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 3051

 1 responsible for determining whether to restate Household's

 2 financial statements, right?

 3 A. I'm not sure I agree with that simplistically.

 4 Q. Well, let me ask you this: Household's auditors --

 5 A. It's an oversimplification.

 6 Q. Household's auditors can't make the decision to restate

 7 Household's financial statements, can they?

 8 A. No.

 9 Q. That decision is made by management, correct?

10 A. It is made by management.

11 Q. And you understand that a restatement occurs when a

12 company violates GAAP in its financial statements and, then,

13 must later correct those financial statements, right, sir?

14 A. I'm not sure I understand "violates GAAP." I think what

15 we had here was a disagreement between two auditors on how

16 credit card expenses should be allocated. And, so, I'm not

17 sure that we -- I -- understand "violated GAAP."

18 Q. So, your testimony -- I just want to make sure I

19 understand it -- is that when you restated your financials,

20 you hadn't violated GAAP?

21 A. I think our view was that we adopted the view of the

22 current auditors, which was different from the prior auditors.

23 And the auditors disagreed.

24 Q. That wasn't my question, whose view you adopted or didn't

25 adopt.

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 3052

 1 A. Yeah.

 2 Q. My question was simply --

 3 A. Yeah.

 4 Q. -- when you restated your financials, you understood that

 5 it was because you had violated GAAP and needed to adjust your

 6 financials, correct?

 7 A. I understood that there was a mistake based upon a

 8 different view from a different accounting firm. There was no

 9 intent to violate anything. I don't understand that at all.

10 Q. I didn't ask you whether you intended to violate GAAP or

11 didn't intend to violate GAAP, right? You understand that?

12 A. Well, I didn't understand that.

13 Q. Okay.

14 I'm asking you whether a company restates when it

15 violates GAAP and needs to adjust its earnings. That's what a

16 restatement is; isn't it, sir?

17 A. I'm not sure I'd define it that way, but -- it's a change

18 in your numbers based upon a different interpretation at a

19 different time.

20 Q. Let's take it this way: Can you restate if you didn't

21 violate GAAP under any circumstances?

22 A. I don't know. I'm not an accountant. So, I'll stop

23 there.

24 Q. Let me just ask you, can you think of a single

25 circumstance in which you could restate if you didn't violate

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 3053

 1 GAAP?

 2 A. I just don't like the word "violate." There's a

 3 difference of opinion here that was totally -- different

 4 opinion from two major accounting firms, two of the largest

 5 accounting firms in the world, who -- and we adopted the view

 6 of the firm that was our auditor at the current time and --

 7 Q. I didn't ask you about a difference of opinion, right?

 8 A. Well --

 9 Q. Did I ask you about a difference of opinion?

10 A. I don't know where this is going. The GAAP treatment

11 before was different from the GAAP treatment after, and I

12 guess that's where I'd end.

13 Q. Okay.

14 And you understood that the reason Household restated

15 its financials is because it had violated GAAP?

16 I'm not asking you whether it intended to. Just --

17 A. I don't know that I'd use that term, "violated." We had a

18 different GAAP treatment.

19 Q. And you understand that in order to restate the

20 financials, the error must be material, correct?

21 A. Yes.

22 Q. You couldn't restate the financials if the error was

23 immaterial, correct?

24 A. That's correct.

25 Q. I'll show you what's been marked as Plaintiffs' Exhibit

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 3054

 1 712 for identification.

 2 (Document tendered to counsel and the witness.)

 3 BY MR. DROSMAN:

 4 Q. Plaintiffs' Exhibit 712 is a Report of Examination from

 5 the Office of the Comptroller of the Currency, correct?

 6 A. Correct.

 7 Q. And it was sent to Household Bank; is that right?

 8 A. Yes.

 9 MR. DROSMAN: Plaintiffs offer Exhibit 712 into

10 evidence.

11 THE COURT: Admitted.

12 (Plaintiffs' Exhibit No. 712 received in evidence.)

13 BY MR. DROSMAN:

14 Q. If you look at the second page of this Report of

15 Examination, it says the Report of Examination is strictly

16 confidential.

17 Do you see that? It's in all capitals at the top of

18 the page -- second page?

19 A. Yes, I do.

20 Q. You understood that this wasn't being issued to the

21 public, correct?

22 A. That's correct.

23 Q. And, then, if you look at the third page of the document,

24 page ending 454, it says the examination start date was

25 October 19th, 1998.

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 3055

 1 Do you see that?

 2 A. I see that.

 3 Q. Okay.

 4 Now, turn to the fourth page, page ending 481. And

 5 there's two bullet points or arrows at the end of the bottom

 6 of the page.

 7 Do you see those?

 8 A. I do.

 9 Q. If you look at the second -- or the last bullet point, it

10 says that, "Management should determine if these cash versus

11 accrual timing and recognition differences are in keeping with

12 FASB Statement of Concepts No. 3 concerning accrual accountin

13 and expenses."

14 Do you see that?

15 A. Yes.

16 Q. And you understand that the FASB Statement of Concepts No

17 3 is part of the generally accepted accounting principles or

18 what we refer to as GAAP, right?

19 A. I believe so.

20 Q. Okay.

21 And, then, it continues: "The unique and complex

22 terms of the UP and GM programs result in numerous deferred

23 expenses and income."

24 Do you see that?

25 A. I do.

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 3056

 1 Q. And the UP refers to Union Privilege, right?

 2 A. That's correct.

 3 Q. And the GM refers to General Motors, right?

 4 A. That's correct.

 5 Q. These were the -- these were two of the three credit card

 6 affinity relationships that Household ended up restating --

 7 A. Yes.

 8 Q. -- several years later, correct?

 9 A. Actually, we didn't restate the credit card relationships.

10 We restated the expenses related to those --

11 Q. Okay.

12 A. -- whether they should be lumped in one place or spread

13 out over several years. That was the issue.

14 Q. Right.

15 And those --

16 A. Yeah.

17 Q. You restated the expenses related to the UP contract,

18 correct?

19 A. That's correct.

20 Q. And the GM contract, correct?

21 A. That's correct.

22 Q. And, then, it continues: "In several cases, the timing

23 and recognition of certain fees (expenses) differ materially

24 from actual cash payments."

25 Correct?

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 3057

 1 A. That's what it says.

 2 Q. And this was a document, like you told me, that had been

 3 received by Household in 1998, correct?

 4 A. That's correct.

 5 Q. I'll show you what's been marked as Plaintiffs' Exhibit

 6 1248 for identification.

 7 (Document tendered to counsel and the witness.)

 8 BY MR. DROSMAN:

 9 Q. Mr. Aldinger, you recognize Plaintiffs' Exhibit 1248,

10 right?

11 A. Yes, I do.

12 Q. And this was a presentation that you made, wasn't it?

13 A. Yes, it was.

14 Q. On December 4th, 2001, correct?

15 A. That's what it says, yes.

16 MR. DROSMAN: Plaintiffs offer Exhibit 1248 into

17 evidence.

18 THE COURT: It's admitted.

19 (Plaintiffs' Exhibit No. 1248 received in evidence.)

20 BY MR. DROSMAN:

21 Q. You made this -- these are PowerPoint slides, right?

22 A. That's correct.

23 Q. And what you do is you'd show up at this Goldman Sachs

24 conference and you'd give a PowerPoint presentation to the

25 folks there, right?

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 3058

 1 A. That's right.

 2 Q. These were big institutional investors and analysts,

 3 right?

 4 A. That's right.

 5 Q. Okay.

 6 And this was the presentation that you gave on

 7 December 4th, 2001, right?

 8 A. Certainly the front page of it. I haven't looked at the

 9 rest, but I assume it is.

10 Q. You don't have any reason to believe that this is an

11 inaccurate representation of what you gave?

12 A. I would -- I don't. I don't have any reason to believe

13 that.

14 Q. Okay.

15 Go ahead, if you would, and turn to the -- there's

16 small print "PFG." Do you see that Bates number down at the

17 bottom right?

18 A. Yes, I do.

19 Q. Turn to the page ending 158, if you would.

20 And the top slide there --

21 A. I'm not there yet.

22 Q. Okay. Let me know when you arrive.

23 (Brief pause.)

24 BY THE WITNESS:

25 A. I'm there.

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 3059

 1 BY MR. DROSMAN:

 2 Q. Okay.

 3 The top slide there, you ask the question, "Have

 4 Household's accounting policies impacted results?" Right?

 5 A. That's right.

 6 Q. And, then, you proceeded to answer that question to all of

 7 the investors and analysts present, correct?

 8 A. That's right.

 9 Q. And in the third bullet point, you wrote, "Chargeoff

10 policies are appropriate for our target market and result in

11 proper loss recognition," right?

12 A. That's right.

13 Q. And that's what you told folks, right?

14 A. Yes.

15 Q. And, then, you said, "All policies have been consistently

16 applied and realistically report results," right?

17 A. That's right.

18 Q. And when you said "policies" there, you were telling folks

19 about your accounting policies, weren't you?

20 A. Yes.

21 Q. I'll show you what's been marked as Plaintiffs' Exhibit

22 759 for identification.

23 (Document tendered to counsel and the witness.)

24 BY MR. DROSMAN:

25 Q. Plaintiffs' Exhibit 759 consists of a number of documents

Household Unsigned Page - - -

 - 

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 Aldinger - direct

 3060

 1 related to the Compensation Committee at Household

 2 International, correct?

 3 A. I'd like to look.

 4 Q. Why don't you turn to the third page of the document.

 5 A. Is this to members of Board Compensation Committee? Wher

 6 are you?

 7 Q. Third page, page ending 028.

 8 A. 28.

 9 Q. Do you see that there's a Compensation Committee meeting

10 agenda set forth there?

11 A. Yes.

12 Q. You were on the Board of Directors, right, sir?

13 A. Yes.

14 Q. In fact, you were the Chairman of the Board of Directors;

15 is that right?

16 A. That's right.

17 Q. You've seen Compensation Committee meeting agendas befo

18 correct?

19 A. Yes, I have.

20 Q. Okay.

21 And this was one that was an agenda for January 29th,

22 2001, correct?

23 A. That's what it says.

24 MR. DROSMAN: Plaintiffs offer Exhibit 759 into

25 evidence.

Household Unsigned Page - - -

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 180 of 245
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 1 people independently made a decision on underwriting.

 2 For us, it was a very valuable benefit.

 3 Q. Sorry.

 4 Let's go to Page 13.

 5 A. Yeah.

 6 Q. "Better Credit Skills."

 7 Do you see that heading, Mr. Aldinger?

 8 A. I do.

 9 Q. Better credit skills than whom, sir?

10 A. Well, again, than the competition and peer groups we

11 looked at, other consumer finance companies.

12 Q. What does it mean when you said here, "Prepared for

13 slowdown over last two years"?

14 A. Well, each year we do a plan, and it's a best guess on

15 where the world is going to go; and, we had been seeing a

16 slowdown. We thought we were probably early and wrong. We

17 thought it was going to slow down faster than it did. But we

18 began to do things like more real estate loans and take

19 actions that related to the belief that things would get

20 worse.

21 Q. Now, the next -- the second -- bullet down says, "Doubled

22 Collectors." Do you see that?

23 A. Yes.

24 Q. Tell the jury what you told the Goldman Sachs conference

25 about that subject, please?

Household Unsigned Page 3109 - 3112

 3109 

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 1 A. Well, I can't remember the exact number, but we had

 2 thousands of collectors. And when we double them, it's a big

 3 investment.

 4 But the investment is to get more people in place who

 5 can work with our customers and do it earlier. And that --

 6 it's a known way of lowering your chargeoff over time.

 7 Q. There's been some suggestion in this case, Mr. Aldinger,

 8 that Household's business model was to make loans to people

 9 who couldn't pay them back; and, then, once they couldn't pay

10 them back, make them another loan they couldn't pay back; and,

11 then, shuffle them all around.

12 As I understood that testimony, the company never got

13 paid back; is that true?

14 A. I have to say I heard the same thing you did and didn't

15 agree with any of it.

16 You know, we made a lot of loans and we had some that

17 went bad, but it was never the intent that you'd ever want to

18 make a loan that goes bad. It can never be good for the

19 company to have a bad loan.

20 Q. And did the company collect most of its loans?

21 A. We collected most of our loans; and, as we have said --

22 Q. More than 50 percent?

23 A. A lot more than 50 percent.

24 Q. 60?

25 A. 90-plus percent or more -- high 90s, probably.

Household Unsigned Page 3109 - 3112

 3110 

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 1 Q. That's the name of the game, right? You lend money --

 2 A. Absolutely.

 3 Q. -- you charge interest, you collect?

 4 A. Absolutely.

 5 Q. And what you have --

 6 A. And what you have to do is respond to the changing

 7 environment, which we did.

 8 Q. When you doubled the number of collectors, I think you

 9 said there were thousands of collectors?

10 A. I believe so, yes.

11 Q. So, when you doubled them, there were twice as many

12 thousands?

13 A. Yes.

14 And I'm sorry, I can't remember the exact number we

15 had before and after. Remember, the company had 33,000

16 people. It was a pretty big company. But we did have

17 thousands of collectors.

18 Q. And what is the impact of doubling the number of

19 collectors, who collect loans from people who aren't paying on

20 the company's delinquency rate?

21 A. It lowers the delinquency rate dramatically.

22 Q. And it costs money to hire more collectors?

23 A. Yes, it does.

24 Q. Then why do you spend the money?

25 A. We spend the money because it's a good investment. We'd

Household Unsigned Page 3109 - 3112

 3111 

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 1 rather have fewer delinquent and fewer chargeoff.

 2 Q. You're not looking to have chargeoffs?

 3 A. I'm sorry?

 4 Q. You're not looking to have chargeoffs?

 5 A. Exactly.

 6 Q. You spend money to prevent chargeoffs?

 7 A. Absolutely.

 8 Q. Turn to the next page, Page 14. This asks the question:

 9 "Are Household reserves adequate?"

10 Do you see that?

11 A. I do.

12 Q. Tell us what a reserve is?

13 I think you started to say this this morning and

14 Mr. Drosman said he didn't want to hear it. Tell us now.

15 A. Yes. Reserves are the thing that I focused on most for

16 the company; and, basically, what we would do is put aside

17 reserves in each quarter to anticipate our losses. And that

18 affects the net income. The more reserves you put up, the

19 lower your profits are. They go down.

20 So, over time, we were very conservative and we made

21 the point at this conference that our reserves were at an

22 all-time high of $3.6 billion, and that we had grown our

23 reserves over the five-year period by $2.1 billion.

24 Our reserve ratios were also higher.

25 Q. I'm sorry, I didn't mean to interrupt.

Household Unsigned Page 3109 - 3112

 3112 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 181 of 245
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 1 Go ahead.

 2 A. No, no, I think in the end the point I'd make is our

 3 reserves were very strong.

 4 Q. I just want to be sure that I'm following you.

 5 Give me an example using numbers. You said the more

 6 you put your reserves up, the lower your profits are.

 7 Explain to me -- give me an example using just a

 8 hundred dollars. How does that work?

 9 A. Well, Dave Schoenholz would do this a lot better than me.

10 So, he's going to critique me, and I am getting worried about

11 that.

12 Q. A lot better than I.

13 A. Basically, what you have is over the course of the year,

14 you earn revenues and income; and, that comes down to your net

15 income. And when you put a reserve to the side, it reduces

16 that net income that you report for shareholders. It reduces

17 your EPS.

18 So, if you had a hundred dollars of net income and

19 you put ten dollars of reserves aside, that would become 90

20 dollars of net income.

21 Q. And the reserves are held aside against what possibility?

22 A. Well, against the possibility that things turn badly.

23 Q. So, then --

24 A. And losses go up.

25 Q. Let's go into the future.

Household Unsigned Page 3113 - 3116

 3113 

4-21-09 Trial Day 15 4/21/2009 5:47:00 AM

 1 Things turn badly and you have losses in some

 2 subsequent period?

 3 A. Yes.

 4 Q. What do you do? You go back and apply the reserves to the

 5 losses?

 6 A. Well, in each quarter you're always adding reserves to

 7 reflect what's going on, but you want to build a base that

 8 protects against a worse scenario.

 9 Q. To avoid surprise?

10 A. Correct.

11 Q. Does the marketplace like surprise?

12 A. No, the marketplace hates surprises.

13 Q. Going back to Page 14 of this exhibit, I think you went

14 through the first two bullet points. Maybe -- you may have

15 touched upon the third.

16 Let's look at the fourth: "Build Reserves For Nine

17 Consecutive Quarters."

18 What were you referring to there?

19 A. Well, the last nine consecutive quarters, we were

20 effectively adding reserves more than our chargeoffs were.

21 So, that's a relatively conservative and good thing

22 to do.

23 And I guess I would make one other point here, which

24 is in the entire eight years that I was CEO of Household, we

25 never, ever had a one-time reserve addition because our

Household Unsigned Page 3113 - 3116

 3114 

4-21-09 Trial Day 15 4/21/2009 5:47:00 AM

 1 reserves were inadequate. So, that's what I focused on.

 2 Q. And the last sub-bullet on this page says, "Reserves Are

 3 Now At 107 Percent of Chargeoff." What does that mean?

 4 A. That means that we, effectively, have put aside -- we have

 5 107 percent of what the actual losses were for the year.

 6 Q. Is that a conservative thing?

 7 A. It is.

 8 Q. Now, what I don't see anywhere on this page, Mr. Aldinger,

 9 is any reference to two-plus.

10 Is the concept of two-plus included somewhere in this

11 page?

12 A. Well, ultimately, two-plus gets incorporated into

13 reserves. I mean, effectively, the way it works is that

14 whatever your two-plus number -- and, again, Dave would be a

15 lot better at this than me -- but there's a formula that they

16 put in, that they put reserves in, related to what your

17 two-plus are.

18 And, then, we add another bit of reserves for re-age;

19 and, then, we add a third kind of reserve called "Judgmental

20 Reserves," which looks at the whole economy and the world and

21 unemployment and what we think might impact the company goin

22 forward.

23 So, we have three kind of pieces that go into that

24 reserve calculation and, effectively, that's the way we look

25 at it.

Household Unsigned Page 3113 - 3116

 3115 

4-21-09 Trial Day 15 4/21/2009 5:47:00 AM

 1 So, delinquency is clearly an element and one of them

 2 that we account for; but, as a CEO, you know, that wasn't my

 3 main measure that I looked at. I looked at reserves.

 4 Q. Did I hear you say that part of the reserves is attributed

 5 to re-aging?

 6 A. That's my understanding, yes. Yes.

 7 Q. So, all this talk we've heard about re-aging throughout

 8 this case is accounted for or addressed by a part of the

 9 reserve?

10 A. That's correct.

11 Q. Let's turn to Page 17.

12 I think you said a few minutes ago, when we looked at

13 a chart that showed us Household's performance in a weak

14 economy, you said in a few pages, we'll see the contrast.

15 This one says, "Household's performance in strong economy."

16 Do you see that?

17 A. Yes.

18 Q. Okay.

19 Tell us what the bullet point margins narrowed means?

20 By that, I mean, what did you say at the Goldman Sachs

21 conference about that subject?

22 A. Well, the point I was making is that you, effectively,

23 manage the company slightly different in a weak environment

24 than you do in a strong environment; and, that there are

25 likely different outcomes in those environments.

Household Unsigned Page 3113 - 3116

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 182 of 245
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 1 So, in a strong environment, it's easier to grow.

 2 People are fully employed, people are spending money, the

 3 economy is good, it's easier to grow your loan portfolio.

 4 Q. And, then, it says --

 5 A. But what happens -- the next point -- is when, if the

 6 economy is good, there are more people who want to make loans

 7 because it's safer. And, so, what happens is more lenders are

 8 trying to make loans, the margins go down. Pricing goes down.

 9 The cost of loans goes down in a good economy. And that

10 lowers yours profit.

11 But the flip side is the next bullet, which is: "In

12 A Good Economy, Chargeoffs Improve," because more people are

13 working and the economy is better and they're able to pay

14 their debts.

15 So, in a good economy, you get good growth, you get

16 thinner pricing and lower losses.

17 The bad economy is just the reverse. Your growth

18 slows down, fewer people are able to qualify for a loan,

19 margins get higher -- because there's a scarcity of lenders --

20 and, finally, chargeoffs get worse because the economy is

21 worse.

22 So, those are the key factors in different

23 environments.

24 Q. What did you tell the people at the Goldman Sachs

25 conference about the next bullet point, "Reserves Increased

Household Unsigned Page 3117 - 3120

 3117 

4-21-09 Trial Day 15 4/21/2009 5:47:00 AM

 1 $525 Million"?

 2 A. Well, again, that was the comment for the year, I think,

 3 net increase.

 4 Q. And, again, is that a good thing to do?

 5 A. It's a good thing to do.

 6 Q. All right.

 7 Turn to the next page, Page 18. And this is

 8 Household's performance in a weak economy.

 9 Is this in contrast to the prior slide?

10 A. Yes, that's the contrast. And what you see here is

11 whereas we grew 22 percent in the good economy, we only grew

12 12 percent in loans in a weak economy.

13 Q. But I see in the fourth bullet, once again, you increased

14 your reserves even in a bad economy, just not as much?

15 A. That's correct.

16 Q. Were you always -- were you trying to always increase your

17 reserves?

18 A. Yes. That -- that -- in my view, is a good thing.

19 Q. Again, the two-plus number is in the reserves somewhere?

20 A. Yes, it is.

21 Q. Let's turn to the Outlook for 2002 on Page 19.

22 Do you see that?

23 A. Yes.

24 Q. I notice, once again, it says, "Reserves Increasing."

25 Is that something you talked about at the Goldman

Household Unsigned Page 3117 - 3120

 3118 

4-21-09 Trial Day 15 4/21/2009 5:47:00 AM

 1 Sachs conference?

 2 A. Yes, I did.

 3 Q. What did you say?

 4 A. Well, I mean, essentially, I used this bullet point. I

 5 said that, effectively, we would grow slower, we're going to

 6 see a weak economy and we're going to continue to increase our

 7 reserves over time, which made investors feel good.

 8 Q. So, you were always increasing reserves in a good economy

 9 or a bad economy?

10 A. Yes.

11 Q. And, respectively, you planned to increase reserves?

12 A. That's correct.

13 Q. Why is there always this focus on increasing reserves?

14 A. Why? It's just a conservative way to run the company.

15 Living -- growing up in the banking world, I learned

16 that reserves are good.

17 Q. Let's turn to Page 21.

18 The question you ask on this page is: "Have

19 Household's accounting policies impacted results?"

20 Was this one of the pages you said you added on that

21 Sunday, to respond to the Barron's article that you learned

22 about when Mr. Streem interrupted your dinner Saturday night?

23 A. Yes, it was.

24 Q. Tell us what this page -- tell us what you told the

25 Goldman Sachs conference about this page.

Household Unsigned Page 3117 - 3120

 3119 

4-21-09 Trial Day 15 4/21/2009 5:47:00 AM

 1 A. I think we wanted to make two points. One was that the

 2 changes occurred in 1996 and the article occurred in 2001.

 3 So, if your accounting changes were really going to

 4 help your company a whole lot, it certainly would have shown

 5 up in the five years -- you know, that it had been done five

 6 years ago -- this wasn't something we did a day before.

 7 And the second point of the article was, "Well, and

 8 the investors didn't know. You secretly changed your

 9 accounting on the investors."

10 Well, if you go forward on the next slide, what we

11 were able to do was to pull up a statement I made in 1996 to a

12 big investor conference call, which said -- if we go to -- I

13 don't want to jump ahead. Do you have a --

14 Q. Well, I was asking you to walk me through Slide No. 21.

15 Have you finished telling us all the things you said

16 at the Goldman Sachs conference about this slide?

17 A. Yes.

18 I mean, I think they're self-explanatory.

19 Q. Okay.

20 Let's go to Slide 22. The heading this time is:

21 "Has Household 'Hidden' Changes in Accounting Policies?"

22 Who had accused Household of hiding its changes in

23 accounting policies?

24 A. Well, there was one analyst who, for years, was negative

25 on us, by the name of Bill Ryan. And the article in Barron's

Household Unsigned Page 3117 - 3120

 3120 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 183 of 245
4-21-09 Trial Day 15 4/21/2009 5:47:00 AM

 1 Q. Okay. Mr. Aldinger, in issuing the financial reports that

 2 were later restated, in other words, the original reports for

 3 all of those years in reliance on the advice of Arthur

 4 Andersen, did you have any intent to defraud anybody?

 5 A. No.

 6 Q. Did you have any intent to misstate anything?

 7 A. Never.

 8 Q. Did you have any intent to do anything other than get the

 9 numbers right?

10 A. No.

11 Q. Did you think you were getting the numbers right?

12 A. I did think we were getting the numbers right.

13 Q. Did you have a reasonable level of comfort that all the

14 people involved in this process were on board with you?

15 A. Yes, I did.

16 Q. Did anyone ever say to you this is wrong, we shouldn't be

17 saying this?

18 A. No.

19 Q. Let's talk a little bit about restructuring.

20 We've heard a lot about it's either called

21 restructuring or re-aging.

22 Are you okay?

23 A. Yes. I'm okay.

24 Q. Can you tell us why Household engaged in the business

25 practice of restructuring loans in the first place?

Household Unsigned Page 3241 - 3244

 3241 

4-21-09 Trial Day 15 4/21/2009 5:47:00 AM

 1 A. Re-aging was a process that was -- was going on for

 2 decades, 70 or 80 years since the beginning of the company,

 3 well before I got there, and it really had two purposes. One

 4 was to fulfill our customer proposition; that is, to work with

 5 customers, keep them in their houses longer.

 6 Second was to maximize cash flow, and we believed

 7 that re-aging did both of those things.

 8 Q. Tell us how -- address each of those things in order.

 9 First start with the customers. Tell us how re-aging helps

10 the customers.

11 A. Well, re-aging in many cases allows the customers to stay

12 in their homes. And, again, I'm not an expert on how we

13 re-age or what the techniques are, what the best approach is;

14 but generally speaking, it allows the customers to continue to

15 pay their loans when they wouldn't be able to do it if we

16 applied bank rules.

17 Q. When you say bank rules, what are you referring to?

18 A. Well, bank rules, something called FFIEC, they're much

19 more strict on what you can do in terms of re-aging and how

20 long you can let customers go without paying.

21 Q. Did they apply to Household's Consumer Lending Unit?

22 A. They did not.

23 Q. Did they apply to Wells Fargo?

24 A. They did.

25 Q. And the second thing you said is re-aging helps to

Household Unsigned Page 3241 - 3244

 3242 

4-21-09 Trial Day 15 4/21/2009 5:47:00 AM

 1 maximize cash flow. Please explain what you meant by that,

 2 sir.

 3 A. Well, it means we believe that by re-aging, ultimately we

 4 get more money than if we didn't re-age.

 5 Q. Explain how that works.

 6 A. By -- by re-aging and allowing the customer to continue to

 7 pay his bills as opposed to walking away, we get more money

 8 than we would otherwise if he walked away.

 9 Q. My fault for not being clear.

10 What would the alternative be to re-aging? If you

11 didn't re-age, what would you do?

12 A. Well, for example, on a home if we didn't re-age, what

13 would happen is you'd have more foreclosures. And from a

14 company -- certainly from a customer standpoint, that's

15 terrible; but from a company's standpoint, it's terrible

16 because you can only lose money on a foreclosure. The way our

17 policy was if there was any gain, it went to the customer.

18 But in 90 percent of the times you ever foreclosed or

19 99 percent of the times, you basically lost money because you

20 had the cost of selling it and you had the cost of maintaining

21 it.

22 And so we never wanted to own a home if we could, and

23 to the extent we could re-age, encourage the customer to stay

24 paying, that was a good thing. Good for the customer, they

25 kept their house; good for us, we got more cash flow, and we

Household Unsigned Page 3241 - 3244

 3243 

4-21-09 Trial Day 15 4/21/2009 5:47:00 AM

 1 didn't get the house back.

 2 Q. Now, again, Mr. Aldinger, you understand that the theory

 3 of the people who are suing you is that Household used

 4 restructuring policies to conceal its credit quality or

 5 manipulate its earnings in some fashion.

 6 Do you understand that's what they say?

 7 A. I understand that that's what they say.

 8 Q. Did Household do any such thing?

 9 A. No. I don't -- I don't agree with that at all.

10 Q. Are you sure?

11 A. I'm sure.

12 Q. How come?

13 A. Because I have faith in the team that runs the business,

14 because we've seen that the cash flow is maximized by doing

15 re-aging. We know that it certainly helps customers, and it

16 fulfills our goals; and, most importantly, because in the end

17 it's all about reserves, and we reserved for re-age, we

18 reserved enough to protect this company.

19 Q. So if what investors' counsel is suggesting for the last

20 several weeks had been going on down at the level they like to

21 focus on, down at the low level --

22 A. Right.

23 Q. -- how would you have been able to see that up at the

24 level you were at?

25 A. Well, I wouldn't see what happens day-to-day. You know,

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 Aldinger - cross

 3330

 1 Q. What did Household do to respond to this increased

 2 headline risk?

 3 A. Well, we tried to be active with regulators. We tried to

 4 be active with investors to tell them our story. But it was a

 5 challenging time.

 6 Q. Did you add any employees? Did you beef up any of your

 7 departments?

 8 A. Well, we obviously -- after adding Jim Kauffman and his

 9 team, we added a significant number of people to the

10 compliance effort. We basically gave him an open budget.

11 Q. What does an open budget mean?

12 A. That means he could hire as many people as he wanted to,

13 no questions asked. We said to him we want you to absolutely

14 have control of whatever you need.

15 Q. Is that a normal thing in the company?

16 A. No. That's rare.

17 Q. Why did you do that?

18 A. Because I thought compliance was the really important

19 issue of the day.

20 Q. Did you give any other departments any -- an open budget?

21 A. Not that I recall.

22 Q. Now, Mr. Aldinger, you've heard some testimony in this

23 case from various people about a settlement with the attorneys

24 general?

25 A. Yes, I have.

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 Aldinger - cross

 3331

 1 Q. Let's see if we can put that in context. What led up to

 2 that scenario? Who were the attorneys general? Let's start

 3 with that.

 4 A. Well, each state has an attorneys general in it; and I

 5 think as you've heard in earlier discussions, at some point

 6 the State of Washington was very active in discussing their

 7 issues with Household. And there were two or three states,

 8 Minnesota being one, which eventually grew to be a group of 12

 9 to 15 attorneys general that began discussing with Household

10 the idea of trying to make some kind of a compromise or a

11 settlement with that group.

12 Q. And did there come a time where you got involved in

13 directing Household's efforts in connection with that subject?

14 A. Yes.

15 Q. Why?

16 A. Well, I thought it was the most important issue in front

17 of us. Clearly, the concerns about regulatory issues were

18 dragging our stock price down, were hurting the morale of the

19 company, were distracting the executives, and so I thought at

20 some point it made sense, if we could, to reach a settlement

21 potentially with the AGs even though we may not have agreed

22 that we had done anything wrong.

23 Q. When you first got involved, how many attorneys general

24 were gathered together opposing Household?

25 A. I think it was between 12 and 15. And at that point, I

Household Unsigned Page - - -

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 Aldinger - cross

 3332

 1 authorized my team to go in and begin discussions with them.

 2 Q. Were you prepared to come to a resolution with these 12 to

 3 15 attorneys general?

 4 A. As it later turned out, we decided not to do that.

 5 Q. Did you make that decision?

 6 A. I did.

 7 Q. What did you want to do instead?

 8 A. Instead I wanted to get a global settlement. My view was

 9 that settling with 12 to 15 of the most aggressive AGs didn't

10 make sense because investors would still have concerns. There

11 still would be the potential for somebody else to come in and

12 litigate, and so we told the team that if we're going to have

13 any settlement, it had to be global with all of the AGs where

14 we did business, and we did business in roughly 48 states.

15 Q. So the idea to expand from 12 or 13 to 48 was yours?

16 A. That's correct.

17 Q. Did you find that there were attorneys general who had no

18 interest in participating?

19 A. Yes, I did. When we first sent the team out to talk to

20 other attorneys general about joining the compromise and the

21 settlement, the reaction of many of the AGs was --

22 MR. DROSMAN: Objection, hearsay.

23 BY MR. KAVALER:

24 Q. Focus on what you said. Did you give instructions to your

25 people with regard to bringing in other attorneys general?

Household Unsigned Page - - -

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 Aldinger - cross

 3333

 1 A. Yes, I did.

 2 Q. What did you say to them?

 3 A. I said that unless we could get a global settlement of 48

 4 AGs, we wouldn't do any settlement.

 5 Q. Was there a time when you had to authorize certain

 6 activities to cause additional attorneys general to join the

 7 team that was opposing Household?

 8 A. Yes.

 9 Q. What did you authorize?

10 A. What I authorized was our government relations team to go

11 out with some outside lawyers and we also hired a number of

12 former attorneys general to come out and work with us and

13 approach the other attorneys general around the country and

14 ask them to join in this --

15 MR. DROSMAN: Objection, hearsay.

16 BY MR. KAVALER:

17 Q. Are these the instructions you gave?

18 A. These are the instructions I gave.

19 THE COURT: Overruled.

20 BY MR. KAVALER:

21 Q. Please continue, Mr. Aldinger.

22 A. And so we asked them to go out and approach the attorneys

23 general and try to sign up effectively 48 of the AGs. And

24 ultimately, in order to get broader participation, we actually

25 had to go out and we offered to pay each of the attorneys

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 1 generals' offices $200,000 per attorneys general per state to

 2 join in this settlement negotiation.

 3 So literally we went and ultimately spent $7 million

 4 bringing in all the states. About 35 states that did not

 5 originally participate and did not originally want to

 6 participate, we brought them in ourselves and actually had to

 7 expend $7 million of our own money of what we called

 8 administrative expenses to get them on board.

 9 One of the ironic parts or the funny parts to this is

10 that at the end, we got calls from two other attorneys

11 general, one in South Dakota and one in Alaska, where we had

12 no customers, no business, no offices, and they said they

13 wanted to join too.

14 MR. DROSMAN: Objection, hearsay.

15 THE COURT: I'll sustain the objection.

16 BY MR. KAVALER:

17 Q. Mr. Aldinger, is there a practice in the business of being

18 a regulated industry where the regulated company reimburses

19 the regulator for the cost of investigating the company?

20 A. Yes, there is.

21 Q. And is that the model that you were following here?

22 A. Absolutely.

23 Q. The $200,000 was a measure of the expense an attorney

24 general might incur in having to send his people to these

25 meetings?

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 1 A. Absolutely.

 2 Q. Did there come a time when you achieved a critical mass of

 3 attorneys general?

 4 A. Yes.

 5 Q. Once you had the critical mass, Mr. Aldinger, did you

 6 authorize people to negotiate with the attorneys general?

 7 A. I did.

 8 Q. Were you kept apprised of the progress of the

 9 negotiations?

10 A. I was.

11 Q. Did there come a time when the people who were reporting

12 to you about the negotiations reported that an offer was on

13 the table that seemed to be within the range of acceptable?

14 A. Yes.

15 MR. DROSMAN: Objection, leading and hearsay.

16 THE COURT: I'll sustain the objection.

17 BY MR. KAVALER:

18 Q. Did you come to understand, Mr. Aldinger, at some point

19 these negotiations had come to a head?

20 A. Yes.

21 Q. What, if any, actions did you take at that point?

22 A. I essentially then talked with my board about the

23 possibility of a settlement once we had a number that we

24 thought made good business sense in terms of settling this

25 whole issue with all the AGs across the board.

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 1 Q. Were you in favor of settling this issue with all the AGs

 2 across the board?

 3 A. Well, I initially was not in favor of it and there were a

 4 number of my board members who had reservations, but in --

 5 because we felt we had done nothing wrong. But in the end, I

 6 think we had to make a practical business decision.

 7 If we didn't settle, we could have potentially had

 8 this drag out for years, keep our stock price down for years,

 9 distract management. And so our view was that if we could get

10 a reasonable settlement, put this all behind us, that our

11 stock price would rise. And from a business standpoint, not a

12 legal standpoint, it was a good decision.

13 Q. Do you recall when you had this conversation with your

14 board of directors?

15 A. It was sometime in October, the day before we announced

16 our settlement.

17 Q. The day before you announced. Do you remember what day

18 you announced the settlement?

19 A. It was in October, I think 11th or 12th. I can't remember

20 the exact date today.

21 Q. But your best recollection is the conversation with the

22 board was the day before?

23 A. That's my best recollection, yes.

24 Q. Did you have to have the board's approval to make this

25 settlement?

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 1 A. I did.

 2 Q. So was it possible to make a settlement before you talked

 3 to the board?

 4 A. No.

 5 Q. You didn't have that authority yourself?

 6 A. No, I didn't.

 7 Q. The people you had negotiating with the attorneys general

 8 didn't have that authority?

 9 A. No, they had no authority.

10 Q. Did the board authorize the settlement?

11 A. They did.

12 Q. What did you do then?

13 A. We then went back and --

14 Q. What did you do, sir?

15 A. Well, I settled it.

16 Q. Did you instruct the people negotiating with the attorneys

17 general?

18 A. Yes, I did.

19 Q. What instruction did you give them?

20 A. To settle the -- to settle.

21 Q. Did the company disclose the fact that it reached a

22 settlement with the attorneys general?

23 A. It did.

24 Q. Let's look at Exhibit 74 in evidence.

25 A copy to counsel. A copy to you, Mr. Aldinger.

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 1 (Tendered.)

 2 BY MR. KAVALER:

 3 Q. This is a July 17, 2002, conference call transcript.

 4 Do you see that?

 5 A. Yes, I do.

 6 Q. Is that several months before the settlement?

 7 A. Yes, it is.

 8 Q. Turn, if you would, to page ending in 489.

 9 Do you see there's a question asked by Bob Napoli?

10 "Good morning and nice quarter." Do you see that?

11 A. I do.

12 Q. Do you know who Mr. Napoli is?

13 A. Yes, he was an analyst.

14 Q. And he says, Good morning and nice quarter. I wonder if

15 you could just expand a little bit more on two issues that are

16 on everybody's minds. Are there any other discussions going

17 on with the regulators? I mean, are they looking for any

18 other unusual types of information or spending and I wonder if

19 you can just talk about that a little bit more.

20 And then the second issue, you know, that frequently

21 comes up is that -- the predatory lending issue. I was

22 wondering if you could just talk about a little bit what's

23 going on with some of the lawsuits and the extent that you can

24 help us out on that. Thanks.

25 And then you begin to answer. And then down at the

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 1 bottom you begin to answer.

 2 And on the top of the next page, 490, you say, What

 3 is happening, I mean, with the ACORN suits and what is

 4 happening with the AGs.

 5 Do you see that?

 6 A. No, I'm not in the right -- same place yet.

 7 Q. Top of 48 -- 490. Top of the next page. Second line

 8 down.

 9 A. Yes.

10 Q. Okay. That was you talking?

11 A. That's right.

12 Q. And on the next page, 491, third paragraph down, that's

13 still you talking. And you say, Now let's talk about the

14 lawsuits. We think straight out the class action suits

15 brought by ACORN in particular are just baseless, and we don't

16 see any long-term impact there. We think they're wrong.

17 On the AGs, obviously again it's a very political

18 issue. There's been lots of talk. We will, like we do on

19 everything else, focus on resolving that issue over the next

20 six months or so. But I can't go into any details except to

21 say that I am confident that our best practices in our current

22 model ultimately will prevail and we'll do what we do because

23 we do not do predatory lending.

24 Do you see that?

25 A. I do.

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 1 Q. And this conversation was in July of '02?

 2 A. That's correct.

 3 Q. And you settled with the attorneys general in October of

 4 '02?

 5 A. That's correct.

 6 Q. Within six months?

 7 A. That's right.

 8 Q. Exactly as you had said?

 9 A. Yes.

10 MR. KAVALER: Ladies and gentlemen of the jury, that

11 transcript is at tab 20 of your binder.

12 And I was remiss in not telling you that the AG

13 Edwards document, Defendants' 891, was tab 19 in your binder.

14 So I apologize for that.

15 BY MR. KAVALER:

16 Q. Now, let's look at Exhibit 550.

17 A copy to counsel. A copy to you, Mr. Aldinger.

18 (Tendered.)

19 BY MR. KAVALER:

20 Q. Is this an analyst report prepared and issued by Morgan

21 Stanley about Household International on or about July 31,

22 2002, while you were CEO?

23 A. Yes, it is.

24 MR. KAVALER: Offer Defendants' 550 in evidence, your

25 Honor, with the usual limiting instruction.

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 1 THE COURT: It will be admitted.

 2 MR. KAVALER: Ladies and gentlemen of the jury, this

 3 document appears at tab 21 in your binder.

 4 BY MR. KAVALER:

 5 Q. Now, Mr. Aldinger, this is an analyst's report released on

 6 July 31?

 7 A. That's correct.

 8 Q. About two and a half months before the settlement?

 9 A. Yes.

10 Q. And this is by Mr. Kenneth A. Posner, whom you talked

11 about yesterday?

12 A. Yes.

13 Q. You thought his analyses were usually the most acute?

14 A. I did.

15 Q. Look at the first page. It's got some bold headings, and

16 the last one down -- the next to the last one down says,

17 Impact of predatory lending may be overblown. Do you see

18 that? He says, New lending practices could reduce the

19 company's consumer finance margins from 2.0 percent to 1.5 to

20 1.75 percent.

21 Do you see that?

22 A. I do.

23 Q. What is he referring to by new lending practices?

24 A. That was the best practices we would put in place. And,

25 also, there's some speculation that if we were to do a

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 1 settlement, there may be other practices to change.

 2 Q. And then he continues, And we're factoring in $500 million

 3 in legal damages/regulatory fines in our price target.

 4 Do you see that?

 5 A. I do.

 6 Q. When you saw this, what did you think he was referring to

 7 by the $500 million?

 8 A. Well, what he was referring to is what we might settle for

 9 with the AGs.

10 Q. Did you know on July 31 what that number might be that you

11 would settle with the AGs for?

12 A. No. We had no number at that point.

13 Q. When is the first time you knew what number you would be

14 able to settle with the AGs for?

15 A. Not until very close -- the day before the settlement.

16 Q. The conversation you described earlier?

17 A. That's correct.

18 Q. And for there to be a settlement, both the company and the

19 AGs had to agree?

20 A. That's correct.

21 Q. And the company could not agree until the board told you

22 it was all right?

23 A. That's correct.

24 Q. Turn to page ending in Bates range 405 in that same

25 document.

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 1 Lower right-hand corner, bold heading, Household has

 2 already been targeted in a number of regulatory and legal

 3 actions.

 4 Do you see that?

 5 A. I do.

 6 Q. He wrote, Further, bad press doesn't help as it often

 7 encourages more borrowers and activist groups to step forward

 8 with complaints. Household has been the subject of a great

 9 deal of bad press lately. To capture the likelihood of

10 additional legal damages and/or regulatory fines, we subtract

11 $1 per share from our target price, based on a probability of

12 75 percent applied to $500 million in damages. This estimate

13 represents an educated guess. We cannot anticipate the

14 outcome of ACORN's class action lawsuit, regulatory actions in

15 the State of Washington, or other potential legal and

16 regulatory issues.

17 Do you see that?

18 A. I do.

19 Q. When you saw that, Mr. Aldinger, did you know if the

20 probability of success of resolving a lawsuit or a dispute,

21 rather, the probability of resolving the matter with the AGs

22 was 75 percent?

23 A. No.

24 Q. Did you know whether $500 million was a high number, a low

25 number or an accurate number?

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 1 A. No.

 2 Q. When is the first time you knew that the probability of

 3 being able to resolve this with the attorney generals was a

 4 hundred percent?

 5 A. About a day before we settled it.

 6 Q. When is the first time you knew what number you'd be able

 7 to settle on with the attorneys general?

 8 A. Again, it would have been about a day before.

 9 Q. The day before what, sir?

10 A. The day before we officially settled it.

11 Q. Mr. Aldinger, have we prepared a demonstrative to show the

12 movement of the stock price on the day the settlement was

13 announced?

14 A. Yes, we have.

15 Q. Now, was there some talk in the marketplace about the

16 settlement even before it was formally announced?

17 A. There appeared to be leaks.

18 Q. Did any leaks come from the Household side?

19 A. They did not.

20 Q. Do you know where the leaks came from?

21 A. Not for certain.

22 Q. But in any event, you know there were leaks?

23 A. Yes.

24 Q. Can we look at DDX 230-03.

25 And, Mr. Aldinger, the left-hand axis reads,

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 1 Household stock price per share.

 2 Do you see that?

 3 A. Yes, I do.

 4 Q. And what does this show us?

 5 A. Well, this shows the stock price going up over a two-day

 6 period.

 7 Q. What do you understand those two days to be?

 8 A. One was, I think, the day before we announced, but the

 9 leak was out, and the second was after we announced.

10 Q. And by how much did the stock price go up over those two

11 days?

12 A. The value -- well, the stock price went from 28 -- $21 to

13 28.20, but the value of the company went up by over $3

14 billion, $3.2 billion.

15 Q. First of all, tell me what percentage increase that is

16 from 21 to 28.

17 A. Well, it's about a 30 percent increase plus, a third.

18 Q. And do you know whether that was a significant increase

19 for Household?

20 A. That may have been the biggest increase I ever saw in my

21 eight years as CEO in any two-day period.

22 Q. Secondly, you told us the value of Household increased by

23 in excess of $3 billion?

24 A. That's correct.

25 Q. Tell us how you got to that calculation.

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 1 A. Well, we had 500 million shares, so basically it was north

 2 of $3 billion.

 3 Q. It's the basically part that I'm not getting. Do the math

 4 for me.

 5 A. Well, if you've got 500 million shares and your stock goes

 6 up by about $7, I was understating it. It's about 3.5 billion

 7 incremental value.

 8 Q. To all the shareholders?

 9 A. To all the shareholders.

10 Q. Including you?

11 A. Absolutely.

12 Q. Including the plaintiffs?

13 A. Yes.

14 Q. And how much did Household -- withdrawn.

15 Is that the result you were anticipating and hoping

16 for?

17 A. It is.

18 Q. Is that the result you were working to achieve?

19 A. Yes.

20 Q. How much did Household pay the attorneys general to

21 achieve this increase in value for all the shareholders,

22 including yourself, and the plaintiffs of $3-1/2 billion?

23 A. $484 million.

24 Q. Were you satisfied that that was a good deal,

25 Mr. Aldinger?

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 1 A. I was.

 2 Q. Still?

 3 A. I still am.

 4 Q. Let's talk about what that $484 million represented to

 5 Household. Have we prepared a demonstrative that shows us --

 6 first, have we prepared a demonstrative that compares the two

 7 numbers you just gave us, the approximately $3-1/2 billion

 8 increase and the $484 million payment?

 9 A. I believe we have.

10 Q. Can we see DDX 220-01.

11 What does this show us, Mr. Aldinger?

12 A. It shows the cost at 484 million and the increase in

13 Household stock to $3.3 billion.

14 Q. Is it to $3.3 billion or by 3.3 billion?

15 A. By 3.3 billion.

16 Q. Secondly, can you give us some idea -- withdrawn.

17 Can you put in perspective this $484 million for us,

18 Mr. Aldinger? For example, can you tell us what Household's

19 gross revenues were in 2002?

20 A. Yes. I think our revenues were about $15 billion during

21 that period.

22 Q. Okay.

23 THE COURT: Is this a good time to stop?

24 MR. KAVALER: Whatever you say, your Honor.

25 THE COURT: I think we'll take our 15-minute break at

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 1 this time and then we'll continue.

 2 (Jury out.)

 3 THE COURT: You may step down, sir.

 4 THE WITNESS: Thank you.

 5 THE COURT: Okay. We're recessed for 15 minutes.

 6 MR. KAVALER: Thank you, your Honor.

 7 (Recess taken.)

 8 THE COURT: Ready to resume.

 9 MR. KAVALER: Yes, your Honor.

10 (Jury in.)

11 MR. KAVALER: Thank you, your Honor.

12 BY MR. KAVALER:

13 Q. Mr. Aldinger, I can't remember if I asked you this

14 question or started to ask you this question. So, let me ask

15 it, again, if I didn't finish it or, in any event.

16 You told me Household's gross revenues in 2002 were

17 about $15 billion. I know I didn't ask it. Can you do the

18 math -- compare Household's gross revenues of 15 billion to

19 the settlement price of 484 million?

20 A. It would be about three percent, I think, of the revenues.

21 Q. Three percent. Is that the same as about 30 times as much

22 revenue?

23 A. That's about right.

24 Q. 15 billion is 30 times as much?

25 A. Yes.

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 1 Q. Okay.

 2 Do you know or can you calculate in your head

 3 Household's gross revenues for the entire period?

 4 We've been talking about 1999 to 2002?

 5 A. I don't know that I'd venture a guess on that.

 6 Q. But it was a lot more than 15 billion?

 7 A. A lot more than 15.

 8 Q. Let's talk briefly about Wells Fargo.

 9 You saw the videotaped deposition of Mr. Todd May?

10 A. I did.

11 Q. Did you ever meet Mr. May in your life?

12 A. No, I did not.

13 Q. The negotiations between Wells Fargo and Household -- that

14 Mr. May was talking about -- did you participate in those?

15 A. I did.

16 Q. Who did you discuss -- who did you negotiate against? Who

17 was your counter-party?

18 A. Dick Kovacevich, the CEO of Wells Fargo.

19 Q. You were the CEO of Household and he was the CEO of Well

20 Fargo?

21 A. That's correct.

22 Q. You spoke CEO to CEO?

23 A. Yes, we did.

24 Q. Mr. May was not in the room?

25 A. That's right.

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 1 Q. All right.

 2 Was there ever an agreement upon a price for that

 3 transaction?

 4 A. No.

 5 Q. Was there ever an agreement to do that transaction?

 6 A. No.

 7 Q. Who terminated the conversations between Household and

 8 Wells Fargo?

 9 A. We did.

10 Q. Who communicated that decision to Mr. Kovacevich?

11 A. I did.

12 Q. When you spoke to Mr. Kovacevich, was Mr. May in the room?

13 A. He was not.

14 Q. What did you say to Mr. Kovacevich as the reason for why

15 Household was terminating the negotiations?

16 A. I said that we had taken too long in the negotiations and

17 we were getting worried about leaks.

18 We also had our annual meeting coming up and didn't

19 want to be in a position where somebody could ask a question

20 and we'd be in a very difficult spot if they asked us about an

21 ongoing transaction, because you never want to let that out.

22 So, I pulled the deal.

23 Q. Do you have any knowledge whatsoever of how Mr. Kovacevic

24 reported your statement to him back to his people?

25 A. I do not.

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 1 Q. Mr. Aldinger, you've seen investors' counsel put up on the

 2 board various press releases that quote you -- various

 3 statements by you. You saw a series of boards the other day

 4 with your picture on them with some language.

 5 In any of the statements that have been attributed to

 6 you in this trial, did you knowingly make any false

 7 statements?

 8 A. I did not.

 9 Q. When you made each of those statements, did you believe

10 them to be true?

11 A. I did.

12 Q. When you made each of those statements, did you believe

13 you had an adequate basis to know whether they were true or

14 not?

15 A. I did.

16 Q. Did you think they were true?

17 A. I did.

18 Q. As you sat here through the trial, has anything that has

19 happened cause you to question the accuracy of anything you

20 said in those statements?

21 A. No.

22 Q. When you signed the various 10-Ks and 10-Qs that have been

23 put in evidence in this case, did you knowingly make any false

24 statements?

25 A. I did not.

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 1 Q. Did you ever ask anyone else to make any false statements?

 2 A. I did not.

 3 Q. Did you ever direct any Household employee to lie to the

 4 press, lie to a regulator, lie to an investor, lie to an

 5 analyst or anyone else about the affairs of Household or

 6 anything else?

 7 A. I did not.

 8 Q. Did you intentionally conceal from the public a widespread

 9 pervasive predatory lending scheme at Household?

10 A. Absolutely not.

11 Q. Did you believe there was a widespread pervasive predatory

12 lending scheme at Household?

13 A. I did not.

14 Q. Did it ever occur to you that there was a widespread

15 pervasive predatory lending scheme at Household?

16 A. No.

17 Q. Did you believe that Household was engaged in various

18 credit concealment devices?

19 A. I did not.

20 Q. Did it ever occur to you anything like that might be going

21 on?

22 A. No.

23 Q. Did you ever knowingly intend -- excuse me.

24 Did you ever knowingly fail to say something that you

25 thought needed to be said, to cause some earlier statement you

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 1 had made to be corrected or amplified or rectified in some

 2 fashion?

 3 A. No.

 4 MR. KAVALER: I have no further questions for this

 5 witness at the present time, your Honor.

 6 Thank you.

 7 THE COURT: Redirect?

 8 MR. DROSMAN: A brief sidebar, your Honor?

 9 THE COURT: Sure.

10 (Proceedings had at sidebar:)

11 MR. DROSMAN: Your Honor, there's been an instance in

12 which defendants have opened the door, that I wanted to run by

13 you.

14 THE COURT: A little bit louder. They won't hear

15 you.

16 MR. DROSMAN: There's been an instance in which

17 defendants have opened the door, and I wanted to run by you --

18 before I use the document -- that I plan on using an SEC Cease

19 and Desist Order with this witness and I'll tell you why.

20 It's an appropriate --

21 THE COURT: Do you object?

22 MR. KAVALER: I object, your Honor.

23 It was -- the matter was specifically briefed and

24 argued before your Honor in a motion in limine. You ruled it

25 couldn't come in. We've done nothing to open the door. I

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 1 don't know what he's talking about.

 2 THE COURT: Well -- go ahead.

 3 MR. DROSMAN: Here's what you said in your order.

 4 You said, "Evidence coming in of settlement negotiations has

 5 been admitted for purposes of rebuttal, for purposes of

 6 impeachment, to show knowledge and intent," and what this

 7 witness did is he sat on the stand and he said, "We disclosed

 8 the fact that we had one payment re-age. We disclosed the

 9 fact that we had automatic re-ages." That was disclosed by

10 Household. I have the quotes.

11 And, then, in -- the SEC said they failed to disclose

12 the one payment re-ages, they failed to disclose the automatic

13 re-ages. It's a proper response to that testimony.

14 MR. KAVALER: I don't believe the SEC said anything,

15 your Honor. There was a settlement agreement with the SEC.

16 THE COURT: No, he is saying the settlement agreement

17 said that.

18 MR. DROSMAN: That's right.

19 MR. KAVALER: It's a Rule 408 problem, your Honor.

20 What he said is Household disclosed it in its

21 securitization prospectuses. Those are in the record.

22 There's no question that it's accurate. I read to him from

23 the settlement -- from the securitization prospectuses -- and

24 he acknowledged what they said.

25 THE COURT: What does it say in the settlement?

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 1 MR. DROSMAN: Here's what the trial says. It says --

 2 this is the testimony: "This was disclosure by Household to

 3 you, to the world, as of the time it filed its prospectus,

 4 that it engaged in one payment re-age."

 5 And what they say -- what the SEC says -- is that

 6 they were false and misleading because they didn't disclose

 7 the fact that they would restructure a loan without receiving

 8 any payments or one-payment.

 9 MR. KAVALER: Your Honor, they're talking about two

10 different documents. The testimony was about the

11 securitization prospectuses.

12 The testimony counsel just read is a truism. It is a

13 disclosure to the world. It is a res gestae. The document is

14 filed with the SEC. It says what it says.

15 THE COURT: That's not the point. The point is it

16 may be perfectly true; but, if your client has previously said

17 that it's not true, he's entitled to impeach him with a

18 previous statement.

19 MR. KAVALER: I'm not sure I understand where he said

20 it's not true, your Honor. What he said on the stand --

21 THE COURT: Well, in the SEC settlement, he is saying

22 that your client said that his company did not disclose these

23 things to the public.

24 Is that right?

25 MR. DROSMAN: Yes, your Honor.

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 1 Your Honor, let me --

 2 THE COURT: Wait, wait.

 3 MR. DROSMAN: Your Honor, here's the point. The

 4 point is he knows full well that they entered into a Cease and

 5 Desist Order. They're using this as a sword. They're sitting

 6 up there saying it was disclosed to the world.

 7 THE COURT: Yeah, I know. That's a general argument.

 8 MR. DROSMAN: No, but listen. If it were, in fact,

 9 disclosed to the SEC, how could the SEC have issued a Consent

10 Decree that said it wasn't disclosed?

11 THE COURT: They can issue whatever they want.

12 MR. DROSMAN: But that's --

13 THE COURT: The question --

14 MR. DROSMAN: I mean, it's evidence that there

15 wasn't, and that's the appropriate response.

16 MR. KAVALER: Your Honor, the SEC settlement involved

17 one particular filing. It was not a global review of

18 everything the company disclosed.

19 The difference between this case and the SEC case is

20 the SEC was an enforcement action that focused on one

21 particular document.

22 THE COURT: I'm not worried -- it's not cases we're

23 comparing. We're comparing statements.

24 Did he say something in the SEC Consent Decree --

25 MR. KAVALER: First of all, your Honor --

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 1 THE COURT: -- that I have barred, that he

 2 contradicted here?

 3 MR. KAVALER: First --

 4 THE COURT: If he did, they can use that statement to

 5 impeach him.

 6 MR. KAVALER: He did not.

 7 THE COURT: I don't know if he did or not because I

 8 don't have the SEC settlement agreement in front of me, and I

 9 would have to look at it to see.

10 MR. DROSMAN: I've got it right here.

11 THE COURT: My other concern is that your client just

12 took the last 15 or 20 of minutes of his testimony, at least,

13 talking about the reasons for going into his settlement

14 agreement with the SEC --

15 MR. KAVALER: With the Attorneys General, your Honor.

16 THE COURT: With the Attorneys General.

17 -- directly telling the jury that the reason they did

18 that was not because he thought they had any liability, but

19 because he wanted to avoid the publicity that came from the

20 lawsuit.

21 Now, I have a ruling in here that you folks -- that I

22 must have spent four hours doing -- when you asked us to

23 specifically not allow any of the terms or any of the

24 settlement negotiations or any of the circumstances

25 surrounding them to come into evidence to show liability.

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 1 You've now used all of those things to try to show no

 2 liability. Why haven't you opened up the door to the entire

 3 proceeding?

 4 MR. DROSMAN: It's blown off the hinges, your Honor,

 5 is what it is.

 6 MR. KAVALER: May I respond, your Honor?

 7 THE COURT: Yeah.

 8 MR. KAVALER: I want to respond to two things.

 9 First, as to the SEC, he was not a party to that

10 settlement. The company was a party to the settlement. And

11 the settlement specifically says it does not apply to any one

12 of the signatories. It carves out people such as Mr.

13 Aldinger.

14 Secondly --

15 THE COURT: It's not who is liable under the

16 settlement. It's whose statement does the settlement

17 comprise?

18 He's here speaking for the company when he says, "We

19 disclosed" or "We didn't disclose." He's not just speaking

20 for himself. You asked him. You asked him, specifically:

21 "So, it was not a secret to anyone?" a half dozen times.

22 If he signed the document or if his company has

23 signed a document that said it was a secret, then those are

24 contradictory statements.

25 MR. KAVALER: Your Honor, this is a disclosure case.

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 1 It's a securities fraud case. What is on the market is on the

 2 market. I don't understand how he can somehow be precluded

 3 from observing what is on the market.

 4 THE COURT: He can't. He can testify to it all he

 5 wants.

 6 But if he has previously made statements that

 7 contradict that, then they can impeach him with those

 8 statements.

 9 MR. KAVALER: If he had done so.

10 I don't believe he's done so. I believe the SEC

11 Consent Decree specifically says, "Without admitting or

12 denying anything, the company enters into a settlement."

13 MR. DROSMAN: That goes to the weight, your Honor.

14 MR. KAVALER: As to the opening --

15 THE COURT: We're talking about which --

16 MR. DROSMAN: There's two different issues.

17 Here's the SEC Cease and Desist (indicating). It's

18 the order instituting Cease and Desist proceedings, making

19 findings.

20 THE COURT: I will have to read it to see.

21 MR. DROSMAN: Okay.

22 THE COURT: And the other point is --

23 MR. KAVALER: Secondly, your Honor --

24 THE COURT: -- as to his testimony regarding the AG

25 settlement was, you know, directly -- I mean, I sat up in my

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 1 seat when you did it; it was directly -- aimed at disputing

 2 that by entering into a settlement, Household was admitting

 3 any liability. It was directly aimed at implying -- not

 4 implying, but telling the jury -- that even though they

 5 entered into the settlement, they did not do any of the things

 6 that the settlement -- that the lawsuit -- accused them of

 7 doing.

 8 MR. KAVALER: But, your Honor, this is precisely --

 9 precisely -- the issue that's created by what Ms. Ghiglieri

10 did, by what the other witnesses did, by putting the $484

11 million number before the jury.

12 And when we discussed this at Page 1723, we discussed

13 the fact that, in view of -- I said, "In view of -- I'm also

14 familiar with your Honor's point about once the door is

15 opened, the door is opened. If Mr. Devor is going to address

16 that, then we will respond."

17 Mr. Devor addressed it. Ms. Ghiglieri addressed it.

18 Everybody addressed it. We were compelled to respond.

19 THE COURT: Sure. But they addressed it for purposes

20 of establishing what, if any, effect it had on the price of

21 the stock.

22 MR. DROSMAN: Exactly.

23 THE COURT: That's what we said they could do.

24 MR. KAVALER: But that's exactly what he responded

25 to, your Honor.

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 1 THE COURT: That's not what he testified to.

 2 No, that's not what he testified to.

 3 MR. KAVALER: Your Honor --

 4 THE COURT: He testified for about 20 minutes saying

 5 that even though they were innocent, that he went around

 6 recruiting Attorneys Generals so that they could get into the

 7 settlement, even though they didn't do anything wrong.

 8 MR. KAVALER: And, your Honor, we very carefully

 9 reviewed the transcript. That is covered at Page 1858 and

10 1859.

11 Ms. Buckley -- this is a sidebar with the Court.

12 "MS. BUCKLEY: Many states participated at the

13 request of Household.

14 "THE COURT: If you want to bring that out, I guess

15 you can."

16 THE COURT: That's right.

17 MR. KAVALER: That's exactly what he brought out --

18 that many states participated --

19 THE COURT: Yeah, but you open the door when you do

20 it. I mean --

21 MR. KAVALER: Well, your Honor, I'm just saying --

22 your Honor, we were responding directly to your Honor's words

23 at Page 1858: "If you think -- " I'm continuing to read --

24 "If you think Arizona participated at the request of

25 Household, if you want to bring that out, I guess you can."

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 1 And, then, you continue: "But I think he has a right

 2 to present whatever evidence he has to rebut what you've tried

 3 to establish with the jury, and this is one such piece of

 4 evidence. The fact that Arizona sued and obtained a

 5 settlement from Household and the issues around which that

 6 settlement was obtained, the amounts I don't think are

 7 particularly relevant."

 8 "Mr. Burkholz: Okay."

 9 Your Honor, we reviewed the transcript very carefully

10 and I believe in both those instances I'm referring to, we are

11 completely --

12 THE COURT: Is there some reason why you didn't bring

13 this up when we took the break? We have the jury sitting out

14 there doing nothing.

15 MR. DROSMAN: Yes -- no, I'm sorry about that. I

16 wanted to let him finish his examination.

17 THE COURT: Let's send the jury back.

18 MR. DROSMAN: All right.

19 (Proceedings had in open court:)

20 THE COURT: Folks, I'm going to ask you to step back

21 in the jury room while we finish this conference.

22 (Jury out.)

23 THE COURT: As I see it, we have two issues before

24 us. One is the effect of the testimony this witness has given

25 on the Court's prior rulings regarding the SEC Consent Decree

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 1 and the other is the same question regarding the Attorney

 2 Generals' settlement.

 3 MR. DROSMAN: I mean, why don't we take the Attorney

 4 Generals' settlement first.

 5 THE COURT: Okay.

 6 MR. DROSMAN: What we had up there was we had an

 7 instance in which Mr. Kavaler chose to explore the

 8 negotiations underlying the settlement -- the reasons that

 9 they entered into the settlement. Okay?

10 Now, what Mr. Kavaler would like is for our hands to

11 be tied behind our back and not be able to respond in kind

12 because there are documents that you've excluded, based on

13 that exact thing.

14 What you've said is the 484 million can come into

15 evidence to show the effect on the stock price.

16 If they chose to go into great details regarding the

17 negotiations and the reasons and why Mr. Aldinger did or did

18 not enter into the settlement, then we should be able to at

19 least respond with the documents that discuss the

20 negotiations; that discuss the reasons for the settlement.

21 They've used this as a sword. And it was designed as

22 a shield. It would be patently unfair for us not to be able

23 to use it.

24 THE COURT: Okay.

25 A response?

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 1 MR. KAVALER: Your Honor, this has been a recurring

 2 theme throughout this case. We've raised it previously. Your

 3 Honor has made rulings. We have very carefully reviewed your

 4 Honor's rulings. We believe we're in complete compliance with

 5 your Honor's rulings.

 6 I refer specifically to two instances. One is at

 7 Page 1723 of the transcript. I was speaking to your Honor and

 8 we were talking about what Mr. Devor was going to address.

 9 And you said -- I said -- "My view is -- "

10 THE COURT: What exactly were we talking about?

11 Mr. Devor was going to address, what?

12 MR. KAVALER: This is one of the times we raised in

13 anticipation. The question -- let me back up.

14 We had -- the discussions we had about Mrs. Ghiglieri

15 mentioning the settlement amount.

16 Then we addressed, your Honor, before Mr. Devor

17 testified and we said we thought the problem would arise,

18 again.

19 And the particular portion I'm referring to is this.

20 I said, "My view is I'm also familiar with your Honor's point

21 about once the door is open, the door is open."

22 If Mr. Devor is going to address that, we will

23 respond.

24 And, then, it went directly during the testimony --

25 or on the eve of the testimony -- Ms. Buckley went to the

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 1 sidebar --

 2 THE COURT: Okay.

 3 So, let me just -- hold on.

 4 When you said that -- "If he's going to address

 5 that" -- you meant, what?

 6 MR. KAVALER: Mr. Devor was going to talk about the

 7 amount of the settlement.

 8 THE COURT: The amount of the settlement?

 9 MR. KAVALER: Your Honor, we -- what we were talking

10 about --

11 THE COURT: Or more than that?

12 Because I ruled that the amount of the settlement,

13 you know, prior to the trial can come in for purposes of

14 showing the shift in price, if any, to the stock, to show

15 damages, to show loss causation. That was the Court's ruling

16 before trial.

17 So, if I said that Mr. Devor can testify to that,

18 that's nothing different and hasn't changed the playing field

19 any at all.

20 MR. KAVALER: Your Honor, as we took the testimony of

21 Ms. Ghiglieri, Mr. Devor and Professor Fischel -- the three

22 experts -- we thought only Professor Fischel was going to

23 address this.

24 It turned out we were wrong about that. We thought

25 we raised that problem. We thought your Honor to be saying --

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 1 THE COURT: Well, the -- okay, now you're arguing a

 2 slightly different issue, which is whether the experts could

 3 testify regarding the settlement and what effect that had on

 4 their opinions.

 5 And I ruled in regard to that, that they could and

 6 that we would give the Court -- at your request, we would give

 7 the jury -- a limiting instruction. And we did, I think, on

 8 some occasions when you requested it -- that the evidence that

 9 was coming in was coming in solely so that the jury could

10 judge the basis and the probative weight of the expert's

11 opinion and not for the truth of what it contained.

12 MR. KAVALER: Yes, your Honor. And we discussed on

13 several occasions the fact that those two rulings appeared to

14 be in some tension.

15 THE COURT: Right.

16 MR. KAVALER: And we approached the Court before

17 Mr. Devor testified, to get clarification.

18 THE COURT: And that's how I resolved it. That's how

19 I resolved it. I said, "The tension's resolved this way:

20 They can testify as to the underlying bases. We'll give the

21 jury a limiting instruction and the jury will consider that

22 approaching solely for the purpose of determining the

23 probative weight to give the expert's opinion."

24 MR. KAVALER: Your Honor, my understanding of what

25 transpired at Page 1723 is somewhat different --

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 1 THE COURT: Okay. Tell mow how.

 2 MR. KAVALER: -- because I understood that you were

 3 saying if the door is opened, the door is opened. And I was

 4 the one trying to keep the door closed at that point.

 5 THE COURT: Well, which door are we talking about?

 6 Let's be specific.

 7 MR. KAVALER: Well, your Honor, that's the question.

 8 Let me just put on the record what we're talking

 9 about at Page 1858, because I think it's a continuation of the

10 same thing.

11 Ms. Buckley approached --

12 THE COURT: Well, wait, wait.

13 Are we talking now about the same conversation or a

14 different one?

15 MR. KAVALER: It's a different conversation.

16 THE COURT: All right.

17 MR. KAVALER: But it also involves Mr. Devor.

18 THE COURT: All right.

19 MR. KAVALER: It's now a sidebar at 1858.

20 "MS. BUCKLEY: Many states participated at the

21 request of Household.

22 "THE COURT: If you want to bring that out, I guess

23 you can."

24 THE COURT: Sure, but what was -- you already showed

25 me that.

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 1 What was the context of that? I don't know what

 2 we're talking about there. Many states are -- why was she

 3 making that statement? Was there an objection to a specific

 4 question or a specific piece of testimony?

 5 If so, what was it?

 6 MR. KAVALER: Your Honor, this was at a sidebar, I

 7 believe, before Mr. Devor started to testify.

 8 Let me just see a second.

 9 Well, I know, your Honor. It has to do with

10 Mr. Burkholz said to your Honor -- the sidebar began with

11 these words at Page 1856:

12 "MR. BURKHOLZ: Your Honor, they opened the door on

13 this Consent Decree from the State of Arizona.

14 "It's not admissible pursuant to your motion in

15 limine."

16 THE COURT: What was he referring to when he said,

17 "They opened the door with respect to this Consent Decree"?

18 Because until I know that, I don't know what the ruling is.

19 MR. DOWD: Your Honor, if you'd like some help, what

20 happened, as I recall, was the defendants put in a

21 videotape --

22 MR. KAVALER: That's right.

23 MR. DOWD: -- which we had objected to, I believe,

24 where they had the Arizona Banking Commissioner testifying.

25 And they said, "Doesn't the bank -- Arizona Banking

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 1 Commissioner -- love you?"

 2 And we said, "They opened the door to at least the

 3 Arizona Consent Decree coming in."

 4 MR. KAVALER: I agree with Mr. Dowd saying that was

 5 the preface of it.

 6 THE COURT: I recall that.

 7 So, the Consent Decree was allowed into evidence in

 8 that case. Whatever they brought out about that Consent

 9 Decree, the Arizona Consent Decree was allowed into evidence:

10 One, because you sought to establish that the State of Arizona

11 loved your clients and had no problem with the way they did

12 business; and, because you did that, the Consent Decree, to

13 the extent that it was contradictory, was allowed in to

14 impeach and contradict the prior testimony that you,

15 yourselves, elicited.

16 All right. Now, we have the context --

17 MR. KAVALER: Your Honor --

18 THE COURT: -- for the quote that you were reading

19 there.

20 MR. KAVALER: Your Honor, the characterization you're

21 adopting is Mr. Dowd's characterization. We did not elicit

22 that video for the purpose of showing the Arizona Commissioner

23 loved us or any such thing. It was elicited specifically on

24 the testimony of Mr. Detelich as an example of training that

25 was conducted by Household and in counter-distinction to the

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 1 homemade Hueman videotape --

 2 THE COURT: Well, I recall that you made that

 3 argument; and, at that point, I ruled that I disagreed with

 4 you -- that I thought that part of the basis for bringing that

 5 out was to show that the State of Arizona, given the questions

 6 you asked and the implications from those questions, had no

 7 problem with the way you folks were conducting business.

 8 And, so, I allowed that particular piece of

 9 information about the Arizona Consent -- the Arizona Consent

10 Decree -- to come into evidence to rebut that.

11 That's what I did.

12 MR. KAVALER: I'm not sure that's right, your Honor.

13 I think -- I'm told by Ms. Buckley -- and I, frankly, don't

14 recall -- that at the end of that whole exchange, the Consent

15 Decree did not come in.

16 But, obviously, we can look at the record. It is

17 what it is.

18 THE COURT: It may not have come in. I don't know.

19 But, then, what's the purpose of reading me the quote

20 where I say, "If you opened the door, you opened the door"?

21 MR. KAVALER: Because, your Honor, it was our clear

22 understanding -- again, I need to read you the five lines

23 of --

24 THE COURT: Go ahead.

25 MR. KAVALER: -- what transpired at 1858.

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 1 THE COURT: Go ahead.

 2 MR. KAVALER: (Reading):

 3 "MS. BUCKLEY: Many states participated at the

 4 request of Household.

 5 "THE COURT -- "

 6 THE COURT: And, at this point, she's arguing as to

 7 why we should not allow evidence of the Arizona Consent Decree

 8 to come in; is that correct?

 9 MR. KAVALER: I think that's right.

10 THE COURT: All right.

11 Go on.

12 MR. KAVALER: It seems to be the context.

13 "THE COURT: If you want to bring that out, I guess

14 you can."

15 THE COURT: Which is true.

16 MR. KAVALER: That's precisely the point Mr. Aldinger

17 was addressing. 35 states participated because Household

18 agreed to reimburse their expenses for participating.

19 THE COURT: Well, sure.

20 I mean, if you want to bring that out, you can; but,

21 you can't bring it out and then say, "Oh, because of your

22 prior ruling, they cannot now rebut the evidence you brought

23 forth."

24 MR. KAVALER: Your Honor, I'm not saying that at all.

25 What transpired at sidebar --

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 1 THE COURT: Then I don't know what we're arguing

 2 about.

 3 MR. KAVALER: Frankly, I don't, either, your Honor.

 4 What transpired at the sidebar is Mr. Drosman said he

 5 wanted to use the SEC Consent Decree. That was on one

 6 subject. Somehow it segued into a different subject.

 7 I can't understand the difference between the two.

 8 Let me be clear.

 9 THE COURT: Because they're somewhat related. I

10 mean, you have that quote there. So, it was clear that you

11 thought they were related, as well. You brought the quote

12 with you to the sidebar.

13 Look, your client just testified for about 20 minutes

14 as to the negotiations that went on in reaching the settlement

15 agreement with the different states' AGs, as to his

16 motivations for doing that -- why he did it -- and made it

17 clear, from his testimony, that the reason he did it was not

18 because he believed that your clients had done anything wrong,

19 but solely for business purposes.

20 And you even put up a chart to show what good

21 business sense it made -- separate and apart from issues of

22 liability or whether they did anything wrong or not; what good

23 business sense it made -- to spend a small amount of money in

24 a settlement agreement and gain the huge bump in the stock

25 prices that you gained.

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 1 They now have a right to rebut that. They have a

 2 right to bring out evidence to rebut what your client said

 3 about how the negotiations went down and what his motivation

 4 was for the -- for reaching that settlement. That's all this

 5 is.

 6 MR. KAVALER: And I have an observation and a

 7 question, your Honor.

 8 THE COURT: Sure.

 9 MR. KAVALER: The observation is: And none of that

10 was objected to by Mr. Drosman on a timely manner.

11 THE COURT: No. And he's not objecting to it now.

12 He's just saying, "Voila, you opened the door."

13 MR. KAVALER: And, secondly, your Honor --

14 THE COURT: Well, he didn't say "Voila," but, I mean,

15 that's what he's doing.

16 MR. KAVALER: -- I don't see how that subject leads

17 in any way to the SEC Consent Decree, which has nothing to do

18 with the Attorney General settlement. It is a hundred percent

19 related to a different document, a different set of facts.

20 THE COURT: I may be mistaken, but I thought that the

21 argument was going to be a parallel argument to both, and

22 that's why I brought them both in together, after he began

23 with the SEC.

24 But maybe I'm mistaken, so let's hear now --

25 MR. KAVALER: They're wholly separate.

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 1 the punch line for five minutes here.

 2 THE COURT: Oh, okay. It seemed more like ten, but

 3 go ahead.

 4 (Laughter.)

 5 MR. KAVALER: Well, it may wind up being 15, your

 6 Honor, but we have to get to the bottom of this. This is very

 7 important.

 8 This is not a global -- that's the very distinction

 9 I'm drawing, your Honor. I was telling you the disclosures on

10 the market are relevant to a private plaintiff.

11 In an SEC enforcement action, I passed that my

12 clients, plural, did not agree to this, Household agreed to

13 this. I passed that this has a carveout for people, not

14 parties. I passed it as a carveout for actions not involving

15 the SEC. And I passed that it was entered into after the

16 class period.

17 Passing all of that, it is addressed to one

18 particular document. It is addressed to the 2001 10-K filed

19 on March 13, 2002.

20 And this paragraph specifically tells you what

21 disclosures it's talking about because later in the same

22 paragraph, your Honor, it says, "Household reiterated this

23 disclosure in its Form 10-Q for the second quarter of 2002,

24 its Form 10-K(A) for fiscal year 2001, its Form 10-Q for the

25 third quarter. Those are the disclosures. It does not relate

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 1 to the securitization prospectuses.

 2 THE COURT: Okay.

 3 MR. DROSMAN: Your Honor, if I can --

 4 THE COURT: Your response?

 5 MR. DROSMAN: -- just say one thing.

 6 Yeah, that's great. That's fine. If he wants to

 7 tell the jury that the securitization prospectus have no

 8 relation to the 10-K disclosures, I'll accept that.

 9 THE COURT: Well --

10 MR. DROSMAN: But his point, your Honor, is just the

11 opposite. His point is that when they disclosed it in these

12 securitization prospectuses, that there was no false statement

13 because it was already known to the world.

14 THE COURT: Well, but that's -- now you're enlarging

15 the argument. I mean, what we're talking about here is a

16 specific point of impeachment. You can't impeach someone by a

17 prior statement that doesn't relate to the statement that he's

18 testified about on the stand. Okay?

19 And this prior statement seems to relate only -- this

20 prior statement which says -- and I'm attributing it to

21 Household because they agreed to this order -- that,

22 "Household's disclosures regarding its restructure policies

23 failed to present an accurate description," relates to the

24 disclosures in Paragraph 7, apparently, which are the 10-Ks.

25 I don't -- in my opinion, a statement which says

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 1 that, "In a prospectus in 1999, we disclosed this to the

 2 world," is not contradictory of a statement that says, "In our

 3 10-Ks in 2002, we did not accurately disclose it to the

 4 world."

 5 Those are not the same things. I think he has a

 6 point.

 7 It took him a while to get there, but I think he has

 8 a point.

 9 (Laughter.)

10 MR. KAVALER: Your Honor, in fairness to me -- I

11 think I mentioned it at the sidebar, but I certainly didn't

12 make it clear -- I apologize for not being vigorous enough.

13 It's one of my well-known failures.

14 THE COURT: I don't think it's a question of vigor,

15 but no apology necessary.

16 And it would appear to me, then, it's the same ruling

17 with respect to the automatic restructuring statement

18 contained in the Decree -- or in the Cease and Desist Order.

19 The same ruling.

20 These are not impeachment of the same statement.

21 They just don't relate to the same statement.

22 So, I'll -- my ruling will be, which I think you were

23 looking for before we went in, is that he has not opened the

24 door for this material from the Cease and Desist Order to come

25 in.

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 Aldinger - cross

 3385

 1 My ruling with respect to the Attorney Generals'

 2 settlement is that that door has been opened; that the very

 3 things we said could not be brought out by the plaintiff --

 4 and the reason I -- this is clearly on my mind -- is that, you

 5 know, we spent a long time ruling on this -- the multiple

 6 motions in limine that were filed by both sides.

 7 One of the major ones was to what extent could the

 8 settlement with the various Attorney Generals of the different

 9 states be brought into evidence.

10 And, you know, the defendants made it clear that they

11 did not want that settlement brought in for any reason other

12 than to show the change in price.

13 Now, during the course of -- and we ruled in their

14 favor on that.

15 During the course of the trial, that ruling was

16 modified to allow the experts -- okay? -- to bring in their

17 use of that settlement and how it affected their opinions.

18 And the jury was instructed that they were to

19 consider the information regarding that settlement -- the

20 settlements -- and what they contained and the amounts, and so

21 on, for purposes of determining how much weight and

22 credibility they wanted to give to the opinion reached by the

23 experts.

24 Now, so far so good. And I feel that my time was

25 properly utilized prior to trial.

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 Aldinger - cross

 3386

 1 But, then, we come here with what is probably the

 2 last of the defense -- defendants -- to testify; and, the last

 3 15, 20, 30 minutes of his testimony is spent describing the

 4 process, the analysis, the motivations for agreeing to the

 5 settlement. All the things that we had ruled could not be

 6 gone into by the plaintiffs are now brought out by the defense

 7 before the jury.

 8 And if, indeed, the sole reason for filing that

 9 motion in limine was to get the Court to rule that this

10 information was not admissible, was to gain a tactical

11 advantage so that the plaintiffs couldn't bring it out, but

12 the defense would be the first to bring it out in its

13 examination of the witnesses, I feel my time has been poorly

14 utilized.

15 MR. KAVALER: Your Honor, let me assure you that was

16 not our purpose. Our feeling is exactly the opposite. We

17 feel we have not gotten the benefit of our victory because

18 it's been undermined, eroded and chipped away at by the

19 plaintiffs.

20 For example, they've shown Plaintiffs' 550 to a

21 number of witnesses. This is a document concerning settlement

22 discussions.

23 They've asked each of their witnesses -- each of

24 their expert witnesses -- to comment about the -- we've had

25 this conversation previously on the record, your Honor. I'm

Household Unsigned Page - - -

 - 

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 Aldinger - cross

 3387

 1 not going to repeat my comments about Ms. Ghiglieri and

 2 Mr. Devor. I would have thought if the plaintiffs were

 3 adhering to your Honor's ruling, it would have come in only

 4 through only Professor Fischel and only in the way Professor

 5 Fischel used it; but, apparently there was a tension between

 6 two rulings. And our view is the plaintiffs exploited that

 7 tension. And when we brought it to your Honor's attention,

 8 your Honor said what you said on the record, which we read

 9 very carefully; and, we felt we had no choice. We had to

10 respond to Plaintiffs' 550. We had to respond to the drum

11 beat throughout this trial about the settlement. Because the

12 implication being used was the settlement was being used for

13 liability, not for measurement of stock price movement. It

14 was being used -- crystal clear to us, your Honor -- to

15 suggest that we were wrongdoers and we've been caught by the

16 Attorneys General and we paid them a lot of money to make up

17 for our wrongdoing.

18 And, in fact, Mr. Cross appeared on the screen there

19 and he testified that the Attorneys Generals settled for the

20 exact same reason Mr. Aldinger testified; that is, to avoid

21 five years of litigation.

22 And I'm sure Mr. Cross' view is they should have gone

23 forward and been vindicated. But we felt we were in an

24 untenable position, your Honor, where both of these rulings

25 were being manipulated, in our view, by the plaintiffs, to our

Household Unsigned Page - - -

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 Aldinger - cross

 3388

 1 detriment; and, when we tried to raise that with your Honor,

 2 your Honor said what I read before.

 3 And we specifically told the Court, prior to the

 4 testimony of Mr. Detelich, that this very scenario would

 5 arise.

 6 And, your Honor, you recall I said to you, "I don't

 7 want to be told later by them, you know, that I didn't know

 8 this was coming."

 9 And you said, "Well, now that you've said that, they

10 can't say it."

11 And, now, in effect, I'm being told it, albeit not by

12 them.

13 I mean, I just, your Honor, feel that our perspective

14 is we are responding to a door opening by the other side,

15 particularly by the repeated use of 550, which we had no

16 choice about.

17 We certainly would have preferred, your Honor -- this

18 was anything but tactical; we would have preferred -- that

19 this entire subject remain as your Honor ruled, but we felt

20 your Honor's rulings have been undermined and eroded, and we

21 were left with no choice.

22 THE COURT: Okay.

23 Well, I've made my point. I think the record is

24 pretty clear on this. My rulings were very narrow and strict

25 with respect to the use of that information. And they have

Household Unsigned Page - - -

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 Aldinger - cross

 3389

 1 been adhered to. Only the experts have testified to it and

 2 only then in order to indicate their support for their

 3 opinions.

 4 And the record will clearly also reflect that the

 5 very first time any of this came into the record was on your

 6 cross-examination of Ms. Ghiglieri. And I've already made a

 7 long and extensive ruling on how that happened and how it

 8 could have been avoided, had you not pressed and pressed and

 9 pressed her on that point.

10 MR. KAVALER: Your Honor --

11 THE COURT: And that -- well, at any rate, we'll let

12 that go. That's done. It's water over the dam.

13 I felt that it was imperative that I make it clear

14 that we spent an awful lot of time on these rulings; and, that

15 I don't want the parties to waltz through the trial ignoring

16 them, thereby making the time and effort that we spent,

17 essentially, a waste of time.

18 But that's that. Let's go forward now and do what we

19 can before the lunch break.

20 MR. DROSMAN: Thank you, your Honor.

21 THE COURT: Let's bring the jury out.

22 MR. KAVALER: Thank you, your Honor.

23 (Jury in.)

24 MR. MILLER: Judge, can we have the switch, please?

25 THE COURT: Yes.

Household Unsigned Page - - -

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 197 of 245
4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 REDIRECT EXAMINATION

 2 BY MR. DROSMAN:

 3 Q. Mr. Aldinger, let's start with the Barron's article that

 4 you spoke about, both today and yesterday.

 5 Do you recall that discussion?

 6 A. I do.

 7 Q. Okay.

 8 And this was an article that you received on December

 9 1st, 2001, correct, sir?

10 A. That's my recollection.

11 Q. Okay.

12 And the Barron's article, essentially, said that some

13 of Household's re-aging was either deferring or masking

14 chargeoffs, right?

15 A. I recall -- I don't recall that specifically. I'd like to

16 see it, if I could.

17 Q. You don't recall that it said that some of Household's

18 re-aging was either deferring or masking chargeoffs?

19 A. I don't remember the specifics of the article without

20 seeing them; and, after yesterday's experience, I'd like to

21 see it before I -- I -- agree to anything.

22 Q. You were worried about investors' reaction to the Barron's

23 article, weren't you?

24 A. Yes, I was.

25 Q. You understood that from the investors' point of view,

Household Unsigned Page 3390 - 3393

 3390 

4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 investors were nervous about re-aging; didn't you, sir?

 2 A. Investors never raised anything about re-aging before that

 3 article.

 4 Q. Fair enough.

 5 I just want to understand that your testimony under

 6 oath today is that you did not understand that, from the

 7 investors' point of view, investors were nervous about

 8 re-aging after you read the Barron's article?

 9 Is that your testimony, sir?

10 A. That's not my testimony.

11 Q. Okay.

12 Is your testimony, sir, that you understood that,

13 from the investors' point of view, investors were nervous

14 about re-aging?

15 A. My testimony is that until the Barron's article, nobody

16 had ever raised a question about re-aging to me in the entire

17 seven years I had been CEO of the company.

18 Post-Barron's, people were nervous about it and

19 that's why we responded the way we did.

20 Q. Okay. Fair enough.

21 So, post-Barron's article -- after you read the

22 Barron's article -- you understood that, from the investors'

23 point of view, investors were nervous about re-aging, right?

24 A. Absolutely.

25 Q. Okay.

Household Unsigned Page 3390 - 3393

 3391 

4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 And you wanted to give more people -- you wanted to

 2 give people more data about re-aging, right?

 3 A. That's correct.

 4 Q. More information about re-aging, right?

 5 A. That's correct.

 6 Q. And more knowledge about re-aging, didn't you?

 7 A. That's correct.

 8 Q. That was -- that was -- really on your mind at the time;

 9 wasn't it, sir?

10 A. That's correct.

11 Q. Okay.

12 And after you read the Barron's article, you

13 understood that investors wanted to see less re-aging; didn't

14 you, sir?

15 A. They would have felt more comfortable, in terms of the

16 risk profile of the company, if there was less re-aging. But

17 re-aging would be what it would be.

18 Q. So, after you read the Barron's article, you understood

19 that investors wanted to see less re-aging, correct, sir?

20 A. I would say investors would have preferred it. But we --

21 we -- just don't change because investors would like it. You

22 have to do what's right for the customer, right for the

23 company.

24 And, preferably, it would have been better if it went

25 down because they'd feel more comfortable.

Household Unsigned Page 3390 - 3393

 3392 

4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 Q. Okay.

 2 I'll show you what we'll mark as Exhibit 1476 for

 3 identification.

 4 MR. DROSMAN: A copy for counsel.

 5 (Document tendered to counsel and the witness.)

 6 BY MR. DROSMAN:

 7 Q. This is a deposition transcript, right?

 8 A. Yes, I believe it is.

 9 Q. It's your deposition, correct?

10 A. Yes, it is.

11 Q. Taken December 18th, 2003; is that right?

12 A. Yes.

13 Q. You were represented in that case; is that right?

14 A. Yes, I was.

15 Q. You were represented by a lawyer, right?

16 A. Yes.

17 Q. In fact, Mr. Kavaler represented you, didn't he?

18 A. Yes, he did.

19 Q. Mr. Sloane represented you in this case -- in that

20 deposition -- didn't he?

21 A. Yes.

22 Q. And that was for a different case than the one we're here

23 on today, isn't it?

24 A. I'm sorry, I --

25 Q. If you'll look at the top left-hand corner, you'll see the

Household Unsigned Page 3390 - 3393

 3393 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 198 of 245
4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 case caption.

 2 A. Oh, I see that.

 3 Yes.

 4 Q. And you answered the questions truthfully at that

 5 deposition; didn't you, sir?

 6 A. I believe I did, yes.

 7 Q. In fact, you were under oath to tell the truth, right?

 8 A. Yes, I was.

 9 Q. The same oath you're under today, correct?

10 A. Yes.

11 Q. And, then, if you turn to me -- to Page 37, just follow

12 along with me, if you would.

13 Let's look at 37, Line 25, to 38, Line 9. Okay?

14 A. I'm not there yet.

15 Page 37, what lines?

16 Q. I'm sorry, 33, Line 15, to 33, Line 25.

17 So, Page 33.

18 A. 33?

19 Q. Yes. I apologize.

20 A. It's okay.

21 Q. Do you see 33, Line 15?

22 A. I'm not there yet.

23 Q. Okay.

24 A. I'm going back.

25 Q. Just let me know when you arrive there?

Household Unsigned Page 3394 - 3397

 3394 

4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 A. I will.

 2 This is the HHS 33, right?

 3 Q. I was using the page of the deposition.

 4 A. Oh, I'm sorry.

 5 Q. Yes.

 6 A. Let me go to 33.

 7 Q. Do you see how each of the deposition pages is numbered in

 8 the top right-hand corner there?

 9 A. I do.

10 Q. Okay.

11 So, I'm talking about Page 33 of the deposition --

12 A. Let me get there.

13 Q. -- Lines 15 through 25.

14 A. I'm there.

15 Q. So, just read with me, if you would.

16 Question: "When you say people were worried about

17 it, what people?"

18 Answer: "Our investors said, basically, that they

19 would like to see less re-aging over time because the

20 perception that we may be risky, as raised in the Barron's

21 article, was hurting the company and hurting the stock."

22 Question: "So, when you refer to people, is it

23 people inside the company?"

24 Answer: "No."

25 Question: "You're referring to investors?"

Household Unsigned Page 3394 - 3397

 3395 

4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 Answer: "I'm referring to investors."

 2 Did I read that correctly, sir?

 3 A. I think you did.

 4 MR. KAVALER: Your Honor, objection. Improper

 5 impeachment. No inconsistency between his testimony today and

 6 his testimony then. It's the exact same testimony.

 7 THE WITNESS: That's the way I read it.

 8 MR. DROSMAN: Your Honor, I asked the question --

 9 THE COURT: Wait just a second.

10 If you don't mind, I'll rule on the objections.

11 THE WITNESS: Sorry about that.

12 THE COURT: I agree. I don't think that was

13 impeaching.

14 The jury will disregard it.

15 Ask your next question.

16 BY MR. DROSMAN:

17 Q. After you read the Barron's article, sir, you understood

18 that investors wanted to see less re-aging, correct?

19 A. They would feel better with less re-aging.

20 Q. Okay.

21 In fact, it's fair to say, isn't it, that the

22 re-aging issue raised in the Barron's article was an important

23 issue to you, isn't it?

24 A. Well, it became an important issue. It wasn't before.

25 Q. Right.

Household Unsigned Page 3394 - 3397

 3396 

4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 After you read the Barron's article, the re-aging

 2 issue that was raised in the Barron's article was an important

 3 issue to you, correct?

 4 A. Yes, it was, because investors were asking about it and I

 5 wanted to give them whatever they needed to know.

 6 Q. Right.

 7 More information, right?

 8 A. Correct.

 9 Q. More data, right?

10 A. That's right.

11 Q. All about re-aging, correct?

12 A. About everything they wanted to know.

13 Q. Right.

14 In this case, they wanted to know about re-aging,

15 right?

16 A. Yes.

17 Q. And you thought you needed to respond to the Barron's

18 article right away, right?

19 A. That's right.

20 Q. So, you went to the Goldman Sachs conference. You talked

21 about that yesterday.

22 Do you recall that discussion?

23 A. I did.

24 Q. And you went there a couple days after the Barron's

25 article, right?

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 1 presented this report, which you can see is quite lengthy,

 2 they presented a smaller version for the board, don't recall

 3 if this specifically was covered, and then gave all board

 4 members a copy of it to take with them.

 5 So I don't remember any of the details of this. I

 6 focused on the -- on the beginning, the executive summary, and

 7 the key issues that I had to know from the company's

 8 standpoint; did not get involved in the minutiae here, so I

 9 can't say that I know any of that.

10 Q. So on March 12th, when you received this report at

11 9:00 a.m. in the morning --

12 A. Right.

13 Q. -- you didn't read this, sir? Is that your testimony?

14 A. I'm saying every part of it.

15 Q. Well, I'm asking you particularly about the passage we

16 just reviewed.

17 A. No, I didn't -- I probably didn't read that, no.

18 Q. You didn't read that, right?

19 A. No.

20 Q. Okay. And your salary at this time was, what, $24 million

21 in overall compensation, is that right?

22 A. I don't remember it exactly that way.

23 MR. KAVALER: Objection, your Honor, form of the

24 question, his salary as opposed to overall compensation.

25 THE COURT: I'll overrule it. The witness can answer

Household Unsigned Page 3426 - 3429

 3426 

4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 the question.

 2 BY THE WITNESS:

 3 A. Whatever I was paid, I was paid.

 4 BY MR. DROSMAN:

 5 Q. Okay. And you didn't read this, is that right?

 6 A. No, I don't believe I did.

 7 Q. And you didn't read this despite the fact that you knew

 8 that investors were nervous about re-aging, right?

 9 A. That's right.

10 Q. And you didn't read it despite the fact that you wanted to

11 get more information out to investors, right?

12 A. Well, I did want to get more information out to investors;

13 but, you know, if I looked at the nits and gnats of every one

14 of five major businesses and went five levels below, I'd never

15 get my job done.

16 My job is to look at things that impact the bottom

17 line of the company in a big way; but you need to put in

18 perspective that each of these businesses has its own CEO, a

19 CFO, Chief Financial Officer, a chief credit officer, a head

20 of collections, and all of those people, including the

21 controllers and accounting support, work on putting our

22 packages together.

23 Now, for me to know the specifics of what Auto does

24 versus what Credit Card does, it would be a very bad use of my

25 time, a very bad use of my time.

Household Unsigned Page 3426 - 3429

 3427 

4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 Q. Sir, you were the one, you were the one that called Eugene

 2 O'Kelly, right?

 3 A. Yes, because -- exactly.

 4 Q. Sir, you can just answer my question.

 5 A. Yes.

 6 Q. Okay. And you had asked him perform this benchmarking

 7 study, didn't you?

 8 A. Absolutely.

 9 Q. Okay. And then you got a copy of it, right?

10 A. Yes.

11 Q. But you couldn't be concerned with the, I think your

12 words, nits and gnats, is that it?

13 A. I think -- I was concerned with the overall summary of the

14 report, and I left it to the rest of the management team to

15 deal with their specific areas, and I was comfortable that

16 what I got at the summary was quite good for me in what I

17 needed.

18 Q. Okay. So you didn't read this stuff about automatic

19 re-aging because it was nits and gnats, is that right, sir?

20 A. That's correct.

21 Q. Okay. Let's look at some other nits and gnats, shall we?

22 A. Well, it would be the same answer for the most part,

23 but --

24 Q. Go ahead and turn to page ending 258.

25 A. If you could put it up there, it would be great.

Household Unsigned Page 3426 - 3429

 3428 

4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 Q. And you see at the top left-hand corner, it says consumer

 2 credit unsecured, right?

 3 A. Right.

 4 Q. You understand that we're talking now about different

 5 types of loans, right?

 6 A. That's right.

 7 Q. Okay. And then we've got Household's policy there, right?

 8 Do you see that?

 9 A. Yes.

10 Q. And then there's a box entitled restructuring, re-aging

11 extensions.

12 Do you see that?

13 A. Yes.

14 Q. Okay. And then in the middle box where the two connect,

15 it says, "One payment in the last two months required to

16 restructure."

17 Do you see that?

18 A. I do.

19 Q. So you realized, right, on November -- on March 12th,

20 2002, at 9:00 a.m., that Household was restructuring loans on

21 one payment, right?

22 A. Actually, I didn't. My answer would be the same as I gave

23 you before. I didn't compare the minute restructuring

24 policies of each business at that level. We had people who

25 were responsible for that, and what I was concerned with is

Household Unsigned Page 3426 - 3429

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 200 of 245
4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 THE COURT: If there's an objection, you have to

 2 wait, and when I'm telling you to wait, you have to wait.

 3 Now your objection, please.

 4 MR. KAVALER: Objection to the form of the question.

 5 He transposed the witness's statement "I don't know that I'd

 6 say that" into a "you don't know that they'd say that."

 7 THE COURT: Well, I'll overrule the objection at this

 8 point in time, but just ask questions.

 9 MR. DROSMAN: Sure.

10 THE COURT: You don't need to repeat the answers.

11 MR. DROSMAN: That's fine, your Honor.

12 BY MR. DROSMAN:

13 Q. You know that KPMG didn't validate any of the information

14 contained in here, right?

15 A. That's my impression.

16 Q. Okay. Instead they accepted Household's representations,

17 right?

18 A. I suppose. I guess that's right.

19 Q. Well, sir, I don't want you to guess.

20 A. Well --

21 Q. They accepted Household's representations, didn't they?

22 A. I believe they did.

23 Q. So you provided KPMG with information about the re-aging

24 practices, and they wrote it down, right?

25 A. That's what it looks like.

Household Unsigned Page 3434 - 3437

 3434 

4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 Q. Turn to page ending 223.

 2 A. Are we going to put it up?

 3 Q. You see these are overall observations. You remember you

 4 reviewed this with Mr. Kavaler yesterday?

 5 A. Yes, I do.

 6 Q. You testified you took great comfort in these overall

 7 observations. Do you remember that?

 8 A. I do.

 9 Q. Okay. So let's take a look at the second bullet point

10 down. It says, "Except as described herein, Household

11 International policies are consistent with peer practices."

12 Do you see that?

13 A. Yes.

14 Q. So you must have read that, right? You did read that,

15 didn't you?

16 A. Yes, I did.

17 Q. On March 12th, 2002, is that right?

18 A. Yes, I did.

19 Q. 9:00 a.m.?

20 A. At some point, yes.

21 Q. At some point around that?

22 A. Maybe 9:05.

23 Q. And you must have read that and said, well, except as

24 described herein, what does that mean, right?

25 A. Absolutely.

Household Unsigned Page 3434 - 3437

 3435 

4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 Q. Okay. And then you looked at the information that we just

 2 looked at to determine what wasn't consistent with Household's

 3 peers, right?

 4 A. That's not my recollection.

 5 Q. You didn't do that, right?

 6 A. No, I think it's -- I think it's in the summary.

 7 There's -- they answer their comment there, as I recall. So I

 8 think if we go later in this document, we'll have an answer to

 9 that.

10 Q. Where Household's policies were not consistent with its

11 peers?

12 A. Yeah, I believe there's a short comment on that is my

13 recollection if we could find it.

14 Q. So March 12th, 2002, was significant for a reason other

15 than the fact that KPMG provided you with this benchmarking

16 study, right?

17 A. Well, it was a board meeting.

18 Q. And there was a 10-K that you filed on that day?

19 A. I didn't remember it was filed exactly on that day, but --

20 Q. You provided your annual report to investors on that day,

21 didn't you, sir?

22 A. I didn't remember that, but I'll accept that.

23 Q. You signed that report, didn't you?

24 A. Absolutely.

25 Q. And you reviewed it before you signed it, didn't you?

Household Unsigned Page 3434 - 3437

 3436 

4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 A. I did.

 2 Q. You looked at every page, didn't you, sir?

 3 A. Well, I looked at every -- mostly, yes.

 4 Q. Were there some pages you skipped, sir?

 5 A. No, I looked at every page.

 6 Q. Okay. Why don't I show you what's been marked as -- in

 7 evidence as Defendants' Exhibit 852.

 8 A. Are we done with the other one?

 9 Q. For the time being. You can put it aside.

10 You understand that this was the 10-K that Household

11 filed on March 12th, 2002, is that right?

12 A. I do.

13 Q. Okay. And you signed it, you said?

14 A. Yes, I did.

15 Q. And if you'd turn with me, would you, to page ending 798.

16 Are you on page 798?

17 A. I'm almost there.

18 Q. Okay.

19 A. I'm at 798.

20 Q. You see the second paragraph of text, do you see that?

21 A. I do.

22 Q. And it reads, "Our policies for consumer receivables

23 permit reset of the contractual delinquency status of an

24 account to current, subject to certain limits, if a

25 predetermined number of consecutive payments has been receive

Household Unsigned Page 3434 - 3437

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 201 of 245
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 1 and there is evidence that the reason for the delinquency has

 2 been cured."

 3 Do you see that?

 4 A. I do.

 5 Q. And there Household was setting forth its re-aging

 6 policies, right?

 7 A. That's one of them.

 8 Q. I'm sorry?

 9 A. Yeah, that's one of them, I assume.

10 Q. What do you mean that's one of them?

11 A. One of the statements in there. I assume there are more

12 than one statement in the whole document.

13 Q. That was the policy that Household told investors that you

14 used to re-age loans, right?

15 A. That's what it says.

16 Q. Okay. You needed two things, correct?

17 A. That's what it says.

18 Q. You needed consecutive payments, right?

19 A. That's what it says.

20 Q. And consecutive, you understand that means more than one,

21 don't you, sir?

22 A. I think I do.

23 Q. Okay. So at least two, right?

24 A. Right.

25 Q. Okay. And then you told investors that the reason for the

Household Unsigned Page 3438 - 3441

 3438 

4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 delinquency has been cured. You wouldn't re-age a loan unless

 2 that happened, right?

 3 A. That's what it says.

 4 Q. Well, that's what you told investors, right?

 5 A. Well, I signed the document, so I'm accountable for what's

 6 in it; but I have to say that in reading that, I didn't

 7 micromanage what those little pieces said.

 8 I relied on the input from the people who do this

 9 every day and the process we put in place; but I'm accountable

10 because I signed it, but I can assure you that I didn't, you

11 know, I didn't focus on the detail of this.

12 Q. You didn't focus on the detail -- you didn't focus on the

13 detail of this re-aging, is that your testimony, sir?

14 A. That's correct, like I read -- what I focused on are the

15 large financial issues the most and the C and D we do to the

16 investment community, and I look at the rest and I read the

17 rest; but I certainly don't, you know, look at that in detail

18 and try to contrast it with something to see if it's right.

19 Q. Okay. So you weren't focused on the re-aging policies

20 when you put together the 10-K, right?

21 A. I wasn't focused on the details of that. I relied on our

22 team to do it. We have a full financial team. We have a full

23 back-up of people who do this, and it's looked at by our

24 outside auditors as well before I sign it. And so I relied on

25 the expertise of people who do this for a living, but I'm

Household Unsigned Page 3438 - 3441

 3439 

4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 accountable because I signed it.

 2 Q. This was the nitty-gritty, right, sir? Is that right?

 3 A. Look at the size of the report. Do you expect me to know

 4 every word of the report and memorize it?

 5 Q. Well, for $24 million, sir, aren't you expected to know

 6 what's in the report?

 7 A. I know what's in the report generally, but I'm not -- I'm

 8 not knowledgeable about these kinds of details to the nth

 9 degree. I'm just not knowledgeable to this level.

10 Q. Right, because you just went out and commissioned a big

11 benchmarking study through KPMG, right?

12 A. And I got a response that was helpful to me and the board,

13 yes.

14 Q. Right, and you didn't read, according to your testimony,

15 some of the report that you received from KPMG?

16 A. That's correct, that's correct. I went with the

17 high-level view.

18 Q. Right. Some of the report that would have been directly

19 relevant to this particular 10-K, right, sir?

20 A. Yes.

21 Q. Okay. So you also said that you had to have evidence that

22 the reason for the delinquency had been cured, right?

23 A. That's what it says.

24 Q. And you didn't tell investors that you actually re-aged

25 with one payment, did you?

Household Unsigned Page 3438 - 3441

 3440 

4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 A. Not there.

 2 Q. You didn't tell investors that you actually re-aged

 3 automatically, did you?

 4 A. It doesn't say that.

 5 Q. Okay. You know that this was materially false and

 6 misleading, don't you?

 7 A. I understand it was incorrect at the time.

 8 Q. My question is, sir, you understand that this is

 9 materially false and misleading, correct?

10 A. You could say that.

11 Q. No, sir. I'm asking you a question.

12 Do you understand that this is materially false and

13 misleading?

14 A. I'll accept that characterization.

15 Q. Is that a yes, sir?

16 A. Yes.

17 Q. Let's take a look at a document that's Exhibit 1267 for

18 identification, Plaintiffs'.

19 You know what this is, right, sir?

20 A. Yes, I do.

21 MR. DROSMAN: This is Plaintiffs' Exhibit 1267. We

22 move it into evidence if it's not already in.

23 It's in evidence, your Honor. I apologize.

24 BY MR. DROSMAN:

25 Q. This is your 10-K/A, right?

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 3441 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 202 of 245
4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 couple of options, right?

 2 A. I sold two options, I believe, two of my options.

 3 Q. You said, sir, yesterday "I sold a couple of options,"

 4 right?

 5 A. Yes, I'll accept that.

 6 Q. Okay. And, sir, when you sold a couple of options, you

 7 made some money, right?

 8 A. Yes.

 9 Q. Okay. In fact, you made over 19 million during 1999

10 through 2002 by selling Household stock, right?

11 A. I thought that's what we covered yesterday, yes.

12 Q. Okay. You sold $28.1 million worth of Household stock

13 during the 1999-through-2002 period, right?

14 A. Based on options, yes.

15 Q. And you bought 8.7 million shares during the same period,

16 right?

17 A. I don't remember that, but --

18 Q. What's a million here or there?

19 A. I don't remember that. I don't -- I didn't look at that.

20 Q. That sounds familiar though, right?

21 A. It sounds right.

22 Q. Okay. So if you bought 8.7 and you sold 28.1, you netted

23 about 19 million, right? A little more?

24 A. I had to -- I think I had to pay for the ones I sold, so

25 that net may not be right, but 19 sounds fine with me. What's

Household Unsigned Page 3486 - 3489

 3486 

4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 your point?

 2 Q. That sounds like about what you made in option sales --

 3 A. That sounds about right.

 4 Q. -- through the 1999 through 2002 time frame, right?

 5 A. That sounds about right. Actually it's the '94 through

 6 2002 time frame because I never sold options before or after

 7 during that time frame.

 8 Q. So you waited until 1999 through 2002 to sell your stock,

 9 right?

10 A. Well, some have to vest.

11 Q. Right, but I'm just asking you, you waited. You didn't

12 sell before. You waited until the 1999-through-2002 period to

13 sell, right?

14 A. That's when I sold, but I also kept a whole lot that I

15 could have sold.

16 Q. Let's talk about your tenure at Household, sir. You

17 mentioned that you were CEO for eight years, right?

18 A. That's correct.

19 Q. When did you leave Household?

20 A. I left in 2005, I believe.

21 Q. 2005. And when did you begin working at Household?

22 A. '94.

23 Q. '94. That sounds like 11 years to me.

24 A. Well, it wasn't Household at that point, so I was CEO for

25 eight years.

Household Unsigned Page 3486 - 3489

 3487 

4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 Q. Okay. And so you never left Household, right?

 2 A. Well, I left -- I was no longer CEO after that. It became

 3 a division of another company, so --

 4 Q. Okay. Let's just walk through your tenure as CEO from

 5 1998 on, okay?

 6 A. Fine.

 7 Q. Sir, you brought Mr. Gilmer back from England in 1998 to

 8 run HFC, right?

 9 A. That's correct.

10 Q. And then you and Mr. Schoenholz hired Andrew Kahr at the

11 end of 1999 to work with Mr. Gilmer to accelerate growth,

12 right? No dispute there.

13 A. No dispute there.

14 Q. Okay. And then in July 1999, when our clients began

15 buying Household stock, it was selling for about 42 bucks a

16 share, right, sir?

17 A. I don't remember the price at the given point; but if you

18 show me something, I'll confirm it.

19 Q. Well, sir, you told me you had a ticker going on in -- all

20 around you, you were surrounded by the stock price, right?

21 A. Absolutely.

22 Q. So 42 bucks a share in the summer of 1999 sounds about

23 right?

24 A. Well, let's see, that's nine-and-a-half years ago, and to

25 know what it was the summer of '99 or in a given month or a

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4-22-09 Trial Day 16 4/22/2009 5:55:00 AM

 1 given day, I'd have a heck of a memory.

 2 Q. But it doesn't -- it doesn't sound like it's off by more

 3 than $5, does it?

 4 A. Probably not.

 5 Q. $42 a share?

 6 A. Probably not.

 7 Q. Okay. Then two years later in July 2001, stock's selling

 8 for about $69 a share, right?

 9 A. That's right.

10 Q. So it's gone up from 42 to 69, right?

11 A. That's right.

12 Q. Okay. So it's gone up over $25 a share, right?

13 A. That's about right.

14 Q. And that's because you're adding value to the company,

15 right?

16 A. It's because the company's performing well.

17 Q. And it's because of you. You're running the ship, right?

18 A. Only as good as the people you have.

19 Q. Okay. And you're driving the growth?

20 A. Part of the team.

21 Q. Okay. And because you're adding shareholder value, it's

22 okay to sell your stock and take some of that value, right?

23 A. It was appropriate to diversify some of my holdings.

24 Q. Okay. So then the truth starts to come out in November

25 of 2001, and the stock begins to drop, right, sir?

Household Unsigned Page 3486 - 3489

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 203 of 245
EXHIBIT 10 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 204 of 245
 Bley - redirect

 3809

 1 from, there's language that says, "The recency factor under 6

 2 indicates customer wants to pay debt with one payment;" and,

 3 then, it says, "We need to be very careful of doing

 4 rewrite-flipping."

 5 Do you see that?

 6 A. Yes.

 7 Q. Do you recall Mr. Vozar's testimony in his deposition

 8 about what that sentence means?

 9 A. It's -- this is -- I see this as a document from senior

10 management.

11 MR. DROSMAN: Objection, your Honor. Lack of

12 foundation. Move to strike. Non-responsive.

13 MR. KAVALER: Well, your Honor, counsel asked him

14 about the same document, picked out a sentence an inch above

15 this one. Apparently, he was capable of answering counsel's

16 questions. And, now, suddenly, counsel objects to him reading

17 the next sentence.

18 MR. DROSMAN: I move to strike that objection.

19 I have no objection to him asking about it. He

20 clearly doesn't remember the testimony.

21 THE COURT: I'll sustain the objection -- that it's

22 not responsive to the question. It seems not to be responsive

23 to your question.

24 Re-ask it.

25 MR. KAVALER: I will ask a different question.

Household Unsigned Page 3809 - 3812

 3809 

 3810

 1 THE COURT: Sure.

 2 BY MR. KAVALER:

 3 Q. To the extent you recall looking at this document in

 4 forming your opinion, what did you take away from the sentence

 5 or the part of a sentence that says, "We need to be very

 6 careful of doing rewrites -- flipping."

 7 Was Mr. Vozar advocating flipping or is he against

 8 flipping?

 9 A. It means he's against flipping. He's --

10 MR. KAVALER: No further questions, your Honor.

11 THE COURT: Anything else?

12 MR. DROSMAN: Nothing further from plaintiffs.

13 THE COURT: You may step down, sir.

14 (Witness excused.)

15 THE COURT: The next witness?

16 MR. KAVALER: Your Honor, we have a video we can play

17 at this time, but I thought we would segue directly into

18 the -- I thought this would be an appropriate time to go to

19 the mini summations, your Honor.

20 We do have a video to play.

21 THE COURT: Oh, you're right. We only have about 12

22 minutes.

23 MR. KAVALER: That was my point, your Honor.

24 THE COURT: Very well.

25 That will conclude the testimony for this week,

Household Unsigned Page 3809 - 3812

 3810 

 3811

 1 ladies and gentlemen.

 2 As usual, we will have the attorneys give six-minute

 3 summations -- their six-minute summations of the testimony

 4 during the week.

 5 I want to remind you that these summations, as all

 6 others by the attorneys, are not evidence in the case. They

 7 constitute merely the attorneys' attempts to summarize the

 8 evidence and to describe for you the reasonable inferences and

 9 conclusions that they feel you should draw from the evidence.

10 If, what the attorneys describe either as evidence or

11 as their conclusions conflict with anything you have seen or

12 heard, you are to disregard what they say and rely upon your

13 own recollections of the evidence.

14 In addition, I want to read to you an instruction

15 regarding some previous testimony at this point in time.

16 During his testimony, among other things, Mr. Devor,

17 the expert attorney -- the expert witness for the plaintiffs

18 -- gave his opinion that Household had a duty to disclose any

19 predatory lending practices in certain 10-Q and 10-K filings

20 that they had with the SEC.

21 Whether such a duty to disclose existed as to any

22 particular 10-Q or 10-K filing is for you to decide on the

23 basis of the evidence and the instructions that I will give

24 you at the end of the trial.

25 Accordingly, I instruct you to disregard that portion

Household Unsigned Page 3809 - 3812

 3811 

 3812

 1 and only that portion of Mr. Devor's testimony.

 2 I recognize plaintiff.

 3 MR. DOWD: Thank you, your Honor.

 4 Ladies and gentlemen, I was going to talk to you

 5 about a couple of things; but, before I start, I just wanted

 6 to say, you know, I sit here and I listen to testimony, where

 7 somebody says, you know, "Gary Gilmer, he walked the walk, he

 8 walked the walk," you know, because he sent out some e-mails

 9 that said "everybody be good"?

10 What happened when he had the chance to walk the

11 walk, when Dennis Hueman's video got found out?

12 Now, you know what he did? He didn't walk the walk

13 one bit, did he? He just talked the talk.

14 But Dennis Hueman kept his job, didn't he? And,

15 then, they sit here and say, "The tone at the top was great."

16 Think about those kind of things, ladies and

17 gentlemen. That's evidence. That's evidence. He could have

18 walked the walk and he didn't. All he ever did was talk the

19 talk. And that's the kind of thing you've got to think about.

20 But what I wanted to talk to you about today was two

21 of the witnesses you saw this week. We called Professor Dan

22 Fischel to the stand to testify, basically, about damages.

23 You know, when you're doing somebody's

24 qualifications, as the attorney put putting the expert on, you

25 want people to understand that the guy's qualified; that he's

Household Unsigned Page 3809 - 3812

 3812 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 205 of 245
4-24-09 Jury Instructions Hearing 4/24/2009 9:35:00 AM

 1 that's not the way the language appears in Tellabs.

 2 MR. BURKHOLZ: I could modify that, your Honor, to

 3 have the exact language from Tellabs. I thought we were

 4 pretty close.

 5 I'm looking at it. It says, "Corporate liability for

 6 a violation of 10b-5 requires -- "

 7 THE COURT: Slow down and louder.

 8 MR. BURKHOLZ: Sorry about that.

 9 I'll read it in, again.

10 "To establish corporate liability for a violation of

11 10b-5 requires 'looking to the state of mind of the individual

12 corporate official or officials who make or issue the

13 statement, or order or approve it or its making or issuance,

14 or who furnish information or language for inclusion therein

15 or the like.'"

16 That's it.

17 THE COURT: I think that's pretty much what I said,

18 isn't it?

19 MR. BURKHOLZ: It is.

20 THE COURT: Is there a structure in there that I

21 don't -- that I'm missing?

22 Is there a structuring of that sentence that I'm

23 missing?

24 MS. BEER: I'm sorry?

25 THE COURT: What am I missing here? You were arguing

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 3840 

4-24-09 Jury Instructions Hearing 4/24/2009 9:35:00 AM

 1 that --

 2 MS. BEER: Well, we're arguing, first of all, that

 3 the sentence should not be included in the instruction at all.

 4 THE COURT: Okay.

 5 And why is that?

 6 MS. BEER: Because there's been no -- there's no

 7 court in this circuit that has imposed liability on the basis

 8 of the scienter of individuals within the organization, who

 9 were not also the persons who issued the statement.

10 THE COURT: You mean no district courts?

11 MS. BEER: There's no court.

12 THE COURT: Okay.

13 MS. BEER: The Tellabs case recites this language,

14 but it does not deal with this issue.

15 THE COURT: Right. But it appears to be the most

16 recent instruction that we can glean from Seventh Circuit

17 opinions on the precise issue that we're talking about now,

18 right?

19 You're telling me it's not a holding, but it appears

20 to be the best language we have right now to interpret the

21 Seventh Circuit's thinking on this precise issue. Why

22 shouldn't we adopt it?

23 MS. BEER: The language appears in the Tellabs case,

24 in a section in which the court is attempting to limit the

25 scope of the corporate scienter doctrine, not in a context in

Household Unsigned Page 3840 - 3843

 3841 

4-24-09 Jury Instructions Hearing 4/24/2009 9:35:00 AM

 1 which they're attempting to expand it beyond those who are

 2 individual defendants.

 3 The case that the Court draws the language from --

 4 the Southland Securities case in the Fifth Circuit -- quotes a

 5 case from California -- the Apple Computer case -- in which

 6 the court says, "It is not enough to establish fraud on the

 7 part of a corporation that one corporate officer makes a false

 8 statement."

 9 THE COURT: No, no, I missed that whole first part.

10 You have got to slow it down a bit for me.

11 MS. BEER: The Southland case from the Fifth Circuit,

12 the Apple Computer Securities Litigation case from the

13 Northern District of California are the authorities that the

14 Tellabs case is relying on. Those cases both refused to find

15 or permit cases to proceed on allegations that the scienter of

16 a corporation could be established on the basis of the

17 scienter of an employee or officer of the corporation, who was

18 not also the individual who had made the allegedly false

19 statement.

20 So, the same language that is appearing in Tellabs --

21 that is now being argued to open the doors more widely -- was

22 quoted in Tellabs in exactly the opposite direction and --

23 THE COURT: Well --

24 MS. BEER: -- was applied in the cases that are being

25 cited to limit liability to -- to limit the imputation of

Household Unsigned Page 3840 - 3843

 3842 

4-24-09 Jury Instructions Hearing 4/24/2009 9:35:00 AM

 1 scienter to those persons who had also made the statements.

 2 And if I could just clarify the timing point.

 3 If we're going to be looking to the state of mind of

 4 individuals, other than the individual defendants and the

 5 corporate spokespersons, that state of mind needs to be

 6 assessed at the time they provided the information.

 7 THE COURT: Of course. When else?

 8 But we --

 9 MR. KAVALER: Your Honor --

10 THE COURT: -- haven't gotten to that issue yet.

11 I just don't understand how it is that, because the

12 language that establishes the scope of the corporation's

13 liability in regards to the acts of its employees, was applied

14 to a certain set of facts -- and, the result reached was that

15 there was no liability -- that that language is somehow not

16 valid to be applied to the set of facts that we have in this

17 case.

18 The language is the language. Whether it resulted in

19 a no-liability finding, in Tellabs or any other case,

20 shouldn't determine whether we apply the language in this

21 case, should it?

22 Whether there's going to be a resulting liability or

23 lack of liability will depend on the facts in this case; and,

24 fortunately, that's a determination that the jury will make in

25 this case, not the Court, because we're at the stage where

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 3843 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 206 of 245
4-24-09 Jury Instructions Hearing 4/24/2009 9:35:00 AM

 1 The chances that they're going to win this case on

 2 this instruction and nothing else are about like that

 3 (indicating); and, the door for an argument on appeal, that

 4 they're opening up, is like this (indicating).

 5 What's the risk benefit here?

 6 But that's not my decision to make. It's not my

 7 decision to force on a case. That's the decision for the

 8 litigants to make.

 9 And I could say the same thing about defendants, as

10 well, frankly, on many occasions. But more so the plaintiffs

11 usually.

12 So, given that they're asserting this theory of

13 liability, it seems to me that -- I think that the Makor or

14 Makor case language tells us what the law is, or is likely to

15 be, as close as we can come in this circuit when it arrives up

16 there. And I think that's the language that we should use in

17 instructing the jury.

18 I think we should tell them -- and how we put it in

19 here is a different matter. I mean, I'm looking at a false or

20 misleading statement instruction, where we talk about, "The

21 plaintiff must prove that the defendant made a false or

22 misleading statement." Not necessarily so.

23 I mean, "made," "issued," "ordered," "provided false

24 information to be included in," I think there's evidence as to

25 most of those. And it seems to me that that's a place where

Household Unsigned Page 3848 - 3851

 3848 

4-24-09 Jury Instructions Hearing 4/24/2009 9:35:00 AM

 1 we start incorporating this language.

 2 Go ahead.

 3 MR. BURKHOLZ: Well, I don't know if we need to do

 4 that. I think the defendant is Household. They make the

 5 statements. Their scienter is what we're struggling with --

 6 the definition.

 7 THE COURT: That's one defendant. But unless I'm

 8 mistaken, there was a substantial amount -- or you asked a

 9 substantial number -- of questions of -- oh, who was the lady

10 that --

11 MR. BURKHOLZ: Ms. Hayden-Hakes.

12 THE COURT: Yes, Ms. Hayden-Hakes.

13 -- about who told her to say this and did she have

14 knowledge or did she get the knowledge from somebody else, as

15 to the various public statements that she made.

16 Are those statements attributable to the defendant

17 that gave her the information to include in the statements?

18 MR. BURKHOLZ: Well, the statements are attributable

19 to the company that she's making.

20 THE COURT: Yes.

21 Are they attributable to the defendant who told her,

22 "Go out there and say that there's no predatory lending"?

23 Are you going to argue that? Is Mr. Dowd going to

24 argue that in closing? Is he going to say, "He told her to

25 say those things"?

Household Unsigned Page 3848 - 3851

 3849 

4-24-09 Jury Instructions Hearing 4/24/2009 9:35:00 AM

 1 MR. BURKHOLZ: That goes to the scienter issue of the

 2 company.

 3 THE COURT: It goes to the making of the statement

 4 issue, as well.

 5 MR. BURKHOLZ: Well, that's the company's statement;

 6 and, the scienter of the company, you look at the --

 7 THE COURT: So, you are not going to argue that when

 8 Mr. Gilmer said to Ms. Hayden-Hakes, "Go out there and make

 9 this statement," but when they got together and discussed it

10 and when they put together the statements that she was going

11 to issue to the press, that the statements she subsequently

12 made were statements also made by Mr. Gilmer, that he can be

13 held accountable for those?

14 You're not going to argue that? You're just going to

15 argue that the corporation can be held liable?

16 MR. BURKHOLZ: Right. The individual defendants are

17 liable for the company's statements.

18 THE COURT: Gee, there you go. Okay.

19 So, you're going to argue just the company's liable;

20 and, then, you're going to, because the company is liable for

21 that statement, say that you're going to impute the company's

22 intent to Mr. Gilmer and to Mr. -- well, the other defendants?

23 MR. BURKHOLZ: Aldinger and Schoenholz.

24 THE COURT: Yes.

25 Is that your theory?

Household Unsigned Page 3848 - 3851

 3850 

4-24-09 Jury Instructions Hearing 4/24/2009 9:35:00 AM

 1 MR. DOWD: Your Honor, I think it depends which

 2 statements we're talking about.

 3 I mean, the issue I think --

 4 THE COURT: I'm asking but all them because I want to

 5 know if I should instruct the jury as to all them.

 6 MR. DOWD: I understand, your Honor.

 7 I think it's -- I mean, I think it's true that the

 8 defendants, to the extent that they're involved in furnishing

 9 the statements, they're liable for them.

10 THE COURT: Well, the instruction we have right now,

11 you know, just says, "prove that the defendant made a false or

12 misleading statement of fact or omitted a fact that was

13 necessary"; and, if that's the case, then -- and if that's all

14 there is -- and I don't know that the statements made by any

15 of their subordinates, that were -- that they ordered or

16 issued or provided the information for, are statements that

17 they would be liable for.

18 MR. BURKHOLZ: Well, but we have the -- I think it's

19 the -- respondeat superior statement that talks about the

20 company is --

21 THE COURT: You're focusing on the corporation's

22 liability. I'm focusing right now on the individual

23 defendants. Okay?

24 What I don't want is for Mr. Dowd to get up and

25 argue, "You know, Mr. Gilmer told Ms. Hayden-Hakes to supply

Household Unsigned Page 3848 - 3851

 3851 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 207 of 245
4-24-09 Jury Instructions Hearing 4/24/2009 9:35:00 AM

 1 this information to the press." She did it and that's a false

 2 and material misleading statement by him. And for the

 3 defendants to get up and say, "Objection. It's not what the

 4 instructions say. Objection, your Honor." He shouldn't even

 5 be allowed to argue that.

 6 And for the jury, then, to go back with no guidance

 7 on that -- because I have -- I mean, unless those questions

 8 you were asking her about -- where she got the information and

 9 who told her to make the statement and whether she had

10 independent knowledge of the truth or falsity of the statement

11 she was making -- were going nowhere, I assumed that you were

12 going to make that argument.

13 If you're not, that's fine. I'd rather not instruct

14 the jury.

15 But if you are going to make that argument, then I

16 think we need to instruct the jury as to, essentially, the

17 language in the Makor case, that that's what we're talking

18 about. We're talking about -- I think other cases have called

19 it -- "substantial participation."

20 And the corporation, it seems to me, is the same

21 language with respect to scienter. If it fits within that

22 Makor language, how do we instruct on that? There's a

23 different --

24 MR. DOWD: I think --

25 THE COURT: We find the defendants' instruction,

Household Unsigned Page 3852 - 3855

 3852 

4-24-09 Jury Instructions Hearing 4/24/2009 9:35:00 AM

 1 where?

 2 MR. BURKHOLZ: It's on Page 60- -- I think it starts

 3 on Page 63 of their red-lined version -- 63 of their red-line

 4 version. The language that they have proposed is on the

 5 bottom of 64, running into 65 of their red-line version they

 6 propose.

 7 THE COURT: So, what about their language do you

 8 oppose?

 9 MR. BURKHOLZ: The -- I guess the -- what's missing

10 is the "or furnishing information or language for inclusion"

11 in the statement, which would go on the top of Page 65 after

12 "In making a false statement or omission of material fact."

13 MS. BEER: We object, your Honor, to the addition of

14 that language as being unsupported by controlling law in the

15 Seventh Circuit and not supported by the factual record of

16 this case.

17 THE COURT: Then what do we tell the jury about scope

18 of employment? Do you think they know what that is?

19 Does the defense have a definition for "scope of

20 employment" language?

21 MS. BEER: We did not include a definition of the

22 language on the assumption that it is relatively common

23 terminology that --

24 THE COURT: Well, among lawyers, I'm sure it is; but,

25 I don't know too many lay people who walk around talking about

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 1 scope of employment, do you?

 2 Well, I mean, in my circles they don't, maybe in your

 3 circles --

 4 (Laughter.)

 5 THE COURT: -- I don't know.

 6 Actually, I think I lost a page here: "Was acting

 7 within the scope of his or her employment."

 8 Well, I guess I could suggest language from the

 9 Illinois pattern jury instructions, which reads something

10 like, "An agent is acting within the scope of his authority if

11 he is engaged in the transaction of business, which has been

12 assigned to him by his principal; or, if he is doing anything

13 which may reasonably be said to have been contemplated as a

14 part of his employment.

15 "It is not necessary that an act or failure to act

16 must have been expressly authorized by his principal."

17 MR. BURKHOLZ: That's fine with plaintiffs.

18 MS. BEER: We have no problem with the language, your

19 Honor.

20 Where would this fit into the instruction?

21 THE COURT: I don't know. You folks are proposing

22 the instructions. I guess it would fit in about where -- or

23 it may be a separate instruction to add after the instruction

24 on scienter.

25 MS. BEER: It might make sense, then, your Honor, to

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 1 pull all of the material, rather than doing a separate

 2 instruction only on the scope of employment, to put -- pull --

 3 all of the material on the imputation of an employee's state

 4 of mind to the corporation, into that separate instruction.

 5 THE COURT: Yes, there's a lot of ways of doing it

 6 for sure. I have no preference, one way or the other. I

 7 think that first we need to go back and revisit the language

 8 on the first element of the 10b-5 claim, to include language

 9 in the Makor case, which makes perfect sense to me.

10 I mean, it just makes -- it's just logical that an

11 individual defendant's liability for violating the rules

12 against fraud in the sale of securities, should not depend on

13 whether he, himself, actually uttered the words that caused

14 the violation, but should also be assigned to him if he

15 provided the information for that purpose or ordered someone

16 else to do it or directed someone else to do it.

17 I can't -- it would be a really crab reading, I

18 think, of the statute, not to conclude that.

19 And, then, with respect to scienter --

20 MS. BEER: Can we back up to that just for a moment,

21 your Honor? I'm sorry to interrupt.

22 If that language is introduced, what's the point of a

23 20-A claim? Maybe I'm missing something in this, but I don't

24 see the distinction between "imposing liability on an

25 individual defendant for statements he did not make" and

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 1 "imposing liability on that individual defendant, as the

 2 controlling person who caused someone else's statements."

 3 THE COURT: Well, I don't think it's quite the same

 4 thing. For example, "controlling person" depends on

 5 establishing a primary liability. So, if the theory is that,

 6 for example, Mr. Gilmer is liable for what Ms. Hayden-Hakes

 7 said, you would first have to establish that Ms. Hayden-Hakes

 8 committed a liability -- was liable; committed a violation of

 9 10b-5. And if she did not have the requisite intent or

10 scienter, that fails. It's a non-starter. It doesn't even

11 get there.

12 So, whether he's her controlling person or not

13 doesn't bring liability on him.

14 I think "controlling person" is for a slightly

15 different situation. I mean, it's for the situation where

16 Ms. Hakes actually had the Full Monty, if you will. She made

17 the statement, she knew it was false, she had the intent, she

18 had everything. And Mr. Gilmer was her controlling person.

19 This is exactly the opposite situation, really -- what we're

20 talking about.

21 We're talking about -- we're talking about -- sending

22 liability in a different direction in the situation that we're

23 involved in.

24 MS. BEER: If we started off talking about the

25 individuals who provided information to the individual

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4-24-09 Jury Instructions Hearing 4/24/2009 9:35:00 AM

 1 defendants --

 2 THE COURT: That's not what we're talking about.

 3 We're talking about the individual defendants as the

 4 individuals who provided information to those who are not

 5 defendants.

 6 Mr. Gilmer, who is a defendant, providing information

 7 or instruction or instructing or ordering Ms. Hakes to tell a

 8 lie; to commit a fraud under 10b-5 -- which, I think, is the

 9 whole crux of the cross-examination that they were doing of

10 Ms. Hakes -- as to whether she knew the truth of what she was

11 saying as to where she got the information, who it came from.

12 I don't see how, given that situation, we're somehow

13 eradicating "controlling authority" liability.

14 MS. BEER: We started off with attempting to analyze

15 the instructions in which the corporation can be found to have

16 a wrongful state of mind on the basis of the actions of

17 employees who did nothing but provide information to someone

18 else who made a statement.

19 THE COURT: Okay.

20 MS. BEER: Now, we're talking about providing --

21 finding liability on the part of an individual defendant

22 who -- for a statement that individual defendant did not make,

23 on the basis that that individual provided information to

24 someone else who did speak.

25 Am I following that correctly? It seems we've

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4-24-09 Jury Instructions Hearing 4/24/2009 9:35:00 AM

 1 shifted to something quite different.

 2 THE COURT: Well, we're talking about two things.

 3 Along the way, it struck me -- as I was looking at the

 4 scienter materials, based upon the conversation we had last

 5 time -- that the language that the Seventh Circuit used in its

 6 scienter discussion also applied to the making of a statement.

 7 I mean, they talked about not only uttering the

 8 statement, but providing information for it, and so on.

 9 And, so, it appeared to me that it would be necessary

10 or appropriate to go back to our instruction on making a false

11 or misleading statement and include that language in it.

12 Ultimately, we're back at where we started out, which

13 is imputing the scienter to the corporation and how we should

14 instruct there. And it shouldn't surprise anyone that some of

15 the same language applies to both questions.

16 So, it's not as if I started out saying one thing or

17 doing another. It's that the language led me to consider

18 something else and I brought it up here.

19 MS. BEER: I think it may be that a part of the

20 difficulty comes from attempting to break the cause of action

21 down into the elements. Because the act that provides a basis

22 for liability includes both the making of a statement and the

23 wrongful state of mind; and, by atomizing those into separate

24 elements to be analyzed, we're separating -- we're maybe

25 separating -- them too far.

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4-24-09 Jury Instructions Hearing 4/24/2009 9:35:00 AM

 1 And if we end up with a situation where one person

 2 does the statement -- makes the statement -- and another

 3 person has the state of mind, it's one thing to talk about

 4 that going up to the corporation, and quite another thing to

 5 say that someone who didn't make the statement can now have --

 6 that liability can be imposed on someone who didn't make a

 7 statement, without finding the elements of the cause of action

 8 as to that individual.

 9 THE COURT: Well, I mean, the argument seems to me

10 you're making -- and now we are talking about the individual

11 liability -- is that if -- I hate to pick on him, but, again,

12 let's use Mr. Gilmer.

13 If Mr. Gilmer said to Ms. Hakes -- if Mr. Gilmer

14 believed in his heart of hearts and his mind that the company

15 was involved in predatory lending practices and he said to

16 Ms. Hakes, "Go out there and tell them we're not involved in

17 any such thing," that he would not be liable under 10b-5.

18 Is that your argument?

19 MS. BEER: No, that's not my argument.

20 THE COURT: Okay.

21 Well, that's all I'm saying is that by including the

22 language in our "false or misleading" instruction -- "ordered

23 approved or furnished information to be included in the

24 statement" -- the person can be liable, assuming that all the

25 other elements are met, as well, of course.

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 209 of 245
4-27-09 Trial Day 19 4/27/2009 5:24:00 AM

 1 Next is Court's 24, previously 23.

 2 MS. BEER: Your Honor, there's a sentence that's been

 3 omitted from the instruction on 10b-5 elements. There's a

 4 reference, in the paragraph on Arthur Andersen, at the very

 5 end of that paragraph a reference to a verdict form; but

 6 there's been no previous reference anywhere in the

 7 instructions to a verdict form.

 8 Defendants' previous version of this instruction

 9 included the sentence, "When you retire to deliberate, you

10 will be provided with a verdict form on which you will record

11 your decision as to each defendant on each of the essential

12 elements."

13 I would request that that sentence be restored to the

14 instruction immediately after paragraph number -- the numbered

15 paragraph four, the fourth element, in order to, A, explain

16 that there will be a verdict form and to lay the predicate for

17 the reference to a verdict form at the end of the final

18 paragraph of this instruction.

19 THE COURT: Plaintiff.

20 MR. BURKHOLZ: I don't even see the language in their

21 proposed red line version that was just referenced by counsel.

22 I think if the Court wants to make any reference, it

23 could just say at the end "as explained on the verdict form

24 that will be provided to you with the instructions."

25 THE COURT: Just leave it the way it is. We say

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4-27-09 Trial Day 19 4/27/2009 5:24:00 AM

 1 included verdict form, and a few minutes later we'll be

 2 explaining to them the included verdict form. If that did not

 3 take place, I guess this would be confusing; but given that, I

 4 don't think it's -- I don't think it is.

 5 Next is the Court's 24, previously 23, false or

 6 misleading.

 7 MR. BURKHOLZ: I believe this was the language we

 8 agreed upon last week that I tried to incorporate from the

 9 Court's ruling into the instruction.

10 MS. BEER: Your Honor, we have an alternative version

11 of this instruction that I'd like to hand up. We spent a good

12 deal of time discussing it. And -- and I think our discussion

13 was not really a linear discussion. We split off into other

14 things, and I'm not sure that the record of the conference

15 last week provides a very clear indication of just what the

16 decisions were as to this instruction. So I'd like to propose

17 the defendants' alternative instruction, if I may.

18 THE COURT: Sure.

19 (Tendered.)

20 THE COURT: Thank you.

21 MS. BEER: That's a copy for Mr. Burkholz.

22 This attempts to clarify the language that we were

23 discussing on Friday, and as well to -- to incorporate a

24 clearer description of when a duty to disclose arises and

25 incorporate -- the last three pages of this should be --

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4-27-09 Trial Day 19 4/27/2009 5:24:00 AM

 1 should be removed. I'm sorry. They shouldn't be on there.

 2 If I could exchange that, something got mixed up in the

 3 copying, your Honor.

 4 (Tendered.)

 5 THE COURT: You want this back? Is that what you're

 6 saying? These are your private notes?

 7 MS. BEER: I can take it back, your Honor. It just

 8 mixed up something in the copying machine that wasn't part of

 9 this instruction. And I'll exchange with Mr. Burkholz the

10 copy with the research being done on something else. If I

11 could have that copy back, please?

12 (Tendered.)

13 MS. BEER: This also incorporates, your Honor, the

14 instruction that was given on the record during the trial

15 regarding Mr. Devor's testimony.

16 (Brief pause.)

17 THE COURT: I think I'm missing my original version

18 of this. Let me -- I think that would have been my 23, I

19 think.

20 MS. BEER: I have another copy if you'd like, your

21 Honor.

22 Would you like a copy, your Honor?

23 THE COURT: I would like the one I marked up frankly.

24 It's got my notes and what I said.

25 Let me take ten minutes, and then hopefully I'll be

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4-27-09 Trial Day 19 4/27/2009 5:24:00 AM

 1 able to find that.

 2 (Recess taken.)

 3 THE COURT: Well, I was only partially successful in

 4 finding my marked-up version.

 5 So what's the plaintiffs' response to defendants'

 6 proposed false or misleading statement instruction?

 7 MR. BROOKS: Judge, we think the instruction that --

 8 THE COURT: Look up, speak loudly.

 9 MR. BROOKS: We think the instruction, your Honor,

10 that has been edited by plaintiffs and submitted is proper.

11 There's a lot in here in defendants' instruction

12 especially on the duty and reiterating the instruction that

13 the Court has already given once to the jury about Mr. Devor's

14 testimony is completely improper, both legally, you know, from

15 a duty standpoint and also improper in the way that it's

16 phrased for a jury instruction. Essentially they're telling

17 the jury what to find on duty, which, of course, is not

18 correct.

19 So we object wholesale, Judge, to this substitution

20 instruction and advance our edits that I believe are the

21 result of the discussion last week to instruction -- former

22 instruction 23 on false and misleading.

23 MS. BEER: The two instructions, your Honor, are

24 really not all that different; and I believe in a case that

25 principally relies on alleged omissions, it is important for

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 210 of 245
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 1 the jury to receive clear instructions on when a duty to

 2 disclose arises.

 3 We've already had some confusion on that, and that's

 4 the reason for the instruction concerning Mr. Devor's

 5 testimony. That's the reason for repeating the instruction on

 6 Mr. Devor's testimony in the final instructions that are given

 7 to the jury to ensure that it's an instruction that they will

 8 remember.

 9 The edits that are incorporated in the version that

10 plaintiffs circulated last night include actually one sentence

11 that's completely backwards and the statement that an omission

12 is misleading only if the defendant has a duty to disclose the

13 omitted fact.

14 We've twisted and teased this language so much that

15 we've just gotten it completely backwards. The omission is

16 not misleading if there's a duty. There is a duty if the

17 statement with the omission is misleading.

18 Much of the rest of the instruction on the --

19 Household is required to file with the SEC, Household is

20 required to prepare its financial statements regarding GAAP,

21 the two instructions really don't differ very much on those,

22 if at all.

23 MR. BURKHOLZ: I'll just point out that defendants'

24 instruction also took out what the Court had worked up as a

25 sentence, but each defendant has a duty to disclose a fact if

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4-27-09 Trial Day 19 4/27/2009 5:24:00 AM

 1 a prior statement he or it made about the same subject would

 2 be misleading if the fact is not disclosed. The Court had

 3 worked up that language, and that's even taken out of the

 4 defendants' new submission.

 5 MS. BEER: The sentence remains in the defendants'

 6 instruction that if a defendant does not have a duty to

 7 disclose a fact but chooses to make a statement about it, the

 8 statement must be truthful and not misleading. I don't think

 9 that's different.

10 MR. BURKHOLZ: Well, there's a sentence before that

11 that the Court had worked up that has now been taken out of

12 the defendants' proposed instruction.

13 MS. BEER: If the plaintiffs' intention in including

14 that sentence in the instruction is to start down the road of

15 suggesting to the jury that a duty arises because of a duty to

16 correct a prior statement, that's an entirely different

17 instruction. That's out of context with the initial

18 explanation of why a duty to disclose arises under 10(b) if

19 the omission of information creates a misleading statement.

20 THE COURT: I think I want to put this proposed

21 instruction in the mix at this point. I think it becomes

22 quite relevant, if you folks want to come up.

23 (Tendered.)

24 MR. BROOKS: Your Honor, are you thinking about

25 putting this somewhere in between the second to last and last

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4-27-09 Trial Day 19 4/27/2009 5:24:00 AM

 1 paragraphs there of the instruction that we handed up?

 2 THE COURT: Yes, or as its own separate instruction.

 3 MR. BROOKS: I think the plaintiffs are fine with

 4 that either way, Judge.

 5 THE COURT: Defendants?

 6 MS. BEER: I think one issue we have, your Honor, is

 7 the potential ambiguity in the phrase "to prevent another

 8 statement made in a 10-K, 10-Q or elsewhere, the duty to

 9 disclose arises if the omitted information causes" -- you have

10 to look at the statement that was made to look at whether it

11 is rendered misleading by the omission of information and

12 opening the possibility that you can look for a duty to

13 disclose by finding a misleading statement in some other

14 document or even elsewhere in a 10-K, which is a huge documen

15 that covers a number of different subjects, introduces an

16 ambiguity that I think moves us away from the actual

17 definition of what gives rise to a duty to disclose.

18 THE COURT: Well, what should you be looking at? I

19 guess what I'm thinking of, the clearest example is if, say,

20 Mr. Aldinger got up the day before the release of the 10-K and

21 said, "And we don't conduct or engage in predatory lending

22 practices, and if you want to see the proof of that, take a

23 look at our 10-K that we're filing tomorrow."

24 And the 10-K has nothing but a statement of revenues

25 in its financial statement. Should it have more? Would the

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4-27-09 Trial Day 19 4/27/2009 5:24:00 AM

 1 law require it to have more under those circumstances?

 2 MS. BEER: In looking at the 10-K -- in looking to

 3 determine whether the language in the 10-K is rendered

 4 misleading by any omission, you look to the language in the

 5 10-K.

 6 THE COURT: So in that situation, what would your

 7 answer be?

 8 MS. BEER: My answer would be that to find a duty to

 9 disclose on the basis of an omission, the analysis would be

10 directed to the statement actually made in the 10-K, whether

11 that statement is misleading because the information --

12 because any information -- because whether that statement is

13 rendered misleading by the omission of information, whether

14 someone reading that statement on its own will find

15 information in that statement that causes that person to be

16 misled --

17 THE COURT: But the question is do you have to read

18 it on its own, given the fact that you're to look at a

19 statement and consider all of the circumstances regarding it,

20 its issuance? If the circumstances before its issuance was

21 that -- let's make it even more stark.

22 Let's say Mr. Aldinger stood up holding the 10-K in

23 his hand and said, "We don't engage in predatory lending

24 practices and the proof of it is look at the disclosures we've

25 made in our 10-K, and here it is, folks. Check it out." And

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 211 of 245
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 1 all the 10-K has is a statement of revenue, and it later turns

 2 out that they had engaged in predatory lending practices.

 3 Would the 10-K statement be misleading without any

 4 explanation, given that context?

 5 MS. BEER: The statement about the 10-K?

 6 THE COURT: The statement in the 10-K of the revenues

 7 earned for that year.

 8 MS. BEER: No, your Honor, I don't believe it would

 9 be.

10 THE COURT: Financial statement says we earned

11 $50 million this year.

12 MS. BEER: I don't believe you can import information

13 from a separate statement into a 10-K. You can look at the

14 language that is used in the 10-K and determine if that

15 language is misleading because something was omitted.

16 MR. BROOKS: We disagree, your Honor. We think that

17 statements that are made, especially when they're relating to

18 omissions, need to be looked at in context.

19 I think that's one of the main arguments that

20 defendants have advanced in this case actually when they're

21 talking about truth on the market and other things, but I

22 think that the issue here is whether the statement that gives

23 rise to the duty has to be the same as the statement that is

24 the false statement, and the plaintiffs' position is that that

25 is not the case.

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4-27-09 Trial Day 19 4/27/2009 5:24:00 AM

 1 If there's a statement that gives rise to a duty to

 2 disclose and absent disclosure the subsequent statement or the

 3 different statement in the same document is false and

 4 misleading because of that failure to disclose, we think that

 5 that's actionable, Judge, and that's why this is an

 6 appropriate instruction.

 7 THE COURT: Well, I mean I think that's the Court's

 8 position, that if the breadth of the context is such that the

 9 statements are essentially intertwined, then it could lead to

10 a duty to disclose in the 10-K financial statement itself.

11 Whether that's -- or to what extent that's been attained in

12 this case is still a circuit question, but I think that as I

13 tried to make clear with my example, I'm not sure I did, but

14 if the CEO of a corporation says we're going to disclose

15 everything there is to disclose about our predatory lending

16 practices in our financial statement that we're filing, in our

17 10-K financial statement that we're filing tomorrow, and they

18 file the statement and all it says is we earned $50 million, I

19 think that statement is misleading because it omits

20 information that, you know, you would expect it to have, given

21 the prior statement by the CEO, that it was going to contain

22 it.

23 That's one I think -- that's one clear sort of

24 best-case example of when that could become an obligation

25 under the law as I see it. I think clearly the first part of

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 4015 

4-27-09 Trial Day 19 4/27/2009 5:24:00 AM

 1 this statement, that the statement of revenue in a 10-K or

 2 10-Q that accurately states the earnings does not by itself

 3 give rise to a duty to disclose specific lending practices, is

 4 correct. It is the law.

 5 But I think that the statement after that, which is

 6 that it's for the jury to determine based on the totality of

 7 the evidence whether any given statement is leading or

 8 misleading is also the law, and it's what we tell them earlier

 9 on. It doesn't really matter whose proposed instruction we

10 take on false or misleading. We tell them that in determining

11 whether a statement is false or misleading, you must consider

12 the statement in light of the circumstances that existed at

13 the time that it was made.

14 MS. BEER: It's our position, your Honor, that that's

15 a sufficient instruction and that the parties can argue what

16 they want from -- from that instruction, and to put the

17 Court's imprimatur on a particular scenario imposing a duty to

18 disclose based on a statement made in one document, a duty to

19 disclose in a separate document is an instruction that we do

20 object to and don't believe should be given. The hypothetical

21 scenario that was described, your Honor, is not a scenario

22 that exists in this case.

23 THE COURT: Absolutely correct.

24 MS. BEER: It's one which you could possibly argue

25 that the two statements are actually merged because of the way

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 4016 

4-27-09 Trial Day 19 4/27/2009 5:24:00 AM

 1 in which you described the statements that were made. That's

 2 not the situation that we have in this case. That's not the

 3 connection between documents that we have the plaintiffs

 4 arguing in this case, and we do -- we object to the giving of

 5 the second part of this instruction. The first sentence we

 6 have no problem with.

 7 THE COURT: Well, I want to make sure that I

 8 understand what you're saying because I'm not sure I do.

 9 So what you're objecting to is the Court telling the

10 jury that whether the 10-K or the 10-Q statement of earnings

11 is misleading is for the jury to decide based on the totality

12 of the evidence?

13 MS. BEER: No, your Honor. If the sentence read as

14 you just read it, we would not object to it.

15 The specific reference to looking to a separate

16 document to find the duty to disclose in a 10-K or 10-Q is the

17 portion of the sentence that we find unsupported and

18 objectionable.

19 THE COURT: But you would not then object to the

20 plaintiffs arguing that the prior statements, given the light

21 of all the circumstances in this case, gave rise to a duty to

22 disclose more in the 10-K than was disclosed, and you arguing

23 that there were no such facts in this case sufficient to give

24 rise to such a duty, is that your position? Because that's

25 what I thought I heard you say.

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4-27-09 Trial Day 19 4/27/2009 5:24:00 AM

 1 MS. BEER: We believe, your Honor, that the duty to

 2 disclose is judged from on the face of the statement, whether

 3 the statement itself is misleading and whether it is

 4 misleading because of specific information that has been

 5 omitted from that statement.

 6 THE COURT: So your reading is that you must consider

 7 the statement in light of the circumstances that existed at

 8 the time that it was made, that the phrase "in light of the

 9 circumstances that existed" means the content of the statement

10 itself?

11 MS. BEER: The content of the statement, the

12 circumstances under which the statement was given, when it was

13 given, to whom it was given, what it was given in response to,

14 any number of factors like that, but not other statements made

15 in other documents. Those other documents may themselves giv

16 rise to a claim that they are misleading.

17 THE COURT: What about other statements in the same

18 document?

19 MS. BEER: I don't think even in that circumstance

20 it's necessarily the case that a statement is going to give

21 rise to a duty to disclose on the basis that the statement was

22 rendered misleading.

23 THE COURT: Well, I don't mean necessarily, but I

24 mean as a matter of law, can it be? That's what we're

25 instructing the jury on.

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4-27-09 Trial Day 19 4/27/2009 5:24:00 AM

 1 I'm trying to see where you draw the line, and I'm

 2 just not -- I don't see the -- I can't think of any authority

 3 for drawing the line there. It seems to me that the

 4 authority's pretty clear that when the facts are in dispute,

 5 the jury decides what the facts are and then decides whether

 6 those facts that relate to the circumstances under which the

 7 statement was made make the statement misleading, either by

 8 virtue of its affirmations or by virtue of its omissions.

 9 That is, as I understand it, what the law is, and that's what

10 I think I'm saying here.

11 But you're telling me that you don't -- you believe

12 that all the circumstances that can be taken into account is

13 circumscribed to exclude other statements.

14 MS. BEER: I'm saying that -- that the jury has the

15 obligation to examine a statement and determine if that

16 statement is misleading, whether it creates a misleading

17 impression because certain other information has been omitted

18 and that the circumstances that may be taken into account -- I

19 don't know that any of us could give a complete catalog of the

20 circumstances that would arise in various cases.

21 What I am saying is that it's not permitted to look

22 at one document to find an omission to derive a duty to

23 disclose in a different statement.

24 THE COURT: Well, when you say statement, do you

25 mean -- I don't think it's not permitted to look at one

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 4019 

4-27-09 Trial Day 19 4/27/2009 5:24:00 AM

 1 document. When you say one document, are you referring to the

 2 10-K in this case?

 3 MS. BEER: We could in this case, yes.

 4 THE COURT: To find an omission to derive a duty to

 5 disclose in a different statement.

 6 Okay. So in my example if Mr. Aldinger got up and

 7 said, "We don't engage in predatory lending practices" or,

 8 better yet, "We're going to tell you to what extent we engage

 9 in predatory lending practices in our 10-K that we're filing

10 tomorrow. Here it is, in the 10-K, or in the financial

11 statement of our 10-K."

12 And the 10-K financial statement says nothing other

13 than here are the revenues we earned, that under those

14 circumstances you could not take into account Mr. Aldinger's

15 prior statement in determining whether the 10-K statement of

16 revenues was misleading? Because that's a prior statement,

17 it's not the same 10-K statement. It's a prior statement

18 completely.

19 Can you take it into account in determining whether

20 that 10-K statement was misleading because of an omission?

21 MS. BEER: The question in that circumstance is

22 whether the prior statement is misleading, not whether the

23 subsequent statement is misleading.

24 THE COURT: So you would agree with the sentence in

25 our instruction that says "but each defendant has a duty to

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 1 disclose a fact if a prior statement he or it made about the

 2 same subject would be misleading if the fact is not

 3 disclosed"?

 4 MS. BEER: If the statement in the prior statement is

 5 rendered misleading by the omission, then the duty to disclose

 6 in that prior statement exists, yes.

 7 THE COURT: The duty to disclose in the subsequent

 8 statement, would result in a duty to disclose in the

 9 subsequent statement?

10 So, for example, to use what I'm thinking you're

11 saying to see if I have it right, if Mr. Aldinger got up and

12 said, "We don't engage in predatory lending practices, and to

13 the extent that we do, it's going to be included in our 10-K

14 financial statement," and he issues a 10-K financial statement

15 that includes no information on it whatsoever.

16 That statement, you're saying, could be evidence of

17 the fact that his prior statement, that they don't engage in

18 predatory lending practices, was misleading?

19 MS. BEER: The prior statement is the statement that

20 you would look to to determine whether a misleading statement

21 had been made. The statement you would look to to determine

22 if information had been omitted would be the prior statement.

23 That's -- that prior statement does not create any obligation

24 to disclose further information in the 10-K.

25 THE COURT: Okay. And you, I take it, disagree with

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 1 that?

 2 MR. BROOKS: We do, your Honor. We don't think that

 3 the statement giving rise to the duty has to be the exact

 4 statement in the same document or -- and we also think that

 5 there can be a statement -- there are many different

 6 circumstances under which a statement can give rise to a duty

 7 or something other than a statement maybe could give rise to a

 8 duty, and that's why this instruction is proper, Judge,

 9 because it gives the jury the chance to weigh the facts and

10 decide whether there was a duty to disclose and whether they

11 did, in fact, disclose.

12 THE COURT: Okay. Well, I -- I agree with that. I

13 think that the only way to honor the instruction which is

14 clear throughout, that the jury is to determine whether a

15 statement is misleading based upon all of the circumstances

16 that existed at the time it was made is to give that

17 instruction.

18 I don't think we can give an instruction that, by

19 implication or otherwise, deprives the jury of the right to

20 consider all of the circumstances surrounding the making of

21 the statement.

22 MS. BEER: Reiterate defendants' objection to the

23 instruction as unnecessary and incorrect.

24 THE COURT: Okay. So let me make sure I have -- the

25 Defendants' Jury Instruction Number 26 is denied. This is the

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 1 one you just submitted today, correct?

 2 MS. BEER: Yes, your Honor.

 3 THE COURT: 26? Was there a prior 26?

 4 MS. BEER: Yes.

 5 THE COURT: So this supersedes it?

 6 MS. BEER: The 26 that was submitted today was

 7 revised in an attempt to take into account the discussion that

 8 we had on Friday with the Court.

 9 THE COURT: Okay. This will be denied.

10 MS. BEER: Can we provide a copy to the court

11 reporter to get it into the record of today's conference, a

12 record of what was submitted and requested by the defendants

13 and denied? Or would you like me to read the three pages into

14 the record?

15 THE COURT: Neither. Why don't you just file it.

16 Then it will be part of the record.

17 MS. BEER: Thank you, your Honor.

18 We take exception to the Court's denial of the

19 Defendants' Requested Jury Instruction Number 26.

20 THE COURT: Okay. The Court will give the Court's

21 Instruction 24, previously 23, as amended in the submission by

22 the plaintiffs.

23 MS. BEER: Again, your Honor, for the record, we

24 object to this instruction. In particular, to the first

25 sentence of the third paragraph, "An omission is misleading

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 4023 

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 1 only if a defendant has a duty to disclose the omitted fact"

 2 as being legally incorrect.

 3 THE COURT: Then I think we'll call the instruction I

 4 just have given to the parties and that we have discussed

 5 Court's 24A, and that will be given over the objection

 6 articulated by the defendants.

 7 Next is the Court's 25, previously Court's 24,

 8 material -- materiality.

 9 MS. BEER: Your Honor, the language that has changed

10 at the beginning of paragraph 3 does not reflect the

11 discussion at the conference last Friday. The language we

12 ultimately ended up with during the conference was "A

13 reasonable investor is presumed to have ordinary intelligence

14 and is presumed to have information available in the public

15 domain."

16 THE COURT: Sounds better.

17 MR. BURKHOLZ: That's fine with us. Can you read

18 that again, please?

19 MS. BEER: "A reasonable investor is presumed to have

20 ordinary intelligence and is presumed to have information

21 available in the public domain."

22 THE COURT: You know, as I look at this, should that

23 be a presumption, or should that be an instruction to the

24 jury? That for purposes of this case, they will take it as

25 true, that a reasonable investor is a person of ordinary

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 1 intelligence and has information available in the public

 2 domain.

 3 MR. BURKHOLZ: That's fine with us.

 4 MS. BEER: Either way would be fine, your Honor. I

 5 think it's included only to further explain the sentence in

 6 the preceding paragraph that "A statement of fact or omission

 7 is material if there's a substantial likelihood that a

 8 reasonable investor would have considered it important."

 9 THE COURT: Either way. If either side -- we can

10 just leave it the way it is. That's fine then.

11 MS. BEER: We have no objection, your Honor, to

12 leaving it as a presumption.

13 THE COURT: Okay. Let's leave it the way it is then

14 and change the language as given by the defendants.

15 MR. BURKHOLZ: We'll do that.

16 THE COURT: All right. The next is Court's

17 Instruction Number 26, previously numbered 25.

18 MS. BEER: We have an alternative version for this

19 instruction, your Honor. We went around a lot of circuitous

20 discussion, and I think --

21 THE COURT: And I thought I was being so focused.

22 MS. BEER: It may be that you were and we were not,

23 your Honor; but we ended up going in a lot of different

24 directions on this instruction, and I would like to propose --

25 to submit defendants' proposed alternative to the instruction

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 1 is --

 2 THE COURT: I mean I think I agree with what you

 3 said, but that it seems to me to keep our options open, we

 4 want a determination as to what the date is that the jury

 5 finds that the disclosure occurred.

 6 MR. BROOKS: Well, I think legally, Judge, the date

 7 that the disclosure occurs is the date that the fraud no

 8 longer affects the market price of the stock; and if they

 9 accept either of Professor Fischel's models, that would be

10 October 11, 2002.

11 Additionally, Judge, if they accept the specific

12 disclosures, which is what we were talking about, they would

13 fill in 7.97 for the days leading up to the first disclosure,

14 and then after November 15th, which is the first time that

15 Professor Fischel finds inflation comes out of the stock, they

16 would drop that number to $6 and something cents a share.

17 It would be evident in the event the Court determines

18 that the disclosure should be measured from sometime during

19 the relevant time frame, which we don't think is correct, it

20 would be evident from that, Judge, that that's the first time

21 that inflation's removed and, therefore, the first

22 "corrective" disclosure during that time frame.

23 Essentially, Judge, to have the jury answer the

24 question was there a disclosure on this date is to have them

25 answer the question twice. They're answering it once when

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 1 they fill out the artificial inflation table and again when

 2 the question is posed separately, as we did in the verdict

 3 form. And as you know from my letter accompanying that

 4 verdict form, we objected, and this is part of the reason that

 5 we object to including that information. I think it's

 6 confusing, your Honor, for the jury. They don't have

 7 information about -- I mean the terms aren't defined.

 8 There's a lot of information that they don't have to

 9 fill this out, and I think that we get what we need, again,

10 assuming that they go with the specific disclosures, we get

11 what we need by reading the drops in the artificial inflation

12 as time goes by. And there are some rises, too, Judge. And,

13 again, that goes back to the first point, which is there are

14 some rises during that time frame and what you'd be doing

15 would be capping damages based on those rises which are due to

16 the fraud, again, if they accept the specific disclosures

17 model.

18 THE COURT: Yeah.

19 MR. DROSMAN: And, your Honor, I just wanted to

20 add --

21 THE COURT: I see all of that, but, I mean, we still

22 come down to why shouldn't we have the jury, based on the

23 information in evidence presented, make a determination on

24 those issues now for possible use later? Why should we make

25 that determination as a matter of law at this point and let

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 1 the jury come back without reaching those determinations,

 2 which means that we're at a point of no return if it turns out

 3 that the argument you've just made is not accepted by the 7th

 4 Circuit.

 5 MR. BROOKS: Well, I think there are two points, your

 6 Honor. First is that this -- this diminution in the

 7 artificial inflation is a point that can be used -- again,

 8 accepting their argument -- is a point that could be used to

 9 measure the correction from.

10 Secondly, Judge, this is an extra step that the jury

11 is going to have to take. This question is an extra step that

12 they're going to have to take that is not a necessary step.

13 It's not one of the elements of the claim, your Honor, and all

14 we're doing is adding more information and more things to hang

15 the jury up on that's not necessary in order to proceed to a

16 verdict or to a judgment against the plaintiffs by, you know,

17 by unanimous jury. It just gives them one more thing to hang

18 up on, and a thing that is not an entirely lucid concept, I

19 mean --

20 THE COURT: Yeah, well, unfortunately, it's in the

21 statute, isn't it?

22 MR. DROSMAN: Your Honor, I think that you are

23 providing them -- you are preserving --

24 THE COURT: I understand, I understand what your

25 argument is, and you know what? If you want to put it in

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4-27-09 Trial Day 19 4/27/2009 5:24:00 AM

 1 writing, I'll consider it. My concern at this point in time

 2 is to preserve -- at this point in time is, and I don't think

 3 anybody, and that includes you frankly, has worked harder at

 4 keeping this clear and simple for the jury than I have. At

 5 times when I think all of the attorneys have kind of lost

 6 track of that, but I also have a concern with keeping a record

 7 here that can be useful.

 8 We are making determinations on a lot of issues for

 9 which there is no clear-cut precedent. So to the extent that

10 we can keep -- we can keep the findings of this jury -- we can

11 make the findings of this jury preserve these different

12 issues, that's my main concern.

13 But if you want to put in writing why you're

14 absolutely convinced that a separate finding on the statutory

15 language, however clumsy and difficult to apply the statutory

16 language may be, I'll be happy to consider it. But for right

17 now, I think I'm going to insist on a verdict form that

18 requires that finding as to disclosure dates.

19 And we haven't gone to the jury yet, so if you want

20 to provide something in writing and I read it and I'm

21 completely convinced that there's no way that it's necessary

22 to do that, it's a simple thing to take something out of a

23 verdict form. Much harder thing to put something in.

24 As far as this particular instruction is concerned, I

25 think we may be able to partially satisfy some of the concerns

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 1 by maybe adding some language. It seems to me that what's

 2 happening in this case is that at this junction of the case in

 3 this particular type of bifurcated process, the measure of

 4 damages is essentially the measure of inflation, as far as

 5 this jury's concerned.

 6 So maybe we can do this: Maybe we can simply add

 7 after the word -- after the phrase "or omission of material

 8 fact occurred" the words, "in other words, the measure of

 9 inflation in the stock price."

10 MR. BURKHOLZ: We'll add that in, your Honor.

11 THE COURT: Excuse me?

12 MR. BURKHOLZ: We'll add that in.

13 MR. OWEN: Your Honor, we had some lengthy discussion

14 on this subject last time around.

15 THE COURT: I vaguely remember it.

16 MR. OWEN: I understand your Honor's point to be that

17 this instruction, as you conceive it, is not inconsistent with

18 Dura in the sense that we do not yet know what the actual

19 trading days will be and that any claimant will only recover

20 for a diminution in the inflation between the time they bought

21 the stock and the time they sold the stock and that their

22 claim will not be measured by the inflation that's in the

23 stock only at the time they bought. Is that -- is that

24 correct?

25 THE COURT: Well, I think I would like to say that

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 1 they don't have damages unless they actually go through the

 2 entire sequence of events. They don't have damages the minute

 3 they purchase the stock even though it's inflated at the time

 4 they purchase it. Damages don't occur until we have deflation

 5 and all the elements are met.

 6 MR. OWEN: Okay. Just to clarify for my own

 7 understanding, hypothesizing an investor who bought when there

 8 was $7.97 in inflation in the stock price who then sells

 9 during a time when there is still $7.97 in inflation in the

10 stock price, that investor has suffered zero damages.

11 THE COURT: I would think. I would like to see him

12 tell me what damages he has suffered. It would be

13 interesting.

14 MR. DROSMAN: We don't dispute --

15 THE COURT: I'm sure you could find a lawyer

16 someplace that would try to help him; but, yes, I agree with

17 you.

18 MR. OWEN: Okay. Subject to that understanding, I

19 think -- I think we're in agreement.

20 THE COURT: Okay. So we can add that language at the

21 end of the -- after the word "occurred" to bring in the

22 language of inflation, if you will, to help the jury relate

23 this instruction to the evidence they heard 233 times --

24 MR. KAVALER: So far.

25 THE COURT: -- so far.

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4-27-09 Trial Day 19 4/27/2009 5:24:00 AM

 1 MS. BEER: Your Honor, we had also discussed adding a

 2 sentence to this instruction to alert this jury that they will

 3 not be asked to determine the amount of damages for each

 4 investor, only the amount of whatever we call it, inflation

 5 per share.

 6 MR. DROSMAN: That's --

 7 MS. BEER: That, I think, would help to actually to

 8 clarify what this instruction is being focused on. Since

 9 we're using the word damages, I think the automatic assumption

10 is that they're going to figure out how much everybody gets,

11 and they're not in any scenario. Even if there were a finding

12 of liability, all they're going to be determining is the

13 amount of inflation. They're not going to be determining, in

14 this phase of the proceeding, the damages for any individual

15 plaintiff, and we did discuss on Friday adding a sentence in

16 the second paragraph to that fact.

17 MR. DROSMAN: Plaintiffs' position is that that's

18 completely superfluous. I mean where would we stop? We could

19 educate them on the entire claims process. I mean it's

20 just -- this is information that is not necessary for the jury

21 to know or understand in order to return a verdict for either

22 side, and it's just surplusage.

23 MR. OWEN: Your Honor, this issue speaks directly to

24 the ambiguity that we're concerned about, and we don't think

25 it's too complex.

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 1 THE COURT: Well, let me ask you this: What is your

 2 concern? What do you think is going to happen or is likely to

 3 happen if we don't put language like that in there?

 4 MR. OWEN: Well, what could happen, the principal

 5 issue we're concerned with, as I was just discussing, is the

 6 jury could read this and conclude that somebody who bought a

 7 share at 7.97 inflation and then sold that share at 7.97 of

 8 inflation was damaged in the amount of 7.97. I think a

 9 straightforward reading of this would or might lead to that

10 conclusion.

11 THE COURT: Suppose they did. What difference would

12 it make?

13 MR. OWEN: They would have an incorrect perception of

14 what would flow from their decision.

15 THE COURT: You understand we're not interested here

16 in their perceptions of a state of facts that will never be

17 brought before them and of an ultimate issue that they will

18 never consider, the actual damages in this case.

19 It doesn't matter whether they think that damages

20 were incurred the day the stock was purchased as opposed to

21 the day that the deflation occurred. It doesn't matter what

22 this jury thinks.

23 The next jury, different matter altogether; but this

24 jury won't have to consider that concept, will they?

25 MR. OWEN: Not in the sense of actually calculating

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 1 the number, but I think there's certainly some value in having

 2 the jury correctly apprehend what it is that they are

 3 concluding with respect to any inflation figures they may

 4 ultimately fill out in the verdict form.

 5 THE COURT: Let me tell you how I look at it. The

 6 value is in getting the jury to do the correct thing according

 7 to the law in language that is as simple and clear as

 8 possible.

 9 If I thought that the explanation you're calling for

10 would help avoid confusion in the actual exercise, and I'm not

11 convinced that we don't need to say something, but I'm going

12 to have to be convinced it's going to help the jury avoid

13 confusion in doing what they have to do.

14 If that's not the case, then I don't want to put it

15 in. If you can give me language that's somehow going to make

16 it easier for the jury to do this, you know, I mean I don't

17 mind telling the jury, look, what you're going to have to

18 decide in this case is just this, the difference between the

19 price the plaintiffs paid for each share and the price each

20 share would have cost if no false or misleading omission, the

21 fact it occurred, period, there's nothing else in the way of

22 damages, that's what you have to decide.

23 I don't mind telling them that, but you have to give

24 me some language that's going to make it easier for the jury

25 to understand. My only concern here is that the jury is

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 1 liable to come back with a question, okay, we figured out what

 2 the difference is between the price it would have been and the

 3 price it was due to inflation. Now how many millions of

 4 shares do we multiply it by? I don't want that question.

 5 You know, if I thought that was likely to be a

 6 question because of jury's misconceptions of what this trial

 7 is or what trials are, then I would include such language.

 8 As I see it, given the instructions and the jury

 9 verdicts, they don't really have that idea thrust in front of

10 them, so I don't think it's a problem, but -- and that's what

11 I want to address, giving them the precise legal concept of

12 what they're doing in the universe of what's to come in this

13 case. I'm just happy to get them to do what they're supposed

14 to do with as simple and clear language as possible. I don't

15 need to teach them correct legal concepts, I don't think,

16 unless they're directly applicable.

17 Now, you tell me, what language do you want me to put

18 in here that's going to help them actually do this

19 calculation, decide if the evidence supports it?

20 MR. OWEN: Your Honor, it's the language that

21 Ms. Beer just mentioned.

22 THE COURT: Which is what?

23 MR. OWEN: Which indicates you will not be asked to

24 determine the amount of damages for each investor, only --

25 THE COURT: The problem with that is that we're

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4-27-09 Trial Day 19 4/27/2009 5:24:00 AM

 1 telling them up top here plaintiffs can recover only actual

 2 damages, and we're telling them how to calculate it, and we're

 3 telling them the damages they must award, okay, and then we're

 4 going to tell them you're not supposed to calculate the

 5 damages?

 6 MS. BEER: No, your Honor, I think that was -- we

 7 would propose that that be the second sentence of the second

 8 paragraph, right after they're told that they must determine

 9 the amount of -- well --

10 THE COURT: All right. Then what else are you going

11 to say? Go ahead.

12 MS. BEER: That they must determine the amount of

13 damages, if any, to which plaintiffs are entitled, and which

14 our version was the amount of daily damages per share, and

15 then you will not be asked to determine the amount of damages

16 for each investor, period.

17 THE COURT: Well, I guess I still have a problem with

18 that. They're liable to look at that and say then what are we

19 doing when we do this calculation? Do you see what I'm

20 saying?

21 I don't know, would the plaintiff object to at the

22 end -- say, at the end of the words, in other words, the

23 inflation in the stock price, if you were to add language to

24 the effect of "this is the only damages calculation you will

25 be asked to make in this case."

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 1 MR. DROSMAN: I don't think we object to that, your

 2 Honor.

 3 THE COURT: Does that satisfy you?

 4 MS. BEER: That's fine.

 5 THE COURT: Is that a yes?

 6 MR. OWEN: Yes.

 7 THE COURT: Okay. All right.

 8 Okay. Next is Court's Number 31, previously Court's

 9 29, the Section 20(a) elements.

10 MS. BEER: No objection from the defendants, your

11 Honor.

12 THE COURT: Okay. Next is Court's 32, previously

13 Court's 30, controlling person, two-part test.

14 MR. BURKHOLZ: I incorporated defendants' language

15 into that instruction.

16 MS. BEER: We have no objection, your Honor.

17 THE COURT: Very well.

18 Court's Number 33, previously 31, selection of

19 presiding juror, verdict form.

20 MS. BEER: I believe, your Honor, this is going to

21 depend a lot on what the verdict form is.

22 THE COURT: Well, this language won't. This is

23 language I'll use no matter what the verdict form is. Whether

24 it's long, short, in Greek, it won't matter. I'm going to

25 tell them, hey, we prepared a verdict form for you, here it

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 1 is, take it to the jury room with you, and, you know, you've

 2 got to sign it when you've reached a verdict.

 3 So this particular language is what I'm talking

 4 about. Is there any objection to this?

 5 MS. BEER: Again, your Honor, depending on the

 6 verdict form, there may be -- there may be a need for

 7 additional instructions on how to use the verdict form, but I

 8 don't know that we can decide that now.

 9 THE COURT: I think I've told you that there will be

10 additional language. There definitely will be. I will go

11 through the verdict form with them, and I will propose some

12 language, although it's not likely to be a verbatim transcript

13 of exactly what I'm going to say, but I will tell you in at

14 least outlined form how I'm going to instruct them when I go

15 through the verdict form with them.

16 But that's not what you're being asked to approve or

17 disapprove here. That's a separate thing. What you're being

18 asked to approve or disapprove is just this language that's

19 before you.

20 MS. BEER: We have no objection to this language. We

21 do reserve on the question of what language is actually used

22 to explain the particular verdict form because we can't decide

23 that until we see what the verdict form is.

24 THE COURT: Correct.

25 Court's Instruction 34, previously 32, communication

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 4050 

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 1 with the Court.

 2 MS. BEER: No objection, your Honor.

 3 THE COURT: Court's Proposed Instruction 35,

 4 previously Court's 33.

 5 MS. BEER: Defendants have no objection.

 6 THE COURT: Court's Proposed Instruction 36,

 7 previously 34, juror notes.

 8 MS. BEER: And, again, defendants have no objection.

 9 THE COURT: Okay.

10 MR. BURKHOLZ: Just one question, your Honor. The

11 Court's 24A instruction.

12 THE COURT: Yes.

13 MR. BURKHOLZ: Should I give it a heading? It's part

14 of the false and misleading element.

15 THE COURT: You could just put the heading 24A on it

16 if you want.

17 MR. BURKHOLZ: Okay. I'll do that.

18 THE COURT: When these instructions go back to the

19 jury, they're not going to have any headings. They're going

20 to be just the text. Pretty much like your demonstrative

21 exhibits.

22 MS. BEER: That's not suggesting that the

23 demonstrative exhibits are going back to the jury, is it?

24 THE COURT: No, it's not.

25 Okay. I have before me Plaintiffs' Proposed Table A,

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 1 Alleged False Or Misleading Statements, and here is my

 2 concern.

 3 I am far from convinced that with respect

 4 specifically to the statement of net income that's included as

 5 a false statement for every 10-K or 10-Q within the period

 6 that there's sufficient evidence on the record to go to the

 7 jury on each of those. Plaintiffs have filed a motion for a

 8 rule -- ruling as to a matter of law, and part of that is a

 9 determination that I have to make as to whether there's

10 sufficient evidence for a reasonable juror to conclude in

11 plaintiffs' favor.

12 For example, statement number one, the first portion

13 of the alleged false statement is Household 10-Q for quarter

14 ending 6-30-99: Household reported net income of $326,900,000

15 for the quarter ended June 30, 1999, and EPS of 67¢.

16 I think given the instructions that we have, the only

17 way that becomes a false statement is if the surrounding

18 circumstances are such that the omission of any information

19 regarding to predatory lending practices would make this

20 statement misleading, and that depends on the evidence you've

21 adduced surrounding the making of this statement.

22 I have, I think, identified two statements for you, I

23 think it's number 27 of your statements and number 15 of your

24 statements in which the 10-Q or 10-K financial statement

25 contains in and of itself language which is sufficient to take

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 4052 

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 1 it to the jury on the question of whether disclosure of

 2 predatory lending practices should have been included.

 3 As to the rest of these, you folks are going to have

 4 to give me one by one what information there is on the record

 5 that would be sufficient to tie this particular 10-Q or 10-K

 6 statement of reported net income and EPS to some prior

 7 statement or circumstances that would require disclosure in

 8 order to make this statement not misleading.

 9 MR. BROOKS: First, Judge, a clarification. The EPS

10 and net income numbers also were false and misleading because

11 of the restatement, and so we've introduced evidence regarding

12 the restatement. Obviously, these are the numbers that were

13 restated on August 14th, 2002.

14 THE COURT: Yeah, the restatement, however, only

15 referred to -- I'm talking about being able to argue that

16 these were false and misleading with respect to the failure to

17 include information regarding predatory lending in that

18 manner.

19 MR. BROOKS: I understand that, Judge. I just wanted

20 to make clear in any event there's a reason to send back to

21 the jury --

22 THE COURT: Yeah, I'm not talking about the

23 restatement of the credit card issues or the aging -- re-aging

24 issue, just predatory lending.

25 MR. BROOKS: Well, your Honor, we've submitted a

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 1 negatively and there is no news in his event study. And he

 2 adds it all up, and he calls it leakage-based quantification

 3 of inflation. That's not accepted methodologically at all.

 4 Q. Let me ask you about that. So you're saying that this

 5 method, the leakage method, is not a recognized method in the

 6 field of economics for conducting an event study?

 7 A. Absolutely not. It has nothing to do with what we are

 8 here for, which is to find how much the stock price declined

 9 because of market learning the truth about the purported

10 fraud. It has no linkage with any of the purported fraud.

11 Q. But Professor Fischel says that he relies on some

12 professor at UCLA, Professor Cornell, to support his approach.

13 Have you looked at Professor Cornell's work?

14 A. I know his work well, and I know Professor Cornell well.

15 Q. And does his work support Professor Fischel's method here?

16 A. Absolutely not.

17 Q. Let me ask you this: If he doesn't identify any days when

18 anything special happened in his leakage model, special in the

19 sense that it was related to the alleged fraud, how does he

20 come up with inflation figures that he says are fraud related?

21 A. Well, all he has measured is underperformance in

22 Household's stock price between November 15, 2001, and end of

23 the relevant period, based on his faulty regression model.

24 That has nothing to do with fraud per se.

25 Q. Is that the same problem we were looking at over here on

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 1 the white board; he's got this estimation period where he's

 2 got the wrong high bar, I think you said it was, and now he's

 3 comparing the price of the stock in a declining stock market

 4 and that's giving him the result?

 5 A. Yes.

 6 Q. Okay. And is this -- is this leakage model that Professor

 7 Fischel used capable -- can you use it to distinguish stock

 8 price movements that might be attributable to fraud from other

 9 movements that have nothing to do with fraud?

10 A. By construction it cannot separate such sources of

11 movement.

12 Q. It's just going to measure decline?

13 A. It's the kitchen sink.

14 Q. All right. Let's talk about his other model, the specific

15 disclosures model. That, at least, is a model you recognize?

16 A. The methodology is well-accepted. I have differences with

17 Professor Fischel about how that methodology was implemented.

18 Q. We'll get to how he implemented it in a minute.

19 Let's start with the basic methodology. Please tell

20 us how that kind of a specific disclosure model is supposed to

21 work to measure inflation.

22 A. Okay. So let's go back to what you were talking about, a

23 typical pattern in these cases. There's an up leg. Inflation

24 comes in. And there is a down leg when market learns the

25 truth and inflation goes up.

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 1 Now, you can conduct economic analysis in one or both

 2 of the following ways: You can look at the plaintiffs'

 3 allegations. Lie number one was told on date number one. And

 4 you can quantify inflation on that date number one. Whether

 5 it is a misrepresentation or it's an omission, you can use

 6 well-accepted statistical techniques and methods to say I now

 7 know as an economist the company lied, stock price was

 8 inflated by 50 cents a share on lie number one.

 9 And you can quantify inflation by adding up all the

10 inflation that came into the stock price on all the dates that

11 lies were told.

12 In addition to this methodology, or depending on

13 facts and circumstances sometimes instead of this methodology,

14 you might say it's more reliable for me to measure how much

15 inflation came out of the stock when the market learned the

16 truth. That's the approach Professor Fischel has adopted.

17 It's factually incorrect. It's methodologically incorrect.

18 But in principle, there's nothing wrong per se in adopting

19 that approach.

20 But if you are quantifying inflation, as an economist

21 whose work is going to be the basis of award of damages,

22 you've got to link the amount of inflation you have quantified

23 to specific lies that are at issue in this case.

24 And as we discussed earlier, Professor Fischel, by

25 looking at certain disclosures after November 15, 2001, has

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 1 concluded that as of November 14, 2001, there was $7.97 of

 2 inflation. But there is nothing in his work that can tell us

 3 how much of that 7.97 is because of lie number one or lie

 4 number 40 that plaintiffs allege in that case.

 5 In fact, the oddness of the result is during July 30,

 6 1999, to November 15, 2001, when 22 lies were told, according

 7 to the plaintiffs, that inflation does not change one cent.

 8 How could the inflation he determined be -- in any reliable

 9 way be tied to the fraud plaintiffs allege has been committed

10 in this case?

11 That is the major shortcoming of Professor Fischel's

12 specific disclosure model at a conceptual level, rather than

13 methodological levels.

14 Q. You told us a few minutes ago, Professor Bajaj, that the

15 information related to plaintiffs' claims was already known to

16 investors before, I think you were talking about November 15,

17 2001. Does that apply to Professor Fischel's specific

18 disclosures model, the one we're talking about now?

19 A. Yes, it does.

20 Q. Why?

21 A. Well, Professor Fischel, as I was saying, is a respected

22 scholar in use of economics for legal proceedings. And I am a

23 fan of some of his writings in the area. And in his own

24 writings, Professor Fischel has said that markets are

25 efficient. He's assumed that Household traded in an efficient

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 4242

 1 Tell us what this shows us?

 2 A. Well, it summarizes what we've been discussing, on April

 3 9th, when Household -- according to the plaintiffs --

 4 disclosed its re-aging policies at Financial Relations

 5 Conference. The stock price went up.

 6 On August 14th, when Household issued its

 7 restatement, the stock price went up -- and August 10th and

 8 11th, when Household settled with Attorneys General -- the

 9 stock price went up.

10 Q. Professor Bajaj, is any of the economic evidence in this

11 case in any way consistent with fraud?

12 A. No.

13 MR. KAVALER: No further questions, your Honor.

14 THE COURT: I think it's a good time to take our

15 break for the afternoon.

16 Take a 15-minute break, ladies and gentlemen.

17 (Jury out.)

18 (Brief recess.)

19 (Proceedings heard in open court:)

20 THE COURT: Ready?

21 MR. BURKHOLZ: All set.

22 (Jury in at 3:13 p.m.)

23 CROSS-EXAMINATION

24 BY MR. BURKHOLZ:

25 Q. Sir, you criticized Professor Fischel on market efficiency

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 4243

 1 and the 14 dates that he selected saying that the information

 2 was stale, yet you were never cited like Professor Fischel was

 3 on market efficiency in the stock market by the U.S. Supreme

 4 Court in the seminal case of Basic v. Levinson, were you, sir?

 5 Have you ever been cited by the U.S. Supreme Court?

 6 A. No, sir, I haven't.

 7 Q. Thank you. It's a "yes" or "no."

 8 Have you ever been cited by the U.S. Supreme Court

 9 with respect to market efficiency?

10 A. No, sir.

11 Q. Now, Professor Fischel, plaintiffs' expert, who the

12 defendants' counsel refers to as "wrote the book," teaches

13 market efficiency and how you calculate inflation here at the

14 University of Chicago and Northwestern University and cited by

15 the U.S. Supreme Court.

16 He is wrong in all his opinions in this case; isn't

17 that true, sir? Isn't that your position, that he is wrong,

18 right?

19 A. That is the market evidence and that is my opinion.

20 Q. That is your opinion, right, sir? He is wrong on all of

21 his opinions, right? Yes or no?

22 A. Well, Counsel, as I --

23 Q. Is he right or wrong, sir? You can't answer that

24 question?

25 A. Well, I testified he is wrong.

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 1 Q. Right. Okay.

 2 Now, you will agree with me, won't you, sir, that you

 3 don't need a stock price increase on the day a company makes a

 4 false statement in order for inflation to come into that

 5 company's stock price? Do you agree with that?

 6 A. Yes, I do.

 7 Q. Thank you.

 8 In fact, in the Computer Associates case, another

 9 case in which you were an expert, you gave the opinion that

10 you don't have to measure a stock price increase in order to

11 estimate inflation, right?

12 You did that in that case, right?

13 A. Well, what I did in that case was estimate inflation on

14 the way in by looking at other companies --

15 Q. Sir, that wasn't my question, sir.

16 My question was, in that case you didn't measure the

17 stock price increase in order to estimate inflation, right?

18 You didn't do that, right?

19 A. Counsel, if I may answer?

20 Q. It's a "yes" or "no," sir. Did you do it?

21 I asked you the question at your deposition and you

22 answered it.

23 A. Well, I think a "yes" or "no" answer would be misleading,

24 so --

25 Q. I don't want you to mislead anybody here.

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 1 MR. BURKHOLZ: I will withdraw the question, your

 2 Honor.

 3 BY MR. BURKHOLZ:

 4 Q. Now, you will agree with me, sir, that a company does not

 5 need to admit it committed fraud for inflation to come out of

 6 the stock price?

 7 A. As a general proposition that could be true, yes.

 8 Q. Okay.

 9 In fact, there are a number of ways in which

10 inflation can come out of a company's stock price. It can

11 come out through a company admission. It can come out from

12 information from third parties, such as analysts or the media.

13 Isn't that correct, sir?

14 A. Not necessarily.

15 Q. Okay. Sir, your deposition was taken in this case, right?

16 A. Yes.

17 Q. And you gave an oath to tell the truth in the deposition,

18 right?

19 A. Of course I did.

20 Q. Okay. Let's look at your deposition at Page 43, Lines 5

21 through 21.

22 (Said videotape was played in open court.)

23 BY MR. BURKHOLZ:

24 Q. That was your testimony that day, right, sir?

25 MR. KAVALER: I'm going to move to strike. That's

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 1 You see that right, sir?

 2 A. That's what it says.

 3 Q. Okay. Now, the next paragraph it says, "In my view, this

 4 is a very unsavory situation, a petulant CEO" -- and you know

 5 what "petulant" means, right, sir? It means easily irritated

 6 or annoyed?

 7 A. Yes.

 8 Q. -- "a petulant CEO who holds banking hostage to research

 9 ratings."

10 Do you see that?

11 A. That's what it says.

12 Q. And you understood, sir, that Morgan Stanley, the firm

13 that Mr. Posner worked for, was one of many investment banking

14 firms that did business with Household?

15 A. I don't know that for a fact, but it doesn't surprise me.

16 Q. Mr. Aldinger was saying no more fees for the bankers if

17 the analysts don't support the stock.

18 Isn't that what he is saying there?

19 A. Well, I can't speak to this document. I have never seen

20 this. I have never considered this. I don't know the

21 context. I don't know what business Morgan Stanley did or

22 didn't do with Mr. Aldinger. This is way outside the scope of

23 anything I did.

24 Q. Well, just like the Barron's article that you looked at

25 and you considered, in the Barron's article they discuss an

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 4267

 1 analyst who's afraid to talk because his company has an

 2 investment banking relationship with Household and they want

 3 to get fees from Household for doing the banking.

 4 Here we have the same situation with Mr. Posner.

 5 And you considered that in forming your opinion,

 6 didn't you, sir?

 7 A. And you didn't want me to explain.

 8 Q. No. You considered that in forming your opinion, didn't

 9 you?

10 A. Yes, I did.

11 Q. Okay. Thank you.

12 Now, you reject Professor Fischel's leakage model in

13 this case, don't you?

14 A. Yes, I do.

15 Q. Okay. And Professor Fischel's opinion is that his leakage

16 model is the most appropriate way to estimate damages in this

17 case, right? That's your understanding of his opinion, right?

18 A. I heard him say that he preferred his leakage model, yes.

19 Q. Now, you, sir, in fact, in your expert report, Page 58,

20 referred to the fact that the Washington DFI report had leaked

21 out at four various times during the summer of 2002, right,

22 sir?

23 A. Where are you referring to in my expert report?

24 Q. Page 58.

25 A. I see that, yes.

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 4268

 1 Q. So there was evidence of leakage in this case on this

 2 Washington DFI report which basically said Household was

 3 committing predatory lending practices in Washington and

 4 around the country. And you saw evidence of that leakage,

 5 didn't you, sir? You put it in your report?

 6 A. And as I testified this morning, there is a proper way to

 7 analyze that leakage.

 8 Q. Okay. So your quarrel with Professor Fischel is over the

 9 way that he quantified the leakage, right? That's really your

10 qualm, right?

11 A. I have no quarrel with Professor Fischel. I like the man.

12 I am simply saying I have a difference of opinion with him on

13 how to analyze this evidence of leakage.

14 Q. Okay. Now let's talk about the October 10th and 11th

15 dates, okay?

16 Household gained about 3 billion in value on that day

17 because the stock went from $22 to about $28, right, sir?

18 About $6 a share, right?

19 A. I think it's about $7 a share, and it's about 3.3 billion,

20 but give or take, you are about right.

21 Q. Now, Household stock had lost somewhere between 16 and

22 $18 billion from November 15th, 2001, to October 10th, 2002,

23 right, sir? Somewhere in that area?

24 A. I didn't do the calculation, but I can take your

25 representation for it.

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 4269

 1 Q. But your opinion is that none of that stock price decline

 2 was due to fraud, right?

 3 A. I didn't see any economic evidence showing me that that

 4 decline had anything to do with your fraud allegations.

 5 Q. Okay.

 6 Now, you will agree with me, won't you, sir, that if

 7 the company lies and the stock is inflated, if it makes

 8 additional statements that are lies, it keeps the stock

 9 inflated, right?

10 A. I think your statement is way too general and overbroad

11 for me to agree or disagree with it.

12 Q. Company lies in the 10-K, the stock is inflated on that

13 day. The company lies three months later in a press release,

14 the stock stays inflated.

15 You will agree with me on that, right?

16 A. No. I think your statement is way too generally worded

17 and way too imprecise for me to either agree or to disagree

18 with it.

19 Q. Now, you talked about testifying for the plaintiffs and

20 the defendants in these cases. But, sir, it's true, isn't it,

21 that in these kind of cases, the securities class action cases

22 on behalf of investors, that you testified for the defense all

23 the time, not for the plaintiffs, right?

24 Isn't that what you told me in your deposition?

25 A. What I said in my deposition was consistent with what I

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 4270

 1 said today, that I have been engaged by plaintiffs' counsel in

 2 cases involving securities fraud allegations.

 3 It is true that I have not been engaged to testify,

 4 by counsel, in a securities class action case.

 5 MR. BURKHOLZ: Thank you. No further questions at

 6 this time, your Honor.

 7 MR. KAVALER: Your Honor, I have no further questions

 8 of this witness at all.

 9 MR. BURKHOLZ: Your Honor -- go ahead.

10 THE COURT: I am sorry?

11 MR. BURKHOLZ: No further questions.

12 THE COURT: And you have no further questions?

13 MR. KAVALER: Right.

14 THE COURT: So you both have no further questions?

15 MR. BURKHOLZ: We don't.

16 (Laughter.)

17 THE COURT: Sir, you may step down.

18 THE WITNESS: Thank you, your Honor.

19 (Witness excused.)

20 THE COURT: Call your next witness.

21 MR. KAVALER: Your Honor, we have three exhibits we

22 need to move into evidence. We asked plaintiffs about them

23 this morning, if they have any objection. If they have no

24 objection, we will move those into evidence and then rest.

25 If they do have an objection, we will move them into

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 4271

 1 evidence and address the objection and then rest.

 2 THE COURT: Well, go ahead.

 3 What are the exhibits?

 4 Are there objections?

 5 (Brief pause.)

 6 MR. KAVALER: Your Honor, we offer Defendants' 454

 7 and Defendants' 397 without objection.

 8 THE COURT: Admitted without objection.

 9 (Said exhibits were received in evidence.)

10 MR. KAVALER: And as to 182, I understand that the

11 plaintiffs want me to make some redactions on it. I think it

12 was just the cover page, but we will work that out with them.

13 Subject to working that out, we offer

14 Defendants' 182.

15 MR. DOWD: It was the videotape, your Honor. And the

16 Court allowed them to play parts and, I think, not the other

17 parts. As long as the parts that were admitted go back to the

18 jury, we have no problem.

19 MR. KAVALER: We will conform it to what we played,

20 your Honor.

21 THE COURT: We will take it under advisement.

22 You can reserve your right with respect to that

23 exhibit in case you need to reopen your case.

24 MR. KAVALER: Very good, your Honor.

25 In that case, defendants rest.

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 4272

 1 THE COURT: Very well.

 2 Plaintiffs?

 3 MR. BURKHOLZ: We have a motion, your Honor, to

 4 submit to the Court, Rule 50(a).

 5 THE COURT: Why don't you -- I will reserve your

 6 right to do that. You can do that after we are done with the

 7 evidence.

 8 MR. BURKHOLZ: Plaintiffs recall Professor Daniel

 9 Fischel to the stand.

10 THE COURT: Professor, I am going to reswear you,

11 please.

12 Raise your right hand.

13 DANIEL R. FISCHEL, PLAINTIFFS' REBUTTAL WITNESS, SW

14 DIRECT EXAMINATION

15 BY MR. BURKHOLZ:

16 Q. Sir, you sat through Professor Bajaj's testimony, right?

17 A. I did.

18 Q. Lots of criticisms of your approach in this case?

19 A. I heard many of them.

20 Q. Did his testimony change any of your opinions in this

21 case?

22 A. No.

23 Q. Let's discuss -- now, you are recognized as an expert on

24 the use of regression analysis and event studies?

25 A. Yes, sir.

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 4273

 1 Q. And you used an event study in this case for both your

 2 specific disclosures and your leakage model, didn't you?

 3 A. Correct.

 4 I believe Professor Bajaj stated that my leakage

 5 model was not based on an event study. That's simply

 6 incorrect.

 7 Q. And did you follow, in your leakage model, the approach

 8 that's been accepted in your field that's laid out in the

 9 Cornell and Morgan article?

10 A. Yes, exactly.

11 Q. Now, your specific disclosure model, did you consider and

12 reject any nonfraud reasons that Household stock price dropped

13 on those dates?

14 A. Yes.

15 Q. And did you find that new information was disclosed on

16 each of those dates?

17 A. Yes. What I noticed, listening to Dr. Bajaj's testimony

18 where he continually stated that information that I said was

19 part of a corrective disclosure was disclosed previously, he

20 was very selective in what he pointed to in terms of what was

21 disclosed previously, and he left out critical information in

22 my disclosure dates in connection with his statement that each

23 and every -- all 14 happen to be stale or whatever the reason

24 was that was given for the red lines, like the red Xs that we

25 had last time.

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 1 I am objecting in advance. I am asking that counsel

 2 be instructed to make sure the witness --

 3 THE COURT: Wait a minute. Let me find out what's

 4 going on first.

 5 MR. BURKHOLZ: All he talked about was the 2001 10-K

 6 that was restated. That's all he said.

 7 THE COURT: So when he said they had to restate it,

 8 he was talking about the 10-K?

 9 MR. BURKHOLZ: Yes. That's already been testified.

10 He is not going to talk about any SEC consent.

11 THE COURT: That's already in evidence?

12 MR. KAVALER: I have no problem with that. I thought

13 he was heading to the C and D. I want to be absolutely

14 crystal clear. If that happens, I have a major problem,

15 because that's a document you ruled out.

16 We made specific tactical decisions in our case

17 because of your rulings. We did not call witnesses we might

18 have called. There is no way they can open their own door

19 here, your Honor.

20 And if that is attempted or effected, it's going to

21 have serious consequences.

22 MR. BURKHOLZ: It's not going to happen, your Honor.

23 THE COURT: Okay.

24 (End of sidebar proceedings.)

25 BY MR. BURKHOLZ:

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 4287

 1 Q. Professor Fischel, did you find analysts in these articles

 2 attributing Household stock price decline in late 2001 to

 3 October 2002 to predatory lending, reaging, and restatement?

 4 A. Yes. Again, I heard Dr. Bajaj testify over and over and

 5 over again that there was no relationship between Household

 6 stock price movements and inflation or the plaintiffs'

 7 allegations.

 8 Again, to me, it's not a matter of a battle of

 9 statistics. It's a matter of which opinion more closely

10 approximates reality.

11 Q. Let me show you Plaintiffs' Exhibit 1450.

12 (Document tendered.)

13 MR. BURKHOLZ: Plaintiffs' Exhibit 1450 is an analyst

14 report issued by Deutsche Bank on September 12th, 2002,

15 offered into evidence subject to the limiting instruction,

16 your Honor.

17 THE COURT: It will be admitted.

18 (Said exhibit was received in evidence.)

19 BY MR. BURKHOLZ:

20 Q. If we can, turn to the second page of the document, the

21 top part of the document.

22 What is the significance of this analyst report to

23 your opinion regarding news coming out about predatory

24 lending, reaging, restatement issues in 2002?

25 A. Well, again, Dr. Bajaj testified that Household's stock

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 4288

 1 price had nothing to do with the allegations of predatory

 2 lending, the regulatory investigations and complaints, the

 3 lawsuits, consumer complaints. It was all a function of what

 4 happened with finance companies.

 5 And I think I have shown, or certainly tried to show,

 6 that if you look at the economic evidence with respect to

 7 finance companies, there was dramatic underperformance of

 8 Household.

 9 But, again, it's not just an opinion of an expert.

10 It's supported by what observers were saying at the time.

11 Again, this first paragraph demonstrates that. The

12 particular analyst talks about how "Household's stock has been

13 under pressure due to concern about accusations of unfair and

14 predatory lending practices, primarily consumer groups (ACORN

15 and AARP) and the State of Washington Department of Financial

16 Institutions." And then talks about the possibility of

17 further developments along the same lines in the future.

18 Q. I want to go back to your S&P financial group.

19 During the time period of your disclosure period,

20 November to October of '02 -- November of '01 to October of

21 '02, how did Household perform within that group?

22 A. Much worse.

23 Q. Did you look to see how they performed?

24 A. Yes. They were the fourth worst out of 70 firms.

25 By the way, that's also true if you take a look at

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 4289

 1 the period that Dr. Bajaj selected -- again, not the correct

 2 period, in my view, because it didn't start with

 3 November 15th. But even looking at his period, Household was

 4 the fourth worst performing firm out of 70 firms --

 5 approximately 70 firms in the S&P financials index, which was

 6 the index that Household itself, as required by law, told

 7 investors that it should be -- its performance should be

 8 judged against.

 9 Q. Before we finish up today, I just want to go back to one

10 more topic, and that's the up-leg, as the defendants refer to

11 it, inflation coming into Household stock.

12 How does the false statements in this case cause

13 inflation to be in Household stock?

14 A. The plaintiffs have alleged in this case that Household

15 failed to disclose that its growth strategy was based on an

16 unsustainable business model; that it was based on predatory

17 lending practices that would ultimately be the subject of

18 regulatory investigations, customer complaints, lawsuits,

19 proceedings by states' Attorney General, et cetera. It also

20 alleged that Household's accounting was incorrect; that its

21 reaging policies masked delinquencies and defaults; and that

22 its accounting for its credit card revenues was incorrect as

23 demonstrated by the ultimate restatements.

24 When Dr. Bajaj gives his opinion over and over and

25 over again that there is no economic evidence that there is

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 4290

 1 any relationship between those allegations and inflation in

 2 Household stock, what he is saying is that had Household

 3 disclosed from the beginning of the relevant period everything

 4 that the plaintiffs allege that Household should have

 5 disclosed, its stock price would have been identical on every

 6 day during the class period.

 7 In other words, if Household had disclosed, our

 8 growth model is based on predatory lending practices, which

 9 can't be sustained; if it disclosed that our accounting is

10 overly aggressive and masked delinquencies; if it had

11 disclosed that our accounting is ultimately going to be the

12 subject of a restatement, that would have had no effect on

13 investors at any point in time during the relevant period,

14 even though we know when that information came out after

15 November 15th, when Household's denials became less and less

16 credible, the stock price fell dramatically.

17 So the premise of, really, both of my analyses -- the

18 specific disclosure model and the leakage model -- is that

19 stock price decreased, that dramatic underperformance from

20 November 15th forward.

21 If the information that came out after November 15th,

22 if that information had been properly disclosed at the

23 beginning of the relevant period, Household's stock price

24 would have fallen the same way that Household's stock price in

25 fact fell when the correct, or truthful, information came out

Household Unsigned Page - - -

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4-28-09 Trial Day 20 4/29/2009 5:47:00 AM

 Fischel - direct

 4291

 1 when Household's denials became less and less credible after

 2 November 15th.

 3 So the way inflation entered Household's stock prices

 4 is very simple.

 5 Dr. Bajaj had all kinds of complicated exhibits, but

 6 the point is very, very simple.

 7 If instead of the disclosures that Household in fact

 8 made before they had to change their disclosures, admit that

 9 some of their disclosures were false and misleading, if they

10 had said those things at the beginning, would the stock price

11 have been the same, or would it have fallen?

12 And what I tried to do was attempt to quantify, using

13 two different methods, how much Household's stock price would

14 have fallen had there been correct disclosures at all points

15 in time.

16 In other words, if the information that came out

17 gradually beginning on November 15th, 2001, if instead of

18 coming out at that time and with Household continually denying

19 the allegations, if Household had made truthful and accurate

20 disclosure at the beginning, its stock price wouldn't have

21 been in the 40s. It would have been lower because investors

22 would have realized the growth strategy is not sustainable,

23 the accounting is not reliable, there is questions about the

24 integrity of management and financial reporting. All those

25 things would have caused the stock price to be lower. That's

Household Unsigned Page - - -

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4-28-09 Trial Day 20 4/29/2009 5:47:00 AM

 4292

 1 what constitutes the inflation. That's what I tried to

 2 quantify under my two different methods.

 3 MR. BURKHOLZ: Is this a good time to break, your

 4 Honor?

 5 I can keep going.

 6 THE COURT: No. It is. Very well.

 7 Ladies and gentlemen, we will break for today. We

 8 will -- as you can no doubt perceive, we are nearing the close

 9 of the evidence in this case. So your patience and your

10 attention is, as always, appreciated. But know that we are

11 almost at the end.

12 We will resume tomorrow at the usual time.

13 Please don't discuss the case with anyone or allow

14 anyone to discuss it with you.

15 Have a good evening. We will see you tomorrow.

16 (Jury out at 4:31 p.m.)

17 THE COURT: You may step down.

18 THE WITNESS: Thank you, your Honor.

19 THE COURT: Tell me what our schedule is.

20 MR. BURKHOLZ: We have the 50(a) motion with respect

21 to --

22 THE COURT: Tell me what the schedule is with the

23 evidence. That's what I need to know.

24 MR. BURKHOLZ: Probably another 20 to 30 minutes.

25 THE COURT: With this witness?

Household Unsigned Page - - -

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4-28-09 Trial Day 20 4/29/2009 5:47:00 AM

 4293

 1 Any other witnesses?

 2 MR. BURKHOLZ: No, your Honor.

 3 THE COURT: All right. I assume you will have about

 4 the same in cross?

 5 MR. KAVALER: In terms of time or in terms of number

 6 of witnesses, your Honor?

 7 THE COURT: In terms of time with this witness first.

 8 MR. KAVALER: Less. Based on what he has done so

 9 far, less. With witnesses, fewer.

10 THE COURT: Any other witnesses after him in

11 surrebuttal?

12 MR. KAVALER: Zero. Again, your Honor, subject to

13 him saying -- hereafter would require some response.

14 THE COURT: Okay. All right. So we can count on

15 releasing this jury tomorrow probably right around lunchtime,

16 I would assume.

17 And I can have your -- when can I have your

18 submissions on the verdict forms?

19 MR. DROSMAN: I have that now, your Honor.

20 We will hand up a copy of the 50(a) motion at the

21 same time.

22 THE COURT: That's fine.

23 MR. DROSMAN: What I have got is, I have got a copy

24 of the 50(a) motion for the Court, a copy of the verdict form,

25 a clean copy of the revised jury instructions, and then a

Household Unsigned Page - - -

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 224 of 245
EXHIBIT 11 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 225 of 245
4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 4431

 1 issue of timing. It was my hope that now that we're into

 2 closing arguments we wouldn't have to consider timing issues

 3 anymore, but alas, it is not so.

 4 I told you yesterday that we would give you the

 5 instructions on the law and you would retire to deliberate

 6 today. It appears, however, that the closing arguments are

 7 going to take the better part of the day, unless, that is, you

 8 folks are willing to give up all of your breaks and your

 9 lunch. And frankly, even if you are, I'm not. So we're not

10 going to do that.

11 (Laughter.)

12 THE COURT: So, the fact of the matter is that the

13 instructions on the law probably won't be finished today,

14 which means that you will be instructed on the law not today

15 but on the next court date. The question then remains for you

16 to debate during your break among yourselves whether you wish

17 to return tomorrow, which I'm sure I need not remind you is a

18 Friday, to receive the instructions on the law and begin your

19 deliberations, or do you wish to keep the same schedule you

20 have kept so far and, that is, return on Monday. You can --

21 A JUROR: I think we can answer that question now.

22 We'd like to keep the old schedule and come back Monday.

23 THE COURT: Very well. I was going to say, unless

24 everyone agrees, we won't break the old schedule. So we will

25 return on Monday for the instructions on the law and you can

Household Unsigned Page - - -

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4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 Dowd - closing

 4432

 1 retire to deliberate on that day.

 2 Today will be devoted to closing arguments. As I

 3 previously have told you, ladies and gentlemen, the arguments

 4 and statements that the attorneys make during their closings

 5 are not to be considered by you either as evidence in the case

 6 or as your instructions on the law.

 7 And should your recollection of the evidence conflict

 8 with that of any of the attorneys, you are to disregard what

 9 the attorneys say and rely upon your own collective

10 recollection. Nevertheless, the statements that the attorneys

11 make, the arguments that they will make to you are intended to

12 highlight the issues, the evidence as it applies to those

13 issues and the reasonable inferences that they believe you can

14 draw from the evidence that has been presented. And as such,

15 closing arguments are an important part of the trial.

16 Therefore, please give these attorneys your close attention as

17 we recognize them for their closing arguments.

18 Mr. Dowd.

19 MR. DOWD: Thank you, your Honor.

20 CLOSING ARGUMENT ON BEHALF OF THE PLAINTIFFS

21 MR. DOWD: Good morning, ladies and gentlemen. It's

22 been a long road. We've been here four and a half weeks, I

23 think, and I've been here longer than that. And what I'd like

24 to talk to you about today is the fact that even though it's

25 been a long road, you saw some amazing things in this trial.

Household Unsigned Page - - -

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4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 Dowd - closing

 4433

 1 You saw and heard amazing things from that witness stand.

 2 Think about William Aldinger. He was the CEO of one

 3 of America's largest corporations, and he got on that witness

 4 stand and he said to you, When we issued that 2001 10-K we

 5 made materially false and misleading statements. He admitted

 6 that to you, ladies and gentlemen.

 7 Think about that. That's an amazing thing. A CEO of

 8 one of America's largest companies making an admission like

 9 that here in this courtroom. And yet, ladies and gentlemen,

10 as soon as he said it, he realized what he had said, didn't

11 he? He started talking in his testimony about how he relied

12 on others. There were business unit chiefs, there were other

13 people below him, there were accounting department people.

14 All these people gave him something.

15 Mr. Aldinger couldn't be bothered with the

16 nitty-gritty as he told you, the nits and gnats. He was like

17 a guy falling off a cliff, ladies and gentlemen, that reaches

18 up and just tries to drag everybody else down with him at that

19 company. But he's right. He's right. He did drag them down.

20 Because they were all responsible for these false and

21 misleading statements. They all were. They all knew they

22 were false and misleading. They knew they were material.

23 But, ladies and gentlemen, why? Why did he do this?

24 Why did he make $20 million a year and couldn't be bothered to

25 look at the nits and gnats, the nitty-gritty? Well, think

Household Unsigned Page - - -

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4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 Dowd - closing

 4434

 1 about what he was doing with his time, ladies and gentlemen.

 2 He told you that he spent 30 percent of his time talking to

 3 Wall Street analysts and people on Wall Street. That's what

 4 he told you. 30 percent of his time.

 5 Think about it. Shouldn't this guy have been

 6 spending a hundred percent of his time thinking about what was

 7 going on in those branch offices, thinking about the issues

 8 that affected that company? No. He was talking to Wall

 9 Street.

10 Why was he talking to Wall Street 30 percent of his

11 time, ladies and gentlemen? Because he was trying to keep

12 that stock price up, wasn't he? He was trying to convince

13 those people that they had real growth. He was trying to

14 convince them that they had great loan quality. That's what

15 he was trying to do. That's why he was on that phone. That's

16 why he was at those conferences. He was trying to convince

17 Wall Street to keep that stock price up.

18 Why did he want that stock price up? He wanted that

19 stock price up because he had himself an exit strategy, didn't

20 he? He was going to sell that company. He was going to sell

21 Household to Wells Fargo. And yet, ladies and gentlemen, when

22 Wells Fargo got in there and they saw those aggressive

23 re-aging practices, when they saw a latent credit bubble, were

24 the words they used, guys sweeping everything under the rug

25 and making a big ol' pile underneath it, when they saw all

Household Unsigned Page - - -

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 226 of 245
4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 Dowd - closing

 4447

 1 15 attorney generals that are investigating Household.

 2 And he writes a letter. It goes to Ms. Curtin and

 3 it's forwarded on to others at the company, including

 4 Ms. Sodeika, who was here, Ms. Hayden-Hakes, Mr. Detelich.

 5 And what does he say on the last page of this exhibit? He

 6 tells them, We note that several of the most insidiously

 7 deceptive sales practices which attracted regulatory attention

 8 to Household, practices at the outset, relate to products and

 9 practices initiated by Household in 1999.

10 1999, that's when they started engaging in what he

11 calls insidiously deceptive sales practices. Then he says,

12 Industry figures indicate that since 1999, Household's

13 originations have nearly doubled. The number of loans they

14 made, the number of deceptive loans they made, the number of

15 predatory loans they made have doubled after these practices

16 got put in place in '99. And he says, almost assuredly the

17 misleading sales practices the states have identified have

18 contributed to that growth.

19 It's not just us, ladies and gentlemen. It's not

20 just us. They were telling these guys, look, we investigated

21 it. We see what happened here. You put in these deceptive

22 practices. The practices allowed you to double the number of

23 loans you were making. That's what drove this growth. And

24 that growth, that phony growth built on deceptive practices,

25 that growth increased the stock price, didn't it, ladies and

Household Unsigned Page - - -

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4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 Dowd - closing

 4448

 1 gentlemen? It's not just us. That's what the attorney

 2 generals told them, too.

 3 So let's take a look a little bit at the other part

 4 of this equation. All through the relevant time period,

 5 ladies and gentlemen -- and I'm sorry. I know this is a

 6 little tough to see. I'll try to walk you through these

 7 boxes.

 8 All through the relevant period, they're talking,

 9 aren't they? Every quarter Household has got a Q. Every year

10 they got a 10-K that comes out. And every time they put one

11 of those things out, right before it, they put out a press

12 release that basically has the same information. They just

13 keep talking, and they're telling people about their growth.

14 They're telling people about how great their loan quality is,

15 showing them those two-plus numbers that we know they forgot

16 to tell people about, all that re-aging that was going on.

17 That wasn't in those Qs and Ks, but they tell them

18 about that. They put in the phony numbers from the credit

19 card accounting, don't they? These are the statements that

20 they make. Their conduct and their statements go hand in

21 hand, ladies and gentlemen.

22 As they put out these press releases, I mean, these

23 are the things, combined with their practices, that drive the

24 stock price up during this period.

25 Let's talk a little bit about false and misleading

Household Unsigned Page - - -

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4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 Dowd - closing

 4449

 1 statements. Let's talk a little bit about your job as jurors.

 2 If we could, I would like to pull up Plaintiffs' Demonstrative

 3 165. And, ladies and gentlemen, the Court is going to

 4 instruct you with the jury instructions. At any time we're

 5 talking about jury instructions, I'm just going to tell you

 6 flat out, you listen to the Court, to Judge Guzman. He's the

 7 boss, not me. So he gets it right. I do my best, but you

 8 listen to him. He's the final word. He's the only word.

 9 So we look at the elements of 10b-5. Right? 10b-5

10 is just that part of the securities laws that you're here to

11 decide. And it says, Defendants made a false statement of

12 fact or omitted a fact that was necessary, in light of the

13 circumstances, to prevent a statement that was made from being

14 false and misleading.

15 So what are we talking about? We're talking about

16 false statements. We're talking about omissions. Where they

17 said one thing and they forget to tell you the rest, that's an

18 omission, right?

19 And so what do we have to prove? We have to prove a

20 false statement or omission. We think we've proved that to

21 you, ladies and gentlemen. We think we proved to you that all

22 these statements that we say are false are indeed false based

23 on what you heard from that witness stand.

24 What else do we have to show? We have to show it's

25 material. It's got to matter to an investor. It's got to be

Household Unsigned Page - - -

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4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 Dowd - closing

 4450

 1 something that they think is important in making a decision.

 2 That's all. That's what materiality is. It's a simple

 3 concept, right? Everybody does it every day. People tell you

 4 something. Some things are important, some things you care

 5 about, and some things you don't. That's materiality.

 6 Let's get to state of mind, knowingly or reckless.

 7 We have to show that the defendants acted knowingly or

 8 recklessly. That's one of the things we'll be talking about

 9 as we continue today.

10 And then finally we've got to show that a substantial

11 factor -- those statements were a substantial factor in

12 causing the plaintiffs' economic loss. That's why you had

13 Dr. Fischel here, to try to explain to you if there's a false

14 statement, this is what happens with the stock price. We'll

15 come back to that as well.

16 I do want to talk to you about a couple of things

17 that relate to these jury instructions. The first is, you're

18 going to see sometimes in the jury instructions something

19 about plaintiffs purchased stock. All right.

20 Now, we didn't put a plaintiff on the witness stand

21 because it wasn't an issue in this case. As this case is set

22 up, we don't have to put a plaintiff on the witness stand. In

23 fact, we didn't have to show you that anybody purchased the

24 stock just because the way this case is set up.

25 So don't be confused by that. That's not an issue.

Household Unsigned Page - - -

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 227 of 245
4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 Apparently, it's not the case. I apologize. I won't

 2 give you the transcript page numbers, but I have them.

 3 Okay. In any event, it was a big number. There's no

 4 question about it. $3 billion is a big number. But it wasn't

 5 a material number. Why? Because it was 3 billion out of a

 6 hundred billion. That's like three pennies out of a dollar.

 7 Maybe I got that wrong. You know, I'm not good at

 8 math. Maybe it's three mills out of a dollar. It's very

 9 small.

10 At the end of the day, they discussed it -- all the

11 relevant people -- and they decided, "We're not required to

12 correct it because it's not material."

13 And Mr. Dowd talked to you about material. And Judge

14 Guzman will instruct you about material. And I agree with

15 Mr. Dowd, you have to listen to whatever the Judge tells you.

16 The rules are the rules. He's prepared his instructions very

17 carefully. They say exactly what he wants them to say. You

18 listen to them, not to me, not to Mr. Dowd. We're both going

19 to discuss what we think the application of those rules to the

20 facts might be, but he is the man who is going to tell you the

21 law. No question about that.

22 But I think what he's going to tell you is if it's

23 not material, it doesn't matter in a securities fraud case

24 because, as Mr. Dowd said in that chart he had up there, one

25 of the things it has to be is material.

Household Unsigned Page 4539 - 4542

 4539 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 And the second thing he's going to tell you is there

 2 has to be some degree of intent on Dave's part. The Judge

 3 will describe what that is. But if it wasn't intentional, if

 4 it was just a mistake, it doesn't matter, either.

 5 And this is interesting. Mr. Dowd was talking a

 6 minute ago about the restatement. He started to say

 7 something -- halfway through his sentence -- and then he

 8 stopped. I'll come to that when I talk about restatement.

 9 But what he was going to say was, "And this speaks to

10 his -- " and then he stopped. The word he was going to use

11 was "intent." And he stopped. He said, "It speaks to

12 restatement."

13 Do you know why, ladies and gentlemen? Because

14 without proof of intent, a mistake doesn't count; without

15 proof of intent, there is no securities fraud claim. And

16 there's no intent in the restatement issue in this case

17 whatsoever. None. Mr. Dowd knows it. I know it. You know

18 it. None. Zero. That's the missing element.

19 So, he spent all that time talking about restatement,

20 telling you something I would have given up in a minute.

21 Remember when questioning Mr. Bley, Mr. Drosman went

22 through state after state after state after state; and, then,

23 he said to Mr. Bley, "15." And Bley said, "I would have given

24 you 15 ten minutes ago."

25 I give him restatement is false. I give him

Household Unsigned Page 4539 - 4542

 4540 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 material. No question. That's what a restatement is. We got

 2 it wrong. We're doing it over. But there's no intent to

 3 defraud. There was no intent ten years earlier to put out

 4 false numbers so that ten years later somebody could meet his

 5 bonus target. That's what he's saying, in fact. That's what

 6 he's telling you. There's no intent.

 7 In other words, Dave didn't lie. He made a mistake.

 8 If he didn't lie, if he had no intent, he didn't commit fraud.

 9 If he didn't commit fraud, when we get down to the thing

10 Mr. Dowd ended on -- the checklist that we'll talk about

11 later -- you have to check "No."

12 You're going to find that you have to check "No" for

13 all of those because there's some problem with each and every

14 one of these cases -- claims.

15 Then there's Gary. Mr. Dowd ridiculed Gary for this;

16 but, it's true, Gary went to work for a local branch at HFC

17 when he was a young man in his local town. He started out in

18 the lowest rung of the ladder; and, he eventually worked

19 himself up to being head of Consumer Lending. That's a good

20 thing. That's not a bad thing. That's a great thing. It's

21 what we all want for our children. That's what America is

22 about. There's no barriers to success.

23 And that's a great success story, just like Bill

24 Aldinger's. Bill's father was a union dock worker in

25 Brooklyn, and Bill is the CEO of a company that touches one

Household Unsigned Page 4539 - 4542

 4541 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 out of six Americans. Where else but in America could that

 2 happen? That's a great story. That's what we want for our

 3 children: Success like that.

 4 And Bill and Dave and Gary are not the only Household

 5 people you met here. In fact, if you think about it, it's

 6 kind of interesting. All the live witnesses that you saw,

 7 every single one -- other than the experts; Mr. Dowd and I

 8 both hired experts, God knows; but, other than the experts --

 9 all the live witnesses, the people who came and sat on that

10 stand -- were all once Household employees.

11 You met several people who worked for Household

12 during the relevant period. They all have one thing in

13 common. I think you know that. They tried their very best to

14 do a good job for the shareholders. You met Megan

15 Hayden-Hakes, Tom Schneider, Craig Streem, Steve Hicks, Tom

16 Detelich, Walt Rybak, Rob O'Han and Lisa Sodeika. And each of

17 them added to your understanding of who is Household.

18 Here's something interesting. Some of them you just

19 met here now in April of 1999, but some of them you met as

20 they were back ten years ago in the relevant period. Because,

21 by the magic of videotape, you were able to actually look over

22 their shoulders and watch Lisa Sodeika and Gary Gilmer doing

23 their job back in the day. And that wasn't a video that

24 somebody made for this jury. That was made ten years ago.

25 That was just Household videotaping its executives doing

Household Unsigned Page 4539 - 4542

 4542 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 228 of 245
4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 things because, as Lisa told you, they wanted to spread the

 2 around the company.

 3 You saw Gary Gilmer talking to the employees. He

 4 didn't know you were going to be watching him. He was

 5 speaking from the heart. He told them.

 6 You saw Lisa Sodeika speaking to the employees. She

 7 was speaking from the heart. She told them.

 8 What did they say? "Go out there and do this company

 9 proud. Do what you've been taught to do: Help the customer."

10 You saw those videos. That wasn't some staged

11 production. That was Household.

12 And Tom Detelich, he showed you another video -- an

13 authorized training video. You noticed it was very fancy,

14 high production values, professional actors, you know, good

15 lighting. It wasn't Mr. Hueman with somebody with a hand-held

16 video camera in his office making some herky, jerky homemade

17 tape that was unauthorized.

18 We'll come back to the Hueman tape.

19 But Tom Detelich showed you the real Household. And

20 you saw a video that Gary Gilmer thought -- it was

21 interesting. Did you see how many things in this case, that

22 was pro-consumer initiatives, were dreamt up by Gary Gilmer?

23 The closing video, do you remember that? That was

24 Gary's idea. He wanted every customer all around the country

25 to see the same video, just like on the airlines you all see

Household Unsigned Page 4543 - 4546

 4543 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 the same "buckle-your-seat-belt" video, to make sure there's

 2 uniformity, to make sure everybody gets the right word. That

 3 was Gary's idea. You saw that video. That's Household.

 4 These videos show you real people doing real jobs in

 5 real time. They give you a much better picture of Household

 6 than Catherine Ghiglieri could ever give you.

 7 Mr. Dowd said she was the longest witness in the

 8 case. She was. And you know why. You know why. If she had

 9 answered a single -- the first question I asked her, "Will you

10 answer 'Yes' or 'No,' if you can?

11 "I'll try, Mr. Kavaler."

12 Not once -- not once -- in two days did she answer a

13 simple question with a "Yes" or "No." That's why she was the

14 longest witness in the case.

15 Now, as Mr. Dowd said -- and I agree with him on

16 this -- the Judge is going to instruct you on you burden of

17 proof. As Mr. Dowd said -- and I agree with him on this, too

18 -- the burden is on the plaintiffs.

19 If the investors are going to recover anything

20 against anybody on any claim, they have the burden of proving

21 that claim.

22 Mr. Dowd talked to you about a scale and tips a

23 little bit. That's his view. I'm going to ask you to

24 consider two things as you think about this concept of burden

25 of proof. And I agree with him, it's not beyond a reasonable

Household Unsigned Page 4543 - 4546

 4544 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 doubt. It's not clear and convincing. It's a preponderance

 2 of the evidence. The scale analogy is apt.

 3 But if the scale is like this (indicating) -- it's

 4 exactly equal -- if you can't figure it out, all ties go to

 5 the defendant. I win because then he hasn't put any weight on

 6 the scale. It starts off equal. If he doesn't move that

 7 scale, he loses. That's how the system works.

 8 In other words, if you look at the evidence and you

 9 say, "Gee, maybe this is right. Maybe not. Mr. Dowd has a

10 point. Mr. Kavaler has a point. I can't tell." That's a

11 vote for the defendants.

12 It also means that the investors have to carry their

13 burden. They have to explain their case to you.

14 So, if a part of the case is unclear or if the

15 evidence is confusing, it's Mr. Dowd's job to straighten that

16 out. Because if he can't explain it to you, then how could he

17 have persuaded you by a preponderance of the evidence that

18 he's right and we're not?

19 So, if you wind up saying to yourself, "This claim

20 makes no sense to me," or "this part of the claim makes no

21 sense to me," that's also a reason to vote for the defendants.

22 It's not our burden to prove anything. My job here

23 today is not to persuade you I've proved anything. My job is

24 simply to show you the ways in which the investors haven't

25 carried their burden.

Household Unsigned Page 4543 - 4546

 4545 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 Now, the Judge is going to tell you about the

 2 elements of a claim of securities fraud. Mr. Dowd had a chart

 3 up there. I don't really disagree with his chart. We have a

 4 similar chart. We could have used his. But, again, the Judge

 5 will tell you the law.

 6 The point I want to emphasize is the investors have

 7 the burden of proving every element on this chart. If they

 8 prove one, it's not good enough. If they prove two, it's not

 9 good enough. If they prove three, it's not good enough. They

10 have to prove all four.

11 Any failure to prove any element, they lose.

12 I know you've all heard the expression, "A chain is

13 only as strong as its weakest link," you know. And there are

14 several weak links in Wall Street's chain here. I'm going to

15 walk you through them for the next period of time.

16 If one link breaks, the investors can't prove their

17 case. And that's how -- the elements of securities fraud.

18 They have to prove falsity and materiality and an intent and a

19 causal connection. All four. If they prove three, it's not

20 securities fraud.

21 Let me walk you briefly through -- remember at the

22 beginning the case, the Judge told you about the elements.

23 He's going to tell you more about them, but let me just put

24 this in context. And I'm going to use his words. I'm going

25 to quote him.

Household Unsigned Page 4543 - 4546

 4546 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 229 of 245
4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 The first thing he told you is, "The plaintiffs must

 2 prove that during the relevant period, the defendants made a

 3 false statement of fact or omitted a fact that was necessary,

 4 in light of the circumstances, to prevent a statement that was

 5 made from being misleading."

 6 The part I want to focus there is "during the

 7 relevant period." It's very important. You know, I asked a

 8 lot of questions of Professor Fischel and Professor Bajaj.

 9 One of them was, "This business about there's the same

10 statement on August 16 and July 22. Both professors said --

11 by the way, you'll see there's a lot of agreement between the

12 professors. It might not have sounded like it, but they agree

13 on the first principles. One is the market reacts instantly

14 to knowledge. The other is once you disclose something -- the

15 the second time you disclose it -- it doesn't make any

16 difference. Both of them agreed that Household made the same

17 statement -- whatever it is, true or false -- July 22nd,

18 August 16th.

19 July 30, which is the first day of the relevant

20 period, comes in the middle there. Well, if it's the same

21 statement, the only one that counts is the first one. That's

22 August 16. That's outside the relevant period.

23 So, that's what you need to focus on when you listen

24 to the judge's instructions. If he tells you that you have to

25 find a statement in the relevant period, and you conclude that

Household Unsigned Page 4547 - 4550

 4547 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 the statement they're talking about -- the August 16th

 2 statement -- Mr. Dowd talked about was first made on July

 3 22nd -- that's outside the relevant period -- we're done.

 4 That's it. They can't prevail.

 5 So, a lot of these things are very, very subtle, but

 6 very important, very important. And I'll try to point some of

 7 that out to you.

 8 The second thing the Judge said when he gave you the

 9 preliminary instructions, was, "Plaintiffs must prove that the

10 false statement or the omitted fact was material."

11 You know, that's an issue; and, you know that a lot

12 of these things, materiality, is a function of what the

13 professors talked about, whether it moved the market or not.

14 If it didn't move the market it wasn't material.

15 Mr. Dowd said what a reasonable investor would want to know."

16 But if a reasonable investor -- the best proof, you

17 know, voting with your feet, as they say, is if the market

18 doesn't move. And Professor Fischel told you, "No change in

19 the inflation from Day One until November 15, '01. '99, '01,

20 two-and-a-quarter years, no movement.

21 What he's telling you is every single statement these

22 guys are talking about for two-and-a-quarter years was not

23 material. Because if it had been material, it would have

24 moved the market. It didn't move the market.

25 I am going to come back to that concept when I talk

Household Unsigned Page 4547 - 4550

 4548 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 about loss causation, which is the last thing Mr. Dowd talked

 2 about, but I'm speaking about materiality now. That was

 3 powerful testimony by Professor Fischel that none of these

 4 statements are material.

 5 Okay. The third thing the Judge said is, "Plaintiffs

 6 must prove that the defendant acted with a particular state of

 7 mind." That's what we were talking about earlier. Dave made

 8 a mistake. No question. I'm not avoiding it. Let me think

 9 of a much more dramatic example.

10 Bill said that statement was false and misleading --

11 the 10-K was false and misleading.

12 Mr. Dowd loves that. He opened his remarks to that.

13 I knew he would. It's true. It doesn't address, however, the

14 question of intent. It does not speak to intent.

15 Sorry, the chart went away.

16 It's a separate line in the chart. One is false.

17 One is material. One is intent. Something can be false, said

18 by accident, not securities fraud.

19 Finally, he told you plaintiffs must prove a causal

20 connection between any material misrepresentation or omission

21 -- if you find one -- and an economic loss by the plaintiffs.

22 "To prove this -- " now, this is the hardest part of

23 the case; this was what Mr. Dowd was talking about at the end;

24 this is what the professors were fighting about -- to prove

25 this, his Honor said, plaintiffs must prove both -- " and I

Household Unsigned Page 4547 - 4550

 4549 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 emphasize enormously the word "both" -- either one alone, not

 2 enough, both: A, that they purchased Household stock at a

 3 price that was artificially inflated because of a -- because

 4 of -- the misrepresentation or omission during the relevant

 5 period." That's that August/July problem, again. I'll come

 6 back to that. And -- and the "and" is the same thing as the

 7 "both" -- you need both of them; and, B, that the subsequent

 8 disclosure of the truth -- that is what Professor Fischel said

 9 later on in the class period, the relevant period statements

10 were maid that revealed the truth that had been concealed.

11 And you know there was no truth that was concealed in

12 the first place. That's why he has no up leg. But we'll come

13 back to that.

14 "Subsequent disclosure of the truth during the

15 relevant period."

16 Now, Mr. Dowd talked to you at length about 201 10-K.

17 When I get around to it, we'll find out when the truth was

18 revealed about that; and, we'll find out whether it was

19 revealed in the relevant or not.

20 If it wasn't in the relevant period, that's a big

21 problem for Wall Street.

22 And, of course, ladies and gentlemen, you know this:

23 The relevant period is between July 30, 1999, and October 11,

24 2002. Those are the goal posts. When I talk about loss

25 causation, I'll draw you a little diagram, I'll put it up on

Household Unsigned Page 4547 - 4550

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 230 of 245
4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 the white board so we can see what's in and what's out.

 2 Now, let me be clear. Everything I just said applies

 3 to each of these claims. It applies to predatory lending,

 4 restatement, re-age, et cetera.

 5 In each of these cases, if you find one of these

 6 elements not proven, your decision needs to be for the

 7 defendants. All right?

 8 A way to think about it is this: To win, Mr. Dowd

 9 has to be right for every one of those claims all four times.

10 I only need to be right once. That's the way the system

11 works.

12 Let me start with predatory lending. We begin today

13 where we began this journey.

14 MR. KAVALER: Your Honor, do you want me to break for

15 lunch at this time?

16 THE COURT: You tell me when it's convenient.

17 MR. KAVALER: Well, since I'm about to begin

18 predatory lending, this is a perfect time to stop.

19 THE COURT: The perfect time to stop, then.

20 We'll break for lunch at this point, ladies and

21 gentlemen. Return at 1:00 o'clock.

22 MR. KAVALER: Thank you, your Honor.

23 (Jury out.)

24 THE COURT: See you in an hour.

25 MR. KAVALER: Your Honor, I apologize, I didn't

Household Unsigned Page 4551 - -

 4551 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 realize we didn't have the capacity to give them a readback,

 2 if they wanted.

 3 THE COURT: Well, every readback is a request and an

 4 issue for the Court to determine, based upon what the parties

 5 present and what the question is. And I don't want to be

 6 prejudged in front of the jury, so that they're led to expect

 7 something that may not come.

 8 MR. KAVALER: I apologize. I won't do it again. I

 9 didn't realize that was your policy.

10 THE COURT: Okay.

11 MR. KAVALER: But I do have page cites for everything

12 in there.

13 THE COURT: I'm sure you do.

14 (Trial recessed until 1:00 p.m. of the same day.)

15

16

17

18

19

20

21

22

23

24

25

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4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 4553

 1 IN THE UNITED STATES DISTRICT COURT

 FOR THE NORTHERN DISTRICT OF ILLINOIS

 2 EASTERN DIVISION

 3 LAWRENCE E. JAFFE PENSION PLAN, ) on behalf of itself and all ) 4 others similarly situated, ) ) 5 Plaintiff, ) ) 6 vs. ) No. 02 C 5893 ) 7 HOUSEHOLD INTERNATIONAL, INC., ) et al., ) Chicago, Illinois 8 ) April 30, 2009 Defendants. ) 1:10 p.m. 9

10 TRANSCRIPT OF PROCEEDINGS - TRIAL

 BEFORE THE HONORABLE RONALD A. GUZMAN, and a ju 11

12 APPEARANCES:

13 For the Plaintiff: COUGHLIN STOIA GELLER RUDMAN &

 ROBBINS LLP

14 BY: MR. LAWRENCE A. ABEL

 MR. SPENCER A. BURKHOLZ

15 MR. MICHAEL J. DOWD

 MR. DANIEL S. DROSMAN

16 MS. MAUREEN E. MUELLER

 655 West Broadway 17 Suite 1900

 San Diego, California 92101 18 (619) 231-1058

19 COUGHLIN STOIA GELLER RUDMAN &

 ROBBINS LLP

20 BY: MR. DAVID CAMERON BAKER

 MR. LUKE O. BROOKS

21 MR. JASON C. DAVIS

 MS. AZRA Z. MEHDI

22 100 Pine Street

 Suite 2600

23 San Francisco, California 94111 (415) 288-4545 24

25

Household Unsigned Page 4551 - -

 - 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 4554

 1 APPEARANCES: (Continued) 2 For the Plaintiff: MILLER LAW LLC

 BY: MR. MARVIN ALAN MILLER

 3 115 South LaSalle Street

 Suite 2910

 4 Chicago, Illinois 60603 (312) 332-3400 5

For the Defendants: EIMER STAHL KLEVORN & SOLBERG 

 6 BY: MR. ADAM B. DEUTSCH

 224 South Michigan Avenue 7 Suite 1100

 Chicago, Illinois 60604 8 (312) 660-7600

 9 CAHILL, GORDON & REINDEL LLP BY: MS. SUSAN BUCKLEY

10 MS. PATRICIA FARREN

 MR. THOMAS J. KAVALER

11 MR. DAVID R. OWEN

 MR. HOWARD G. SLOANE

12 MS. JANET A. BEER

 MR. JASON M. HALL

13 MR. JOSHUA M. NEWVILLE

 MS. LAUREN PERLGUT

14 MS. KIM A. SMITH

 MR. MICHAEL J. WERNKE

15 80 Pine Street

 New York, New York 10005 16 (212) 701-3000

17

18

19

20

21

22 Court Reporter: NANCY C. LaBELLA, CSR, RMR, CRR Official Court Reporter 23 219 South Dearborn Street

 Room 1222

24 Chicago, Illinois 60604 (312) 435-6890 25 Nancy_LaBella@ilnd.uscourts.gov

Household Unsigned Page 4551 - -

 - 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 231 of 245
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 1 matter of time before it wound up in the press, and that's

 2 when Bill said I'm done with this. Let's find out what it

 3 costs to get rid of it and move on.

 4 Okay. And the company settled -- this is an

 5 interesting fact -- for precisely the same reason the state

 6 settled. Mr. Cross testified in his videotaped deposition, he

 7 said we wanted to get it behind us. We didn't want to spend

 8 years in the courtroom. We don't want to spend the state's

 9 resources. That's the same thing Bill said.

10 So the two of them came up with a number, and they

11 did a deal. And the investors knew all these facts, and some

12 of them even labeled them correct. You remember my analogy

13 about me being 200 pounds and I say I'm 200 and you can decide

14 if I'm thin or fat because you get to label. I just tell you

15 the facts.

16 It would be enough if we told the investors the facts

17 and they could label it predatory or not predatory, and we

18 certainly did that. There's no question that we told them all

19 the facts as we went along; but here there were some investors

20 who labeled the facts exactly the same way that Mrs. Ghiglieri

21 came here and testified and Mr. Dowd says the investors were

22 incapable of doing.

23 Remember the theory of the case, the investors didn't

24 know that what you were doing was predatory. Yes, they knew

25 you were a subprime lender, but they didn't know you were

Household Unsigned Page 4579 - 4582

 4579 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 predatory. That's the whole point, right? That was what he

 2 said in the opening, didn't come out until the AG settlement

 3 in October 2002. At no time, he said in his opening, before

 4 October of 2002 did my clients know what you knew all along,

 5 Mr. Aldinger, that this was a predatory enterprise. That's

 6 what he said.

 7 Well, the problem with that is back in March of 2001,

 8 about a year and a half before, Julie Goodrich knew because

 9 she submitted a proposal to Household to be included in the

10 proxy statement. And the proposal said I want management to

11 pay more attention to this predatory lending problem.

12 And then in May of 2001, she appeared before an

13 annual meeting of the shareholders. The shareholders meet

14 once a year to vote on the directors, they vote on the

15 auditors; and in May 2001, she got up in front of an annual

16 meeting of the shareholders. You saw her on the videotape.

17 She's right there on that screen. And she spoke for a couple

18 of minutes, two-and-a-half minutes, I think. Bill Aldinger

19 stood there waiting politely for her to finish. Camera was on

20 him, and you heard her voice.

21 What did she say to her fellow shareholders in May

22 of 2001? She said our company is engaged in predatory

23 lending. I don't want them to be. We should vote to make the

24 board pay more attention to this. The board should tie

25 compensation of senior management more closely to their

Household Unsigned Page 4579 - 4582

 4580 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 efforts to combat predatory lending.

 2 So she knew the facts. She knew how to label it.

 3 She wasn't fooled. She knew everything. She's not one of

 4 those Wall Street companies. She's an individual investor, a

 5 small fund of some sort. And her fellow shareholders, these

 6 people, voted against that proposal by 90 percent, 90 to 10.

 7 Today they come in here and sue us, saying you didn't tell us

 8 what you were doing.

 9 Mr. Dowd talked to you about an important month. He

10 said two things happened in that month: The 2000 10-K was

11 filed and Schoenholz wrote a memo about Kahr memos. The mon

12 was March 2001, ladies and gentlemen. And the third thing

13 that happened that month is very important: Julie Goodrich

14 filed her request to be heard at the annual meeting on the

15 subject of predatory lending. She knew. They all knew. Wall

16 Street knew.

17 Let me talk about re-aging. There are some parts of

18 this case where the parties are ships passing in the night.

19 Re-aging is one of them. The plaintiffs have told you half a

20 story about re-aging and the wrong story. All right?

21 The re-aging story they're telling you doesn't matter

22 at all. Both Bill and Dave told you whether or not an account

23 has been re-aged, whether it's re-aged once or re-aged twice,

24 it's taken into account in setting the loss reserves.

25 The loss reserves are the real story in this part of

Household Unsigned Page 4579 - 4582

 4581 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 the case. That's what's important. It's the only story that

 2 mattered to the investors. Bill told you when he went around

 3 talking to the investors, they always wanted to know about

 4 loss reserves. Bill and Dave told you that's what the

 5 investors care about. That's what they looked at. Dave

 6 testified, "Two-Plus statistics taken by themselves wouldn't

 7 be of great interest to a reader of Household's financial

 8 statements. I think it would be of interest in the context of

 9 loss reserves of the company to get a full picture of the

10 credit position of the company."

11 All right. And Dave also explained it this way, "So

12 if an account is re-aged, it would have a reserve against it,

13 and it would have a bigger reserve, a higher reserve, rather,

14 against it than if it had not been re-aged such that from a

15 financial point of view and from earnings that investors would

16 see, that was irrelevant."

17 The earnings were properly stated because the

18 reserves were properly stated. The issue here is reserves,

19 ladies and gentlemen. Bill testified two-plus gets

20 incorporated in reserves. There's a formula. They put

21 reserves in related to what your two-plus are, and then he

22 said then we add another bit of the reserves for re-age.

23 So, in other words, whatever is going on with the

24 re-age down there, when they do the reserves which hit income,

25 they take account of it, all right?

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 232 of 245
4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 And Bill and Dave both told you when investors asked

 2 questions, the questions were about the reserves, not about

 3 the two-plus, all right?

 4 And Bill described what he was doing was building a

 5 fortress balance sheet. That's what he told investors at the

 6 Goldman Sachs conference. He explained that to you. He said

 7 the two things I emphasized were strong reserves and strong

 8 equity capital, and he said we were a high risk company --

 9 higher risk company, and we believe we wanted to have a very

10 strong reserve and very strong equity capital, and we had it.

11 And the best evidence, ladies and gentlemen, that the

12 reserves were always adequate is there was never a blowup.

13 There was never a time when they had to go back and add money

14 to the reserves. And Bill and Dave both told you that means

15 there was never a need to adjust the reserves; therefore, the

16 reserves were right in the first place; therefore, the

17 two-plus was okay. It was fine. Whatever they were doing

18 down there, it was fine.

19 What they were doing, by the way, has to do with what

20 Mr. Dowd said this morning, plan. Every company makes plans.

21 They were trying to meet plan, no question. But they weren't

22 impacting the financial statement. The financial statement

23 focuses on the reserves.

24 Now, I know you listened very carefully to Mr. Dowd's

25 statement this morning, and I know he goes again after me, so

Household Unsigned Page 4583 - 4586

 4583 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 who knows what he'll say next, but I didn't hear him say the

 2 reserves were inadequate. He talked about two-plus, but he

 3 didn't say the reserves were inadequate because if he did, he

 4 would have a hard time pointing to any evidence in the case

 5 because although two-plus is an important internal matter,

 6 reserves is the important external matter. And here's a list

 7 of the people who Bill told you reviewed the reserves and

 8 never said there was a problem: The internal auditors, the

 9 Audit Committee, the outside independent auditors, both

10 Andersen and KPMG, the analysts. There's not a single person

11 who ever stepped up and said the reserves are not adequate.

12 Well, you might ask yourself I'm sure the plaintiffs

13 solved that problem. They had an expert witness who was an

14 accountant. He must have said that, Mr. Devor.

15 Well, actually he didn't say that. The question was

16 asked of him -- where's my question? The question was asked

17 whether he had an opinion about reserves, and he said, "That's

18 way beyond the scope of my engagement."

19 Okay. So he had a chance to come in here and say the

20 reserves are inadequate. He didn't say it either. Nobody has

21 said the reserves are inadequate, okay?

22 The reason I say the investors are telling you half a

23 story here is because they keep talking about two-plus and

24 delinquent loans because they don't want you to focus on the

25 fact that the undisputed testimony from everybody who knows

Household Unsigned Page 4583 - 4586

 4584 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 anything about it is we took the reserve to take into account

 2 that there are -- that there's re-aging going on, all right?

 3 Dave explained it to you. He said the one other

 4 point I would make, though, is there could be an assumption

 5 that we're doing re-aging to defer credit losses, but that's

 6 just not the case, I mean, because we reserved for those

 7 accounts. So if an account was re-aged, it would have a

 8 reserve against it, and it would have a higher reserve against

 9 it than if it had not been re-aged, such that from a financial

10 point of view and from an earnings that investors would see,

11 that was irrelevant. Then he continued, "The earnings were

12 properly stated because the reserves were properly stated."

13 All right. Now, look, there's nothing wrong with

14 re-aging. Mr. Devor, their expert, admitted that re-aging can

15 be a "good thing to do in terms of helping customers." And he

16 said, "I mean there may be very good business reasons why

17 companies would re-age and give their customers a break and

18 give them time to cure whatever problem it is that caused them

19 to go delinquent." And he admitted that other companies

20 besides Household re-age also.

21 Re-age, ladies and gentlemen, is not an accounting

22 policy or a financial policy. It's an operational policy.

23 It's good for customers, it's good for the investors, it

24 maximizes cash flow, and you saw Dave's e-mail, which is

25 Plaintiffs' Exhibit 1115 -- about to see it, there it is -- he

Household Unsigned Page 4583 - 4586

 4585 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 says, "I want to make sure we're doing the right thing for the

 2 customer and making a good economic decision." In other

 3 words, good for the customer, good for the shareholders.

 4 The undisputed evidence in this case, ladies and

 5 gentlemen, is that re-aging worked because it resulted in more

 6 money for the investors. You heard Walt Rybak testify, and he

 7 told you that Consumer Lending did studies that showed that

 8 re-aging maximized cash flow to the investors. He said, "We

 9 basically saw that more dollars were collected, that more cash

10 was collected, and fewer accounts rolled into later

11 delinquency."

12 Finally, plaintiffs tell you that we didn't tell them

13 that there was automatic or automated re-aging, and it was

14 only disclosed in the company's securitization prospectuses.

15 This morning Mr. Dowd spent a lot of time telling you that

16 Dave Schoenholz knew at the time of the 2001 10-K that

17 Household did one-payment re-ages. That was -- he made a big

18 point of that. That's his main argument against Dave

19 Schoenholz. When the 2001 10-K was filed, Dave knew that

20 Household did one-payment re-ages.

21 You know who else knew? The plaintiffs. Look at

22 Defendants' Exhibit 695.

23 That's the securitization prospectus. It talks about

24 one-payment re-ages. There's another securitization

25 prospectus in 1999. Household disclosed this fact. It

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 233 of 245
4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 disclosed it in securitization prospectuses because at that

 2 point in history, no one, no company, the evidence shows, put

 3 this particular kind of detail in their 10-K. But Household

 4 put it in their securitization prospectuses.

 5 Now, some of the analysts you know quoted the

 6 securitization prospectuses. They said I looked at the

 7 securitization prospectus, and here's what I learned about

 8 Household. And that's how it works. Household discloses it,

 9 the analysts read it. They discuss it with other people, and

10 on it goes.

11 But there's another significant point about those

12 securitization prospectuses, and that's this: You can't have

13 in your mind simultaneously the intent to conceal something

14 and reveal it, and you certainly can't do that, act on the

15 reveal impulse and then conceal it.

16 Once I tell you I weigh 200 pounds, I stand here in

17 this room and I say to you I weigh 200 pounds, I can't turn

18 around and say to Ms. Farren over here I'm not going to tell

19 you how much I weigh. It's a secret. It's too late, I told

20 her. We're done.

21 Household indicated of those two mindsets that you

22 can have, conceal, reveal, it indicated it had a disclosure

23 mentality by disclosing. Back in 1999 they put this very

24 fact, the very fact that Mr. Dowd is saying that

25 Mr. Schoenholz concealed later, two years later, they put it

Household Unsigned Page 4587 - 4590

 4587 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 in a securitization prospectus, filed with the SEC for the

 2 whole world to see.

 3 He's got the burden of proving an intent to conceal.

 4 How could the company have intended to conceal in 2001

 5 something it had publicly disclosed in 1999? It doesn't work.

 6 If he said it wasn't in the 2001 document, that might

 7 be right. That might be right. But it was revealed, it was

 8 publicly known, the analysts were talking about it; and,

 9 therefore, his clients were not fooled. That's a different

10 question. These are very subtle gradations. You've got to

11 watch very carefully what he's telling you.

12 Let me touch on a couple points that relate to the

13 re-aging subject. Mr. Dowd mentioned briefly, he mentioned in

14 one of his mini-summations Elaine Markell. He said we circled

15 the wagons. Remember all that?

16 Mrs. Markell's own admissions on the witness stand in

17 this case are that she knows nothing about the reserves. She

18 has no knowledge or understanding of the subprime business.

19 She worked for ten companies before Household, none of which

20 did anything with reserving. She has no experience with

21 re-aging. She doesn't know -- that's not her expertise.

22 Whatever her expertise is, that ain't it, okay?

23 She admitted there's nothing inappropriate or wrong

24 about restructuring accounts. She said that Household's

25 policies were designed to protect borrowers from losing their

Household Unsigned Page 4587 - 4590

 4588 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 homes in foreclosure. It doesn't matter what you thought of

 2 Mrs. Markell. You might have thought she was truthful. You

 3 might have thought she was confused. Whether she's a

 4 believable witness or not, it doesn't matter. It doesn't

 5 matter. Just like Mr. Dowd said she's outside the circle,

 6 she's outside the wall, all right? She's also outside the

 7 circle of people who know something about reserves. She said

 8 so.

 9 Remember Mr. Sloane asked her a series of questions.

10 She said no, no, no, no. She just doesn't know anything about

11 reserves, and the issue here is reserves, all right?

12 What about mistakes? Mr. Dowd referred to the

13 Financial Relations Conference, and he said that

14 Mr. Schoenholz made a mistake about the re-aging practices.

15 Okay. I already discussed that with you. I talked about the

16 fact it was not a material mistake.

17 Also, there's no showing that Mr. Schoenholz did it

18 on purpose. All right? He got it from Pantelis. Pantelis

19 hasn't been here. We haven't talked to Pantelis. We don't

20 know what Pantelis was thinking. All Dave did is he repeated

21 what Pantelis told him. That's his testimony, all right?

22 And, secondly, it was not material as we discussed it

23 earlier -- as we discussed earlier.

24 Okay. I can skip some of this because I think I've

25 covered it already.

Household Unsigned Page 4587 - 4590

 4589 

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 1 Bill also told you that when Household began

 2 disclosing more about restructuring and re-aging, it was the

 3 first company to do so. It was the very first company to make

 4 any disclosure in this area at all, and here are the

 5 defendants, the plaintiffs, rather, accusing the defendants of

 6 fraud over, first of all, a mistake, a mere mistake, and,

 7 secondly, a mistake they made in an effort to get further

 8 information to the public and give out more information than

 9 any other company was giving anybody, and for that they get

10 sued for fraud.

11 All right. It was well known that Household was a

12 leader in this disclosure. Let's look at a DB Alex. Brown

13 analyst report, which is Defendants' Exhibit 526. "Few

14 companies provide even the detail that Household provides.

15 Many of the large competitors, including CitiFinancial and

16 Wells Fargo Financial, provide less information than Household

17 on policies such as re-aging and recency."

18 All right? That's exactly what I just said.

19 So the real story, the real story here is, the story

20 the plaintiffs aren't telling you, they want to talk about

21 re-age down here. I'm suggesting you focus on reserves up

22 here. If you focus on reserves, you know there was never a

23 problem. There was no intent to deceive. There was no

24 concealment. They disclosed it elsewhere. None of the

25 elements come together, notwithstanding that people made

Household Unsigned Page 4587 - 4590

 4590 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 234 of 245
4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 mistakes. Walt Rybak said he made a mistake. People make

 2 mistakes.

 3 Wells Fargo. Mr. Dowd spoke about Wells Fargo.

 4 There's no question the company talked to Wells Fargo about a

 5 possible transaction. Well, look, there's also no question

 6 Wells Fargo is a bank. Household was finance company. How

 7 many times have you heard this in this case? They operate

 8 under different accounting rules and different government

 9 regulations, all right? Although apparently Mr. Devor,

10 plaintiffs' accounting expert, didn't know that. But everyone

11 else knows that.

12 And Wells Fargo was constrained in its re-aging

13 activity with its customers by a practice called the FFIEC

14 regulations. Under FFIEC, the banks have to be pretty strict

15 with their borrowers, so you miss a couple of payments,

16 foreclosure city for you.

17 The finance companies, as you've heard over and over

18 again, are more lenient with their borrowers because they're

19 not subject to FFIEC. They don't have to foreclose. They

20 don't have to close out -- write off that loan on their books,

21 all right? So that's why Household can lend to people with

22 less substantial credit than Wells Fargo.

23 So if Wells Fargo had acquired Household, you'd have

24 to combine these two different accounting systems somehow.

25 What Wells Fargo was talking about, they were not measuring

Household Unsigned Page 4591 - 4594

 4591 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 the difference between Household and a compliant culture. I

 2 mean Mr. Dowd talked about a bubble. That's not what they're

 3 measuring. They were measuring the difference between

 4 Household and Wells Fargo, a bank and a finance company, and

 5 they're saying if we acquire them and we have to convert them

 6 to bank accounting, what's it going to cost? It was also very

 7 hard to do. It's not that easy to put two different kinds of

 8 things together, okay?

 9 So that's an understandable problem, and then what

10 eventually happened is Mr. Aldinger and Mr. Kovacevich had a

11 meeting which Mr. May was not at -- Todd May said he never met

12 Bill, Bill said he never met Todd -- and in the meeting, one

13 of the participants of that meeting, Bill, testified. He came

14 here. He told you what happened. He said he told

15 Mr. Kovacevich no more. We're done. Been dragging on too

16 long, annual meeting season is coming up. I don't want this

17 hanging out there. We're done.

18 Mr. Dowd says that's not true. Based on what, ladies

19 and gentlemen? Based on Kovacevich's testimony? He wasn't

20 here. Based on May's testimony? He wasn't there. Two people

21 in the room, Kovacevich, Aldinger. You have Aldinger's

22 version and Mr. Dowd's disbelief.

23 The restatement claim. I was listening to Mr. Dowd

24 this morning and something struck me that hadn't struck me

25 before. The restatement arises out of accounting decisions

Household Unsigned Page 4591 - 4594

 4592 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 first made in 1992. Mr. Dowd says the motive was so that

 2 later, years later, it would be easier for these guys to hit

 3 their targets and get their bonuses. Remember he went through

 4 this exercise with you this morning, and he showed you with

 5 the restatement, they made it. Without the restatement, they

 6 didn't make it.

 7 I passed it, Bill explained why that's not true.

 8 Because when you restate a series of years, all the numbers,

 9 it's like going down a stairway, all the numbers go down. The

10 size of each tread remains the same. So the difference

11 between year to year, they would have made it anyway.

12 I also passed Bill's testimony the way the bonus pool

13 worked, there's a lot of room there, and they weren't

14 exhausting it. But forget all that.

15 So Mr. Dowd's theory this morning is 1992, these guys

16 did bad accounting so that in 1999 and 2000, they could reap

17 the benefits. It's a good theory.

18 Bill came to the company in 1994. Uh-oh, theory

19 doesn't work. What about Gary? Gary came in 1998. He was in

20 London. So whoever did this in '92 not only can see ten years

21 into the future, but he was doing it to benefit a CEO they

22 hadn't hired yet and a guy who worked in London who didn't run

23 Consumer Lending. That's his theory.

24 Look, the restatement is very simple. It's really

25 very simple, and it amounts to this: Household was a leader

Household Unsigned Page 4591 - 4594

 4593 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 in the development of something called affinity credit cards.

 2 Today they're very common. I'm sure each of you has one in

 3 your wallet. You know, it's an airline or a gas company. You

 4 get points. You get some kind of bennies from whoever the

 5 affinity partner is, and the bank and the partner have some

 6 kind of an arrangement, and somebody pays somebody. And the

 7 you have to account for it. The bank and the partner have to

 8 account for it.

 9 As usual, Household was the leader in this. They

10 came up with the first one of these. The first one

11 involved -- the first two were GM. There's a card for owners

12 of GM cars. You got points towards your next GM car, and

13 AFL-CIO, a card for the union members. They made a deal with

14 the AFL-CIO. And then they had these other cards. And under

15 these arrangements, money was paid back and forth, fees

16 pursuant to contracts.

17 And the question was how do you account for this?

18 Well, there was no guidance in the accounting literature

19 because it was a new product. So Household turned to

20 Andersen, their longstanding outside auditors, very

21 prestigious firm, and they said what should we do here?

22 Andersen thought about it, and they came back and

23 they said we'll do this, and Household said okay, fine. So

24 they did. And for years, for years, Household accounted for

25 these transactions in exactly the way Andersen had approved,

Household Unsigned Page 4591 - 4594

 4594 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 235 of 245
4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 and Andersen signed off on their financial statements year

 2 after year after year, gave a completely clean bill of health,

 3 including this stuff.

 4 Three witnesses in this case have addressed this

 5 subject. Mr. Devor, the plaintiffs' accounting expert, all

 6 right, and Bill and Dave. All three of them agree what

 7 happened was nothing but a professional disagreement. After

 8 Andersen had been their accountants for years, Andersen, not

 9 Household, Andersen got in trouble. Had nothing to do with

10 Household. They didn't do anything wrong on the Household

11 account.

12 They were the auditors for a company called Enron.

13 Enron imploded. It was front-page stories for months in the

14 Wall Street Journal, local papers, national news magazines.

15 It was Household's concern that here comes more headline risk,

16 what do we need this for? Why should my auditor be Enron's

17 auditor?

18 So Household, it turns out, was the first company,

19 one of the first companies, Bill told you, in America to say

20 to Andersen you're very nice guys, thank you very much, you're

21 fired, we're done. The shareholders approved in one of their

22 annual votes the hiring of KPMG.

23 So KPMG -- another big accounting firm -- KPMG comes

24 in, and they have to re-audit several years back, all right?

25 And they look at '99, 2000, 2001. The only thing they come

Household Unsigned Page 4595 - 4598

 4595 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 up, the only thing they say is this, everything else is fine,

 2 this you've got to re-do this, you've got to restate this.

 3 Bill testifies he says what? I did what Andersen

 4 told me for all these years. Now you're telling me something

 5 different? How come? The answer becomes impenetrable. Who

 6 knows how come? Because the accountants disagree. Even

 7 Mr. Devor, their expert, described it as a dispute between

 8 professional accountants.

 9 And Bill told you what the problem was. Household is

10 not a bank, as we just discussed. They don't have a vault

11 downstairs with depositors' money. If they're going to be in

12 the business of lending money to borrowers, they have to

13 borrow money in the financial markets themselves. And Bill

14 told you to borrow money in the financial markets, you have to

15 have a current set of financial statements on file with the

16 SEC.

17 To file your financial statements with the SEC, you

18 need a seal of approval from an accounting firm. If you're a

19 big company, it has to be a big accounting firm. In America,

20 there are four big accounting firms. They just got rid of

21 Andersen. They had a conflict with another one. That left

22 them two. They picked one of those two. That was KPMG. They

23 paid KPMG millions of dollars to do the audit, and then KPMG

24 comes in and says got to restate this. Bill says, what am I

25 going to do? Okay. So they restate.

Household Unsigned Page 4595 - 4598

 4596 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 And that's where Mr. Dowd got hung up when he was

 2 talking to you this morning because he started to say, "And

 3 they had the right kind of --" and he stopped. Because they

 4 had no intent. There's no intent to defraud. This is the

 5 opposite, ladies and gentlemen, of an intent to defraud. When

 6 you intend to commit financial fraud if you're a company who

 7 is the first person you have to fool? The auditors, right?

 8 If you're pretending you have widgets in a warehouse,

 9 you're making up widgets and you're putting them on your

10 balance sheet, one thing you've got to do is make sure the

11 accountants don't go down in the basement to count the widgets

12 because then the game is over. You know, it's like a sitcom.

13 No, no, don't go in the basement, don't go in the basement.

14 Oh, the basement's flooded. Don't go in the basement, because

15 once the auditors find out, you're done.

16 Here you have just the opposite. They went to the

17 auditors. First they went to Andersen and they said, what do

18 you want to do? Then later they went to KPMG. And you also

19 heard Bill and Dave discussed this with the OCC, the Office of

20 the Comptroller of the Currency.

21 Does that sound like they're hiding stuff? They're

22 talking to our government. And then they discussed it with

23 the ombudsman of the OCC. That's another guy in the

24 government who settles disputes you have with the OCC.

25 Well, talking to all these people, just going to

Household Unsigned Page 4595 - 4598

 4597 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 these people is the opposite of an intent to conceal. It's

 2 also interesting, every one of the people they talked to had a

 3 different opinion, it turned out.

 4 The OCC originally thought Andersen was right. Then

 5 later they thought KPMG was right. The ombudsman thought the

 6 OCC was right. Then they thought they were wrong. Then

 7 Mr. Devor had an opinion. He thought KPMG was right. It's

 8 not fraud. It may be chaos. It may be confusion. It may be,

 9 as Bill said, disappointment. It may be frustration. Where's

10 the intent to defraud? Where is the -- who are you

11 defrauding? The auditors know what you're doing. They're

12 doing it with you. It's not fraud.

13 It's not a mistake either. Don't sit there and

14 think, oh, he's always saying it's a mistake. It's not a

15 mistake. It was a careful, conscious, professional decision

16 by a terrific accounting firm with which another terrific

17 accounting firm ten years later disagreed. And in both cases

18 Household said whatever you say.

19 It's not fraud. And if it's not fraud, ladies and

20 gentlemen, then everything that Mr. Dowd says follows from it

21 doesn't follow at all. When he says and you carry it all the

22 way back in every K and every Q, every three months for years

23 and years and years, they're all false, no, no. They all

24 represent Andersen's accounting judgment. And then after a

25 date, they represent KPMG's accounting judgment. But part of

Household Unsigned Page 4595 - 4598

 4598 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 236 of 245
4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 accounting is you have to go back and restate the

 2 Andersen-approved ones the way KPMG now says you've got to d

 3 it. So you wind up with a restatement.

 4 And even Mr. Devor, plaintiffs' accounting expert,

 5 testified just because there's a restatement doesn't mean

 6 there's a fraud. That's all they have here. They have a

 7 restatement.

 8 As Mr. Bley said, are they giving you 15 states ten

 9 minutes ago? I'd have given you a restatement an hour ago.

10 There's no fraud. There's no intent to deceive. It's just a

11 restatement.

12 That's a restatement that comes out of the credit

13 card business, ladies and gentlemen. You remember there

14 was -- plaintiffs have I think it's 897-01. All right, this

15 is defendants'. They have one, we have one.

16 See over there down on the bottom row on the left,

17 credit card services. That's where it comes from.

18 Private-label credit card, one of the credit card businesses.

19 See in the middle Consumer Lending? That's Gary. So Gary has

20 nothing to do with this.

21 This is a Dave and Bill issue because it's the

22 financial statements of the parent company up above. It has

23 nothing to do with Gary. He has no responsibility for it. He

24 committed no fraud. He committed no nothing. They sued him,

25 too. They named him on the restatement claims, also.

Household Unsigned Page 4599 - 4602

 4599 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 Let me talk about loss causation. I think as I was

 2 listening to Mr. Dowd, I may have gotten the impression that

 3 he said loss causation is something like damages. Make no

 4 mistake about it, ladies and gentlemen, loss causation is not

 5 damages. Loss causation is an element of a securities fraud

 6 claim. It's the part -- loss causation is a word lawyers use

 7 and professors like Professor Fischel and Professor Bajaj

 8 used.

 9 When they're talking about the element of the claim,

10 causal connection to economic loss, loss causation is just

11 academic speak for that. So we sometimes lapse into the

12 jargon of the academics, but it's not damages. It's an

13 element of the claim. In other words, if they don't prove it,

14 they don't have a claim. It's not a measure of the damages.

15 It's part of their case.

16 Remember I told you earlier, there are four elements

17 to their case. They have to prove each of them. They have to

18 prove each of them for every one of the 40 statements that

19 Mr. Dowd was talking about. There are 40 statements going to

20 be attached to your verdict form. For each statement they

21 have to prove falsity, omission, material, intent to

22 manipulate and loss causation.

23 Okay. Let me see if I can walk through this. Loss

24 causation is where the rubber meets the road in a securities

25 fraud claim because all these other things you can argue

Household Unsigned Page 4599 - 4602

 4600 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 about. Reasonable people can argue about them. Mr. Dowd and

 2 I can argue. You can argue among yourselves.

 3 Loss causation, you have to have an expert. They

 4 have an expert. We have an expert. You saw the testimony of

 5 the experts. I couldn't have done that. Mr. Dowd couldn't

 6 have done that. Nobody can do that but an expert. Both

 7 highly qualified guys. They both seem to like each other.

 8 They know each other. They talk the same language. They just

 9 have a difference of opinion.

10 By the way, it's interesting, part of Professor

11 Bajaj's opinion is that Professor Fischel made a mistake. He

12 used the wrong index, and he used the wrong, what did he call

13 it, some kind of window in the middle there.

14 Part of Professor Fischel's opinion is that Professor

15 Bajaj made a mistake. He says he used the wrong index.

16 Neither one of them accuses the other of fraud. Neither

17 Mr. Dowd nor I accuses either of these professors of fraud.

18 They're just one of them or the other or both, for all I know,

19 made a mistake. Mistakes are common. Fraud is pretty rare.

20 Okay. I know it's late in my appearance here. I'll

21 see if I can get through this pretty quickly. I'll try to be

22 as simple as I can. But it's very important because if I'm

23 right about loss causation, ladies and gentlemen, then nothing

24 else matters.

25 If the plaintiffs cannot establish loss causation; in

Household Unsigned Page 4599 - 4602

 4601 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 other words, if they can't show you that what they're talking

 2 about here actually caused harm in the marketplace to the

 3 price of the stock, then we're just wasting a lot of time

 4 here. There's just nothing to it.

 5 We watched Professor Fischel and Professor Bajaj

 6 debate the issue for several days altogether. They're both,

 7 you know, really smart guys; but underneath all of this

 8 academic stuff is some common-sense concepts. And if you

 9 apply the common-sense concepts to part of this case, I think

10 you'll conclude that your verdict needs to be for the

11 defendants on all counts on this issue alone.

12 This is actually the clearest issue. It sounds

13 counter-intuitive, but it's the clearest issue because you

14 really don't have a dispute between Professor Bajaj and

15 Professor Fischel on the bottom line. They completely dispute

16 how you get there, but they're actually saying the same thing.

17 Why do we have to look at loss causation in a

18 securities fraud case? Because we need to isolate out the

19 movements in the stock price that were caused by the alleged

20 fraud as opposed to what Professor Bajaj described as noise or

21 as he described market movements. For instance, on Mr. Dowd's

22 chart today when I went over and sat in the corner and looked

23 at it, that big red decline after September 11. That's the

24 whole market, the whole stock market declining. If that's all

25 he's showing you, he's just telling you Household is a company

Household Unsigned Page 4599 - 4602

 4602 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 237 of 245
4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 THE COURT: It is indeed.

 2 MR. KAVALER: Thank you, your Honor.

 3 THE COURT: 15-minute break.

 4 (Jury exits courtroom.)

 5 THE COURT: Recess for 15 minutes.

 6 (Recess taken.)

 7 THE COURT: Ready?

 8 Bring them out, please.

 9 (Jury in.)

10 THE COURT: Counsel.

11 MR. KAVALER: Thank you, your Honor.

12 Ladies and gentlemen, one last time, just for a few

13 minutes.

14 You've heard me say several times this afternoon,

15 plaintiffs have the burden on each element. These are the --

16 this is not the verdict form. We'll look at the verdict form

17 together in a minute. These are the three theories, predatory

18 lending, re-age, restatement. These are the elements, false,

19 material, intent to deceive or conceal and loss causation.

20 For Mr. Dowd -- for the plaintiffs to prevail, he

21 needs a four or a four or a four, going down, all four boxes

22 in any column or all the columns or two columns.

23 What we just spent a lot of time talking about, the

24 testimony of Professors Fischel and Bajaj, means this: You

25 can't get there in this row. You can't get past loss

Household Unsigned Page 4631 - 4634

 4631 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 causation. So he might get one or more of these nine boxes up

 2 here. It doesn't matter. These are the elements. He's got

 3 to prove all of them. I said this to you a number of times

 4 today. And the best he can do -- I don't think he can do

 5 that. But the best he can get is threes, a three, a three and

 6 a three. No good.

 7 The way you're going to be asked to reflect that and

 8 judge this verdict form, the same one Mr. Dowd showed you, is

 9 this: Loss causation is an element of a 10b-5 claim. It's

10 part of the claim. It's not damages. It's part of the claim.

11 No loss causation, no claim.

12 Now, the activity that's being claimed didn't cause

13 it. So what you do is you go up here to question number one,

14 first of 40 pages because there are 40 statements, you go in

15 the first column. Statement number one. Go to the box next

16 to Household and check no. They haven't proven loss

17 causation, therefore, they haven't proven an element of the

18 claim. Then you go to the box for Gilmer and check no. Then

19 you go to the box for Schoenholz, you check no. And then you

20 go to the box for Aldinger, you check no. You've now

21 finished -- if you agree with me -- with this page. Turn to

22 the next page, do it again. 39 more times.

23 You don't have to go to question number two or

24 question number three if you're checking no. If you're not

25 checking no, then you have to work your way through the boxes.

Household Unsigned Page 4631 - 4634

 4632 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 My point is: Since he's got to get all four, loss

 2 causation turns out to be the simplest one, doesn't it? After

 3 all that talk, it turns out to be pretty easy because Fischel

 4 already did it for you with the red Xs. Check no. All right.

 5 That's the box chart and the verdict form.

 6 One final note on Professor Fischel's charts. You

 7 know, ladies and gentlemen, and your common sense tells you,

 8 all these lawyers haven't been sitting around this room all

 9 these weeks taking up your valuable time for $7.97. I suspect

10 we all know there's some larger number involved. Maybe none

11 of us are quite sure what it is. But you know in this case

12 every number winds up being a gigantic number.

13 For example, what Bill was telling you, how he came

14 up with the 3 and a half billion dollar increase in the stock

15 price, which compared to the $484 million for the attorney

16 generals' settlement, he said there were 500 million shares

17 outstanding. The stock went up about seven bucks. He

18 multiplied 500 million by $7 and he came up with 3 and a half

19 billion dollars. And that puts the settlement in perspective

20 for you.

21 Every number in this case is very large because the

22 company is very large. I don't want you to think -- first of

23 all, I think you'll never think this because I don't believe

24 you'll ever get to the point of picking a number off this

25 chart. And, secondly, if you are picking a number, you can't

Household Unsigned Page 4631 - 4634

 4633 

4-30-09 Trial Day 22 4/30/2009 3:39:00 PM

 1 pick a number because Fischel didn't tell you how to do it.

 2 But when you look at Fischel's chart, I don't want you to ever

 3 think, well, it's only $7.97; what's the harm. There's a lot

 4 of harm.

 5 The last point. Mr. Dowd told you before, he always

 6 goes first and I go last and today it's different. He's

 7 absolutely right. Absolutely correct. This is my last chance

 8 to speak to you. No matter what he says now, I don't get to

 9 respond. So I'm going to rely on you. When you go in the

10 jury room there, you'll have his words ringing in your ears,

11 and I suspect they will be ringing. And you'll say to

12 yourself, what would Mr. Kavaler say if he got one last

13 response. You know my answers to everything because they've

14 been consistent throughout this case. I told you in the mini

15 summations. You know the questions I've asked. Whatever he

16 says now, I want you to go in the room and say to yourself, if

17 Kavaler got to speak one more time, what would he say, how

18 would he respond. Because you know we have a response to

19 everything he says. So you go in there and you make my

20 response for me, if you will.

21 The reason I don't get to go again is exactly what

22 Mr. Dowd said. It's his burden. If the scales are equal, he

23 loses. So if he can't persuade you, if he can't explain it to

24 you, and that's why he needs another opportunity to speak,

25 because he's not quite there yet. I don't think he's going to

Household Unsigned Page 4631 - 4634

 4634 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 238 of 245
5-04-09 Trial Day 24 Jury Instructions 6:40:00 AM

 1 Can you bring them out, please, Carole.

 2 MR. KAVALER: Your Honor, we got the revised jury

 3 instructions. I don't believe we got the revised verdict

 4 form.

 5 THE COURT: Revised? The verdict form was --

 6 MR. KAVALER: Or final. If there's any -- I just

 7 want to be clear. If you're under the impression we've seen a

 8 verdict form since Friday, we have not.

 9 THE COURT: It's the same verdict form. I haven't

10 made any changes. I don't think anybody requested any

11 changes, did they?

12 MR. KAVALER: No. I just thought we were going to

13 see what we were going to see at 9:00 o'clock this morning.

14 We did get a set of jury instructions. That's my only point.

15 Just so there's no confusion as to what we have.

16 THE COURT: The jury instructions you got because we

17 never had a clean set without the captions, and there was

18 never -- and what you had was not placed in the order that I

19 was going to read them to the jury. These instructions that

20 you've gotten are the same instructions without the captions

21 and in the order that I intend to read them. The verdict form

22 remains exactly the same. It hasn't been changed.

23 All right. Bring them out.

24 (Jury in.)

25 THE COURT: Good morning, ladies and gentlemen.

Household Unsigned Page 4705 - 4708

 4705 

5-04-09 Trial Day 24 Jury Instructions 6:40:00 AM

 1 I want you to know that I have received your note,

 2 which asks me to be loud, clear and to speak slowly. And I

 3 will certainly try to do that.

 4 You will receive to take with you copies for each of

 5 you of the jury instructions I'm about to read. So you do not

 6 need to take notes with regards to the jury instructions.

 7 Members of the jury, you have seen and heard all the

 8 evidence and arguments of the attorneys. Now I will instruct

 9 you on the law.

10 You have two duties as a jury. Your first duty is to

11 decide the facts from the evidence in the case. This is your

12 job and yours alone.

13 Your second duty is to apply the law that I give you

14 to the facts. You must follow these instructions, even if you

15 disagree with them. Each of the instructions is important,

16 and you must follow all of them.

17 Perform these duties fairly and impartially. Do not

18 allow sympathy, prejudice, fear or public opinion to influence

19 you. You should not be influenced by any person's race,

20 color, religion, national ancestry or sex.

21 Nothing I say now, and nothing I said or did during

22 the trial, is meant to indicate any opinion on my part about

23 what the facts are or about what your verdict should be.

24 In this case, defendants William Aldinger, David

25 Schoenholz and Gary Gilmer are individuals, defendant

Household Unsigned Page 4705 - 4708

 4706 

5-04-09 Trial Day 24 Jury Instructions 6:40:00 AM

 1 Household is a corporation and plaintiffs are entities that

 2 purchased Household stock that represent a class of others

 3 similarly situated. All parties are equal before the law.

 4 Defendants and plaintiffs are entitled to the same fair

 5 consideration.

 6 The evidence consists of the testimony of the

 7 witnesses, the exhibits admitted in evidence, and

 8 stipulations.

 9 During the trial, certain testimony was presented to

10 you by the reading of a deposition and video. You should give

11 this testimony the same consideration you would give it had

12 the witness appeared and testified here in court.

13 A stipulation is an agreement between both sides that

14 certain facts are true. If the parties have stipulated to a

15 fact, you must accept that fact as proved.

16 In determining whether any fact has been proved, you

17 should consider all of the evidence bearing on the question

18 regardless of who introduced it.

19 Certain things are not to be considered as evidence.

20 I will list them for you.

21 First, if I told you to disregard any testimony or

22 exhibits or struck any testimony or exhibits from the record,

23 such testimony or exhibits are not evidence and must not be

24 considered.

25 Second, anything you may have seen or heard outside

Household Unsigned Page 4705 - 4708

 4707 

5-04-09 Trial Day 24 Jury Instructions 6:40:00 AM

 1 the courtroom is not evidence and must be entirely

 2 disregarded. This includes any press, radio, Internet or

 3 television reports you may have seen or heard. Such reports

 4 are not evidence and your verdict must not be influenced in

 5 any way by such publicity.

 6 Third, questions and objections or comments by the

 7 lawyers are not evidence. Lawyers have a duty to object when

 8 they believe a question is improper. You should not be

 9 influenced by any objection, and you should not infer from my

10 rulings that I have any view as to how you should decide the

11 case.

12 Fourth, the lawyers' opening statements, periodic

13 summations and closing arguments to you are not evidence.

14 Their purpose is to discuss the issues and the evidence. If

15 the evidence as you remember it differs from what the lawyers

16 said, your memory is what counts.

17 You will recall that during the course of this trial

18 I instructed you that I admitted certain evidence only for a

19 limited purpose. You must consider this evidence only for the

20 limited purpose for which it was admitted.

21 During the trial I provided you with a written copy

22 of the limiting instructions that apply to certain categories

23 of evidence, including analyst reports, investor relations

24 reports, presentations to investors, ratings agency reports,

25 newspaper and magazine articles, complaints and settlements in

Household Unsigned Page 4705 - 4708

 4708 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 239 of 245
5-04-09 Trial Day 24 Jury Instructions 6:40:00 AM

 1 other legal proceedings, and individual customer complaints.

 2 I will not read those instructions again, but they are

 3 included in the instructions that you will take to the jury

 4 room and that you must follow in your deliberations.

 5 Some evidence was admitted for the limited purpose of

 6 assisting you to evaluate an expert witness' opinion. Such

 7 evidence must not be used by you for any other purpose.

 8 Each party is entitled to have the case decided

 9 solely on the evidence that applies to that party.

10 Any notes that you have taken during the trial are

11 only aids to your memory. The notes are not evidence. If you

12 have not taken notes, you should rely on your independent

13 recollection of the evidence and not be unduly influenced by

14 the notes of other jurors. Notes are not entitled to any

15 greater weight than the recollections or impressions of each

16 juror about the testimony.

17 You should use common sense in weighing the evidence

18 and consider the evidence in light of your own observations in

19 life.

20 In our lives, we often look at one fact and conclude

21 from it that another fact exists. In law we call this

22 "inference." A jury is allowed to make reasonable inferences.

23 Any inference you make must be reasonable and must be based o

24 the evidence in the case.

25 You may have heard the phrases "direct evidence" and

Household Unsigned Page 4709 - 4712

 4709 

5-04-09 Trial Day 24 Jury Instructions 6:40:00 AM

 1 "circumstantial evidence." Direct evidence is proof that does

 2 not require an inference, such as the testimony of someone who

 3 claims to have personal knowledge of a fact. Circumstantial

 4 evidence is proof of a fact, or a series of facts, that tends

 5 to show that some other fact is true.

 6 As an example, direct evidence that it is raining is

 7 testimony from a witness who says, "I was outside a minute ago

 8 and I saw it raining." Circumstantial evidence that it is

 9 raining is the observation of someone entering a room carrying

10 a wet umbrella.

11 The law makes no distinction between the weight to be

12 given to either direct or circumstantial evidence. You should

13 decide how much weight to give any evidence. In reaching your

14 verdict, you should consider all the evidence in the case,

15 including the circumstantial evidence.

16 You must decide whether the testimony of each of the

17 witnesses is truthful and accurate, in part, in whole, or not

18 at all. You must also -- you also must decide what weight, if

19 any, you give to the testimony of each witness.

20 In evaluating the testimony of any witness, including

21 any party to the case, you may consider, among other things:

22 The ability and opportunity the witness had to see, hear, or

23 know the things the witness testified about; the witness'

24 memory; any interest, bias, or prejudice the witness may have;

25 the witness' intelligence; the manner of the witness while

Household Unsigned Page 4709 - 4712

 4710 

5-04-09 Trial Day 24 Jury Instructions 6:40:00 AM

 1 testifying; and the reasonableness of the witness' testimony

 2 in light of all of the evidence in the case.

 3 You may consider the statements given by any party or

 4 witness who testified under oath before trial as evidence of

 5 the truth of what he or she said in the earlier statements, as

 6 well as in deciding what weight to give his or her testimony.

 7 With respect to other witnesses, the law is

 8 different. If you decide that, before the trial, one of these

 9 witnesses made a statement not under oath or acted in a manner

10 that is inconsistent with his testimony here in court, you may

11 consider the earlier statement or conduct only in deciding

12 whether his testimony here in court was true and what weight

13 to give to his testimony here in court.

14 In considering a prior inconsistent statement or

15 conduct, you should consider whether it was simply an innocent

16 error or an intentional falsehood and whether it concerns an

17 important fact or an unimportant detail.

18 It is proper for a lawyer to meet with any witness in

19 preparation for trial.

20 You may find the testimony of one witness or a few

21 witnesses more persuasive than the testimony of a larger

22 number. You need not accept the testimony of the larger

23 number of witnesses.

24 The law does not require any party to call as a

25 witness every person who might have knowledge of the facts

Household Unsigned Page 4709 - 4712

 4711 

5-04-09 Trial Day 24 Jury Instructions 6:40:00 AM

 1 related to this trial. Similarly, the law does not require

 2 any party to present all exhibits -- all papers and materials

 3 mentioned during this trial.

 4 I'm sorry. Let me reread that.

 5 Similarly, the law does not require any party to

 6 present as exhibits all papers and materials mentioned during

 7 this trial.

 8 Plaintiffs contend that defendants at one time

 9 destroyed documents regarding Andrew Kahr's recommendations

10 for Household and documents regarding use of the effective

11 rate presentation. However, defendants contend that they did

12 not destroy any documents regarding Andrew Kahr's

13 recommendations, and whatever they did with regard to

14 documents relating to the effective rate presentation was for

15 legitimate business purposes.

16 Defendants' destruction of a document, standing

17 alone, does not warrant an inference that the document

18 contained information that is unfavorable to the defendants.

19 You may assume that such evidence would have been unfavorab

20 to defendants only if you find by a preponderance of the

21 evidence that:

22 One, defendants intentionally destroyed evidence or

23 caused evidence relevant to plaintiffs' claims to be

24 destroyed; and, two, defendants destroyed the evidence or

25 caused the evidence to be destroyed in bad faith, in other

Household Unsigned Page 4709 - 4712

 4712 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 240 of 245
5-04-09 Trial Day 24 Jury Instructions 6:40:00 AM

 1 words, for the purpose of hiding adverse information.

 2 You have heard witnesses give opinions about matters

 3 requiring special knowledge or skill. You should judge this

 4 testimony in the same way that you judge the testimony of any

 5 other witness. The fact that such a person has given an

 6 opinion does not mean that you are required to accept it.

 7 Give the testimony whatever weight you think it deserves,

 8 considering the reasons given for the opinion, the witness'

 9 qualifications, and all of the other evidence in the case.

10 Certain demonstrative exhibits have been shown to

11 you. Those exhibits are used for convenience and to help

12 explain the facts of the case. They are not themselves

13 evidence or proof of any facts.

14 You must give separate consideration to each claim

15 and each party in this case.

16 When I say a particular party must prove something by

17 "a preponderance of the evidence" or when I use the expression

18 "if you find" or "if you decide," this is what I mean: When

19 you have considered all the evidence in the case, you must be

20 persuaded that it is more probably true than not true.

21 Plaintiffs contend that defendants Household, William

22 Aldinger, David Schoenholz and Gary Gilmer violated Section

23 10(b) of the Securities Exchange Act and the Securities

24 Exchange Commission or SEC's Rule 10b-5. From now on, I will

25 use 10b-5 to refer to both the section and the rule.

Household Unsigned Page 4713 - 4716

 4713 

5-04-09 Trial Day 24 Jury Instructions 6:40:00 AM

 1 To prevail on their 10b-5 claim against any

 2 defendant, plaintiffs must prove each of the following

 3 elements by a preponderance of the evidence as to that

 4 defendant:

 5 One, the defendant made, approved or furnished

 6 information to be included in a false statement of fact or

 7 omitted a fact that was necessary, in light of the

 8 circumstances, to prevent a statement that was made from being

 9 false or misleading during the relevant time period between

10 July 30, 1999, and October 11, 2002;

11 Two, the false statement or omission was material;

12 Three, the defendant acted with a particular state of

13 mind; and

14 Four, the defendant's statement or omission was a

15 substantial factor in causing plaintiffs' economic loss.

16 If you find that the plaintiffs have proved each of

17 the above elements as to any defendant, your verdict should be

18 for the plaintiffs and against that defendant. If you find

19 that the plaintiffs have not proved each of the above elements

20 as to any defendant, your verdict should be for that defendant

21 and against the plaintiffs.

22 To meet the first element of their 10b-5 claim

23 against any defendant, plaintiffs must prove that during the

24 relevant time period, the defendant made a false or misleading

25 statement of fact or omitted a fact that was necessary to

Household Unsigned Page 4713 - 4716

 4714 

5-04-09 Trial Day 24 Jury Instructions 6:40:00 AM

 1 prevent a statement that was being made from being misleading.

 2 Table A to the verdict form that you will be given

 3 sets forth the statements that plaintiffs claim are false and

 4 misleading.

 5 In determining whether a statement of fact is false

 6 or misleading, you must consider the statement in light of the

 7 circumstances that existed at the time it was made.

 8 An omission violates 10b-5 only if the defendant has

 9 a duty to disclose the omitted fact. The defendants do not

10 have a duty to disclose every fact they possess about

11 Household or any fact that is in the public domain. But each

12 defendant has a duty to disclose a fact if a prior or

13 contemporaneous statement he or it made about the same subjec

14 would be misleading if the fact is not disclosed. If a

15 defendant does not have a duty to disclose a fact but chooses

16 to make a statement about it, the statement must be truthful

17 and not misleading.

18 Defendant Household is required to file with the SEC

19 an annual report, called a 10-K, and quarterly reports, called

20 10-Qs, for the first three quarters of each year. These

21 reports include financial statements and other disclosures.

22 Financial statements present a company's financial position at

23 one point in time, or its operating results and cash flows for

24 a specified period. Household has no duty to update its 10-Q

25 reports on any cycle other than quarterly.

Household Unsigned Page 4713 - 4716

 4715 

5-04-09 Trial Day 24 Jury Instructions 6:40:00 AM

 1 Household is required to prepare its financial

 2 statements regarding the delinquency status of loans and the

 3 accounting for its credit card agreements in accordance with

 4 Generally Accepted Accounting Principles or G-A-A-P, GAAP.

 5 GAAP are the accepted rules and procedures used by accountant

 6 in preparing financial statements. If you find that any of

 7 Household's financial statements regarding the delinquency

 8 status of loans and the accounting for its credit card

 9 agreements was not prepared in accordance with GAAP, you may

10 presume that that portion of the financial statement is false

11 or misleading.

12 To meet the second element of their 10b-5 claim

13 against any defendant, plaintiffs must prove that the false or

14 misleading statement of fact that the defendant made, or

15 failed to make, was material.

16 A statement of fact or omission is material if there

17 is a substantial likelihood that a reasonable investor would

18 have considered it important in deciding whether to buy or

19 sell Household stock. An important statement or omission is

20 one that a reasonable investor would view as significantly

21 altering the total mix of information to be considered in

22 deciding whether to buy or sell Household stock.

23 A reasonable investor is presumed to have ordinary

24 intelligence and is presumed to have information available in

25 the public domain.

Household Unsigned Page 4713 - 4716

 4716 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 241 of 245
5-04-09 Trial Day 24 Jury Instructions 6:40:00 AM

 1 In determining whether a statement or omission is

 2 material, you must consider it in light of the circumstances

 3 that existed at the time the statement was made or the fact

 4 was omitted.

 5 To meet the third element of their 10b-5 claim

 6 against any defendant, plaintiffs must prove that the

 7 defendant acted with a specific state of mind. Defendants

 8 William Aldinger, David Schoenholz, Gary Gilmer acted with the

 9 required state of mind in making a statement of material fact

10 if he made the statement knowing that it was false or

11 misleading or with reckless disregard for a substantial risk

12 that it was false or misleading.

13 Defendants William Aldinger, David Schoenholz or Gary

14 Gilmer acted with the required state of mind in failing to

15 disclose a material fact if he knew that the omission would

16 make another statement he made on the same subject misleading

17 or he recklessly disregarded a substantial risk that the

18 omission would make another statement he made on the same

19 subject misleading.

20 A defendant's conduct is reckless if it is an extreme

21 departure from the standards of ordinary care and he knows

22 that it presents a risk of misleading investors or the risk is

23 so obvious that he had to have been aware of it.

24 A finding that any defendant acted with the required

25 state of mind depends on what he knew or should have known

Household Unsigned Page 4717 - 4720

 4717 

5-04-09 Trial Day 24 Jury Instructions 6:40:00 AM

 1 when he made a particular statement or omission.

 2 Defendant Household, which can only act through its

 3 employees, had the required state of mind with respect to a

 4 false statement or omission if defendants William Aldinger,

 5 David Schoenholz, Gary Gilmer or any other Household employee

 6 made the statement or omission with the required state of mind

 7 while acting within the scope of his or her employment.

 8 The fact that Household restated certain financial

 9 statements does not, by itself, prove that any defendant acted

10 knowingly or recklessly with respect to the information in the

11 original financial statements. However, you may consider it

12 along with any other evidence to determine whether any

13 defendant acted knowingly or recklessly.

14 The intent of a person or the knowledge that a person

15 possesses at any given time may not ordinarily be proved

16 directly because there is no way of directly scrutinizing the

17 workings of the human mind. In determining the issue of what

18 a person knew or what a person intended at a particular time,

19 you may consider any statements made or acts done by that

20 person and all other facts and circumstances received in

21 evidence which may aid in your determination of that person's

22 knowledge or intent.

23 You may infer, but you are certainly not required to

24 infer, that a person intends the natural and probable

25 consequences of acts knowingly done or knowingly omitted. It

Household Unsigned Page 4717 - 4720

 4718 

5-04-09 Trial Day 24 Jury Instructions 6:40:00 AM

 1 is entirely up to you, however, to decide what facts to find

 2 from the evidence received during this trial.

 3 To meet the last element of their 10b-5 claim against

 4 any defendant as to any false or misleading statement or

 5 omission of material fact, plaintiffs must prove that the

 6 defendant's particular statement or omission was a substantial

 7 cause of the economic loss plaintiffs suffered. Plaintiffs do

 8 not have to prove that any statement or omission was the sole

 9 cause of plaintiffs' loss.

10 A statement or omission of material fact is a

11 substantial cause of plaintiffs' loss if, one, it causes

12 Household's stock price to be higher than it would be if the

13 statement had not been made or the concealed fact had been

14 disclosed; and, two, the market's discovery of the truth about

15 that statement or omission causes Household's stock price to

16 decrease. The truth may be revealed to the market through a

17 single disclosure or a series of disclosures made by any

18 person or entity.

19 Household is liable for any violation of 10b-5 that

20 you find defendants William Aldinger, David Schoenholz, Gary

21 Gilmer or any other Household employee committed while acting

22 within the scope of his or her employment and trying to

23 further Household's goals. A Household officer or employee

24 acts within the scope of his or her employment when

25 transacting business Household assigned to him or her or doing

Household Unsigned Page 4717 - 4720

 4719 

5-04-09 Trial Day 24 Jury Instructions 6:40:00 AM

 1 anything that can reasonably be considered to be a part of his

 2 or her employment.

 3 If you find that plaintiffs have not proved all of

 4 the elements of their 10b-5 claim against any defendant, then

 5 you should not consider the question of damages.

 6 If you find that plaintiffs have proved all of the

 7 elements of their 10b-5 claim against any defendant, then you

 8 must determine the amount of per-share damages, if any, to

 9 which plaintiffs are entitled. Plaintiffs can recover only

10 actual damages, which is the difference between the price

11 plaintiffs paid for each share of Household stock and the

12 price each share would have cost if no false or misleading

13 statement or omission of material fact had occurred, in other

14 words, the measure of inflation in the stock price. This is

15 the only damages calculation you will be asked to make in this

16 case. Any damages you award must have a reasonable basis in

17 the evidence. Damages need not be proved with mathematical

18 certainty but there must be enough evidence for you to make a

19 reasonable estimate of the damages.

20 Under Section 20(a) of the Securities Exchange Act, a

21 defendant may be liable for what is called a "secondary

22 violation," even if he did not violate Rule 10b-5, if he had

23 the authority to control another defendant who violated 10b-5.

24 Plaintiffs claim that each of the individual defendants,

25 William Aldinger, David Schoenholz and Gary Gilmer, is liable

Household Unsigned Page 4717 - 4720

 4720 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 242 of 245
5-7-09 Trial Day 26 Verdict 8:54:00 AM

 1 IN THE UNITED STATES DISTRICT COURT

 FOR THE NORTHERN DISTRICT OF ILLINOIS

 2 EASTERN DIVISION

 3 LAWRENCE E. JAFFE PENSION PLAN, ) on behalf of itself and all ) 4 others similarly situated, ) ) 5 Plaintiff, ) ) 6 vs. ) No. 02 C 5893 ) 7 HOUSEHOLD INTERNATIONAL, INC., ) et al., ) Chicago, Illinois 8 ) May 7, 2009 Defendants. ) 10:30 a.m. 9

 VOLUME 26

10 TRANSCRIPT OF PROCEEDINGS - TRIAL

 BEFORE THE HONORABLE RONALD A. GUZMAN, and a ju 11

12 APPEARANCES:

13 For the Plaintiff: COUGHLIN STOIA GELLER RUDMAN &

 ROBBINS LLP

14 BY: MR. LAWRENCE A. ABEL

 MR. SPENCER A. BURKHOLZ

15 MR. MICHAEL J. DOWD

 MR. DANIEL S. DROSMAN

16 MS. MAUREEN E. MUELLER

 655 West Broadway 17 Suite 1900

 San Diego, California 92101 18 (619) 231-1058

19 COUGHLIN STOIA GELLER RUDMAN &

 ROBBINS LLP

20 BY: MR. DAVID CAMERON BAKER

 MR. LUKE O. BROOKS

21 MR. JASON C. DAVIS

 MS. AZRA Z. MEHDI

22 100 Pine Street

 Suite 2600

23 San Francisco, California 94111 (415) 288-4545 24

25

Household Unsigned Page 4769 - 4772

 4769 

5-7-09 Trial Day 26 Verdict 8:54:00 AM

 1 APPEARANCES: (Continued) 2 For the Plaintiff: MILLER LAW LLC

 BY: MR. MARVIN ALAN MILLER

 3 115 South LaSalle Street

 Suite 2910

 4 Chicago, Illinois 60603 (312) 332-3400 5

For the Defendants: EIMER STAHL KLEVORN & SOLBERG 

 6 BY: MR. ADAM B. DEUTSCH

 224 South Michigan Avenue 7 Suite 1100

 Chicago, Illinois 60604 8 (312) 660-7600

 9 CAHILL, GORDON & REINDEL LLP BY: MS. SUSAN BUCKLEY

10 MS. PATRICIA FARREN

 MR. THOMAS J. KAVALER

11 MR. DAVID R. OWEN

 MR. HOWARD G. SLOANE

12 MS. JANET A. BEER

 MR. JASON M. HALL

13 MR. JOSHUA M. NEWVILLE

 MS. LAUREN PERLGUT

14 MS. KIM A. SMITH

 MR. MICHAEL J. WERNKE

15 80 Pine Street

 New York, New York 10005 16 (212) 701-3000

17

18

19

20

21

22 Court Reporter: NANCY C. LaBELLA, CSR, RMR, CRR Official Court Reporter 23 219 South Dearborn Street

 Room 1222

24 Chicago, Illinois 60604 (312) 435-6890 25 Nancy LaBella@ilnd.uscourts.gov

Household Unsigned Page 4769 - 4772

 4770 

5-7-09 Trial Day 26 Verdict 8:54:00 AM

 1 THE CLERK: 02 C 5893, Jaffe v. Household.

 2 THE COURT: We have a note from the jury. 9:40 --

 3 9:50. It reads as follows: Lawsuit date parameters, colon,

 4 can the beginning date in determining any guilt have a

 5 beginning date subsequent to July 30, 1999?

 6 If so, does each and every statement within the

 7 period require the unanimous, quote, yes, unquote, vote of the

 8 jurors to render a valid verdict by this jury?

 9 I'll read it again.

10 Lawsuit date parameters: Can the beginning date in

11 determining any guilt have a beginning date subsequent to July

12 30, 1999?

13 If so, does each and every statement within --

14 statement is in quotation marks -- within the period require

15 the unanimous, quote, yes, end quote, vote of the jurors to

16 render a valid verdict by this jury?

17 Plaintiff?

18 MR. DOWD: I think it's yes and yes, your Honor.

19 MR. KAVALER: We agree, your Honor.

20 MR. DOWD: Could I have a moment?

21 (Brief pause.)

22 MR. DOWD: Yes and yes. We're still there.

23 MR. KAVALER: As are we, your Honor.

24 THE COURT: Okay. So they have to vote yes on each

25 of the alleged false statements for a valid verdict?

Household Unsigned Page 4769 - 4772

 4771 

5-7-09 Trial Day 26 Verdict 8:54:00 AM

 1 MR. DOWD: I think that's a slightly different

 2 question.

 3 THE COURT: If so, does each and every statement

 4 within the period require the unanimous, quote, yes, unquote,

 5 vote of the jurors to render a valid verdict by this jury?

 6 MR. DOWD: You're reading that a different way from

 7 me, your Honor. I thought they meant do they have to decide

 8 each statement unanimously.

 9 THE COURT: Write it down the way I read it.

10 If so, comma, does each -- the word each is

11 underlined -- and every -- the word every is underlined --

12 statement -- the word statement is both underlined and in

13 quotation marks -- within that period require the unanimous

14 yes -- the word yes is in quotations -- vote of the jurors to

15 render a valid verdict by this jury.

16 MR. DOWD: I'm still yes on the --

17 (Brief pause.)

18 MR. DOWD: I think, your Honor, it's yes as to the

19 first one. I think on the second one, I think maybe what we

20 should tell them is it should be unanimous yes or no as to --

21 it should be unanimous yes or no as to the remaining

22 statements, but you don't need a verdict as to each statement

23 to have a valid verdict. But I don't know how you explain

24 that to them.

25 THE COURT: Well, why don't we answer the question

Household Unsigned Page 4769 - 4772

 4772 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 243 of 245
5-7-09 Trial Day 26 Verdict 8:54:00 AM

 1 We certainly are not going to agree to a shifting of the

 2 burden. And we certainly are not going to agree that there's

 3 some burden on the jury to find a unanimous no. A failure to

 4 find a unanimous yes is a defense win. That means the

 5 plaintiffs failed to carry their burden of proof. I don't

 6 think you can tell them that. That's why we took "no" out of

 7 the first sentence. But it seems to me that -- and that's why

 8 we took the second sentence out entirely. But if you're going

 9 to put something like the second sentence back in, you can't

10 shift the burden of proof or you can't -- let me say it

11 differently. You can't relieve the plaintiffs of the burden

12 of proof.

13 MR. DOWD: Your Honor, just a response for the

14 record. Under that theory, there would never be a hung jury;

15 so I don't understand it.

16 THE COURT: Well, I think, in view of the comments of

17 the parties, that the instruction I'm prepared to give the

18 jury is this: With regards to the first question, the

19 instruction I will give them is as follows: The answer to

20 that question -- well, let me read the question so that we're

21 clear. I will read the question, which is: Can the beginning

22 date in determining any guilt have a beginning date subsequent

23 to July 30, 1999?

24 The answer to that question is yes. You need only

25 find that a false statement was made on or after July 30,

Household Unsigned Page 4781 - 4784

 4781 

5-7-09 Trial Day 26 Verdict 8:54:00 AM

 1 1999, which caused Household's stock price to become inflated.

 2 I think the question clearly relates to only one

 3 aspect and, that is, the date, beginning date. And the

 4 response clearly now relates to only one aspect, and, that is,

 5 the beginning date of the false statements. So I'm satisfied

 6 with that answer, that it's clear as to what it refers to. It

 7 does not in any way indicate that the other elements of

 8 liability, since it strikes the word liability from it, can be

 9 ignored.

10 And I'm also -- I also believe, contrary to the

11 plaintiffs' proposal, that we need to make clear to the jury

12 what we're talking about here, which is the beginning date of

13 the false statements.

14 The second part, I'll read the question: If so, does

15 each and every statement within the period require the

16 unanimous yes vote of jurors to render a valid verdict by this

17 jury?

18 The answer to that question is as follows: A vote of

19 yes or no as to any statement must be unanimous. However, you

20 need not vote yes as to each of the alleged false or

21 misleading statements in order for your verdict to be valid.

22 You may vote yes as to some and no as to others and your

23 verdict will still be valid.

24 I will mark the submissions by the plaintiffs and the

25 defendants as exhibits, and they'll become part of the record.

Household Unsigned Page 4781 - 4784

 4782 

5-7-09 Trial Day 26 Verdict 8:54:00 AM

 1 Let's bring the jury out.

 2 MR. KAVALER: Your Honor, just for the record, we

 3 object to both of those instructions as you proposed to give

 4 them.

 5 And I further note that this confusion -- or this

 6 note is the direct and proximate cause of the matter we

 7 discussed in the jury conference, which I think would have

 8 been obviated if we had left the time period concept in the

 9 loss causation element. It's the consequence of taking the

10 time period piece out of the loss causation instruction that

11 has caused this issue to arise.

12 But, in any event, we object to these instructions.

13 THE COURT: Okay. Bring the jury out.

14 (Jury in.)

15 THE COURT: Be seated, please.

16 Good morning, folks.

17 We have your question. We have discussed it, and I

18 have an answer for you.

19 Your question has two parts. I will read the first

20 part. Can the beginning date in determining any guilt have a

21 beginning date subsequent to 7/30/99?

22 The answer to that question is yes. You need only

23 find that a false statement was made on or after 7/30/99 which

24 caused Household's stock price to become inflated.

25 I will read the second part. If so, does each and

Household Unsigned Page 4781 - 4784

 4783 

5-7-09 Trial Day 26 Verdict 8:54:00 AM

 1 every statement within that period require the unanimous,

 2 quote, yes, unquote, vote of the jurors to render a valid

 3 verdict by this jury?

 4 The answer to that question is as follows: A vote of

 5 yes or no to any statement must be unanimous. However, you

 6 need not vote yes as to each of the alleged false or

 7 misleading statements in order for your verdict to be valid.

 8 You may vote yes as to some and no as to others and your

 9 verdict will still be valid.

10 With that, ladies and gentlemen, I ask you to

11 continue your deliberations.

12 (Jury out.)

13 THE COURT: Okay. We will let you folks know.

14 MR. DOWD: Thank you, your Honor.

15 MR. KAVALER: Thank you, your Honor.

16 (Whereupon a recess was taken at 11:38, after which the

17 following further proceedings were had at 2:09 p.m.:)

18

19

20

21

22

23

24

25

Household Unsigned Page 4781 - 4784

 4784 

Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 244 of 245
5-7-09 Trial Day 26 Verdict 8:54:00 AM

 1 individual verdicts in all respects?

 2 JUROR GALVAN: Yes.

 3 THE COURT: Next.

 4 JUROR KAMINSKI: Joe Kaminski.

 5 THE COURT: Sir, did you hear the verdicts as

 6 published by the Court?

 7 JUROR KAMINSKI: Yes.

 8 THE COURT: And do these verdicts constitute your

 9 individual verdicts in all respects?

10 JUROR KAMINSKI: Yes.

11 THE COURT: Sir.

12 JUROR DAVIS: Charles Davis.

13 THE COURT: Sir, did you hear the verdicts as

14 published by the Court?

15 JUROR DAVIS: Yes.

16 THE COURT: And do these verdicts constitute your

17 individual verdicts in all respects?

18 JUROR DAVIS: Yes.

19 JUROR HODGES: Renee Hodges.

20 THE COURT: Ma'am, did you hear the verdicts as

21 published in open court?

22 JUROR HODGES: Yes.

23 THE COURT: And do these verdicts constitute your

24 individual verdicts in all respects?

25 JUROR HODGES: Yes.

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5-7-09 Trial Day 26 Verdict 8:54:00 AM

 1 JUROR STUBBS: Gail Stubbs.

 2 THE COURT: Ma'am, did you hear the verdicts as

 3 published by the Court?

 4 JUROR STUBBS: Yes.

 5 THE COURT: And do these verdicts constitute your

 6 individual verdicts in all respects?

 7 JUROR STUBBS: Yes.

 8 JUROR BERARD: James Berard.

 9 THE COURT: Sir, did you hear the verdicts as

10 published by the Court?

11 JUROR BERARD: Yes.

12 THE COURT: And do these verdicts constitute your

13 individual verdicts in all respects?

14 JUROR BERARD: Yes.

15 JUROR HUNT: David Hunt.

16 THE COURT: Sir, did you hear the verdicts as

17 published by the Court?

18 JUROR HUNT: Yes.

19 THE COURT: And do these verdicts constitute your

20 individual verdicts in all respects?

21 JUROR HUNT: Yes.

22 THE COURT: Very well.

23 Any other motions before I release the jury?

24 MR. DOWD: None from the plaintiffs, your Honor.

25 MR. KAVALER: Yes, your Honor. We believe the

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5-7-09 Trial Day 26 Verdict 8:54:00 AM

 1 verdict is fatally inconsistent in a number of ways, which

 2 we're prepared to detail to the Court. I'm not sure if you

 3 need the jury to be present. Obviously it's up to you.

 4 Primarily it's the interspersal of the yeses and nos

 5 when juxtaposed again Professor Fischel's leakage model,

 6 whatever the -- whatever our position on the leakage model ab

 7 initio might have been, it certainly doesn't work that way.

 8 And certainly a verdict which contains both yeses and nos but

 9 nevertheless adopts Professor Fischel's leakage damage model

10 is fatally flawed and internally inconsistent.

11 THE COURT: Okay.

12 MR. KAVALER: We have other things we'll say at the

13 appropriate time, but that is something which I thought should

14 be mentioned before the jury retires.

15 THE COURT: All right. Does the plaintiff have

16 anything to say?

17 MR. DOWD: No, your Honor. We think the verdicts are

18 consistent.

19 THE COURT: Very well.

20 Ladies and gentlemen, that constitutes your jury

21 service in this case. And I might add, quite a long, diligent

22 and some might even say heroic service it has been. I want to

23 personally thank you for your patience, your attentiveness and

24 your persistence as jurors in this case. I don't need to tell

25 you, it has been a difficult case. It has been a long case.

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5-7-09 Trial Day 26 Verdict 8:54:00 AM

 1 It has been a complicated case. But it has been an important

 2 case. And as such, I thank you for having taken the time out

 3 of your lives at what I know is considerable cost both

 4 personal and pecuniary to many of you to do this.

 5 I also tell you that you should consider yourselves

 6 to some -- in some respect fortunate to have had the

 7 opportunity to take part in what is a fundamental aspect of

 8 our democratic way of life. You have served your country

 9 today without having to join the military, pay anything extra

10 in taxes or volunteer for community service. And we very much

11 appreciate it, and you should be proud of it.

12 We'll be back for any of you who wish to stick around

13 to talk to you if you want to -- have any questions for me, if

14 there's anything you want to ask, anything you want me to

15 explain. But you need not stick around.

16 Now, you are not required to and I would advise you

17 not to speak to anyone about your jury service after you leave

18 here today. It's done. You have done your duty. You have

19 finished. You have done it well. Put it behind you and move

20 on.

21 Retire to the jury room.

22 (Jury out.)

23 THE COURT: Date for motions?

24 (Brief pause.)

25 THE COURT: Does anybody need a date for motions?

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Case 1:02-cv-05893 Document 1658-2 Filed 09/03/2009 Page 245 of 245