BillAckman May28 2003 NYAG Deposition

7/22/2019 BillAckman May28 2003 NYAG Deposition

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2 ATTORNEY GENERAL STATE OF NEW YORK

3 ----------------------------------------x

4 In re

5 GOTHAM PARTNERS INVESTIGATION

6 ----------------------------------------x

7 May 28, 2003

10:30 a.m.

8

9 CONTINUED EXAMINATION of

10 WILLIAM ACKMAN, held at the office of The

11 Attorney General of the State of New

12 York, 120 Broadway, New York, New York,

13 before Debbie Zaromatidis, a Shorthand

14 Reporter and Notary Public of the State

15 of New York.

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2 A P P E A R A N C E S :

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4 COVINGTON & BURLING, LLP

5 Attorneys for Gotham Partners

6 1330 Avenue of the Americas

7 New York, New York 10019

8 BY: AARON R. MARCU, ESQ.

9 JENNA M. MINICUCCI, ESQ.

10

11 STATE OF NEW YORK

12 OFFICE OF THE ATTORNEY GENERAL

13 ELIOT SPITZER

14 120 Broadway

15 New York, New York 10271

16 BY: ROGER WALDMAN, ESQ.

17 LYDIE PIERRE-LOUIS, ESQ.

18 CHARLES T. CALIENDO, ESQ.

19 MARC MINOR, ESQ.

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2 W I L L I A M A C K M A N, resumed.

3 CONTINUED EXAMINATION

4 BY MR. WALDMAN:

5 Q. Last time you testified that

6 you met with Alice Schroeder I think

7 before the report was issued.

8 A. Yes.

9 Q. Who exactly did you meet with?

10 A. I met with Alice, Viney Saqi, a

11 fellow by the name of Charles -- he is

12 quoted in my report, so I could find the

13 name for you if you would like, and I

14 would say another one or two other

15 people, whose names I don't remember.

16 Q. Did you meet at Morgan Stanley?

17 A. Yes.

18 Q. How long did you meet?

19 A. A couple of hours, two, two and

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20 a half hours maybe, maybe three.

21 Q. Who set up the meeting?

22 A. I contacted Alice to see if she

23 would meet with me. She agreed to meet.

24 We set up a time.

25 Q. Well, in that conversation, why

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2 did you say you wanted to meet with her?

3 A. I originally left her a

4 voicemail. I didn't reach her initially,

5 and then she called me back, left me a

6 voicemail saying that she was going to

7 look into my references, that she didn't

8 want to be part of any short seller

9 scheme, but she would check on my

10 references, and I told her to call Byron

11 Wean, who is a very well-regarded person

12 at Morgan Stanley, whom I have known for

13 years, who sort of put a word in saying

14 that she should at least take a meeting

15 with me, and that I was a legitimate

16 person, and then it was scheduled I think

17 through her secretary and at her office.

18 MR. WALDMAN: I'm sorry. Could

19 you swear in the witness again.

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20 W I L L I A M A C K M A N,

21 having first been duly sworn by a Notary

22 Public of the State of New York, was

23 examined and testified as follows:

24 Q. Mr. Ackman, you recall the

25 warnings I gave you at the beginning of

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2 the examination about possible perjury,

3 when perjury might occur, and that

4 anything you say might be used against

5 you?

6 A. Yes.

7 Q. Would you like me to read them

8 again to you?

9 A. No.

10 Q. So then the meeting was in the

11 morning or afternoon?

12 A. Afternoon I think.

13 Q. Tell me what happened at the

14 meeting.

15 A. I sat down and -- oh, I

16 remember another guy from the meeting

17 telephonically. I think his name is

18 William Wilt. He used to work for one of

19 the rating agencies. He was patched into

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20 the meeting. I presented my findings on

21 MBIA. I had a draft of the report in

22 front of me, and I used it as kind of a

23 guide to walk through everything through

24 special purposes vehicles to what was in

25 the special purpose vehicles to CDOs, to

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2 meeting with the insurance department,

3 and, you know, I answered their

4 questions. I went over all the salient

5 issues about the company.

6 Q. I am going to hand you what has

7 been marked as Attorney General Exhibit

8 1, which is your report on MBIA, and ask

9 you to turn to the overview.

10 The draft that you had with

11 you, did it differ in any material

12 respect in terms of the overview of

13 opinions and conclusions?

14 A. I don't think I had written the

15 overview yet. It was kind of a

16 preliminary round draft.

17 Q. Did any part of the report in

18 draft form at that point differ

19 materially from what you published?

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20 A. I don't really know exactly

21 what stage the report was in at the time

22 I met with her. It definitely was, you

23 know, tightened up over time plus more

24 sections were added. Some sections were

25 taken out. I don't know which one I had

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2 with me when I met with her, but the

3 overview I did -- it was really the

4 last thing I did after the report was

5 written.

6 Q. You did discuss the SPVs,

7 right?

8 A. Yes.

9 Q. And what did you tell her about

10 the SPVs?

11 A. I walked her through each of

12 the companies that I was able to identify

13 that had borrowed money from one of the

14 SPVs, what the basic terms of those

15 facilities were, and then brief,

16 descriptive information about each of the

17 companies, you know, their market cap,

18 what business they were in. The same

19 kinds of things that are discussed in the

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20 report.

21 Q. With respect to the points you

22 made in the report, is there anything

23 that you recall now that you added with

24 respect to the SPVs after you met with

25 her?

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2 A. Nothing specifically, no.

3 MR. MARCU: I am sorry.

4 Nothing specifically that you recall?

5 THE WITNESS: Correct.

6 Q. What did she or her team ask

7 questions about?

8 A. I don't remember specific

9 questions. I mean she -- we had kind

10 of an interactive presentation where

11 periodically you she might -- she or

12 someone in her group might stop me and

13 ask a question about something.

14 Q. Well, did you discuss triple A

15 at all?

16 A. Yes.

17 Q. What did you tell her about

18 triple A?

19 A. That it had $3 billion of

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20 commercial paper outstanding.

21 Q. And did you talk about your

22 concerns about the liquidity problems

23 that triple A might cause to the company?

24 A. Yes.

25 Q. And what did you tell her?

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2 A. I don't remember my specific

3 words, but I told her it had $3 billion

4 of commercial paper outstanding, and that

5 if the company had trouble rolling over

6 that commercial paper, it would I think

7 have a significant effect on their

8 business, and I also told her that I

9 didn't think that $3 billion of

10 commercial paper debt was consistent with

11 a -- I don't remember my precise words

12 to her, but I summarized the basic facts

13 of triple A, that the assets in triple A

14 were not particularly high quality

15 assets. I gave her examples. They were

16 supported by commercial paper, and I

17 thought there was significant risk as a

18 result of that.

19 Q. Did you talk about the

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20 liquidity risk for MBIA that you thought

21 was created by the commercial paper?

22 A. Yes.

23 Q. What did you tell her?

24 A. I told her that if they

25 couldn't roll any of the commercial

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2 paper, they had to draw on the liquidity

3 facilities, and there is always a risk

4 that those facilities might not be

5 drawable, and but even if they were

6 drawable, I told her that I thought that

7 just the short-term nature of that much

8 debt coming due could put the company in

9 a very awkward position financially.

10 Q. Well, did you talk about your

11 belief that CP conduit liquidity

12 facilities typically have two outs which

13 allows banks not to fund?

14 A. I don't know if I had that

15 information when I met with her. I don't

16 remember if I told her that or not.

17 Q. You didn't have that

18 information?

19 A. I don't know if I was aware --

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20 I did have a conversation with Alice. I

21 don't remember if it was at that meeting

22 or later, but there was a conversation

23 with her where I did review those outs.

24 I am not sure it was at that meeting

25 because I remember -- the reason I

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2 remember that is that she offered to me

3 that this issue about a bank requesting

4 an audit of the value of the assets in

5 the SPV before they fund, that was a

6 concept that I got from her. Now, I

7 don't remember that coming up at the

8 meeting I had with her, but I do remember

9 having a conversation with her about

10 that.

11 Q. You had another conversation

12 with her between the the meeting and the

13 time the report came out?

14 A. That's correct.

15 Q. In person or on the telephone?

16 A. The telephone.

17 Q. And who was on the telephone

18 call?

19 A. Myself and herself.

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20 Q. And is that the only

21 conversation you had with her between the

22 time you had the meeting with her and the

23 time the report came out?

24 A. I don't know if it was the only

25 conversation. There may have been more

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2 than one. I remember a specific

3 conversation.

4 Q. All right. Let's talk about

5 that specific conversation.

6 What did she say to you and

7 what did you say to her?

8 A. Well, I had -- I think I

9 called her to follow-up on the meeting,

10 and it was probably two or three days

11 after I met with her, and she told me

12 that she had called Jay Brown, the CEO of

13 MBIA, and had reviewed some of the

14 findings of my report with him, and she

15 said -- I said: Well, what is your

16 assessment of the company in light of

17 your conversation with him?

18 She said: Let's put it this

19 way: Morgan Stanley has lost confidence

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20 in management, and then she gave me a

21 couple of specific examples of some of

22 the things he had said on restructurings.

23 She said that Jay called them, and she

24 thought it was almost humorous,

25 logistical refundings was his euphemism

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2 for restructuring, and then she said that

3 Morgan Stanley was more concerned about

4 the impact on the capital markets of the

5 company's failure than the failure of the

6 company itself, and those were the basic

7 subjects.

8 Q. What did you understand that

9 statement to mean?

10 A. I think that she thought that

11 the -- this company was indicative of a

12 broader issue in capital markets, that

13 there is a lot of debt that is guaranteed

14 by financial guarantors. You know, over

15 a trillion dollars of the debt in the

16 capital markets is guaranteed by three or

17 four companies, and if my analysis for

18 MBIA is correct, then if these companies

19 fail, it could have a very negative

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20 effect on various subsegments of the

21 capital market.

22 Actually, she talked about --

23 in particular she talked about the impact

24 on some of the subprime issuers of debts

25 like some private lenders like auto

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2 lenders and subprime home equity lenders.

3 Q. Now, your report came out on

4 December 9?

5 A. Yes.

6 Q. How long before that did you

7 have this conversation with Alice?

8 A. It was I believe in

9 mid-November. I could certainly get the

10 -- I should be able to come up with the

11 date by looking at the calendar, but I

12 met with her. It was within one to three

13 days after speaking to her, business

14 days. I don't remember exactly what day

15 the meeting was. I don't know. If we

16 met on Friday, it was Monday, Tuesday or

17 Wednesday. Something like that.

18 Q. What else did she say to you?

19 A. In that conversation?

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20 Q. Yes.

21 A. I asked her if she was going to

22 write on the company, and she said that

23 they were probably going to put out some

24 kind of note -- I think she told me

25 that they were putting out a note that

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2 morning on the company. I spoke to her

3 early, like 8:30, and I think that

4 morning they were putting out a report,

5 and she told me that -- you know, that

6 they had either just filed it or it would

7 be available very shortly.

8 Q. And did they?

9 A. Yes.

10 Q. Was that in your production to

11 us?

12 A. Yes. I asked her if -- I

13 guess I should let my lawyers answer what

14 was in the production because they

15 produced it.

16 MR. MARCU: If it was in the

17 files, we produced it. I can't say

18 specifically whether I remember this

19 morning if we produced it, but if it

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20 was a note that we have and didn't

21 produce it, we will produce it.

22 THE WITNESS: I am confident we

23 produced it. It is --

24 MR. MARCU: We will just go

25 forward.

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2 THE WITNESS: Okay.

3 Q. Incidentally, the draft of the

4 report that was before you when you spoke

5 to Alice, was that a hard copy?

6 A. Yes.

7 Q. Does it still exist?

8 A. If it did, we gave it to you.

9 MR. MARCU: Just answer the

10 question.

11 A. That is the answer.

12 MR. MARCU: The question was

13 does it still exist.

14 A. I don't know.

15 MR. MARCU: Yes, no, or I

16 don't know.


18 Q. Did you maintain a file that had

19 drafts of the report in it?

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20 A. No, not a physical file.

21 Q. But did you maintain a file,

22 electronic file that had drafts of the

23 report?

24 A. I know that we had some copies

25 that were earlier versions of the report

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2 I believe that were on -- that were in

3 our electric file.

4 Q. Under what heading?

5 A. Under MBIA report or company

6 analysis MBIA.

7 Q. Have you produced to us

8 everything in that file?

9 A. Yes.

10 Q. Did you at any time purge that

11 file?

12 A. Get rid of earlier -- purge

13 the file.

14 MR. MARCU: What do you mean

15 by "purge"?

16 A. Yes.

17 Q. Did you have a policy with

18 respect to keeping or deleting drafts?

19 A. I think we had -- we didn't

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20 have any kind of official policy, but I

21 think we -- we generally eliminate

22 early versions of the report as we

23 replace them with more updated versions

24 of the report.

25 Q. Incidentally, did you give

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2 Alice the draft that you had?

3 A. No, I did not.

4 Q. Let get back to the telephone

5 conversation.

6 A. Sure.

7 Q. I think you told us that you

8 commented about restructuring.

9 A. Yes.

10 Q. And that the company or Morgan

11 Stanley had lost confidence in the

12 management, and that she was more worried

13 about the effect on the capital markets

14 than on the company or words to that

15 effect. Something like that. Whatever

16 your prior testimony is will bein the

17 record. I am just trying to recall the

18 general topics.

19 A. Yes.

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20 Q. What else did you say?

21 A. I asked her if she was going to

22 downgrade the stock, and she said that

23 she couldn't tell me, you know, what they

24 were going to do with respect to that,

25 and I think that is when she told me they

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2 had put out a report that morning, and

3 that I should take a look at it.

4 Q. Did she comment on any of the

5 specifics other than restructuring?

6 A. I think she gave me a -- she

7 basically told me that there were --

8 she thought we were right.

9 Q. Right about what?

10 A. That our assessment of MBIA was

11 correct and that nothing she learned from

12 management, you know, led her to believe

13 that we were wrong, and in fact, you

14 know, the conference they had

15 telephonically with management or her

16 call with Jay Brown had -- you know, she

17 said let's put this way: Morgan Stanley

18 has lost confidence in management. That

19 was kind of her overall aassessment.

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20 Q. I understand that was her

21 overall aassessment.

22 Did she confirm any specific

23 items in your report?

24 A. Nothing I can remember other

25 than the restructuring comment.

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2 Q. Nothing about CDOs?

3 A. No.

4 Q. Nothing about SPVs?

5 A. No.

6 Q. Nothing about regulatory

7 problems?

8 A. No.

9 Q. Nothing about reserves?

10 A. No.

11 Q. Before we shift back to the

12 meeting, you said you may have had other

13 telephone calls with her.

14 What makes you think so?

15 A. Well, I definitely had more

16 telephone calls with her subsequent to

17 that call. I don't know, you know,

18 precisely when those occurred relative to

19 my meeting and my releasing the report,

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20 so I definitely had calls afterwards.

21 You asked me did I speak with her from

22 that point between then and the December

23 9 release of the report. I just don't

24 remember exactly when those calls were.

25 Q. Well, tell me how many calls do

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2 you remember whether or not they were

3 subsequent.

4 A. I probably had spoken to her

5 four or five times. I would say three to

6 five times subsequent to that call I just

7 spoke about.

8 Q. The first conversation --

9 A. The first conversation after

10 that?

11 Q. After that, did you call her or

12 did she call you?

13 A. I also had some E mail

14 correspondence with her, so I am --

15 MR. MARCU: Could you --

16 A. I am just trying to remember. I

17 don't remember, you know, the order of

18 any calls I had with her.

19 Q. What do you remember about what

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20 was said in the telephone calls?

21 A. I remember she called me after

22 the Attorney General investigation was

23 announced, and she told me that she

24 wouldn't be able to speak to me any more

25 on the advice of her lawyers. She told

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2 me that she thought she might get dragged

3 into this and end up being, you know, my

4 defense in terms of providing evidence

5 that we were right, and she apologized

6 for not being able to take my calls in

7 the future. So that was one call.

8 Q. Well, we know there were no

9 calls after that, right?

10 A. That's correct. That is why it

11 was easier to remember that one.

12 Q. Well, what did she say or what

13 was said in telephone calls prior to

14 that?

15 A. I spoke to her after she

16 released her second report. She released

17 a report prior to my release. I think it

18 was called "Headline Risk Remains," and

19 it talked about Gotham releasing a

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20 report. Her next report was kind of

21 "Gotham's Concerns Warranted." I spoke

22 to her prior to her release of that

23 report. Now I remember because I gave

24 her the what I would call dare to be

25 great speech.

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2 What I mean by that is I knew

3 she was under a lot of pressure not to

4 downgrade the stock because Wall Street

5 doesn't like to downgrade stocks, and I

6 said, you know, I tried to -- I said:

7 Look, I really want you -- I hope you

8 can write what you really believe, and

9 she assured me that she would, you know,

10 write an accurate report, and one thing

11 she said to me that I thought was kind of

12 strange is she said the Morgan Stanley

13 rating system, the way it works is

14 regardless of what you think of a

15 particular stock your rating has to

16 reflect where you think the stock will be

17 over the next 12 months or something, and

18 even if you think -- she thinks it is

19 not a great investment, if the market is

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20 going to value it differently from the

21 way she thinks about it, she has to set

22 -- she has to give it a rating equal to

23 what she thinks the stock will do,

24 not -- we had a discussion about the

25 whole rating system, and we both really

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2 agreed, if that is really the case, that

3 is absurd, and she said that she was

4 lobbying at Morgan Stanley to just get

5 rid of ratings for stock because she just

6 thought they were not useful. So we had

7 a discussion about that.

8 She said to me that she did not

9 want to be the one that lit the match

10 here. Some expression like that, sort of

11 -- she said she didn't want to be the

12 catalyst for the company's failure, and

13 she gave me the impression that if

14 she -- that is where I felt that she

15 wasn't going to downgrade it because I

16 got the sense that if she -- she felt

17 that if she downgraded it, somehow she

18 would be a catalyst for the company's

19 demise. So it was that conversation, and

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20 then she released a report.

21 Q. How did that conversation come

22 about; did you call her; did she call

23 you?

24 A. I mean I -- I think I

25 probably called her. I don't -- and

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2 she probably called me back. I don't

3 think I --

4 Q. Why did you call her?

5 A. I called her to see what she

6 thought of my report.

7 Q. What did she say?

8 A. She thought --

9 Q. Did you ask her what do you

10 think of my report?

11 A. Yes.

12 Q. What did she say?

13 A. She thought it was very well

14 done.

15 Q. That is all she said?

16 A. She said that they were going

17 to be writing a piece on the --

18 analyzing the report in greater detail.

19 Q. Did she say anything else?

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20 A. That is when we got into the

21 discussion about ratings.

22 Q. Now, that conversation occurred

23 shortly after within a few days of your

24 issuing a report, right?

25 A. I don't remember the exact time

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2 line. It was between the time she issued

3 her second report and the time of

4 producing my report.

5 Q. In any event, were there any

6 conversations between the time she called

7 after her meeting with management and

8 this call, which was shortly after your

9 report came out?

10 A. I don't remember.

11 Q. You spoke to her subsequent to

12 that?

13 A. I believe so, yes.

14 Q. When was the next occasion?

15 A. I checked in with her probably

16 in January. It was before her next

17 report came out, shortly before.

18 Q. How long was that conversation?

19 A. Not long.

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20 Q. Anybody on the call except you

21 and her?

22 A. No.

23 Q. What did she say to you and

24 what did you say to her?

25 A. I think there were a couple of

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2 significant developments with respect to

3 MBIA and affiliated companies,

4 Americredit was going through a credit

5 crisis, and I think I called her to bring

6 those issues to her attention. I may

7 have also sent her an E mail summarizing

8 some of those points, but I don't

9 remember -- again, you could look up

10 the dates for those documents.

11 And, you know, I asked her if

12 she was going to follow-up further, and

13 then she said that -- that they

14 probably were going to write again, and

15 she was pretty cryptic about, you know,

16 what, if anything they were going to say.

17 MR. WALDMAN: Would you mark

18 this please as the next exhibit.

19 (Exhibit 14 marked for

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20 identification.)

21 (Document handed to witness.)

22 Q. I show you Exhibit 14 and ask

23 you if you have seen it before.

24 A. Yes.

25 Q. What is this?

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2 A. This is an E mail to Alice

3 Schroeder where I wrote her -- that I

4 forwarded to Henny Sender at the Wall

5 Street Journal.

6 Q. Henny Sender is who?

7 A. Henny Sender is a reporter at

8 the Wall Street Journal who wrote a story

9 on MBIA.

10 Q. Now, it says, "Call me when you

11 have a chance. I am too inpatient to

12 write at the moment."

13 A. Sorry. This was an E mail from

14 Henny Sender to me of an E mail that I

15 had forwarded to her from Alice

16 Schroeder.

17 Q. Did you call Henny Sender or

18 after?

19 A. I am sure I did. We have

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20 spoken many times.

21 Q. No. Did you call her in

22 response to this E mail?

23 A. Probably.

24 Q. The original message, the

25 message with it is what?

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2 A. The message from her?

3 Q. You sent a message to Sender

4 saying FYI?

5 A. Yes. Correct.

6 Q. Which sent to her your message

7 to Alice Schroeder of November 6, 2003?

8 A. Correct.

9 Q. Which in turn said that very

10 few of the facts concerning the company

11 had been put in Henny Sender's column,

12 right?

13 A. Yes.

14 Q. And then she sent you a message

15 "Call me when you have a chance. I am

16 too impatient to write at the moment."

17 A. Correct.

18 Q. Did you call her?

19 A. Yes.

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20 Q. What did you say to her and

21 what did she say to you?

22 A. I don't know.

23 Q. You have no idea?

24 A. I spoke to Henny Sender many

25 times. I don't --

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2 Q. But this is in response to you

3 have attacked her column. You sent her

4 an FYI. She said call me when you have a

5 chance, and you don't remember any

6 discussion with her that discussed her

7 column and your comments to Schroeder

8 about it?

9 A. I don't think she -- I didn't

10 mean this as an attack on her column, and

11 I don't think she interpreted it that

12 way.

13 Q. Did you have a conversation

14 with her which dealt with your E mail to

15 Alice Schroeder?

16 A. In Henny -- I don't know. I

17 mean Henny had suggested that I call

18 Alice, so I forwarded this to Henny to

19 show her that I had contacted Alice.

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20 Q. When did she tell you or

21 suggest to you that you call Mrs.

22 Schroeder?

23 A. Probably a few weeks prior to

24 my calling her.

25 Q. How did that come up?

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2 A. She had -- one of the people

3 that she had spoken to in doing her

4 analysis on MBIA was Alice Schroeder,

5 and she said that she was by far the best

6 analyst on the street on the company, and

7 she said that you might want to talk to

8 her.

9 Q. Now, the date of your E mail to

10 Alice Schroeder is November 6, right?

11 A. Yes.

12 Q. Now, with this in mind, how

13 many days after this E mail did you have

14 a meeting? I call your attention to the

15 next to last or the last paragraph and

16 first sentence and second sentence which

17 says you would like to meet with her as

18 soon as possible.

19 A. It was probably within a week

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20 or ten days of this E mail, and I can get

21 you the exact date from my file if you

22 would like.

23 Q. What file?

24 A. The calendar we sent you guys.

25 Q. Let's return to the meeting.

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2 A. With Alice?

3 Q. With Alice.

4 A. Okay.

5 Q. You told me you made a

6 presentation to her?

7 A. Her and a number of other

8 people.

9 Q. Her and a number of other

10 people?

11 A. Charles Schorin by the way is I

12 think the name of the Charles.

13 Q. You told me they asked

14 questions?

15 A. Yes.

16 Q. What else do you remember about

17 the meeting?

18 A. I remember that it was -- I

19 think it probably started around 3 or 4

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20 o'clock because it was dark outside by

21 the time the meeting finished. It was in

22 a conference room at Morgan Stanley.

23 There were five or six people from their

24 side of the room. There were two other

25 people from my firm there.

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2 Q. Who was that?

3 A. David Klafter and Greg Lis.

4 Q. By the way, is Klafter still

5 employed by your firm?

6 A. He is now an employee of the

7 partnership as opposed to -- he is just

8 handling legal work for the partnership

9 directly in place of other counsel. He

10 is no longer an employee of the

11 management company, but we do -- we

12 give him office space. We pay his

13 healthcare.

14 Q. What about Lis?

15 A. No.

16 Q. And do you have any idea where

17 Lis works now?

18 A. He just took a job at a hedge

19 fund, the name of which I don't remember.

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20 Q. Do you know where he lives?

21 A. Yes.

22 Q. Where?

23 A. West End Avenue.

24 Q. Do you know his telephone

25 number?

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2 A. 663-3524. It is his home

3 phone, but I am happy to get you a phone,

4 his contact information, if you would

5 like it.

6 MR. MARCU: If you are

7 interested in serving a subpoena, we

8 would be happy to accept service.

9 MR. WALDMAN: When and if you

10 tell me that he retained you, then I

11 will consider whether I will serve it

12 on you.

13 Have you been retained yet by

14 him?

15 MR. MARCU: When and if I tell

16 you, you will know whether I have been

17 retained by him.

18 MR. WALDMAN: So I assume you

19 have not yet been retained by him.

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20 Therefore, it would be inappropriate

21 to serve a subpoena on you, and it

22 might be inappropriate for you to

23 represent him, but I will leave it to

24 you as an attorney, the conflict

25 situation.

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1 W. ACKMAN

2 Q. Do you remember the substance of

3 any of the questions that they asked?

4 A. No.

5 Q. Do you remember anything about

6 the meeting other than you made a

7 presentation and the details you gave me

8 about the presentation and that they

9 asked questions?

10 A. I do remember at one point I

11 read a part of a transcript of a

12 conference call where Charles Schorin

13 asked a question to management about

14 whether they used fair value accounting

15 or market model, whether they -- they

16 use mark to market value in determining

17 their fair values, and they pointed out

18 to me that the person who asked the

19 question was Charles Schorin, who had

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20 been in the early part of the meeting and

21 had left.

22 Q. How did you come to read that

23 to them?

24 A. I read it to them because I

25 thought it was relevant to the

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2 discussion.

3 A. It was -- actually I ended up

4 quoting it in the report, so --

5 Q. What was the discussion, if you

6 can remember it, about the mark to market

7 issue?

8 A. We were discussing our mark to

9 market estimate of losses on CDOs. I

10 told them how we came up with a number,

11 and then we conjectured as to why the

12 company had such smaller numbers, and it

13 was our view that they were using mark to

14 model as opposed to mark to market

15 accounting, and I quoted from the recent

16 shareholder quarterly call, which implied

17 that they were using models to come up

18 with numbers as opposed to market values.

19 Q. What about the matter of

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20 whether credit defaults that are not

21 synthetics should be marked to market at

22 all?

23 A. I don't believe we discussed

24 that at that meeting.

25 Q. Well, that was pretty

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1 W. ACKMAN

2 significant, wasn't it?

3 MR. MARCU: Are we talking

4 about CDOs?

5 MR. WALDMA: We are talking about

6 CDOs.

7 A. I guess I was much more focused

8 on the economics of their mark to market

9 issues, not too much the accounting for

10 them. So again I don't --

11 Q. One changed the number

12 completely in terms of your estimated

13 loss, didn't it, quite a bit?

14 A. No. No. Their estimated

15 losses don't change whether they are

16 required to mark to market or not from an

17 economic standspoint, only from a

18 reported, GAAP or accounting standpoint.

19 My -- the reason why I went to the

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20 dealers to get the quotes was to see what

21 their economic loss was. I mean it is

22 possible we may have discussed the

23 accounting issue. I just don't remember

24 it coming up.

25 Q. Well, I think you testified to

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2 me last time that your belief that CDOs

3 needed to be marked to market as well as

4 synthetics came from Alice Schroeder's

5 report?

6 A. That is one of the places where

7 it was -- where I began to focus on the

8 issue.

9 Q. What were the others?

10 A. Recently I have done a lot more

11 work on this issue.

12 Q. Never mind recently. Let's

13 talk about before you issued your report.

14 A. I did very limited -- Alice

15 Schroeder was my primary source.

16 Q. Was there any other source?

17 A. No, not that I can remember.

18 Q. And you didn't discuss this

19 with her in your meeting?

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20 A. I don't remember discussing it

21 with her in the meeting.

22 Q. What about this belief you had

23 that if commercial paper was guaranteed

24 by MBIA, the commercial paper of triple

25 A, did you talk about that at the

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1 W. ACKMAN

2 meeting?

3 A. No.

4 Q. How come?

5 A. I didn't believe it was the

6 case then.

7 Q. You did not believe it was the

8 case then?

9 A. Correct.

10 Q. Sometime between November 15 or

11 so and the issuance of the report on

12 December 9 you came to believe that was

13 the case?

14 A. Correct.

15 Q. And how again did you come to

16 believe that was the case?

17 A. When we were fact checking the

18 report, David Klafter and Greg Lis and I

19 went through every sentence in the

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20 document, and David Klafter would ask me

21 what was your source for that.

22 MR. MARCU: No. Let's not

23 talk about what your conversation was

24 with him.


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1 W. ACKMAN

2 A. We would go through the

3 document, and a sentence would come up,

4 and we had a conference room with the

5 whole -- fifteen boxes worth of

6 documents, and I would get the relevant

7 source, and show it to David and Greg to

8 show that the report was correct.

9 When we got to the -- in the

10 overview where I said that they had

11 guaranteed -- in the original version of

12 the document that they had guaranteed the

13 liquidity facilities, Greg and David

14 convinced me based on the language in the

15 report, which said MBIA guarantees the

16 liquidity providers to the SPV, that that

17 language meant both the commercial paper

18 and liquidity facilities, so at that

19 point, which was I would say days before

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20 the release of the report, I made the

21 change.

22 Q. Before we leave the meeting, do

23 you remember anything else about what was

24 discussed in this two-hour meeting?

25 A. I mean I did most of the

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1 W. ACKMAN

2 talking in the meeting, and I walked

3 through the issues in the report, and

4 there were, I would say, periodic

5 questions where an issue might come up or

6 where Alice might have a comment about

7 something, but I don't really remember,

8 you know, what those questions -- other

9 than the one that I remembered about

10 Charles Schorin, I don't remember

11 specifics.

12 MR. WALDMAN: With your

13 permission, there was inadvertently a

14 line drawn on Exhibit 7, which I would

15 like to remove. I note that. I am

16 showing counsel Exhibit 7.

17 MR. MARCU: You mean the pencil

18 line in the margin there?

19 MR. WALDMAN: Correct.

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20 MR. MARCU: I have no objection.

21 I don't know what that document is

22 frankly.

23 MR. WALDMAN: Exhibit 7 is the

24 10 K and the part of the 10 K that has

25 the annual report.

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1 W. ACKMAN

2 MR. MARCU: I will certainly

3 take your representation, and I have

4 no problem with that.

5 MR. WALDMAN: We will take a

6 short break.

7 (Recess taken.)

8 BY MR. WALDMAN:

9 Q. I believe --

10 A. Roger, I actually remembered

11 something that Alice said at the meeting.

12 I just wanted to give it to you.

13 She said to me at the meeting

14 that her -- sort of as by way of

15 explanation, Morgan Stanley could never

16 have done the kind of work that I did on

17 MBIA because she covers 26 stocks, and as

18 a result she can't devote the resources

19 that I devoted to writing a report on

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20 MBIA, and she also told me I think that

21 her department was being cut back and

22 that she was losing her resources, and

23 then we had kind of had a general

24 discussion about that subject matter.

25 MR. WALDMAN: Can you read back

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1 W. ACKMAN

2 where we left off before the break.

3 (Record read.)

4 Q. The best you can recollect,

5 what is it that Greg said to you that

6 convinced you that guaranteed, MBIA that

7 is, guaranteed the commercial paper?

8 A. I am not certain whether it was

9 Greg or David, but one of them just went

10 to the actual language, and explained to

11 me -- by liquidity facilities, you know,

12 they asked is the commercial paper buyer

13 a liquidity provider to the SPV. I said

14 yes, and then he said then we should

15 clarify this to say both liquidity

16 facilities and the commercial paper

17 buyers.

18 Q. And what did you say?

19 A. I said okay. It sounds right.

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20 Q. And how long before the report

21 was published did this conversation take

22 place?

23 A. It was within a day or two or

24 three of the -- of the report being

25 issued. This was kind of our final

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1 W. ACKMAN

2 review of the document.

3 Q. Did you check with anybody else

4 as to whether that interpretation was

5 correct?

6 A. No.

7 Q. How come?

8 A. I thought it was -- the

9 interpretation was correct, and I trusted

10 Greg, and David Klafter is a lawyer.

11 Q. Let me show you Exhibit 7 and

12 ask you if you can to tell me what they

13 pointed to you or what was pointed to you

14 as the source of the interpretation?

15 A. Now, the document they gave me

16 was the actual annual report, so this is

17 a different document.

18 Q. The annual report starts I

19 believe in that document on page 29.

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20 Excuse me. Let me point it out

21 to you.

22 A. Actually I think that whole

23 thing is the annual report.

24 MR. MARCU: May I have a

25 minute to discuss a privilege question

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1 W. ACKMAN

2 with Mr. Ackman, please?

3 MR. WALDMAN: Sure.

4 MR. MARCU: We are going to

5 step out for a second.

6 (Witness and counsel confer

7 outside the room.)

8 (Witness and counsel return to

9 the room.)

10 MR. WALDMAN: Can you read back

11 the question. I think there is a

12 question pending.

13 (Record read.)

14 A. Page 7.

15 Q. Page 7 of the report?

16 A. Of the annual report.

17 Q. This is page 7 of 63?

18 A. Yes.

19 Q. Would you read the language

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20 that was pointed to?

21 A. Sure. This is the third full

22 paragraph. "Pursuant to insurance

23 policies issued by MBIA, all the

24 investments of triple A are

25 unconditionally irrevocably guaranteed as

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1 W. ACKMAN

2 to principal and interest when due. In

3 addition, full amounts due to liquidity

4 providers under various agreements are

5 unconditionally and irrevocably

6 guaranteed."

7 Q. That is it?

8 A. Yes.

9 Q. That is all they pointed to?

10 A. Correct.

11 Q. Did they discuss any other

12 paragraphs or parts of paragraphs in the

13 agreement that might cast light on the

14 issue?

15 A. No.

16 MR. MARCU: Mr. Waldman, we

17 are trying to be careful to preserve

18 the attorney-client privilege and at

19 the same time not to interfere at all

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20 with your effort to gather the facts,

21 and I would just ask, and I

22 appreciated your previous question a

23 few questions ago when you asked about

24 Greg Lis, and then Mr. Ackman actually

25 answered by reference to both Mr. Lis,

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1 W. ACKMAN

2 who is not a lawyer, and Mr. Klafter,

3 who is the general counsel or was of

4 Gotham Partners, but if we could try

5 to, as you did, if we could try to

6 continue to be careful about

7 distinguishing between the

8 conversations with lawyers and

9 nonlawyers, it will facilitate our

10 ability to preserve the privilege, if

11 it is appropriate.

12 I am not taking the position at

13 this point that the previous

14 conversation that you elicited was

15 protected by the privilege, but I

16 don't want to -- I don't want to

17 inadvertently expose any privileged

18 communication. So if you could take

19 care of it in that respect, I would

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20 appreciate it.

21 MR. WALDMAN: Well, our

22 position is that to the extent a

23 privilege applies, it has been waived.

24 MR. MARCU: In what respect has

25 it been waived?

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1 W. ACKMAN

2 MR. WALDMAN: He has testified

3 to the substance of the conversation

4 and the substance of the advice, and I

5 am now inquiring into the details. A

6 waiver occurs when you testify as to

7 the substance of advice given you from

8 counsel as to that advice.

9 MR. MARCU: I was not able to

10 intervene because your question

11 related to Mr. Lis, and the answer

12 that came out related to both of them,

13 and my point to you is that, and

14 certainly that was not a deliberate

15 attempt to waive the attorney-client

16 privilege even with respect to this

17 one conversation --

18 MR. WALDMAN: I am not talking

19 about that QA. I am talking about

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20 prior to that when he said Mr. Klafter

21 and Mr. Lis convinced him.

22 MR. MARCU: Your position is

23 that that was a waiver of the

24 privilege?

25 MR. WALDMAN: Yes.

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1 W. ACKMAN

2 MR. MARCU: Then you take the

3 risk, if that was your position, and I

4 will continue to assert the privilege

5 as appropriate.

6 Q. What, if anything, did Mr.

7 Klafter say in this meeting?

8 THE WITNESS: Am I allowed to

9 answer the question?

10 MR. MARCU: If the question

11 calls for legal advice, advice you got

12 from your lawyer, then you should not

13 answer the question.

14 MR. WALDMAN: First of all, I

15 haven't heard any legal advice given.

16 MR. MARCU: How would I know

17 what was said in the conversation?

18 MR. WALDMAN: Fine.

19 Q. What did Mr. Klafter say, if

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20 anything, about this paragraph?

21 MR. MARCU: Objection.

22 Instruction not to answer the

23 question.

24 MR. WALDMAN: Whether or not it

25 was legal advice?

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1 W. ACKMAN

2 MR. MARCU: I don't know what

3 the answer would be, Mr. Waldman.

4 MR. WALDMAN: Why don't you

5 confer with your client and find out

6 and then see if you are going to

7 assert the privilege.

8 MR. MARCU: Very well.

9 Would you bring the exhibit with

10 you, so we can confer, please.

11 (Witness and counsel leave the

12 room.).)

13 (Witness and counsel return to

14 the room.)

15 MR. WALDMAN: There is a pending

16 question. Please read it.

17 (Record read.)

18 MR. MARCU: I withdraw my

19 objection and then the instruction

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20 because the question does not call for

21 legal advice. It was imparted from

22 Klafter to Ackman.

23 A. Basically we went through the

24 report sentnece by sentence. When we got

25 to the portion of the report that says

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1 W. ACKMAN

2 MBIA guarantees liquidity providers, he

3 asked me where in that document did I use

4 to confirm that fact. I went to this

5 annual report. I showed him this

6 language, and then he asked me are the

7 commercial paper buyers liquidity

8 providers to the SPV. I said: Yes. He

9 said: Then if that is correct, then you

10 should change the language to reflect

11 that both the -- that both the

12 commercial paper buyers and that the

13 liquidity facilities are guaranteed by

14 MBIA. Greg Lis agreed with that

15 interpretation, and we changed the

16 document to reflect that fact.

17 Q. Does the draft of the document

18 that you were fact checking exist?

19 A. I don't know.

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20 MR. WALDMAN: I am going to

21 prepare a subpoena for Mr. Klafter,

22 and I am going to assume that you are

23 going to represent him. We would call

24 for his appearance tomorrow.

25 MR. MARCU: Tomorrow?

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1 W. ACKMAN

2 MR. WALDMAN: Tomorrow.

3 MR. MARCU: I will accept

4 service after I speak to Mr. Klafter,

5 and he authorizes me to. I would be

6 happy to get back to you very shortly.

7 In fact, if you want to take a break,

8 I can do that, but I don't know about

9 the scheduling.

10 MR. WALDMAN: No, he is going

11 to appear tomorrow.

12 MR. MARCU: Well, we will

13 discuss that later.

14 (Recess taken.)

15 MR. WALDMAN: Mr. Marcu.

16 MR. MARCU: I couldn't reach

17 Mr. Klafter.

18 MR. WALDMAN: It is our view

19 that you cannot represent him because

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20 there is a conflict of interest

21 between the client you represent and

22 him, which I think I will discuss with

23 you off the record rather than on the

24 record, but since we had this

25 interchange on the record about your

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1 W. ACKMAN

2 representing him I wanted to put that

3 on as to where we stand, and we can

4 have a further discussion on it.

5 MR. MARCU: I don't see any

6 need to respond at this point except

7 to say that the fact that I haven't

8 responded shouldn't be construed as

9 any agreement with that.

10 A. Mr. Waldman --

11 THE WITNESS: Sorry. Can I

12 speak?

13 MR. MARCU: Yes, unless it is

14 about that subject.

15 A. No, I just want to make sure I

16 am clear on what took place, which is

17 that as part of our kind of I will call

18 it sentence by sentence review of the

19 document David Klafter asked me where the

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20 evidence was for the section. I showed

21 it to him in the annual report. He asked

22 me whether, you know, commercial paper

23 buyers were liquidity providers to the

24 SPV. I told him that they were, and Greg

25 Lis agreed, and he said then you should,

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1 W. ACKMAN

2 you know, change the document to reflect

3 that both are guaranteed by MBIA, and I

4 agreed with the change, and I made it, as

5 did Greg.

6 Q. All right.

7 MR. WALDMAN: We will have to

8 go off the record for a minute.

9 (Discussion held off the

10 record.)

11 MR. WALDMAN: Back on the

12 record.

13 Q. During the last day of your

14 examination, I referred to Exhibit 11,

15 which was an E mail to Henny Sender,

16 which has within it in an E mail from

17 Alice Schroeder to you, and I directed

18 your attention to the second paragraph

19 where you stated --

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20 MR. MARCU: Could we have a

21 copy of the E mail, please?

22 Q. Yes, here is Exhibit 11.

23 A. This is today.

24 Q. No, this is a different one.

25 A. No, this is the same one you

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1 W. ACKMAN

2 gave me today.

3 MR. MARCU: If Exhibit 11 is

4 the same --

5 A. This is the one I got today.

6 MR. MARCU: What is the Bates

7 number on it? Is it 044113?

8 MR. WALDMAN: Right.

9 MR. MARCU: I think that is

10 also the one that you marked as

11 Exhibit 14 today. I am assuming that

12 it is identical. I don't know if it

13 is. I am sorry. It is the same Bates

14 number.

15 MR. WALDMAN: Yes, it is the

16 same.

17 Q. In any event, I pointed last

18 week to the last sentence in the second

19 paragraph which talked about "Violates

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20 the New York State insurance

21 regulations."

22 A. Yes.

23 Q. And I asked you the basis for

24 your conclusion, and you said "On the

25 basis of my and my general counsel's

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1 W. ACKMAN

2 analysis of the law, on the basis of

3 statements made in various research

4 reports written on the industry by

5 Moody's and other brokerage firms, and

6 most significantly based on the advice

7 that was given us by the former general

8 counsel of the New York State Insurance

9 Department, whose is name is Bonnie

10 Steinberg and who is a lawyer today at

11 Fried Frank."

12 Now, what was your analysis of

13 the law?

14 A. Well, I am not a lawyer, but

15 there is a fairly strict prohibition

16 against insurance companies generally not

17 guaranteeing -- using insurance company

18 capital to guarantee derivatives. I

19 think there is actually an outright

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20 prohibition. A credit derivative is a

21 derivative.

22 MBIA guarantees those

23 derivatives through an SPV called

24 LaCrosse Financial Products. LaCrosse

25 Financial Products is described as an

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1 W. ACKMAN

2 orphan subsidiary, which means that the

3 equity of this orphan subsidiary is owned

4 by a nominee or charity, but that entity

5 itself does not have the financial

6 wherewithal to provide the guarantees for

7 these derivatives. So, you know, it is

8 my -- my understanding was this was

9 just a -- actually someone referred to

10 it as a fig leaf. You know, MBIA is --

11 their insurance company guarantees these

12 derivatives. There is an intermediary

13 entity that doesn't have sufficient net

14 worth or capacity to provide the

15 guarantees. So in my view it is a fairly

16 clear violation of the law, certainly the

17 spirit of the law, and, you know, whether

18 it -- you know, the technical elements

19 of the law, I am not the right person to

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20 ask.

21 Q. And then I asked you what

22 Bonnie Steinberg had told youm and there

23 was an objection on privileged grounds.

24 What I want to ask you now is

25 did she advise you in writing or orally?

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2 A. Orally.

3 Q. By telephone or in person?

4 A. By telephone.

5 Q. Did you ever pay her for

6 providing that advice?

7 A. I don't know, but I suspect

8 that --

9 MR. MARCU: That is it. You

10 don't know.

11 MR. MARCU: Could we go off the

12 record for a moment.

13 (Discussion held off the

14 record.)

15 Q. Did you ever retain her to

16 provide services, legal services to the

17 company?

18 A. We attempted to.

19 Q. Tell me about that.

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20 A. When we originally called her,

21 we were contacting her to get her. She

22 had been recommended to us as an expert

23 in New York State Insurance Law, and her

24 having been the prior general counsel we

25 thought it was a good idea, and we

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2 brought her this issue. I guess David

3 Klafter and I contacted her, and she gave

4 us her kind of initial reaction of the

5 issue.

6 MR. MARCU: I don't want you

7 to go into any of the substance of the

8 conversation.

9 THE WITNESS: I understand.

10 A. And she said she wanted to think

11 about it, and she called back I think

12 David and told him what she thought, and

13 then we had a call with her where she

14 proposed to --

15 MR. MARCU: That is --

16 THE WITNESS: It is not giving

17 advice or anything.

18 A. She was going to come with us to

19 a meeting. She was going to come with us

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20 to a meeting that we had scheduled with

21 the New York State Insurance Department,

22 and she knew the people who we were

23 scheduled to meet with, and she thought

24 it would enhance our credibility.

25 I think we spoke to her on

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2 Friday, and I think our meeting was the

3 following week, and the day before the

4 meeting she called I guess David Klafter

5 and told him that she could not represent

6 us.

7 MR. MARCU: Were you on that

8 call?

9 THE WITNESS: No, this is what

10 David Klafter told me.

11 MR. MARCU: That is enough.

12 Q. What did David Klafter tell you?

13 THE WITNESS: It wasn't legal

14 advice. It wasn't as far as I know.

15 You want me to tell you what it is

16 first?

17 MR. MARCU: Yes, I don't know

18 what he said. Whisper it in my ear,

19 so we can stop wasting time.

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20 (Witness confers with counsel.)

21 MR. MARCU: All right.

22 A. After consulting with some of

23 her partners in the structured finance

24 group, they would not let her represent

25 us because Fried Frank did not want to be

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2 representing someone whose interests were

3 adverse to MBIA's in light of the large

4 amount of business the structure finance

5 group does with MBIA. So she declined to

6 come to the meeting, and that was the

7 last conversation we had with her about

8 the subject on any subject as far as I

9 know.

10 Q. Now, you also said after that

11 you had also sought advice from Sullivan

12 & Cromwell?

13 A. Yes.

14 Q. I asked you who at Sullivan &

15 Cromwell, and you mentioned Tonly Coletta

16 and then an Asian American woman who does

17 insurance related law for Sullivan.

18 A. Yes.

19 Q. Did you retain Sullivan &

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20 Cromwell to give you advice on this

21 issue?

22 A. I don't know what retained

23 means.

24 Q. Well, at the time you spoke to

25 Mr. Coletta and/or the Asian woman, were

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2 they already providing legal services to

3 the firm?

4 A. Yes.

5 Q. Sullivan & Cromwell.

6 And what were those legal

7 services?

8 A. Well, Sullivan & Cromwell was

9 representing us on other matters at the

10 time that I called them about MBIA.

11 Q. Did they ever render a bill to

12 you for whatever they did with respect to

13 MBIA?

14 A. Yes, they did.

15 Q. You said you relied on advice

16 from Sullivan & Cromwell, and I asked you

17 who at Sullivan & Cromwell, and you

18 identified the Asian American woman.

19 What advice did she give you?

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20 MR. MARCU: Objection.

21 Instruction not to answer.

22 MR. WALDMAN: I believe he can

23 say he was relying on advice and then

24 not state what the advice was.?

25 MR. MARCU: Yes.

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2 Q. The conversation you had with

3 Bonnie Steinberg, the initial

4 conversation, which I believe you said

5 she gave you some preliminary thoughts.

6 A. Correct.

7 Q. How long was the conversation?

8 A. Thirty minutes.

9 Q. Anybody else present?

10 A. David Klafter.

11 Q. During your meeting with Alice

12 Schroeder, did you speak at all about the

13 matter referred to in an E mail,

14 specifically "We believe they are in

15 violation of New York State insurance

16 regulations"?

17 A. Yes.

18 Q. What did you say?

19 A. We described --

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20 MR. MARCU: What did you say?

21 A. I described what the -- how

22 MBIA guarantees credit facilities through

23 an intermediate entity, which was an

24 orphan subsidiary, Lacrosse Financial,

25 which was an orphan subsidiary, and I

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2 told her of our meeting at the Insurance

3 Department where we were asked multiple

4 times by I guess people who worked at the

5 Insurance Department are you sure MBIA is

6 using insurance company capital to

7 guarantee credit derivatives, in which I

8 interpreted as their not being aware that

9 this was going on, and I -- I think I

10 told her that I didn't believe they could

11 do indirectly what they are not permitted

12 to do directly.

13 Q. And what did she say, if

14 anything?

15 MR. MARCU: She, Ms.

16 Schroeder.

17 MR. WALDMAN: Correct.

18 A. I don't remember.

19 Q. Did you mentioned that you had

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20 consulted either Sullivan & Cromwell or

21 Fried Frank or both?

22 A. I am not sure.

23 Q. Did you tell her what the

24 position of Sullivan & Cromwell and/or

25 Fried Frank was on this issue?

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2 A. I don't know.


4 this, please.


6 identification.)

7 (Document handed to witness.)

8 Q. Let me take that back from you

9 for a moment.


11 this, please.


13 identification.)

14 Q. Showing you what has been

15 marked as Exhibit 16, I ask you if you

16 have ever seen it before?

17 A. Yes.

18 Q. What is it?

19 A. It is a photocopy of a Meridian

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20 Funding Company medium-term note

21 prospectus, which looks like it has my

22 underinings on it.

23 Q. This came from the files of

24 Gotham Partners, correct? It has a Bates

25 stamp number on it.

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1 W. ACKMAN

2 A. Yes.

3 Q. Bates stamps 6506 to 6654.

4 Now, you had this before you

5 before you wrote your report, correct?

6 A. Yes.

7 Q. During your last examination

8 you spoke about put rights?

9 A. Correct.

10 Q. What, if anything, in this

11 agreement led you to believe that the

12 holders of the medium-term notes had put

13 rights?

14 A. If you turn to page 12, if I

15 can read the third sentence of the first

16 paragraph, it says, "If a surety event

17 has occurred and is continuing, the

18 principal and premium, if any, and

19 interest on the notes shall become due

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20 and payable immediately, and the trustee

21 and under certain circumstances holders

22 will have the right to direct the

23 exercise of remedies under the indenture

24 and the security agreement, but payment

25 under the insurance policies may not be

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1 W. ACKMAN

2 accelerated without the consent of the

3 guarantor except in the case of insurance

4 policies related to each series of notes

5 issued on or before November 5, 1999,

6 which may be accelerated upon the

7 occurence of a surety event."

8 And it is those notes that were

9 issued prior to November 5, 1999, which

10 may be accelerated upon the occurence of

11 a surety event, I was referring to with

12 respect to the puttable notes.

13 Q. Let me direct your attention to

14 Exhibit 1 again, which is your report. I

15 direct your attention to the next to last

16 paragraph on page 23.

17 Would you read it, please.

18 A. "This same analysis is likely

19 to hold true to a less significant degree

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20 for the SPVs that are funded by MTNs for

21 these MTN holders often have put rights

22 in the event of default by the financial

23 guarantor on any of its guarantee

24 obligations."

25 Q. Now, you knew exactly what the

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2 holders of MTN notes put rights were?

3 A. Yes, in this -- in Meridian

4 Funding.

5 Q. Right. Meridian is where the

6 medium-term notes were, correct?

7 A. Meridian Funding as well as

8 three other SPVs.

9 Q. The vast majority of them are

10 in Meridian, right?

11 A. Correct.

12 Q. All but a very small number are

13 in Meridian, correct?

14 A. I am not sure sure that is

15 correct.

16 Q. We agree except for Meridian,

17 for the majority of the MTNs, there are

18 no put rights except with respect to

19 notes issued prior to November 5, 1999?

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20 A. Correct.

21 Q. Why didn't you put that

22 qualification in?

23 A. Because I was advised -- let's

24 put it this way: There is a

25 confidentiality stipulation in the

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2 Meridian prospectus, and -- which says

3 that -- which we concluded that we

4 couldn't include specific facts from that

5 prospectus unless we had -- we were

6 able to get them from another source. So

7 while I would have preferred to put the

8 detail here, we concluded in light of the

9 confidentiality stipulation that we had

10 to take it out.

11 Q. What other source did you get

12 it from then, the statement that is

13 there?

14 A. I didn't -- I didn't get it

15 other than general, you know, market

16 knowledge. There is no specific source

17 for that information other than that that

18 prospectus, although actually there is an

19 analyst report on it written by Deutsche

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20 Bank, which may have given me some of

21 this information, so I would have to

22 check that to give you an accurate

23 answer.

24 Q. Did you get the offering

25 memorandum for Meridian?

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2 A. Is that your question?

3 Q. Yes.

4 A. Did I get it?

5 Q. Yes.

6 A. Yes.

7 Q. Did it say anything about put

8 rights?

9 A. Yes.

10 Q. Do you know what percentage of

11 the medium-term notes were issued on or

12 before November 19, '99?

13 A. I can calculate it.

14 Q. Please do.

15 A. If you turn to page 18, there

16 is a capitalization table. I can

17 estimate what the number is. It is about

18 a billion and a quarter out of 4. 4

19 billion, which is about a little more

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20 than 25 percent. 27 percent, 28 percent,

21 something like that.

22 Q. Now, the notes were supported

23 by receivables or some underlying

24 mortgage, some underlying asset, right?

25 A. Yes.

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2 Q. The ones issued before 1999,

3 November 1999, were of course more

4 seasoned than the ones issued since,

5 right?

6 A. You mean they had been

7 outstanding longer?

8 Q. Yes.

9 A. Yes, by definition.

10 Q. And what, if anything, is the

11 relation between the likelihood of

12 default and the length of time

13 outstanding?

14 A. On these medium-term notes?

15 Q. Yes.

16 A. None. I am not sure I

17 understand your question. I mean longer

18 term notes have a higher probability of

19 defaulting than shorter term notes, but

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20 the put right exists in the event that

21 MBIA -- in the event of a surety event,

22 which is I think a default on the part of

23 MBIA on any of its other obligations, not

24 specifically of these obligations.

25 Q. Now, what was the number you

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2 told told me was the total of the

3 floating rate that was prior to November

4 '99?

5 A. A billion and a quarter

6 approximately.

7 Q. Now, in here somewhere it tells

8 you what a surety event is, right?

9 A. Correct.

10 Q. Where is that?

11 A. Where is that?

12 Q. Yes, where is that.

13 A. 6540 it looks like. Yes.

14 Q. Well, now there are three

15 surety events, right?

16 A. It appears to be.

17 Q. The first is the failure to pay

18 if any 1997 Euro notes are outstanding,

19 the failure of the guarantor to make

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20 payments on the CapMAC surety bond or any

21 insurance policy or any other bond or

22 financial guarantee insurance policy.

23 A. I am not sure that is a -- I

24 am not sure that is exactly what it says.

25 Q. In any case, the first one is

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2 limited to the situation as of the time

3 this 1997 note is still outstanding,

4 right?

5 A. No, I don't believe that is

6 correct.

7 Q. What is your interpretation?

8 A. What is my interpretation?

9 Q. Of A.

10 A. It says the failure of CapMAC

11 or the guarantor if any 1997 Euro notes

12 are outstanding, otherwise the failure of

13 the guarantor to pay when and as

14 required. My interpretation of that is

15 that if either CapMAC or the guarantor

16 defaults when the '97 Euro notes are

17 outstanding this clause applies, but if

18 that is not true, then you look to the

19 failure of the guarantor if there is no

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20 notes outstanding.

21 Q. All right.

22 Did you make any analysis of

23 the likelihood of the surety event A --

24 A. I mean --

25 Q. -- occurring.

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2 A. When you say analysis, can you

3 -- you mean explain when it -- our

4 assessment of MBIA is that the company is

5 not what it appears to be, and that if it

6 is downgraded, it may fail. It is hard

7 to give you a precise probability for

8 whether that will occur, but that is the

9 event -- that is at least one of the

10 events that would trigger any of the

11 three of these default provisions.

12 I think the other one that we

13 were focused on is the New York State

14 Insurance Department, if it were to deem

15 the guarantees of CDOs as inconsistent

16 with the law or in violation of the law,

17 the first thing they will do is

18 invalidate the policy, which means they

19 wouldn't perform on a guarantee that they

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20 have with respect to CDOs, which could be

21 a trigger as well in my understanding for

22 these surety events.

23 So I mean again it is hard to

24 come up with a precise probability, but

25 in light of our understanding that they

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2 were in violation of New York State

3 Insurance Law, we thought there is

4 frankly a decent chance that the New York

5 State Insurance Department would

6 invalidate those policies, which in turn

7 would increase the possibility that a

8 triggering event might take place.

9 Q. If there were a downgrade, how

10 in your analysis would that cause a

11 surety event?

12 A. Well, it depends on the reason

13 for the downgrade.

14 Q. All right.

15 What reason for a downgrade

16 would cause any of the surety events?

17 A. Well, if, for example, the New

18 York State Insurance Department were to

19 conclude the guarantees or CDOs were

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20 invalid and that in turn would invalidate

21 the policies, I suspect the investment

22 banks that bought those policies from

23 MBIA would probably sue for damages equal

24 to what they felt they lost in terms of

25 the benefit of te bargain when they got

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2 those policies. You know, $75 billion of

3 these obligations are outstanding. The

4 --

5 Q. That is one.

6 A. That is one.

7 There would -- you know, if

8 they were to take a loss in their

9 portfolio, on their CDO portfolio of a

10 significant size, which in turn would

11 cause a downgrade and would also threaten

12 their financial viability, that could

13 also cause a surety --

14 Q. Let's stop there. When you say

15 take a loss on their CDO portfolio, what

16 do you mean?

17 A. If the company were forced to

18 recognize a loss either by on a mark to

19 market basis or actually write a check

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20 out of pocket basis, you know, where the

21 company acknowledged that there was a

22 loss in their CDO portfolio anywhere near

23 an order of magnitude like we described,

24 I think that might trigger an event as

25 well.

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2 Q. Let's just take the forceD to

3 mark to market. How would that trigger a

4 surety event? It wouldn't we can agree

5 stop them from making a payment on their

6 guarantees, right?

7 A. It really depends. I mean the

8 company's investme

BillAckman May28 2003 NYAG Deposition

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