Appendix — Rubin v. United States
Supreme Court brief1981
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JOINT APPENDIX
————————————————————————
IN THE
Supreme Court of the United States
Octoser Term, 1980
No. 79-1013
WILLIAM RUBIN,
Petitioner,
UNITED STATES OF AMERICA,
Respondent.
On Writ of Certiorari to the United States Court of Appeals
for the Second Circuit
PES AE SE A LCE,
PETITION FOR CERTIORARI Fitep DecemsBer 19, 1979
CERTIORARI GRANTED Apri 14, 1980
INDEX
PAGE
Relevant Docket Entries la
Relevant Portions of Trial Transcripts 3a
Relevant Exhibits 123a
Order Granting Certiorari 179a
WITNESSES FOR GOVERNMENT
John Joseph Keating:
BOONE cccccuceescinineaincoidgaddnvopeauiatnedaiaeaeneae 3a, dla
Voir Dire .... 30a
Cross .. 64a
pT AMRIT PEMD Neon DO USES SERIE rn A 66a
Thomas Cox:
I cs ccicentstinharcanbspbailiahiiiiangclncaitane’ mend ena 72a
Max Englander:
URINING cscoicdcanihaiaiatniasidiees ani amen 85a
Charles Leeds:
Direct ... 86a
John E. Pinto, Jr.:
Direct 89a
PROTO ~ ciccccsniatsensiorcdeiildltueasieaaea ee 96a
li INDEX
PAGE
Alfred Reeves:
Direct ma 97a
Donald W. Jennings:
Direet ... 104a
WITNESS FOR PETITIONER
William Robert Rubin (Petitioner):
Direct 120a
Cross 12la
EXxuHisits FoR GOVERNMENT
1—30 Day Promissory Note for $50,000, dated
October 20, 1972 . on 123a
7—Blank Stock Power oe ee ae 125a
8—Blank Stock Power 127a
11—3 Month Promissory Note for $50,000, dated
seek sesewteenenennanen 129a
12—3 Month Promissory Note for $50,000, dated
November 22, 1972, Extending the October
au, 1972 Note for 3 Months ................................ 13la
14—3 Month Promissory Note for $100,000, dated
November 30, 1972 . 1338a
16—3 Month Promissory Note for — 000, dated
ER 135a
19—Power of Attorney 136a
20—Corporate Resolution z 137a
INDEX iii
PAGE
21—Demand Note for $475,000, dated February
By UE ik ceteeesdiesacatartiehtadestincceosinpngnanaciaibavomontaciot 139a
TE —— ERIE FERRE BOR wsccecencccrsctdsceswsessnssnicjensecetiosnis 14la
Ze RTRMNNE TOG OIG snisceciccenticssutnccsersnsdccentacnncibaniiisin 143a
30—Tri-State Energy Corporate Resolution, June
BR, STI coleabaichehiccsinheenglsstohsiiiithacthinalinstacudaummtiianaan 144a
37A—Stock Power Sedna sclsisiesecanshaicebias 145a
37B—Undated Stock Power ...2................c.scscccscseceesseesee 147a
37C—Undated Stock Power ....................--+-- lcelianticnds 149a
38A—Undated Letter of Consent to Pledge Stock 150a
47—Draft Memo of Bankers Trust Company,
dated December 6, 1972 ....... ceiencinnen aaa
48—Draft Memo of Bankers Trust Company,
CRE SOMONE DE TIRE cncecvncsencscinenstinesctnicctsam 156a
49A-7—Memo from John J. Keating to W. C. Pow-
derly, dated February 2, 1973 ..W.0000..... 160a
49A-8—Draft Memo of Bankers Trust Company,
GEO SOWMRET 11, BOTS a ccseivvvienencccivictsneenensaceienss 16la
49B-7—Letter from Jack Lifsitz to William R. Rubin,
Gated October 21, 1GT2 --.ccsnssecccsetncoccccsnnccembejonn 166a
49-58—International Advice Re: Satellite Systems
Corp. 167a
57—Investment Letter, General Investment Stock 168a
65—Bankers Trust Company Notes, dated April
16, 1975 Re: Stocks and Loans, Tri-State
EO I seksi dsinseistaiosinischancinenteiaatl 169a
iv INDEX
PAGE
147—Pink Sheets—All States Life Insurance Co.
Stock “ 170a
163—Affidavit of Confession of Judgment .............. 175a
EXHIBIT FOR PETITIONER
J—Minutes of First Board of Directors, Tri-
State Energy Held July 7, 1972 176a
Date
1-27-78
2- 2-78
3-22-78
JOINT APPENDIX
Relevant Docket Entries
Proceedings
Filed Indictment and related to 78-er-76. ...
Motley, J.
Defendant (attorney present) pleads not guilty.
Filed affidavit of Louis Bender in support of
motions addressed to the indictment.
4-10-78—Filed Affidavit of R. K. Neugarten, AUSA, in
4-10-78
d- 8-78
d- 9-78-
9-25-78
9-26-78
6-30-78
6-30-78
7-6-78
opposition to defendant’s omnibus motions.
Filed Government’s memorandum in response to
omnibus motions.
Defendant and attorney present. Jury trial com-
menced.
Trial continued.
Trial continued and concluded. Jury finds de-
fendant Guilty on Count 1; Count 2 is Dismissep
on Government’s motion; Not Guilty on Count 3.
Sentence 6-30-78. Bail continued. Motley, J.
District Court Judgment set out in Appendix B
to the Petition for Certiorari.
Filed Notice or Appeat of Defendant to United
States Court of Appeals for the Second Circuit
from Judgment of conviction.
Filed True Copy of United States Court of Ap-
peals Order that motion is granted to the extent
that surrender is stayed until July 5, 1978 by
which time the court can consider the motion on
a complete record.
Date
7-11-78
6-30-78
2a
Relevant Docket Entries
Proceedings
Filed True Copy of United States Court of Ap-
peals Order granting continuation of appellant on
bail and under same conditions Re: determina-
tion of appeal and that a briefing schedule be
arranged promptly. —
Filed Transcripts of Record of Proceedings
dated: May 8, 9, 10, 11, 12, 15, 16, 17, 18, 19, 22,
23, 24, 25, 26, 30, 1978.
Judgment of the District Court affirmed in an
Opinion dated September 6, 1979, set forth in
Appendix A to the Petition for Certiorari.
The issuance of the mandate stayed by the Court
of Appeals on October 10, 1979 pending appli-
eation to this Court for a writ of certiorari.
Petition for rehearing and in the alternative for
a hearing en bane denied by the Court of Appeals
on November 20, 1979.
3a
Relevant Portions of Trial Transcript
* + .
[210]* Joun Josepm Keatina, called as a witness on
behalf of the government, having first been duly sworn,
testified as follows:
(Direct Examination)
[216] Q. What were the general nature of the kinds of
corporate loans that were done out of that branch in 1972
as you knew it? [217] A. By industries?
(). By industries? A. About half of the loan portfolio
was to garment center, mostly women’s wear manufac-
turers and the other 50 percent was spread amongst sev-
eral industries really with no concentration at all.
Q. Was a written loan application customarily used for
corporate loans of Bankers ‘rust? A. No, there was no
written loan application.
(). How would a corporation obtain a loan? <A. Basie-
ally they would come into the bank, they would present
financial statements on the corporation, they would give
a general resume of what the corporation did and what
business they were involved with, a deseription of their—
of the officers of the corporation and generally, in most
instances, the bank would ask for a projection. If they
were asking for a loan, a projection was merely a form
of indicating how they were going to pay the loan back.
Q. A projection of what? <A. Basically of cash flow,
generally, mainly whatever sales were going to be gen-
* Figures in brackets refer to the page of the Stenographic Tran-
script.
4a
John Joseph Keating—for Government—Direct
erated over whatever period of time and how these sales
would be turned into cash over another period of time to
pay the loan off.
Q. Did bank procedures let a loan office make a loan
[218] by himself or herself? A. No, Bankers Trust re-
quired two signatures on—for a loan to be approved, and
both signatures—the officers who signed the loan applica-
tion both had to have authority equal to cover the amount
of the loan.
Q. When you say authority equal to the limit, what
kind of authority are you talking about? <A. Lending
authority. The bank assigns to each lending officer a cer-
tain amount of lending authority, meaning maybe you
would have 100,000 or 200,000 dollars in authority. In
other words, the bank was giving you the right to make
that amount of loan with another lending officer.
Q. So, you could loan—if you had $100 thousand au-
thority, you could make a loan up to $100 thousand? A.
That’s right.
[219] Q. Do you reeall what lending limit. you person-
ally had in 1972, the latter half of 1972? <A. I am not
exactly certain, I think it was a hundred or $200,000, It
was one or the other. I know it was increased during
that period. I am not exactly sure when it was increased.
Q. When a loan was made by a branch, in your ease,
the Seventh Avenue branch, under what circumstances if
any would it be reviewed by somebody outside of your
branch? A. Generally you could send a copy of a memo
covering the transaction to an area of the bank called
“loan administration”, but the branch really had the au-
thority to make loans without sending—without any con-
currence from anybody else up to a half million dollars.
Q. Above a half million dollars, that is $500,000, was
there a different procedure? A. Above a half million
5a
John Joseph Keating—for Government—Direct
dollars there were two people at the branch that had what
was described as the unlimited lending authority of the
bank; in other words, they could lend up to the legal
limit.
Every bank has a limit imposed on it by the Federal
Reserve System where you are not allowed to lend more
than 10 per cent of your capital and surplus.
[220] At that time, Bankers Trust had, I believe, some-
where around $67 million in legal lending limit. Ray
Ludwig had legal lending limit authority or unlimited
authority, so if a loan was going out of the office, he
would have to get the concurrence of somebody else in
Loan Administration for anything above $500,000.
Q. So in other words, if Mr. Ludwig wanted to make
a loan of $525,000, he needed somebody outside of your
branch? A. Exactly.
Q. But anything—$500,000 or less, he was the highest
authority? A. That’s correct.
[221] Q. Did there come a time in 1972 when you
heard of a [222] company called Tri-State Energy? A.
Yes. I first heard of Tri-State Energy on October 19,
1972.
Q. Do you recall the circumstances under which you
heard of Tri-State Energy? <A. Yes. There was—
was late in the afternoon. It was after banking hours
had closed. There was a meeting going on at Ray Lud-
wig’s desk which was in clear sight of my desk. The
way the lending officer seats were arranged was on a long
narrow corridor, almost like the jury box over here. There
was a meeting going on, there were three gentlemen there
6a
John Joseph Keating—for Government—Direct
with Mr. Ludwig, and Mr. Ludwig—I could see conver-
sations going on—called me over, informed me that we
were going to be making a loan to Tri-State Energy
which he said was a coal company, that the loan would
be booked tomorrow because it was after banking hours
at that particular time, and that I should go back to my
desk and open up checking accounts and get the normal
information that you would when you would be starting
a new relationship from a company.
Q. When you say it was after banking hours, what
was the close of banking hours at that time? A. Three
o’clock, so it was somewhere between—after three. I am
not exactly sure.
[223] Q. Did Mr. Ludwig introduce you to the three
persons with whom he was? A. Yes, he did.
Q. Do you recall their names? A. C.W. Deaton, William
Rubin and Leonard James.
Q. Do you recognize anyone in the courtroom today?
A. Yes, I do.
Mr. Bender: That identification is conceded.
Ms. Neugarten: The identification of the defend-
ant Rubin, I assume.
Mr. Bender: None other.
[225] Q. Were you told what the loan was for? A.
I believe that the initial loan was for payroll at the mine.
Q. Did you do any paper work with respect to that
loan on that date? A. Yes, we took in several documents,
including the note itself which is like the equivalent of
Ta
John Joseph Keating—for Government—Direct
an IOU from the corporation, and we had deposit reso-
lutions, borrowing resolutions and corporate guarantees of
the three principals.
[228] specific conversations that you mention, what posi-
tions the three people have at Tri-State? A. Leonard
James was the president of the corporation, C.W. Deaton
was secretary-treasurer, and William Rubin was the vice-
president.
Q. Was the loan to be effective that day, October 19
or some other time? A. No, it couldn’t be effective that
day because the loan had to be processed by the clerical
staff. They were—it was past banking hours, so that
couldn’t be done. The loan was to be effective the next
day, on the 20th of October.
Q. That’s 1972? A. Yes, sir, 1972.
Q. How was Tri-State to obtain the money that was
borrowed? A. The money was to be credited to their
checking accounts.
Q. At what bank? A. Bankers Trust, Seventh Avenue
Branch.
Q. That was the checking account that you opened
on that day? A. Yes, that’s correct.
Q. Were they to get $50,000 or some other amount?
[229] A. It was a liability less than $50,000. The way
Bankers Trust processed loans, they discounted the in-
terest in advance. What they did was they deducted
whatever one month’s interest was from the proceeds of
the loan so they would receive $49,000 and some hun-
dreds.
I would have to see the note to know the exact amount,
but it was something less than $50,000.
8a
John Joseph Keating—for Government—Direct
Q. Did there come a time that Bankers Trust received
initial collateral on that loan? <A. Yes.
Q. Do you recall when that was? A. I believe it was
delivered to the bank on the 20th of October. It was
a stock certificate, and I knew that the stock certificate
was coming in because on the 19th, during the conver-
sations, Ray Ludwig told me that we would be receiv-
ing collateral on the loan.
Q. Do you recall who brought in the stock certificate?
A. It was Rubin or Deaton or both, perhaps, I am not
certain at this time.
[233] A. Government’s Exhibit 6 is a stock certificate
for a company named American Leisure Corporation. The
stock certificate is registered in the name of Tri-State
Energy. It is for 400,000 shares and there is a legend
on the stock meaning that the stock is restricted.
Q. Now, is this the stock certificate which you earlier
testfied you received as collateral the next day which is
October 20, 1972? A. That’s right.
Q. Now, Government’s Exhibit 7 and Government’s Ex-
hibit 8 for identification, two separate pieces of paper.
A. Okay.
Government’s Exhibits 7 and 8 are stock powers signe:l
by Tri-State Energy and by C. W. Deaton with the signa-
ture guaranteed by Chelsea National Bank, an officer of
that bank guaranteed that this was the signature of C. W.
Deaton.
And the stock powers would be used by a bank [234]
when they would be accepting marketable securities as
collateral so that they could sell them if they had to at
some future date.
9a
John Joseph Keating—for Government—Direct
Q. Now, both Exhibits 7 and 8 are stock powers, is
that correct? A. Yes.
Q. Now, do you have a precise recollection of when you
received those stock powers? <A. I imagine it would have
been the day that the stock was delivered, because that
would be standard policy. I can’t recall specifically, but
if you were receiving a stock and you didn’t have the
stock powers you really wouldn’t have collateral.
®. But they are not dated, is that correct? A. No,
they are not.
[235] Q. Now, Government’s Exhibit 9 for identifica-
tion, can you identify this document? <A. Yes, I can.
Government’s Exhibit 9 is what Bankers Trust Com-
pany calls an offering ticket. And what this is basically
is the vehicle whereby a loan is put on. Okay? This
creates the loan in the bank. And the information on the
offering ticket gives the date of the loan, the name of the
company, the amount, the maturity date, the rate of in-
terest being charged, whether the loan is a new loan or
a renewal of an already existing loan, what type of loan
it is, if there are any guarantees involved and who the
guarantors are.
And if we have any collateral for the loan. And also,
it gives the initials of the two lending officers who create
the loan.
[237] A. Right.
Q. Do you see the words “Tri-State Energy”— A. Right.
(. —printed on the front of them? A. Right.
Q. I mean hand printed on the front of them. Do you
recognize the handwriting? A. Ray Ludwig’s printing.
10a
John J oseph Keating—for Government—Direct
Q. And the offering ticket, Government’s Exhibit 9 in
evidence, by whom is the information on this offering ticket
filled out? A. The information on the offering ticket is
filled out by clerks, they called it the general cage in the
bank, that was the jargon for the area who prepared
this—
* * *
A. It was prepared by clerks. The general case was
[238] the name of the area who prepared the offering
ticket.
Q. Now, you see a column “R or N”? A. Yes.
Q. What does that mean? A. That means whether the
loan is a new loan or whether it is a renewal of an exist-
ing loan.
Q. And what is the indication on that offering sheet,
Exhibit 9 in evidence? A. It’s a new loan.
(. Now you see a column labeled “Rate”? A. The rate
on the loan was 7 percent.
Q. That refers to the interest? A. Yes.
Q. And you see a note “RA”? <A. Yes. There is a—
printed there it says “Lien Stock, 400,000 shares American
Leisure Corp.”
Q. And to what does that refer? A. To the stock that
was given as the collateral for the loan.
Q. So in other words, the collateral is lien stock? A.
No, the lien stock is when a bank—basie jargon that was
used in the bank at that time was that when you were
taking collateral, side collateral for a loan, you would
say lien stock of whatever numbers of shares it would
[239] be.
Q. Now, when you said “side collateral,” can you tell
us what you mean by that? A. Well, when the loan was
made initially, the loan was envisioned that it would be
lla
John Joseph Keating—for Government—Direct
repaid from the ongoing operations of the corporation,
namely from the sale of coal or natural gas. The col-
lateral was taken as a secondary source of repayment
in the event that the primary source, the ongoing opera-
tions of the corporation didn’t materialize.
[241] Q. Now, directing vour attention from Govern-
ment’s Exhibit 1, next to Government’s Exhibit 6 in evi-
dence, you see a red stamp. A. Yes.
Q. Could you read it out loud as best you ean? It is
printed over other writing, I believe. A. “The shares by
this certificate is unregistered [242] stock, and these
shares may not be sold, disposed of or otherwise distrib-
uted without, one, complying with the registration require-
ments of the Securities Act of 1933 as amended, and these
rules and regulations thereunder, or, two, without obtain-
ing an opinion of American Leisure Corp.’s counsel that
the proposed disposition of said shares is’”—and I can’t
make out the last line.
Q. Now, before you got this particular collateral on
October 20th, had you ever seen a stamp of a similar kind
on a stock certificate before? A. Yes.
Q. And have you since? A. Yes, I have.
Q. And what did you understand it to mean? A. Well,
basically, it is a restriction having to do with some insider
information on a stock. Basically, the stock—it is not
marketable in a broad sense. It can be sold, but the only
amount of the stock that can be sold is predicated on I
think the activity for the prior six months or year, a cer-
tain percent of that activity.
Q. Now, as a practical matter, did that have any signi-
ficance—does that have any significance to the worth of a
12a
John Joseph Keating—for Government—Direct
stock certificate as collateral? A. Because it isn’t as mar-
ketable as an unrestricted [243] stock, the worth of the
collateral is substantially reduced, because if you had to
sell the stock, you could only do it in dribs and drabs over
a long period of time. You couldn’t sell it all at once.
Q. So this certificate would have been more valuable if
it didn’t have that stamp? A. Yes.
Q. To you, for collateral. A. Yes.
Q. Now, do you see—would you read the line beginning
“This certifies’? A. “This certifies that Tri-State Energy,
Ine. is the owner of”—keep on going?
Q. Yes. A. —400,000 fully paid and non-assessable
shares of common stock without par value of American
Leisure Corporation”—
+. Okay, stopping there.
What did you understand that to say? <A. That Tri-
State was the owner of the stock.
Q. Now, were you at any time ever told by Rubin,
Deaton or James, anything to the contrary? <A. No.
Mr. Bender: I object to that. I object to the
[244] form of the question, your Honor.
The Court: Well, I gather the suggestion is it
is leading?
Mr. Bender: Also, I think the question ought to
be directed to whether Mr. Rubin ever said any-
thing, not what somebody else said. This man has
indicated that he’s been at the bank, he has met Mr.
Rubin and in I don’t know what period of time we
are referring to in this question.
Q). The question is at any time. An open-ended ques-
tion.
The Court: At any time.
13a
John Joseph Keating—for Government—Direct
A. At no time did they say that this was anything else
but their stock.
Q. Now, at the time you received this, which was Octo-
ber 20, 1972, what did you understand to be the relation-
ship between restrictions on stock and stamps like this
red stamp on stock certificates? A. At that time I be-
lieved the only way a stock could be restricted was if it
had this stamp on the certificate.
Q. Have you generally discovered whether you were
correct or incorrect in your belief? A. I was incorrect.
Q. And you have learned that stock can be [245] re-
stricted and not have a stamp? A. Yes. It can be re-
stricted through—by means of a letter ealled an invest-
ment letter that’s attached to the stock certificate with no
stamp on the face of the certificate itself.
Q. Now, did Bankers Trust have any policy regarding
whether or not restricted stock could be received as col-
lateral? A. No, there was no policy.
The way a banker would look—a banker generally looks
at any loan and says that collateral makes any loan better.
So to that extent that we had restricted stock, it was
better than if we had nothing at all. However, obviously
the preference of any lending officer was to have unre-
stricted stock so that if anything went wrong with the loan
he would be in a position to sell it right away instead of
over an extended period of time.
Q. Now, again, do you recall who brought you that stock
certificate, Government’s Exhibit 6? A. It was Rubin or
Deaton or both.
Q. And that was on October 20th? <A. Yes.
Q. And did you have any conversation with the person
or persons who brought you that certicate? [246] A. Yes,
I had a conversation with him and specifically what was
said it was that it was fine that they were bringing in the
14a
John Joseph Keating—for Government—Direct
restricted stock, but the desire of the bank was to get
good marketable collateral and we were informed by
either Deaton or Rubin, or perhaps both of them, that we
would be getting good marketable collateral in the future
and we would be getting New York Stock Exchange col-
Jateral.
Q. Were you told anything regarding the restriction on
this particular stock? <A. Yes. It was indicated—I can’t
recall who said it—but that the restriction would be re-
leased at some future date.
Q. When you say you ean’t recall who said it, who
were the— <A. Well, it would have been either Deaton or
Rubin or both of them perhaps.
Q. But one of those two at least? A. One of those two.
Q. Now, did Tri-State in fact ever bring you unre-
stricted American Leisure stock? <A. No.
Q. And did they ever in any way remove the stamp from
the American Leisure stock? [247] A. No, they did not.
Q. Now, when you got the stock, the American Leisure
did the person or persons who brought it to you tell you
how it had been obtained by Tri-State? A. Yes. The con-
versation that I recall having with Deaton or Rubin or
both of them was that they had gotten the stock in a coal
swap. In other words, they had a mine in Kentucky and
they traded part of the rights to, a certain amount of coal
in that mine, in exchange for the stock.
Q. Now, as of October 20, 1972, or after October 20,
1972, and during the next month, that would be up to and
including November 20, 1972, did you ever talk to Rubin
or Deaton? <A. I talked to both of them on just about a
daily basis, both in person and on the phone.
Q. And was that both of them together or separately?
A. In both manners, they came in together on several oc-
casions and they came in separately on several occasions.
lda
John Joseph Keating—for Government—Direct
Q. And do you recall of the two of them, that is Rubin
and Deaton, whom you saw and talked to the most? A.
Rubin.
Q. Now, did there come a time that Bankers Trust made
another loan to Tri-State? [248] A. Yes.
Q. Now, handing you Goverment’s Exhibits 11, 12 and
13 for identification, and referring to them again by num-
ber, would you identify each of those documents for the
Judge and jury? A. Government’s Exhibit 11 is another
note that was dated November 20, 1972 for $50,000, and
it was signed by C. W. Deaton of Tri-State Energy, Ine.
Q. Now, do you recognize his signature on that? A.
Yes, I do.
Q. And turning to Government’s Exhibit 12 for identi-
fication? A. Government’s Exhibit 12 is a note for $50,000
dated November 22, 1972 by Tri-State Energy, Inc., signed
by C. W. Deaton.
Q. And do you recognize his signature? <A. Yes, I do.
Q. And does this note bear any initials on it? A. Yes,
it bears the November 22nd note which is Government’s
Exhibit 12, it bears my initials and the note dated Novem-
ber 20th, which is Government’s Exhibit 11 bears Ray
Ludwig’s initials.
Q. Now, when you say initials as to Ludwig—
Ms. Neugarten: Strike that.
[249] Q. Government’s Exhibit 13 for identification. <A.
Government’s Exhibit 13 is an offering ticket, it means
the way a loan is created, dated November 22, 1972. It is
for Tri-State Energy, Ine. and it reflects two loans being
paid, one for $50,000 with a maturity date of February
22nd, and one for $50,000 with a maturity date of Febru-
ary 20th.
l6a
John Joseph Keating—for Government—Direct
The February 22nd maturity date is a new loan and
the February 20th maturity date is a renewal of the loan
that was placed on October 20th and had matured.
The loans are guaranteed by Deaton, James and Rubin,
and we continue to hold in lien stock the 400,000 shares
of American Leisure Corporation.
Q. Now, is that initialed by anyone? A. Yes, it is ini-
tialed by Ray Ludwig and me.
Q. And the two loans to which Government’s Exhibit 13
for identification pertains are the loans which are docu-
mented by Government’s Exhibits 11 and 12 for identifica-
tion? A. Yes. That’s true.
Ms. Neugarten: Your Honor, at this time the
government offers Government’s Exhibits 11, 12 and
13 for identification into evidence as Government’s
Exhibits 11, 12 and 138.
Mr. Bender (handing).
[250] Mr. Bender: I have no objection, your
Honor.
The Court: All right. Government’s Exhibits
11, 12 and 13 are received.
The Clerk: Government’s Exhibits 11, 12 and
13 are received in evidence.
(Government’s [Exhibits 11, 12 and 13 were re-
ceived in evidence.)
(). Now, directing your attention to Government’s Ex-
hibit 13 in evidence, you noted that it refers to guar-
antees of three people, is that correct? <A. Yes.
Q. Now, did you obtain a second or new guarantee
form at that time? A. No.
Q. And was there a reason why you did not? A. It
wasn’t necessary. The initial guarantee covers all and
future loans that would be granted.
17a
John Joseph Keating—for Government—Direct
Q. And what do you understand to be an unlimited
guarantee which I believe is how you characterized those
three guarantees that we have seen? A. The people who
execute the guarantee, in this case Rubin, Deaton and
James, guaranteed the loan regardless of how much it
would be. If we had made a $100 million loan to the
company they would be guaranteeing the full $100 * * *
[253] Q. Now, when the clerical staff went to fill in
in cases where they did a value for collateral, do you
know how they would do that? A. They would either get
it from the newspapers or from documents that were called
pink sheets because of this color which had the prices
of stock that wasn’t traded on either the New York or
American Stock Exchange, what is called over-the-counter
securities.
Q. So do I understand that for stock exchange traded
stock they would go to the newspaper and for over-the-
counter stock that was listed in the pink sheets, they
would [254] go to this thing called the pink sheets? A.
That’s correct.
Q. Now, at the time that you got the loans—or you
made the loans embodied by Government’s Exhibits 11
and 12, did you have any conversations with anyone from
Tri-State? A. Yes, I did. I spoke to Rubin or Deaton
or both, and this particular—the loan itself was again
for payroll, and again we were talking about getting addi-
tional marketable collateral which would be New York
Stock Exchange collateral.
18a
John Joseph Keating—for Government—Direct
[255] Q. Now, directing your attention to Government’s
Ixhibits 14 and 15 for identification, can you identify
them for us (handing)? <A. Yes.
Government’s Exhibit 14 is a $100 thousand loan which
is dated November 30, 1972, and it is signed by Tri-State
energy. It was for three months. And again, they didn’t
[256] receive the full amount of the loan. In this instance
the actual dollars received were $98,250 in one set and the
interest that was discounted was $1,749.99.
Q. And you said it’s signed by Tri-State. By whom?
A. C. W. Deaton
Q. And Government’s Exhibit 15 for identification? <A.
Government’s Exhibit 15 is an offering ticket representing
the granting of this loan, $100 thousand.
Again, the guarantees continued to be enforced of
Deaton, James and Rubin, and we continued to hold the
400,000 shares of American Leisure as collateral.
[258] Q. Now, handing you what has been marked as
Government’s Exhibit 21 for identification, do you recog-
nize that document (handing)? A. Yes, I do.
This is a demand note rather than a time note which
the others were, meaning that these loans ran for a
specific period of time.
This loan, this document here, Exhibit 21, was a loan
that was payable on demand of the bank.
Q. And by whom is it signed? A. It is signed by
Leonard James.
Q. Was that signature affixed in your presence? A.
It was signed in my presence.
Q. And that is as distinguished trom the other notes
that you have referred to? A. Yes.
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John Joseph Keating—for Government—Direct
Q. And does it bear your initials on it? <A. Yes, it
does.
Ms. Neugarten: Your Honor, at this time the
government offers Government’s Exhibit 21 for
identification in evidence as Government’s Exhibit
21.
Mr. Bender: No objection.
The Court: Received. Government’s Exhibit
21 is received.
[259] Q. Now, returning to Exhibits 14 and 15, again
the offering sheet, Government’s Exhibit 15 in evidence,
was that prepared in the same way as the other offering
sheets that you have discussed? A. Yes, it was.
Q. And it that described as a renewal or a new note?
A. New loan.
Q. And this was for an additional $100 thousand beyond
that that you previously loaned? A. It was a $100 thousand
in new money.
Q. And at that point the total indebtedness of Tri-
State to Bankers Trust was how much? A. $200 thousand.
Q. And did you have a conversation with anyone re-
garding this loan? A. Yes, I did.
Q. And do you recall with whom you had that con-
versation? A. Rubin or Deaton or both of them. And
the basic conversation went along the lines that this loan
would be used for small equipment purchases, as well as
payroll.
[260] Q. And that’s for the mining operation? A.
Yes.
Q. Now, did there come a time that Tri-State borrowed
further money? A. Yes.
20a
John Joseph Keating—for Government—Direct
Q. And handing you Government’s Exhibits 16 and 17
for identification, can you—do you recognize those docu-
ments? A. Document—or Government’s Exhibit 16 is a
note for $275 thousand dated December 6, 1972, signed by
C.-W. Deaton on behalf of Tri-State Energy.
Q. And does it bear your initials? A. Yes, it does.
Q. And do you recall whether or not Mr. Deaton signed
it in front of you? A. No, I do not. It is possible that
this could have been signed in blank.
Q. Now, directing your attention to Government’s Ex-
hibit 17 for identification. A. Government’s Exhibit 17
is an offering ticket dated December 6, 1972. It shows
$275 thousand with a maturity date of 3/6. It is a new
loan, at 7 percent, and the loans continued to be guaranteed
by Deaton, James and Rubin.
[261] We now have lien stock of $750 thousand, and it
is signed by me, Ray Ludwig, and it has the initials of
another lending officer named Jerry Weiner.
Ms. Neugarten: At this time the government
offers Government’s Mixhibits 16 and 17 for iden-
tification into evidence es Government’s Exhibits 16
and 17.
(Documents handed to Mr. Bender.)
Mr. Bender: No objection, your Honor.
The Court: Reeeived. Government’s Exhibits
16 and 17.
(Government’s Exhibits 16 and 17 were received
in evidence. )
21a
John Joseph Keating—for Government—Direct
[279] Q. As of December 6, 1972, once this note, Gov-
ernment’s Exhibit 16 for $275,000 was signed, what was
[280] the total amount of the indebtedness of Tri-State
Energy to the bank at that time? A. $475,000.
Q. Were you ever told by anyone at Tri-State the pur-
pose for the $275,000 loan? A. Yes. Rubin told me the
$275,000 loan was to buy a mining machine called an
auger.
Q. Do you recall when you had that conversation with
Mr. Rubin? <A. Some time in the beginning of Decem-
ber. It could have been on the 6th, I am not certain.
Q. In the month commencing December 6, 1972, and
running until January 6, 1973, did you have any other
occasion or did you have any occasion to speak to Mr.
Rubin? <A. Yes, several times, both in person and on
the telephone.
Q. Did you speak to Mr. Deaton at all during that
period? A. Yes. There were several occasions where
[ spoke to Mr. Deaton also. At that time the primary
contact person was Mr. Rubin.
Q. By “that time,” you meun what time? A. Decem-
ber to January of 1972 and early 1973.
Q. Handing you what have been marked as Govern-
ment [281] Exhibits 18, 19 and 20 for identification, would
you tell us what those documents are by number, please?
A. Government Exhibit 18 is an unlimited guarantee
signed by C.W. Deaton. It isn’t dated on the back. On
the front there is a stamp dated November 17, 1972,
and it is guaranteeing the debt of Tri-State Energy.
Q. Do you recognize the signatures of Mr. Deaton on
that document? <A. Yes, I do.
Q. Addressing yourself to Government Exhibit 19 for
Identification. A. Government Exhibit 19 is a Bankers
22a
John Joseph Keating—for Government—Direct
Trust form called a power of attorney to endorse se-
curities. It is signed by C.W. Deaton and dated the
27th day of November, 1972.
Q. The handwriting filling in that date, whose is that!
A, The date is my handwriting.
Q. Do you recognize the signature of Mr. Deaton? A.
Yes, I do, that’s Mr. Deaton’s signature.
Q. Addressing yourself to Government Exhibit 20 for
identification. A. Government Exhivit 20 is a corporate
resolution to transfer of securities. This is another
Bankers Trust [282] form, and it is signed by Deaton
and the signature is guaranteed by me.
Q. Is that your signature where t'1e guarantee is? A.
Yes, it is.
Q. Do you recognize the signature of Mr. Deaton? A.
Yes, I do.
Ms. Neugarten: Your Honor, at this time the
Government offers Government Exhibits 18, 19 and
20 for identification into evidence as Government
Exhibits 18, 19 and 20.
Mr. Bender: No objection.
(Government Exhibits 18, 19 and 20 were re-
ceived in evidence.)
[283] A. When you take stock as collateral, there are
two ways in which you have the right to sell it: Num-
ber 1, you can take stock powers as we did when the
American Leisure stock was delivered to the bank.
The second way you can do it is to get a blanket form
called a power of attorney to endorse securities. This
23a
John Joseph Keating—for Government—Direct
form can be used in lieu of stock powers to cover various
amounts of securities; in other words, if you have got
tons of certificates, this one form would be used in lieu
of getting an equal amount of stock powers.
It was just an effort to save paper.
The second document, corporate resolution on the trans-
fer of securities is just a document that authorizes the
bank, in other words, the corporation, meaning Tri-State
Energy, is authorizing the bank that they are giving it
the right to sell, assign, transfer or dispose of any stocks,
bonds or other securities which the bank may hold as
collateral.
Q. Before getting to the next note, was there a reason
why you obtained that power of attorney and those corp-
orate resolutions? [284] A. Yes, because we were in the
process of receiving additional collateral for the loan and
in addition to that we were promised on many occasions
that we would be receiving New York Stock Exchange
collateral in the future.
Q. Handing you Government Exhibit 21 already in evi-
dence and Government Exhibit 22 and 23 for identifica-
tion, would yeu first indicate if you recognize Government
Exhibits 22 and 23 for identification and indicate what
they are? A. Yes, Government Exhibit 22 is an offering
ticket which creates a loan. This is dated February 26,
[1973], with Tri-State Energy, Ine. being the borrower. It
is for $475,000, payable on demand. It is recorded as a
new loan and the rate of interest is 12 per cent. It con-
tinues to have the guarantees of Deaton, James and
Rubin, and there is writing on it meaning that there is lien
collateral of stocks and bonds and it is signed—not signed,
but it is initialed by me, Ray Ludwig and it has Jerry
Weiner’s initials also.
24a
John Joseph Keating—for Government—Direct
[289] Q. Did you ever receive any collateral from Tri-
State other than the American Leisure Corporation stock?
A. Yes, I did.
Q. Directing your attention—
Mr. Bender: Excuse me. Was that question him
personally or the bank?
Ms. Neugarten: The bank.
A. The bank received it.
Q. Directing your attention to Government Exhibits 24,
25, 26, 27, 28, 29 and 30 for identification, do you recognize
them? A. Yes, I do.
Q. Would you identify them by number, please? A.
Government Exhibit 24 is a stock receipt [290] form issued
by the Bankers Trust Company indicating that we had re-
ceived as collateral 1000 shares of Allstate Life Insurance
registered in the name of Tri-State Energy and 1000
shares of Allstate Life Insurance Company registered in
the name of Owen J. Oons.
Q. That is a business record of Bankers Trust Com-
pany? A. Yes, it is.
Q. And Government Exhibit 25 for identification? A.
Government Exhibit 25 is a stock certificate for 1000
shares of Allstate Life Insurance Company registered in
the name of Tri-State Energy.
(). To the best of your recollection, is this the stock cer-
tificate, this Government Exhibit 25, that Bankers Trust
actually received? <A. To the best of my knowledge, it is.
Q. And Government Exhibits 26 and 27 for identifica-
tion, what are they? A. Government Exhibit 26 and Gov-
ernment Exhibit 27 are stock certificates for Allstate Life
Insurance Company, each of them representing 500 shares
of stock, and they are both registered in the name of
Owen J. Oons.
25a
John Joseph Keating—for Government—Direct
Q. To the best of your knowledge, are these the certifi-
cates actually received by Bankers Trust Company? [291]
A. Yes.
Q. And Government Exhibits 28 and 29 for identifica-
tion? A. Government Exhibits 28 and 29 are stock powers
both signed by Owen J. Oons and guaranteed by both the
North American Planning Corporation and by the Chelsea
National Bank.
Q. Are those signatures with which you had personal
familiarity? A. No, they were not.
Q. From whom or from what company did Bankers
Trust recieve these stock powers? A. They received the
stock powers from Tri-State Energy.
Q. Directing your attention to Government Exhibit 20
for identification, or 30 for identification, rather. A. Gov-
ernment Exhibit 30 is a corporate resolution of Tri-State
Energy, Ine., signed by C.W. Deaton and Leonard James
and the signature is guaranteed by the Chelsea National
Bank, and the resolution authorized Leonard James and/
or C.W. Deaton to sign any and all papers necessary or
eaused to be arranged alone on Allstate Life Insurance
Company stock.
[292] Q. And this is a photocopy, is that correct? A.
Yes, it is.
Q. Does the signature of Mr. Deaton appear to you to
be the signature of Mr. Deaton? A. Yes, it does.
Ms. Neugarten: At this time the Government
offers Government Exhibits 24 through 30 for iden-
tification into evidence as Government Exhibits 24
through 30.
Mr. Bender: I have no objection, your Honor.
The Court: All right.
26a
John Joseph Keating—for Government—Direct
(Government Exhibits 24 through 30 were re-
ceived in evidence.)
Q. Directing your attention to the stock certificates,
Government Exhibits 25, 26 and 27 in evidence, were these
received by the bank as collateral? A. Yes, they were.
Q. And do they bear any stamp of the kind that was
on the American Leisure stock certificate? A. No, they
do not.
Q. Do you recall at what point Bankers Trust received
these three certificates as collateral? A. If I can use this
as a reference.
Q. To what are you referring? A. Exhibit 24.
[293] The bank received the stock certificates as col-
lateral on or about November 10, 1972.
Q. At what point in time would this Government Ex-
hibit 24 in evidence be prepared? A. In theory it should
be prepared on the day that the collateral is received.
Q. Was that in fact always precisely the case? A.
Not always, but I would say most of the time.
Q. If there was a variation, by about how much was
there a variation? A. One or two days, that is about it.
Q. Handing you Government Exhibit 31 for identifi-
cation, do you recognize this document? <A. Yes, I do.
Q. What is it? A. Government Exhibit 31 is a stock
receipt form issued by the bank, dated December 6, 1972,
representing that we received 100,000 shares of Manage-
ment Dynamics, Inc. stock, and it was collateral for Tri-
State Energy loan.
Q. Do you recall whether at some point Management
Dynamics, Inc., stock was received as collateral? A. Yes,
I do.
Q. Was it received? A. Yes, it was. It would have
been on or about [294] December 6, 1972.
27a
John Joseph Keating—for Government—Direct
Ms. Neugarten: At this time the Government off-
ers Government Exhibit 31 for identification into
evidence as Government Exhibit 31.
Mr. Bender: No objection.
(Government Exhibit 31 was received in evidence.)
Q. Handing the witness Government Exhibit 32 for iden-
tification, 33A through Y for identification, 35 for iden-
tification, 836A through D for identification, 37A through C
for identification, 38A and B for identification as well
as Government Exhibit 39 for identification, and going
back to them one by one and in order, would you please
identify them? A. Government Exhibit 32 is a stock
- receipt form of the Bankers Trust Company dated De-
cember 19, 1972, and it says that we have received 175,000
shares of General Investment Corporation stock registered
in the name of Tri-State Energy, Inc., and it is for col-
lateral for a loan.
Q. And was there a time that Bankers Trust in fact
received such shares of General Investment Corporation
as collateral for Tri-State? A. Yes, it would have been
on or about December [295] 19, 1972.
Q. And the next exhibit? A. The next exhibit is Gov-
ernment Exhibit 33A through Y, and they represent shares
of stock of General Investment Corporation registered in
the name of Tri-State Energy, Ine.
Q. And to the best of your knowledge, are these the
actual stock certificates that were received from Tri-State
Energy? A. Yes, they were.
Q. And the next exhibit, please. A. Government Ex-
hibit 34 is a stock receipt form of Bankers Trust indi-
cating that we have as collateral 50,000 shares of Satellite
28a
John Joseph Keating—for Government—Direct
Systems Corp. from Tri-State Energy, Inc., and it is
collateral for a loan.
Q. Do you recall that such stock was in fact received
by Bankers Trust as collateral? A. Yes, I do. It was
either on or about January 19, 1973.
Q. And the next exhibit. A. Government Exhibit 35
is a stock certificate of Satellite Systems Corporation
representing 50,000 shares registered in the name of Tri-
State Energy, Ine.
[296] Q. And to the best of your knowledge, is this
the actual certificate that Bankers Trust received? A.
Yes, it is.
Government’s Exhibit 36A through D are stock certi-
ficates for Marlin Investment Company registered in the
name of Bachelor Investments and they represent 20 thou-
sand shares of the stock.
Q. And to the best of your knowledge, are those actual
certificates which were received? <A. Yes, they are.
Q. And the next exhibit. A. The next exhibit, which
is Exhibit 37A through C, are stock powers signed by
Bachelor Investment and guaranteed by the Chemical
Bank.
Q. Did Bankers Trust receive those documents from
representatives of Tri-State? A. Yes, they did.
Q. Can you recall in connection with what stock that
was? <A. It would have been in connection with the
Marlin Investment stock.
Q. And the next exhibit. A. Government’s Exhibit 38A
is a letter of consent to pledge and hypothecate securities
signed by Bachelor [297] Investments in favor of Tri-
State Energy, Ine.
Q. And 38B? A. 38B is a form of the General Stock
Transfer Company.
29a
John Joseph Keating—for Government—Direct
Q. Do you recall whether Bankers Trust had com-
munication with General Stock Transfer about any of
this collateral? A. Yes. The Bankers Trust has at-
tempted to get the collateral registered in the name of
Tri-State Energy, Inc, because when we had received the
stock as collateral we had been told that this stock was
really Tri-State Energy stock and that it should be regis-
tered in their name and this form is the result of the
bank’s attempts to register the stock in Tri-State Energy’s
name. :
Mr. Bender: If the witness is talking about some-
one who told him something somewhere without
further identification, we would object to it and
move that that answer be stricken.
The Court: Do you recall by whom you were
told?
The Witness: Rubin or Deaton or both of them.
Q. And to what stock were you referring? A. This is
in connection with the Marlin Investment stock.
Q. And then this document, 38B was received from
[298] General Stock Transfer by Bankers Trust Com-
pany? A. Yes.
Q. And was it the normal course of Bankers Trust’s
business to receive such documents? A. Yes, if you at-
tempted to get a stock re-registered and for some reason
it couldn’t be re-registered, this would be the format
for the reply.
Q. And this was received in the normal course of
Bankers Trust’s business? A. Yes, it was.
Q. And Government’s Exhibit 39 for identification? A.
Government’s Exhibit 39 is a form dated January 30,
1973 and it is a form of Bankers Trust that is used when
30a
John Joseph Keating—for Government—Voir Dire
stocks are going to be re-registered and basically it says
that the bank is instructing that the 20 thousand shares
of Marlin Investment Company be transferred and regis-
tered in the name of Tri-State Energy, Inc.
Q. Is this a photocopy of the actual bank form? A.
Yes, it is.
Ms. Neugarten: At this time the government
offers Government’s Exhibits 32 through 39 for
identification, including in some instances subparts
A through the letters previously indicated, in evi-
dence, as the exhibits by those numbers.
[299] Mr. Bender: May I ask one question?
The Court: Yes.
Voir Dire examination by Mr. Bender:
Q. On Exhibit 38, Mr. Keating, I guess “A-B”—
Ms. Neugarten: A is the first page and B is the
second page.
Q. How did you describe that document? A. 3SA is a
letter of consent to pledge and hypothecate collateral.
Q. Did that document also give the bank authority to
sell it? A. Yes, it did.
Q. I wanted to make sure you weren’t just limiting
it to pledging and hypothecating.
Mr. Bender: Thank you, your Honor.
The Court: All right. lie
Mr. Bender: May I again ask another question?
The Court: Yes.
3la
John Joseph Keating—for Government—Direct
By Mr. Bender:
Q. On Exhibit 34 for identification which you identi-
fied as a stock receipt where the bank received 50 thousand
shares of Satellite Systems Corporation, there is some
handwriting on the face of it, “From Benjamin.” Do you
[300] know who wrote that? A. No, I do not.
[305] Q. Directing your attention back to the Allstate
stock, which I think is indicated by Government’s Ex-
hibits 25 through 27, do you recall when the bank re-
ceived it as collateral? A. The bank received the stock
as collateral on or about November 10, 1972.
Q. Did it remain as collateral when the other loans
that were dated after November 10th were made by the
bank to Tri-State HKnergy? A. This stock was collateral
for each and every loan Tri-State took from the Bankers
Trust.
Q. So it was not limited to the first loan? A. No, it
was not.
Q. What led to the bank receiving Allstate stock as
collateral? A. It was delivered to us by either Deaton
or Rubin or both of them for the bank.
Q. Had there been any request for it? A. This was
part of the overall conversations that we have had with
Tri-State from the beginning of the transaction that we
wanted to get good marketable collateral that was not
restricted.
So, this was part of that conversation. This was the
result of it.
[306] Q. Was it in response to it? <A. Yes.
Q. Do you recall who brought that collateral? A.
Deaton or Rubin or both of them.
32a
John Joseph Keating—for Government—Direct
Q. Do you personally recall being told how Tri-State
had obtained the Allstate stock which it was pledging as
collateral? A. Yes.
Mr. Bender: May we have the conversation,
your Honor, if there was a conversation, and with
whom and when?
The Court: All right.
A. I recall in conversations with Deaton and Rubin that
Tri-State had sold coal rights in their mine to this com-
pany so that they could get the stock as collateral.
Q. By “this company” do you mean Allstate? <A. Yes.
Q. Were you told anything about the stock? A. That—
Q. And if so, by whom? <A. We were told by Deaton
or Rubin or both of them that the stock was in response
to our request to get good marketable securities that was
not restricted.
Q. Had you discussed the subject of collateral with
[307] anyone from Tri-State before you received this All-
state stock? A. There were continuing conversations with
Deaton and Rubin that we wanted to get not unrestricted
stock, that our preference was to get New York Stock
Exchange collateral, and we were promised on several oc-
casions that we would be receiving unrestricted and New
York Stock Exchange collateral.
(Q. About how frequently before November 10th had
you discussed this matter? <A. Daily.
Q. With whom? A. With Deaton and Rubin.
Q. Did there come a time that you received stock of
Management Dynamics as collateral? A. Yes.
Q. When again was that? A. (No response.)
Q. Is there a document you are looking for? A. Yes,
33a
John Joseph Keating—for Government—Direct
it is a stock receipt certificate which would have the
date.
Q. If you look at Government’s Exhibit 31. A. We re-
ceived the stock of Management Dynamics on or abcut
December 6, 1972.
[308] Q. And from whom did Bankers Trust receive it?
A. Deaton or Rubin or both of them.
Q. Were you told anything by Rubin or Deaton about
Management Dynamics?
Mr. Bender: May we have, instead of leading,
whether there was any conversation, with whom and
when?
The Court: All right.
A. On or about December 6, 1972 I had conversations with
Deaton or Rubin or both of them, and again this was a—
these conversations were continuous. You have to under-
stand what was happening here. The people were coming
into the bank almost on a daily basis, each time they would
come in they would be deseribing various activities of the
coal company and the conversations always evolved to the
point of the collateral that we were holding and our de-
sires to get New York Stock Exchange collateral.
This was presented to us, and actually it was not New
York Stock Exchange collateral, it was our understanding
that this collateral was marketable and it was not re-
stricted.
Q. Were you told that? <A. Yes.
Q. Did there come a time after you received Manage-
ment Dynamics that you had another conversation [309]
concerning it? A. Yes. I believe the date was December
15, 1972. Rubin came into the bank. It was a Friday
afternoon and he indicated that they were going to swap
34a
John Joseph Keating—for Government—Direct
some coal rights and Management Dynamies stock, they
meaning Tri-State Energy, for New York Stock Exchange
collateral.
He wanted the stock released to him so that he could
effect the swap. I didn’t have the authority to make the
withdrawal of the stock then and give it to Rubin. I went
over to Ray Ludwig, I asked him for permission to re-
Jease the stock. The permission was granted. I indicated
to the general cage of the Seventh Avenue office that the
stock was to be released and it was given to Kubin.
Q. Did Mr. Rubin tell you anything about his future
intentions? <A. Yes, he said that by Monday morning we
would have New York Stock Exchange collateral in ex-
change.
Q. What day of the week was this conversation? <A. It
was a Friday.
Q. Did you receive anything from Mr. Rubin that fol-
lowing Monday? A. I received nothing at all.
Q. Do you recall talking to him that day? <A. I don’t
recall specific conversations with him.
[310] Q. Did there come a time that you did talk to him
again? A. I believe it was the following Wednesday.
Rubin came into the bank and we received additional
stock, but it was not New York Stock Exchange collateral.
He indicated that the stock was marketable, that it wasn’t
restricted, that something had gone through with or fell
through with the transaction that they were going to have
with this unnamed stock exchange company, and that they
had managed to get this other collateral, this other stock,
in exchange for it.
Q. What was this other stock that you received? A.
There would be a document—Satellite Systems Corpora-
tion stock.
Q. What is the date of that receipt? A. 1/19/73.
35a
John Joseph Keating—for Government—Direct
Q. I will check that. That’s not correct. It would have
been December 19, 1972 collateral, not the January, be-
cause it was December when he came into the bank. It
was the General Investment Corporation’s stock. It was
17,500 shares.
Q. What document is it that you are looking at to re-
fresh your recollection? A. Government’s Exhibit 32. It
is a stock receipt [311] certificate dated the 19th of De-
cember.
Q. It was the General Investment stock that Mr. Rubin
discussed that Wednesday? A. Yes.
Q. Did you make any response to Mr. Rubin? A. I was
quite disturbed because I felt that it was a breach of con-
fidence, that we were promised certain things and it just
didn’t transpire.
Q. Did you tell him that? A. Yes.
Q. Going back to that Satellite Systems that you just
had there, did there come a time that you did in fact re-
ceive Satellite Systems? A. Yes. On January 19, 1973,
on or about that date, we received 50,000 shares of Satel-
lite Systems Corporation stock.
Q. Do you recell from whom you received it? A. It
was either from Deaton or Rubin, I’m not sure which one.
Q. Did you ever receive any literature concerning it?
A. Yes. Subsequent to this date, Deaton brought into the
bank a clipping, a copy of a newspaper clipping from the
International Herald Tribune, and the clipping was [312]
a reflection of stock prices for a particular day, and cir-
cled on the clipping from the International Stock Ex-
change was bid and asked quotes of the Satellite Systems
Corporation stock, stating that it was selling for approxi-
mately $20 a share.
Q. When you say “bid and asked,” what do you mean?
A. Well, on an over-the-counter security, there is two
36a
John Joseph Keating—for Government—Direct
prices, what somebody is—there is not the usual market-
ing in the New York Stock Exchange and a particular
company or brokerage house, at least in the United States
—1 don’t know how it works over in Europe—would make
a market in the stock.
They would offer it at a certain price and somebody else
might bid at it at a certain price.
Q. When Satellite Systems was brought in, did you have
any conversation with the person who brought it to you?
A. Yes. When the stock was brought into the bank, and I
don’t know who brought it in, it was Deaton or Rubin,
the gentleman bringing it in was very happy saying, “Here
is a stock, now you don’t have to be asking all the time
for New York Stock Exchange collateral, because while
this isn’t New York Stock Exchange collateral, here is col-
lateral for you that is worth $1 million because we are at
50,000 shares, $20 a share.”
[313] He says, “This stuff is readily marketable, it
it not restricted, all the requests that you have should
be more than satisfied by this particular piece of stock.”
Q. Were you told how that Satellite Systems stock had
been obtained? <A. Yes, it was the same as each of the
other pieces of collateral that we had received, and that
was through the sale of coal inghts to the mine that
they owned in Kentucky.
Q. From whom did you receive the Marlin Investment
Company stock? A. Deaton or Rubin or both of them,
I can’t recall.
Q. When you received it, were you told anything by
the person from whom you received it? A. Yes. The
Marlin Investment Company stock was registered in the
name of Bachelor Investment Company. When the stock
was presented to the bank, we had the pledge of stock
37a
John Joseph Keating—for Government—Direct
and hypothecation delivered with it, plus stock powers
in the name of Bachelor Investment.
However, I was told that this particular stock was
really Tri-State’s property, and that we would be—we
should register it in Tri-State’s name because, again, Tri-
State had obtained the stock through the sale of coal
rights to this Bachelor Investment Company.
Q. So this hypothecation document which is 38A [314]
there, what was its significance, what was its purpose?
A. The purpose of the document was to give the bank
the right to sell in between the time that we would take
the stock in and when we would have it registered in
Tri-State’s name. In the event that we didn’t have that
document, then the stock would be worthless to us be-
cause there was nothing that would tie Bachelor Invest-
ment to the Tri-State loan.
Q. Were all of the discussions personal, face to face
discussions with Rubin or Deaton held at Bankers Trust?
A. No. There were a number of meetings that were held
in the offices of Tri-State Energy.
Q. Did you go to Tri-State Energy by yourself or
with anyone else? A. I went by myself once and I went
with Ray Ludwig once.
Q. Do you recall whom “from Tri-State was present?
A. I recall meeting with Rubin and Deaton.
Q. Do you recall in whose office? A. I was in Rubin’s
office, and I believe I was in Deaton’s office also.
Q. Do you recall when these meetings were? A. I’m
not sure of the exact date, but I know it could be some-
where in the December to January time frame [315]
basically because Rubin’s office had all Christmas cards
that he had received strung up on the wall on some
string.
38a
John Joseph Keating—for Government-—Direct
Q. Did you ever see them face to face anywhere other
than their offices or your offices? A. I had lunch with
them both, I know, on one occasion, that was some time,
I believe, in October or early November, them meaning
Rubin and Deaton.
[332] Q. Did the bank generate internal documents re-
garding Tri-State as well? <A. Yes, all correspondence or
any written information received from a client was gath-
ered and maintained in the credit file.
Q. How was the credit file actually physically put to-
gether? A. It was a binder. Any documentation that
would come into the bank would have holes punched in
it and attached to clips inside the binder.
Q. And it was the normal course of business for Bankers
Trust to compose a credit file about a loan account?
A. Any correspondence coming in on any borrowing ac-
count or commercial account would have a credit file.
Q. And the one that was made in this case, that is
the Tri-State Energy credit file, that was made in the
normal course of Bankers Trust business? <A. Yes,
it was.
[335] Q. Handing you a pasteboard bound folder, two
sides, left and right, marked in toto Government Exhibit 49
for identification, do you recognize tnis compilation of
documents? A. Yes. This is the credit file for Tri-
State Energy Incorporated.
Q. Before coming to court today have you at some
point coded or paginated the various documents in there?
A. Yes, I have.
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John Joseph Keating—for Government—Direct
Q. Will you explain how you did that? A. I coded
everything on the left side of the credit file A, num-
bered 1 through whatever the end is, and on the right
side of the credit file was numbered B- and numbers
going out after that.
[336] Q. And your sequential numbering system, for
instance, on this right side document, B-1 is the top docu-
ment and the numbers get higher as you get to the bottom
of the folder, is that correct? A. Yes. It goes from
B-1 to B-58.
(). And on the left side here we start with document
A-1 and go sequentially with the higher numbers at the
bottom of the folder, correct? A. Yes, it goes to A-44.
[338] The Court: 49 is received.
(Government Exhibit 49 was received in evi-
dence. )
The Court. Let’s proceed.
Q. Now, as I ask you questions about this document, I
am going to refer to numbers according to your coded page
numbers. When responding if you would also refer to the
coded page numbers for purposes of the record, and so
we all know where we are going— A. Okay.
[339] Q. Directing your attention to document B-2A and
also to B-3A, describe what B-2A is and hold it up to the
jury. A. B-2A is the financial statement of Tri-State
[340] Energy dated October 20, 1972, and it is prepared
by Englander & Bernstein, CPA’s.
40a
John Joseph Keating—for Government—Direct
Q. That is two pages, B2-A followed by B2-B and that
is a report? A. And 2C.
Q. And 2C then is what? <A. It is the balance sheet of
the financial statement. B-2A and B-2B are notes to the
financial statement.
Q. And B-2A and 2B are signed by Englander & Bern-
stein? A. Yes.
Q. And the date of the balance sheet? A. October 20,
1972.
(). And the date of the report? A. The date of the re-
port is October 20, 1972.
[353] Q. Turning to document B11A. <A. Document
B11A is a projection that was presented to us by Tri-
State Energy, Ine.
Q). By whom? A. That I can’t recall. It would have
been Deaton or Rubin or perhaps both of them. The Tri-
State Energy, Ine. projection shows the revenues that
could be gathered predicated on different daily gross ton-
nages of coal which would be mined from the operation,
and the projection covers the revenue, profit and capital
expenditures which would be associated with each of the
various assumptions.
Q. What significance, if any, did that document have to
you? <A. Well, just basically outlined that given the
amount of coal that Tri-State Energy, that they could
generate a substantial profit from their operations under a
number of different alternatives, starting with 500,000 tons
or 500 tons a day, up to 5,300 tons a day.
Q. Document B—strike that.
About when did you receive this projection? A. It would
have been on or about the same time that the balance sheet
was presented to us.
4la
John Joseph Keating—for Government—Direct
Q. You testified that was October 27th? [354] A. Yes.
Q. Document B45? A. Document B45 is a map that was
presented to us by Tri-State of their coal mine.
[355] Q. What were you told? A. That it was a subsi-
diary of Tri-State Energy and that they had tremendous
reserves of natural gas located in Tennessee.
Q. Did they quantify those reserves in any way? A.
Yes.
There was an outline or synopsis that was presented to
us. I believe there were 330 billion cubie feet of natural
gas with a recoverable value of $250 million.
Q. Directing your attention to Document B7. A. Docu-
ment B7 is a letter from American Leisure Corporation
to William R. Rubin dated October 27, 1972 signed by
Jack Lipschitz, President.
Q. Do you recall how you got this letter? A. Yes, it
was presented to us by Rubin or Deaton or both of them.
Q. Do you recall approximately when? <A. It would have
been in late October, early November 1972.
Q. Did you discuss it with anyone? [356] <A. Yes, I
discussed it with Mr. Rubin.
Q. What was the substance of that conversation? A.
Well, it was in connection with the American Leisure Cor-
poration stock of 400,000 shares that we had received
when the loan was first put on. Mr. Rubin had indicated
that the shares—that the restriction, the stamp that was
on the face of the shares would be removed at some fu-
ture date, and basically the letter was demonstrating that
this was going to happen.
42a
John Joseph Keating—for Government—Direct
Q. Did that ever happen? <A. No, it did not.
[3865] Q. Turning to document A-19. A. Document A-19
is a projection that was prepared by Mr. Rubin and de-
livered to me by Mr. Rubin.
Q. How do you know it was prepared by Rubin? A.
He told me he prepared it.
Q. About when did he deliver it to you? <A. It was
some time after the initial loan was made, October, late
October, early November 1972.
Q. Did you have any discussions with him concerning
it? A. Yes. This was the—as far as I was concerned,
this was one of the most important documents that I had
received from the company. What it did is it gave me
an analysis of when the company was going to generate
cash from the sale of coal and how much was going to be
generated and when the—what the cash would be used for
and what the net figure or net cash flow of the company
[366] was so that that could be used to retire any bank
loans that had been made.
Now, the document indicates that sales would be made
of $120,000 in December 1972, 240 in January of 1973,
and 180 in February of 1973.
Now, the sales that are associated with this were $300,-
000 from a Continental Coal Corporation and $240,000
from Repoca Resources.
Q. How is that indicated on the document? A. I’ve
got notes on the document which indicate that.
Q. What are those notes, if you would read them?
A‘ Three hundred thousand or three hundred “M” which
means thousand, C/C/C, 240,000 R/R.
43a
John Joseph Keating—for Government—Direct
Q. I take it C/C/C is Continental Coal? <A. That’s
right.
Q. And R/R is Repoca Resources? A. That’s correct.
[870] Q. And I believe you had just explained what
CCC and RR were. A. Right. As I stated, this was a
projection which Rubin had prepared for us indicating
how Tri-State was going to generate sufficient cash to
pay off our loans and the projection indicated that $540,-
000 would be generated in the December 1972 to February
1973 period. There would be equipment purchases of
approximately $200,000 for a net cash flow of $340,000.
The way it was explained to me by Rubin, this was on a
specific basis. In addition to this there were other items
that were outstanding that may not necessarily happen at
this particular [371] point. He wasn’t putting it in his
firm projection. But he did indicate that the firm had
been in negotiations on other fronts besides just the sale
of coal to these two companies, one of which was—he
stated there would be $200,000 received through down
payments for the sale of gas in place in Tennessee, and
the institution of driling programs for the exploration of
reserves in Scott and Morgan Counties, Tennessee.
He stated that this particular money will be coming
from a company called Ohio Gas.
A. And the last part of the projection, that outlines that
it is the opinion of the management that the cash flow
generated from operations through February 1973 will be
more than sufficient to meet a monthly [372] amortization
schedule of $100,000 per month.
44a
John Joseph Keating—for Government—Direct
In addition to the information that I already stated
there is a mention in the projection of a long term export
eontract from Roland-Werkstatten, which was a German
company that wanted to import coal from Tri-State
Energy.
[375] Q. Continuing with Document A9, what if any
[376] significance had this document to you as a lending
officer? A. At that time this was the most significant
document that I had received. When we made the loan
to Tri-State we made the loan with the overall operations
of Tri-State; the sale of coal, the sale of natural gas
being their business.
This was how cash was going to be generated to repay
the loan. This was our primary source of repayment and
this document indicated to us what, how and when they
were going to repay the loan.
[3878] Q. Directing your attention to Document A18. A.
Document A18 is a Dun & Bradstreet report on! 'Tri-
State Energy, Inc. and it is dated November 30, 1972.
Q. How did it come to be in the eredit file? A. It was
ordered on the corporation. It was standard policy to
order something like this on an account.
[379] Q. Turning to document B47A. B47A is a de-
scription of the lease on the coal properties in Kentucky.
Q. How did you come to have it. A. This was presented
to me by Rubin, Deaton or both.
45a
John Joseph Keating—for Government—Direct
Q. Do you recall if you had any discussion concerning
it? A. Well, I had discussions. As far as the substance
of the exact conversation, I can’t recall. Basically it was
an indication of overall strength of the company, how
much coal they had, and an outline of where the operations
were.
[380] Q. Turning your attention to page 47C, which is
to say B47C of that document. <A. Yes.
Q. Do you see a summary? A. Yes. The summary in-
dicates that—
Q. Could you, rather than summarize it, would you read
‘it to the jury? <A. “In summary, the three major seams,
the Amburgy, the Whitesburg and the Hazard 4, are all
high range coals with low sulfur and high BTU character-
istics. These traits make the coal especially attractive to
metalurgical coking markets, and the low sulfur ean de-
mand a premium price in the increasingly pollution con-
scious steam market of the north. The three other seams,
the Hazard 5A, the Amburgy Rider and the Elkhorn 3
are not calculated as part of the reserves. Rather, they
serve as a compensatory factor to allow for error in the
calculations of the other reserves.”
Q. Directing your attention to page 47K, that is B47E
of that document, do you see an indication at the bottom,
a statement of the total reserves? A. 24,070,547.
Q. Looking again to page 47F, do you see a figure for
total reserves? A. Yes, 24,070,547.
[381] Q. Turning to page 48B, do you see a description
of the Whitesburg seam? A. Yes.
Q. Would you read the first paragraph of that descrip-
tion? A. “Thickness ranging from 30 to 45 in avergaging
36 inches. The Whitesburg coal is good metalurgical coal
and high grade blending steam coal. It is an analysis”—
Q. And then read the numbers. A. BTU 13,500.8 per-
46a,
John Joseph Keating—for Government—Direct
cent maximum, around 8 percent, fixed carbon 52.2 per-
cent, vol. matters 35.2 percent, FSI 5.
Q. Turning to page B50. A. B50 is a letter from Otto
IX. Sebold to Tri-State Energy dated September 20, 1972.
Q. Does it state the present value of certain coal? A.
Yes. He states that it is his opinion that the present value
of the coal is $3 per ton in place.
Q. That price, $3 a ton in place, do you recall whether
that is the same or different as you discussed with respect
to that October 20th balance sheet? A. Same amount.
* * *
[382] Directing your attention to B48A, B and C, as
well as B50. A. All right.
Q. Did you have any discussion concerning those docu-
ments? A. Yes. We had discussions on the size of the
reserve, the strengths. My basic impression, after the dis-
cussions and the discussions would have been with Rubin
or Deaton or both of them, I don’t recall, is that the Tri-
State Energy had tremendous reserves of coal. Most of
[383] these reports added to—we are given as substance
that they did have good reserves of coal and that’s the
basic outline in what these documents contained.
Q. Directing your attention to document B29. A. Docu-
ment B29, it appears to be a letter from Continental Coal
Corporation to Tri-State Energy, Ine. dated December 14,
1972.
Q. How did you come to have that? <A. It was given to
me by Rubin, Deaton or both.
Q. Did you have any discussions concerning this? A.
Yes. This was presented as further authenticity of the
projections that had been presented to us previously. The
letter speaks about buying coal at $9.25 per ton. This was
47a,
John Joseph Keating—for Government—Direct
just further verification that the sales that were indicated
in those projections were going to materialize.
Q. Directing your attention to document B28, the back
side of that document. <A. B28 is a copy of a cable or a
Telex to Mr. Deaton from Ian J. Ward.
Q. Are you referring to the front, back or both of B28?
A. I am referring to the back. The date of the cable is
December 13, 1972 and the cable states that, “This will
confirm our interest in purchasing approximately 750
[384] short tons per day of your Neon Kentucky Coking
Coal per your analysis of September 5, 1972. It is my
understanding that you require U.S. dollars 12, per short
ton loaded on rail cars at Neon. I am awaiting confirma-
tion of rail rates and loading facilities and will revert to
you as soon as possible.”
Q. Do you recall how you got document B28? A. It
was delivered to me by Rubin or Deaton or both of them.
Q. Do you recall when? A. It would have been in De-
eember or January, December 1972 or January of 1973.
Q. Did you have any conversation regarding that? A.
Yes. It was just, again, a further indication of the over-
all story we had been receiving that the coal was going to
be sold.
Q. Documents B52, B53, B54 and B55. A. Document
B52 is a letter from Rapoca Resources to C. W. Deaton,
Tri-State Energy Corporation, dated November 28, 1972.
The letter states that “We are pleased to submit the fol-
lowing purchase bid on our coal located at Neon, Ken-
tucky. $12 per ton, 20,000 tons graded 2 in-0 in loaded
in ear at Neon, Kentucky per analysis of Standard Labora-
tories, Ine. Delivery of the above tonnage to begin [385]
no later than January 15, 1973.”
Q. And B54 and 55? A. B54 is a domestic bank check-
ing on Rapoca Resources, Inc., and it is dated November
48a
John Joseph Keating—for Government—Dvirect
29, 1972. It was done with the 53rd Bank. It doesn’t
say where the bank was located, but the checking out-
lines the borrowings that they were—that that bank was
loaning to Rapoca Resources. It indicated that it pro-
bably was a substantial company because they were loan-
ing them $400 thousand unsecured and 3.5 million dollars
secured.
Q. Does the document incicate the reason for this bank
check? <A. It says “Bankers Trust Company has been
asked to lend against a commitment from subject.”
Q. From that, what do you understand to be the rea-
son? A, From the analysis here is that we were pro-
bably approached to lend against the actual sale of coal
that would be transmitted between Tri-State Energy and
Rapoca Resources.
Q. Directing your attention to document B23. A. Docu-
ment B23 is a letter from a German company, Roland-
Werkstatten, to Tri-State Energy, Ine. to the attention
of Leonard James, dated December 3, 1972.
[386] Q. Do you recall how you obtained this doecn-
ment? <A. It was presented to me by Rubin, or Deaton,
or both of them.
Q. Is that the same company that is mentioned in the
projection you discussed earlier? A. Yes, it is.
Q. Did you have any discussions concerning this docu-
ment B23? A. Yes. Tri-State was going to sell the
German company coal, and the method of sale was to
be by a letter of credit. A letter of credit is basically
an instrument that facilitates international trade.
[389] Q. Directing your attention to document A11A,
through A12. A. These documents concern a proposal of
49a,
John Joseph Keating—for Government—Direct
natural gas [390] sales to Anheuser Busch. Where did
you say to end off on?
Q. Through Al2. A. It is just an analysis of what
they could make and how much gas Anheuser Busch would
be using.
Q. How did you come to get these documents? A.
These were delivered by Rubin or Deaton or both of
them.
Q. Did yeu have any discussion concerning this trans-
action? A. Yes, it was again part of the overall, the
other prong approach of Tri-State Energy. It was one
hand coal, the other part natural gas, and this particular
document was used as an example of what plants they
had, who they were talking to and again, as a further
instance of how they would be able to generate cash to
repay loans.
[391] Q. Do you recall being told anything about the
transaction with Anheuser-Busch? A. Yes. Apparently
the General Oil & Gas who was the subsidiary of Tri-
State, who owned the natural gas fields in Tennessee,—
and I am not sure of the exact terminology at this time—
it’s either that fields were dedicated or they were not
dedicated. It had something to do with that. Basically
Anheuser-Busch, if they bought the gas from General Oil
& Gas, they could buy it cheaper than from other sources.
So it would be a good deal for Anheuser-Busch and a
good deal for Tri-State. |
[395] Q. Handing you Government Exhibit 47 in evi-
dence, does it contain any information regarding General
Oil & Gas? A. Yes, it states that “General Oil & Gas is
a subsidiary of Tri-State Energy and it has approxi-
00a
John Joseph Keating—for Government—Direct
mately 330 billion cubic feet of natural gas which, at
today’s prices, would have a recoverable value of $250
million.” :
[396] A. Yes.
Q. Advancing to the next paragraph, the third full
paragraph on tie first page, would you read the first
and second sentence? A. “We have advanced 475,000 on
paper submitted by 750 in marketable securities as lien
collateral. In the near future, we expect the lien col-
lateral to be replaced by guaranteed letter of credit which
will be opened in our favor to support the loan.”
Q. I believe you testified earlier that there was a time
when a series of bounced checks or overdrafts were ex-
perienced in the Tri-State account. A. Yes.
Q. Did you discuss those bounced checks with anyone?
A. Yes, I discussed it with Rubin on several occasions.
Q. Do you recall the substance of those conversations?
A. Yes, I kept on telling Rubin that it was [397] sense-
less to be sending out checks if he didn’t have any money
in the bank because I wasn’t going to pay them. He in-
dicated that Deaton had the checkbook, Deaton was writ-
ing all of the checks and that he was really unable to
control him.
* * *
[403] Q. Directing your attention back to the eredit
file, to page B22 and B24. A. B22 is a letter from C. W.
Deaton to Onyx Investment Limited in Montreal, dated
January 20, 1973.
B24 is a listing of mining equipment.
dla
John Joseph Keating—for Government—Direct
rat
Q. Do you recall what these documents—first of all, do
you recall how you obtained these documents? <A. They
were delivered to me by Rubin or Deaton or both of
them. ;
The documents were in connection with a loan that
Tri-State was trying to get from Onyx Investments Lim-
ited, and the loan was for $2.25 million, and it would
cover the purchase of mining equipment, plus working
capital for the company.
[404] Q. And did you discuss this letter with anyone?
A. Yes, I discussed it with Rubin or Deaton or both of
them.
Q. What relation, if any, did the document B24 have
to the letter B22? A. That was the equipment listing
that the loan was covering.
Q. And this is the same company from which you had
received an inquiry, you earlier testified? A. Yes.
Q. And were you told how this equipment was to be
paid for? A. Yes, the loan basically was to be gotten by,
again, a swap of coal and this was the standard practice
that Tri-State had used to get the securities or the stocks
that we had as collateral and it was also part and parcel
of this particular transaction.
Q. Did you have any reaction to Tri-State’s suggestions
that, it was swapping its coal reserves? A. I figured
that they had plenty of coal, that it was better to get cash
than to sit on reserves, the theory being that half a pie was
better than a whole pie if you weren’t going to get any-
thing.
[410] Q. Directing your attention to document B58. A.
This is a copy of a newspaper article from the Interna-
tional Herald Tribune dated January 22, 1973.
52a
John Joseph Keating—for Government—Direct
Q. How, did the bank come to have this copy? A.
Deaton brought it into the bank. Basically, it was an
indication that the Satellite Systems Corporation stock
that had been brought or given to the bank as collateral
[411] was in fact trading at 20 to 20.50 dollars a share
as indicated in the newspaper clipping.
Q. Directing your attention to Document A7. <A. A7 is
a memo from me to William Powderly dated February
2, 1973. The document indicates that “Pursuant to a
phone conversation with Ray Ludwig, the following is a
list of the side collateral which we have in support of
our loan to the subject,” meaning Tri-State Energy.
Q. Do you recal! what occasioned your sending this
memorandum? A. Not specifically.
I know there was a conversation with Powderly on
the account and, you know, from Ludwig, he wanted
Powderly to know what collateral we had and which of the
collateral was restricted and which was marketable.
Q. Who was Mr. Powderly? A. He was vice president
in Loan Administration who had concurrent responsibility
for the office above a half million dollars.
Q. On an organizational chart, what relationship did
he bear to Mr, Ludwig? A. He was his superior for
credit purposes.
Q. And for credit purposes, would include loans; is
that correct? [412] A. Loans, right.
Q. And Document A2? A. Document A2 is a memo from
Bill Powderly to me dated February 5, 1973 on Tri-State
Energy, Inc. and the memo asks, “With respect to the
stock collateral we hold, do we have complete documen-
tation including our standard form of resolution for'
transfer of each issue? Please check this with Mr. Miller
and send me a short memo.”
53a
John Joseph Keating—for Government—Direct
Q. Directing your attention to Document B38. A. Docu-
ment B38 is a checking that was performed on All States
Life Insurance Company, dated February 6, 1973.
Q. And that is an internal bank document? <A. Yes, it
is.
Q. Does it indicate for whom this checking was per-
formed? [413] A. It was requested by me.
(). Your initials are on it? A. Yes.
(). How did they come to get there? A. I signed it.
You know, I don’t recall specifically what caused me
to get this particular investigation performed, but it was
performed. I don’t know what instituted it.
Q. And when the document reflecting the checking was
completed, it was sent to you and you initialed it? A.
Yes.
Q. Is that true for B39? <A. Yes.
Q. And the date at the top? A. February 6, 1973,
checking on General Investment Corporation.
Q. What date does that reflect? A. That would be the
date that the investigation was either made or typed
out.
(Q). And document B51? <A. B51 is an investigation on
Marlin Investment Company dated February 6, 1973.
Q. Is it again requested by you? A. Yes.
[414] Q. As indieated by your initials? A. Yes.
Q. And document B35B. <A. B385B is a checking on
American Leisure Corporation dated February 6, 1973, and
it again contains my initials.
Q. And 385A? A. 35A is a bank checking on American
Leisure Corporation dated January 16, ’73 and it was re-
quested by Mr. Ludwig and me and it indicates no ac
counts with the exception of a closed account at Chemical
Bank.
d4a
John Joseph Keating—for Government—Direct
Q. Directing your attention to document A44. A. A44
is a letter dated February 7, 1973 from me to the Inter-
national Stock Exchange in London asking for informa-
tion that might be available on the stock of Satellite Sys-
tems Corporation, including the current trading price and
whether or not it is actively traded.
Q. And what date does that bear? A. February 7, 1973.
Q. This series of checkings, both on the bank forms and
your letter, was there a reason why you requested them
or did them? A. Well, there was a reason. At this time
I don’t recall why I instituted the checkings. I have opin-
ions on why I did. There were so many things going on
at this [415] particular time.
Number one, it was—
Mr. Bender: Your Honor, may we have an an-
swer to the question, a responsive answer, rather
than an exposition?
(Question read.)
A. Yes, but I don’t recall at this time why I instituted the
checkings.
(). Had you any concerns at this time? A. Yes, I did.
At that time the account had been overdrawn. Many of
the things that were indicated in the projections had not
transpired. It was subsequent to this party that Ludwig
was present at that certain information was stated that—
Mr. Bender: I object to this. I knew we were
going to try to get this in the back way, particu-
larly after we had that side bar conference. That is
why I objected.
0a
John Joseph Keating—for Government—Direct
The Court: Yes. You have not been able to tes-
tify as to what transpired at that party, so please
do not refer to it.
A. Many things were happening that were of concern to
me at that time and all of the things which I had stated
and basically the lack of performance to date by the com-
pany in meeting its projections.
[419] Q. Directing your attention to Government’s—the
credit file, page A25. A. A25 is a request for a D & B
report on general [420] investinent dated February 9,
1973.
Q. By D & B, do you mean Dun & Bradstreet? A.
Dun & Bradstreet.
Q. For A35, what is that? A. A35 is a request for Dun
& Bradstreet report on Sagor Corporation.
Q. And A32? A. A32 is a Dun & Bradstreet Report on
[Marlin] Investment Co. dated February 12, 1973.
Q. The A36? A. A386 is a request for a Dun & Brad-
street report on Satellite Systems Corporation dated Feb-
ruary 12, 1973.
Q. No that’s the date of the request, is that correct? A.
Right.
Q. Then A37? A. A387 is the Dun & Bradstreet report
on Satellite Systems Corporation dated February 12, 1973.
Q. Now, both [Marlin] Investment Co., the subject of
A32, and Satellite, those were companies whose stock was
collateral for this loan? A. Yes, it was.
Q. Did there come a time that you received, you indi-
vidually received the Dun & Bradstreet on Satellite, [421]
document A387? A. Yes.
d6a
John Joseph Keating—for Government—Direct
Q. Do you recall about when you received it? A. Feb-
ruary or March, 1973.
Q. Did you do anything in response to it? A. Yes.
After receiving the report, I called a Mr. Benjamin who
was listed in the report as a principal of the corporation.
Q. In response to your call with Mr. Benjamin—strike
that.
Did you have a conversation with Mr. Benjamin? A.
I had a conversation with Mr. Benjamin.
Q. Then in response to that conversation with Mr. Ben-
jamin, did you do anything? <A. Yes, I called Mr. Rubin.
Q. Did you have a conversation with Mr. Rubin? A.
Yes. The substance of the conversation with Mr. Rubin
basically revolved around the conversation which I had
with Mr. Benjamin.
Q. Can you tell us what you told Mr. Rubin as you re-
eall it and what Mr. Rubin told you? A. I told Mr. Rubin
that Mr. Benjamin had said that this stock on Satellite
Systems Corporation was restricted stock. There was an
investment letter attached to the stock [422] and that it
could not be used as collateral for any loan. Mr. Rubin
told me that that is crazy, that’s been defrauded because
they had traded coal rights for the Satellite Systems stock,
and that he was going to have his attorney look into the
matter.
Q. Did you ever meet a William Hamilton? A. Yes,
I did.
Q. With whom did you meet Mr. Hamilton? A, I met
Mr. Hamilton with Mr. Rubin in the branch at 550 Seventh
Avenue.
Q. That is the Bankers Trust Branch? A. Yes.
Q. Do you recall when that was? A. It would have
been in January or February somewhere in that area
of 1973. I am not certain of the exact time.
o7a
John Joseph Keating—for Government—Direct
Q. Do you recall what conversation you had with Mr.
Rubin and Hamilton? <A. Yes. I had a conversation
with both of them and I am not sure exactly what stock
it resolved around. It either was in reference to the
Marlin Investment Co. stock or it was in reference to
Satellite System. At this time, I am not sure which
one it was in reference to.
Q. But it was one of the two? [423] A. Yes, but the
substance of the conversation was that Mr. Hamilton re-
presented himself as being the attorney for Tri-State
Energy and that he indicated that they had been de-
frauded by either Bachelor Investments or by Benjamin
of Satellite Systems because they had traded stock and
they did not have any knowledge that any of this stock
was restricted and that it was crazy. He was going to
institute a lawsuit.
Q. Directing your attention to documents A26 and 27.
A. A26 is a request for a Dun & Bradstreet on Charter
Financial Limited dated February 12, 1972 and AQ7 is
a letter dated February 8—1973, the date of the Charter
Financial request for Dun & Bradstreet. It should be
2/12/73. Document A27 is a letter to the manager of
Barclay’s Bank, 120 Broadway, New York, dated Febru-
ary 8, 1973, initialed by me asking for information on
Charter Financial Limited.
Q. Document A24? A. Document A25 is a Dun &
Bradstreet report on American Leisure Corporation dated
February 13, 1973.
Q. And document A4? A. Document A4 is a mem-
orandum dated February 22, 1973 from me to Emanuel
Miller, Associate General Counsel of [424] Bankers Trust
on Tri-State Energy. The substance of the memo asks
that for him to examine contracts covering the mineral
58a
John Joseph Keating—for Government—Direct
royalty rights of the subject firm on properties in Ken-
tucky, it’s to see if we could take an assignment and
use the mineral royalty rights as collateral for our loan.
[425] Q. Is there anything attached to that memoran-
dum? A. It is documents A5A and 5B and 5C and 5D,
5E, 5F and 5G, which is basically a copy of the rights
that Tri-State had to the coal properties.
Q. Now, how would you have gotten these attachments,
that is the copies of the rights to the coal properties.
A. It was given to me by Rubin or Deaton or both of
them. Q. There came a time when a demand note was
executed, is that correct? A. That’s correct.
Q. That was February 26, 1973? <A. That’s right.
Q. At that time, what were the options that you and
Mr. Ludwig had with respect to this loan? A. We would
call the loan at that time, we could let it—there were,
I believe, two notes that had already matured, that had
come due, and there were two notes that had yet to
mature. We could just let the notes be carried on a past
due basis and wait for whatever events to happen, or
we could take everything and put it into one neat pack-
age, that is the demand note so that there would be one
instrument of debt representing all of the $475 thousand
in loans.
Q. And was there a reason for making the choice [426]
you did? A. Normally that was the policy of the bank,
when there was a problem loan to put it on a demand
basis,
Q. At that time, had you any expectation regarding
whether or not the note would be repaid? A. T still
thought that the loan would be repaid.
Q. Why was that? A. Well, from conversations at
that time when the note was signed with James, and
d9a
John Joseph Keating—for Government—Direct
those conversations reverted around several factors that
he had brought to my attention on that day.
Number one, he said that there was a coal strike in
Kentucky, that there was coal in sidings in cars at the—
waiting to be shipped. He indicated that they were ap-
proaching the Bank of New York and First National
City Bank’s mineral group to seek out a loan.
In addition to that, they were looking for an SBA
loan from some bank in New Jersey. It was just the
litany of events that were described to me which indi-
cated that, yes, they were having problems, but they would
extricate themselves from the problems and repay the
loan.
Q. And this was on February 26, 1973? A. Yes.
Q. Did he tell you anything about the coal in [427]
Kentucky? A. He said that it was in side ears or rail-
way cars that couldn’t be shipped because there was a
coal strike.
Mr. Bender: Excuse me, your Honor, I take it
you are taking this subject to connection.
The Court: Yes.
Mr. Bender: As far as Rubin is concerned.
Q. When was the last time you saw Mr. James? A.
That day, until today or—
Q. Have you seen him today? A. Yes. He was in
the courtroom.
Q. Have you seen him anywhere else today? A. He
was in the hall speaking to Mr. Rubin.
Q). Directing your attention to document B16. <A. 16
is a subpoena from the United States Department of—
not a subpoena, an inquiry from the United States De-
60a
John Joseph Keating—for Government—Direct
partment of Justice, dated February 23, 1973 asking for
information on Intercommunications Systems, Inc. North
American Mutual Funds, Tri-State Energy Company and
C. W. Deaton, and the inquiry was received by Bankers
Trust Company.
Thexe is a time stamp on it on February 28, 1973.
Q. So that was two days after the demand note? [428]
A. Yes.
Q. Directing your attention to document Al. A. Al
is a demand letter that was sent to Mr. Leonard James
on March 5, 1973 with copies to Mr. James, Mr. Deaton
and Mr. Rubin. The document states that “This will
serve as your notice that unless our demand note for $475
thousand dated February 26, 1973 is repaid in full with-
in three business days of the date of this letter, we will
commence selling the collateral we hold without any
further separate notice.”
Q. Do you recall whether there was any response to
this letter? A. No, I don’t recall.
Q. Does it indicate carbon copies were sent? A. Yes.
Q. To whom were they sent? A. Mr. James, Mr. Deaton
and Mr. Rubin.
[429] Q. Why were carbon copies sent? <A. Because
they were the guarantors of the loan.
Q. To the best of your knowledge, was that loan repaid
in full within three days? A. No, it was not.
Q. Do you know for certain it was not? A. For cer-
tain.
Q. To the best of your knowledge, has it ever been
repaid? A. No. I believe it was charged off by the
bank.
Q. Apart from these credit checks that you had per-
formed in January and February of 1973, up to December
6, 1972, that is going back several months, had you done
6la
John Joseph Keating—for Government—Direct
any checkings with third parties, that is anyone other than
the three people from Tri-State? A. Well, there were
daily litigation checks on the individuals that were per-
formed to find out if they were being sued by anybody.
Q. What was the result of that check? A. They came
up clear.
Q. Did you do anything else? <A. I don’t believe that
I did at that particular time.
Q. Did you pull Dun & Bradstreet on the company
[430] itself? A. Dun & Bradstreet was pulled also as a
matter of course by the credit department, so that would
have been extra financial information that would be or-
dered. That didn’t have to be done at my direction.
Q. Did you ever do any checking with regard to the
accounting firm? <A. Yes, the accounting firm was checked
out also to find out what kind of accounts that they were
auditing or doing work for within Bankers Trust or any
of the other banks in New York City.
Q. This checking, rather the degree and extent of this
checking, was this normal or abnormal in your experience?
A. It wasn’t abnormal because of the nature of how the
account had come into the bank.
Q. What do you mean by that? A. Well, the account
eame to Ludwig, who was the branch manager, and he
had known Rubin as an accountant with an accounting
firm called Fred Landau & Company in the past. It was
normal, under the circumstances, that if you had a very
good reference and you were very, very familiar with
the people that were involved in this thing, that you
wouldn’t do the amount of detective work [431] that you
would if something just walked in the door.
Q. So was the checking for someone who was known
to the bank different than if someene had walked in off
the street asking for a car loan, say? A. Yes.
62a
John Joseph Keating—for Government—Direct
Q. And the reason? <A. Because of our knowledge of
the individual and respect for his judgment.
Q. To the best of your knowledge, had Mr. Rubin had
prior dealings with the bank? A. Yes. He was known
to Ludwig from his days as an accountant with Fred
Landau & Company.
Q. Directing your attention to document B26-A. A.
B26-A is a memorandum on Tri-State Energy Company
describing their operation, both in the coal and in the
natural gas areas.
Q. From whom did you get this document? A. This
would have been received from Rubin or Deaton or both
of them.
Q. Turning to the second page of this document, do you
see a discussion of General Oil & Gas? <A. Yes. There
is an analysis of their operation with specific reference to
the amount of natural gas that they had and the amount
of dollars which they believed [432] could be recovered
from the natural gas.
Q. Do you see a sentence in the middle of that second
paragraph commencing “General also has”? <A. Yes.
Q. Would you read that please, that sentence? A. “Gen-
eral also has leases and options to purchase the natural
gas located under approximately 250,000 acres in Scott
and Morgan Counties, Tennessec. Attached is a map
showing all existing pipeline and gathering systems in the
area in the proposed Morgan and Scott County System.”
Q. Before that, do you see immediately before it a sen-
tence with a certificate of convenience? A. Yes.
Q. Would you read that? A. Would you repeat that?
Q. The sentence immediately preceding the one you just
read. A. “General received a certificate of convenience
and necessity from the State of Tennessee to operate as a
public utility in the transmission transportation and pur-
63a
John Joseph Keating—for Government—Direct
chase and sale of natural gas and byproducts thereof. At-
tached release from Public Service Commission.”
Q. Directing your attention to document B31. [4383] A.
Document B31 is a copy of that Tennessee Public Service
Commission announcement stating that “General Oil &
Gas, Ine., CCN, to operators of public utility in the trans-
mission, transportation and purchase and sale of natural
gas and the byproducts thereof.”
Q. Were you ever told anything else regarding this cer-
tificate of operation? A. No, I was not.
Q. Directing your attention to document B34-A. A.
Document B34-A is a copy of a printed financial state-
ment in writing of American Leisure Corporation and sub-
sidiaries as of September 30, 1971.
Q. Do you know how you received this document? <A.
It would have been presented to us by Rubin or Deaton
or both.
Q. Does that apply to the whole series which is B34-A
through B34-E? <A. Yes, it does. It is all part of the
same financial statement.
Q. Document A31-A? A. A31-A is a Dun & Bradstreet
report on Insurance Industries, Inc., dated July 26, 1972.
Q. Do you recall how you came to receive that? A. That
was ordered by the bank, but I don’t know [4384] why it
was done.
Q. Document B41-A. A. Document B41-A is a financial
statement prepared by Dale W. Ogden, ecrtified public ac-
countant, on General Oil & Gas, Ine. as of July 31, 1972.
The letter of transmittal is dated August 25, 1972.
Q. Do you know how you came to receive it? <A. It
would be delivered to the bank by Rubin or Deaton or
both of them.
Q. Do you recall at what point? <A. Early October,
November, 1972.
64a
John Joseph Keating—for Government—Cross
Q. Directing your attention to document A3. A. Docu-
ment A3 is a subpoena from the United States District
Court, Southern District of New York, directed to Bankers
Trust Company and it was dated the 14th of March 1973,
and it asks for all records, internal memoranda, corre-
spondence and documents relating to any loans to Tri-
State Energy Corporation for the years 1972 to the date
hereof.
(Cross Examination)
[480] Q. You testified that the first note reflected a loan
of $50,000 from the bank? <A. Yes.
Q. This actually was more or less an unsecured loan for
the $50,000 wasn’t it, based pretty much upon the favor-
able background that Mr. Rubin had with the bank? A.
The note itself was an on-paper note.
Q. Excuse me, just answer the question. You will have
a chance to explain later. I think we will get along fur-
ther if you are responsive to the question. A. It was not
an unsecured loan.
Q. Did you ever indicate that this first $50,000—did
you ever indicate to any agent or any attorneys or anyone
else that this was an unsecured loan for $50,000 where
subsequently some security in the form of this restricted
stock was given to support the events? A. I don’t know
what I said to agents. I do know that that note was signed
on the 19th and on the 20th it was booked and when it
was booked we had American Leisure stock. Therefore,
the loan was not unsecured.
Q. Was the money given before the stock was received?
A. The stock was received on the 20th of October and that
is when the loan was made.
65a
John Joseph Keating—for Government—Cross
[481] Q. Is that your best recollection? A. To the best
of my recollection.
Q. That is your best recollection, that you never said
to anyone that the first note was unsecured but neverthe-
less the American Leisure restricted stock was then sent in
to support the events? A. The loan was made with Ameri-
can Leisure stock as collateral for the loan.
Q. Could you tell us, looking at your credit file—maybe
you can help us—is there anything here which indicates
that the American Leisure stock was actually received by
the bank on October 20?
Do you know without looking at that, sir, what the basis
of your information is? A. The S.R. ticket which was
one of the exhibits is dated the 20th of October, to the
best of my recollection.
Q. Is that the only thing that you go on, the fact that
it was dated October 20? A. Yes.
Q. But nothing else? You have no independent recollec-
tion of that? A. I have independent recollection also.
(Q. What is that based on? A. That the loan was made
secured by American [482] Leisure stock.
[580] Q. Would you be good enough to tell us when
the bank received American Leisure stock, according to
the stock receipt? A. That one isn’t here.
Q. I can’t hear you? A. That one isn’t here. I know
there is one. I need the number. According to the stock
receipt we received the American Leisure Corporation
stock on or about 10/20/72.
Q. On or about what date, sir? A. 10/20/72.
Q. That was the stock receipt which is the form of
stock certificate issued by the bank that you testified to
before? A. This is the stock receipt ticket.
66a
John Joseph Keating—for Government—Redirect
Q. That is exhibit— A. 10.
Q. When did you receive Allstate stock? That was
[581] 1000 shares I think you testified, in the name of
Tri-State and 1000 in the name of Albert Combs? A.
Yes. This collateral was received on or about November
10, 1972.
Q. That certificate is what number? A. 24.
Q. When did you receive the General Investment stock?
A. General Investment Corporation was received on or
about December 19, 1972.
Q. That again is from the stock receipt which is Ex-
hibit 31? A. 32.
Q. Excuse me. The stock receipt Exhibit 31 is the re-
ceipt of the stock of Management Dynamics? A. Yes,
it is. That was received on December—on or about De-
cember 6, 1972.
Q. Exhibit 34 is the stock receipt, is it not, of the bank
for the receipt of the Satellite Systems stock and that is
dated January 19, 1973? <A. Yes, it is.
Q. When was it, about what time you received the
stock certificate of Marlin Investment? That is what
you testified about this morning. A. It would have—I
can’t give you an exact date. [582] It would have been
before January 30.
Q. You testified today it was some time in January,
before January 30? <A. That’s right.
[Redirect Examination]
[591] Q. Addressing your attention to Government Ex-
hibit 65, does it indicate collateral received on the Tri-
State Energy loan? A. Yes, it does.
67a
John Joseph Keating—for Government—Redirect
Q. Does it indicate dates next to that collateral? A.
Yes, it does,
Q. What were those dates? What did you intend those
dates to mean when you prepared that document? A.
It would have been the dates that we received the stock.
Q. And was this document accurate at the time you
prepared it? A. To the best of my knowledge, it was.
Q. And what is the date listed next to Marlin Invest-
ment Company? A. January 30, 1973.
1593] Q. I believe on cross-examination you characterized
this as an on-paper note, is that correct? A. Correct.
Q. What did you mean by that? A. That is the form
that is utilized by the bank. That was the jargon that
was utilized. It is a yellow form normally associated
with an unsecured loan, [594] aithough this particular loan
was not. The reason that that note was utilized rather
than a secured note form was because we believed the
primary source of repayment was going to come from the
operations of the coal mine and the gas fields and the eol-
lateral that was taken at that time was in what we eall
side collateral or lien collateral, and that was basically
under a security agreement which was given to us in con-
nection with the loans.
(). Now, the loan itself, the first loan, Government Ex-
hibit 1 is dated October 20, is that correct? A. Correct.
Q. And it was effective that day? <A. Yes, it was.
Q. But it was granted on the 19th? A. All the paper
work was filled out and we committed on the 19th to the
loan.
Q. You had a meeting of the minutes on the 19th? A.
That’s right.
68a
John Joseph Keating—for Government—Redirect
Q. But no moneys flowed out until the 20th? A. That’s
correct.
Q. And that was the same day you received the Ameri-
ean Leisure stock? <A. Yes, I believe that is the same day
that we received the American Leisure stock.
[598] A. My understanding of the functions were that
Rubin was the financial man. He answered questions on
financial matters and spoke to the bank about financial in-
formation. Deaton was the operating man. Whenever you
would get into specifices on coal or natural gas, that is
when he would speak.
That is what my impressions were.
Q. How did you reach those impressions? A. From
conversations with both gentlemen.
Q. Do I take it your conversations with Mr. Deaton were
directed in the same or different areas from your con-
versations with Mr. Rubin? A. Most of the time differ-
ent. If they were there together then Rubin would answer
the financial questions and Deaton would answer the op-
erating questions as far as coal and gas.
Q. You testified in cross-examination that Mr. Rubin
appeared to have some relationship to financial affairs of
the company, is that correct? A. That is correct.
Q. Upon what did you base that conclusion? A. From
conversations with him on financial matters. He was the
one that I spoke to whenever there [599] was anything
of finance that had to do with Tri-State Energy.
Q. Did he appear to be knowledgeable about it? A. Yes.
Q. Do you recall being asked on cross-examination about
prior dealings of the bank with Englander & Bernstein,
the accountants? A. Yes.
69a
John Joseph Keating—for Government—Redirect
Q. Do you know whether the bank had any prior deal-
ings with Mr. Rubin? A. Yes.
Q. And did that affect the making of the loan in any
way? <A. Yes, it did.
Q. How was that? A. Well, he was known to Ray Lud-
wig, who was the office manager, the chief lending officer
of the office, and he was, to my understanding, respected
as a knowledgeable accountant.
Q. Did the bank’s knowledge of Mr. Rubin affect, in any
way, the kind of background checking done on the bor-
rower? A. Yes. We normally, if an account was being
[600] brought in by someone that was well-respected, well-
known to the bank, vou would not normally do the amount
of background checking that you would if somebody walked
in off the street or was introduced to you from someone
that you didn’t know at all.
Q. Now, did the fact that Mr. Rubin was known make it
harder or easier for Tri-State to get a loan? A. Easier.
Q. Have you personally ever dealt with Deaton or James
previous to Tri-State Energy? <A. No, I had not.
[605] Q. I believe on cross examination you were asked
if as of February 26, 1973 any of the notes were in de-
fault, do you recall that? <A. Yes.
Q. And you answered that they certainly had matured?
A. True.
Q. Is there a difference between the two? A. Default
has the connotation that the loan is more of a loan agree-
ment where you might set down certain specifics that a
company would have to live up to and if it didn’t live up
to it then you would have the right to accelerate the loan
before its maturity. These loans had matured but we still
70a
John Joseph Keating—for Government—Redirect
—they were due and payable, but we didn’t consider them
at that time to be in default. We still thought we would
get paid.
Q. Is there a reason you didn’t consider a default? A.
Because we felt we would be paid.
Q. What was the basis for that thought on your part?
A. Diseussions with the officers of Tri-State Energy.
Q. Was there anything that compelled or obliged the
bank to make the new loan or the new note evidenced by
[606] the February 26th demand note? <A. Nothing.
Q. That was discretionary? <A. Yes, it was.
Q. Could you at that point have simply let all the notes
mature? <A. Yes, we could.
Q. And at maturity, could you have demanded payment?
A. Yes, or before, if we so chose.
Q. If there was an event permitting it? A. Yes.
Q. Why again did you choose not to follow that course?
A. The normal policy of the bank when there was a work-
out loan or a problem loan was to put it on a demand
basis in one note.
Q. If there was no hope of repayment at the time, as
maturity approached, what would you have done? A. I
don’t know. I most likely, I ean only say that I probably
would have let the loans mature and sent it to the Legal
Department for collection.
Q. And sold the collateral? A. Yes.
Q. The October 20, 1972 financials, you made loans [607]
to Tri-State after you got those financials? A. Yes.
Q. And were you aware of the contents of those fi-
nancials when you made those later loans? A. Yes.
Q. And the first collateral you received was October
20th, correct? A. That is correct.
Q. And you received other collateral later, is€that cor-
rect? A. That is correct.
Tla
John Joseph Keating—for Government—Redirect
Q. And did you make or continue to make loans after
you received subsequent collateral? A. Yes, we did.
* * *
[608] Q. That projection, Document A9, had you re-
ceived it before or after the December 6, 1972 loan for
$275 thousand while it was made? A. I believe before.
Q. Did you take it into account with respect to that
December 6th loan? A. Yes.
Q. What about the November 30th $100 thousand loan?
A. I believe that I had the projection at that time and
that it would have been taken into account also.
Q. And that projection, if you turn to it, A9, the top
line, does it refer to the length of the projection? A.
Yes, it indicates that it is a three-month projection.
[618] Q. Mr. Keating, the length of maturity of these
notes to which you have testified, the three-month notes
you had, and when I say you, I mean the bank, had
the authority, did you not, in the event that checks were
bouncing to calla note? A. Yes.
Q. So that actually the maturity of the notes which
had been issued up to December 6, 1972 totaling $475
thousand, could have been called by virtue of the events
[619] which occurred at the bank to which you made
reference of alarming overdrafts by Tri-State Energy?
A. Yes, they could have been called prior to maturity.
Q. But they weren’t? A. They were not.
72a
Thomas Cox—for Government—Direct
[649] Tomas Cox, called as a witness by the Gov-
ernment, being first duly sworn, testified as follows:
Direct Examination
* * *
[680] Q. You mentioned earlier some stock. Did Mr.
Rubin tell you how Tri-State got the Allstate stock? A.
Allstate Life Insurance stock I think was obtained from
a Herbert Berg. I’m not sure just who, whether Deaton
knew Herbert Berg. But—
Mr. Bender: Again, excuse me, your Honor, is
this his own recollection or is he talking about
what Mr. Rubin said?
[681] The Witness: This is my recollection of
what Mr. Rubin told me or told us.
A. Rubin, when he was with North American Planning
Company had Bank Computer Stock and I believe the
Bank Computer had a value to it and all the other stock
that Mr. Rubin described was shell corporations, mean-
ing that they were legally incorporated, these corpora-
tions were legally set up, but they did not have any, any
assets. They had no value. They did not have a busi-
ness. They did not have any office and all they were were
names with the legal authorization to issue stock.
Q. Again, this is as Mr. Rubin told it to you? A. Now,
that is my understanding, and this is it, maybe not his
words, but these, these are what these corporations con-
sisted of. These were shell—his words were “shell cor-
porations”.
Q. Okay. Only tell us what Mr. Rubin told you. A.
It’s pretty hard to remember the exact words.
73a
Thomas Cox—for Government—Direct
The Court: Your best recollection. She is not
asking you for the exact words. Give us your best
recollection of what he said.
A. My best recollection was that these were shell cor-
porations without assets. He didn’t say without—he said,
“shell corporations.”
[682] And that they rented these stocks and buy—
Q. Who are “they”? <A. Tri-State Energy, Deaton,
James. Whether that includes Rubin or not, I don’t know.
Mainly Deaton and James. They rented it. They paid
money for the use of the stock and the purpose for rent-
ing the stock was to use it as collateral for bank loans,
and in addition to Deaton and James there was another
individual, an Owen Oons, who is going throughout the
country, Albuquerque, Florida, and he was pledging this
stock or he was using this stock as collateral to get back
loans.
Q. Which stock? A. Allstate Life Insurance. I’m not
sure about Bank Computer. I would have to look up the
names. There were several stocks. Allstate Life Insur-
ance was one. I’m not sure if they used Charter Financial.
They had two and a half million shares of Charter Fi-
nancial.
Q. As to Allstate, did he tell you how that particular
stock was obtained? A. Which one?
Q. Allstate. A. Allstate Life Insurance was rented from
a Herbert Berg.
Q. Whose word was “rented”? [683] A. Rubin’s word.
Q. Continue. A. As I say, I don’t recall who contacted
Herbert Berg or how Herbert Berg was contacted.
Q. Did he tell you anything about the transaction that
you do recall? <A. To explain it I have recollections of
Allstate Life Insurance and the other stocks that came in
74a
Thomas Cox—for Government—Dtvrect
and I have recollection from other individuals that told
me about it.
Q. Don’t tell us about that. A. Yes, but I’m trying to
separate what Rubin told me from what I know about it,
and I would say other than him mentioning Allstate Life
Insurance Company and him knowing that it is—it was
without value and that it was going to be used as col-
lateral, I don’t think I recall just exactly what it was.
Q. Did he tell you when he knew that it was rental?
A. He knew that these were valueless all along, that they
were rented stocks, yes.
Q. What do you mean by “all along”? A. Whenever
the Tri-State acquired it he knew. In May I think he
first became associated with these individuals from Tri-
State in the early part of 1972 in [684] May, and they
incorporated Tri-State Energy something like June 12 of
1972, and all these series of what they did is on paper
they would transfer millions of tons of coal in-ground
and they would purchase this stock on-paper secured by
reserves in the ground, and they would pay the individual
that had it, they would pay him in cash a certain amount
of money.
Q. Again he called this what? A. These were rented
stocks.
Q. Did he tell you anything about Satellite Systems
and Marlin Corporation stock? A. They were obtained
from a Medwin Benjamin. Medwin Benjamin, a Peter
Crosby and a William Hamilton. Somebody contacted
James, either William Hamilton or Peter Crosby, and said
that he could, the Medwin Benjamin—Peter Crosby did.
Peter Crosby called James. And Peter Crosby told him
that he had stock that he could rent, that he could use
as collateral in the bank. And those stocks were Satellite
75a
Thomas Cox—for Government—Dtvrect
Systems and the other one you just mentioned. Peter
Crosby at the time was a fugitive. And he—
Mr. Bender: I am going to object to that, your
Honor. Is this another thing—
The Court: Is this something that Mr. Rubin
[685] told you?
The Witness: Mr. Rubin told me that.
Mr. Bender: I object to it anyway, is that some-
thing that Mr. Rubin is saying that he learned in
1974, °75, °76, or whenever this man is testifying
that he interviewed Mr. Rubin? Is this an impression
we are trying to create that this man knew that
it was with Tri-State in 1972? I object to it. I
think it is improper.
Ms. Neugarten: May we ask when the witness
knew—
The Court: When did Rubin say that he knew
that Mr. Crosby was a fugitive with relation to the
activity at the bank?
The Witness: At the particular interview we
had with Mr. Rubin, Rubin knew at that inter-
view that Crosby had been a fugitive, and he knew
at the time that William Hamilton brought up the
stock or brought the stock to Tri-State Energy that
Peter Crosby was a fugitive.
(). He knew it at the time that Mr. Hamilton brought
the stock, is that what you are saying? <A. The reason
I have to think so much is because a lot of people have
told us what happened, and Mr. Rubin told us what hap-
pened, but at the time that William Hamilton brought
the stock Rubin knew that he [686] was a fugitive.
76a
Thomas Cox—for Government—Dvirect
Q. That is what Mr. Rubin told you? A. That is what
Mr. Rubin told me.
Q. Again we only want to hear what Mr. Rubin told
you, okay? A. I’m trying to separate what Mr. Rubin told
me from what other people have told me.
Q. Did Mr. Rubin tell you what the terms were for
Marlin and Satellite? A. I don’t think he did.
The Court: When you say the terms were, what
do you mean?
Ms. Neugarten: I don’t want to lead the witness
your Honor.
A. What I understand you mean by the terms is what they
had to give to get the stock, how much money they had
to give or what they had to give in return for it. Is that
it? I don’t think he know or he didn’t mention what they
gave.
Q. Going back to Allstate, did the witness tell you any-
thing about a Jerry Marshall? A. Yes, he did.
Q. Can you tell us what that—I said did the witness
tell you, I’m sorry. Did Mr. Rubin tell you anything [687]
concerning Jerry Marshall? <A. Jerry Marshall was a
stock broker that Rubin knew personally. And they had
pledged this stock at, or they were going to pledge this
stock at Bankers Trust Company and they wanted to give
a value to it, Deaton wanted to give a value to it. So
Deaton wanted a price in the pink sheets. The pink sheets
are the national—the over-the-counter market. I think the
National Quotation Service. They print the sheet. They
print the price each day of the transactions. And these
prices come out on sheets that are colored pink and they
eall them pink sheets.
Ta
Thomas Cox—for Government—Dvirect
So Rubin introduced Deaton to Jerry Marshall. Deaton
told Rubin to buy a hundred shares of stock and he gave a
check made out to cash for $2200 for the stock.
Rubin endorsed this check and he gave it to Jerry Mar-
shall, and the reason that Deaton didn’t want—let me see
—no. He asked Rubin to make out his own check because
he didn’t want Tri-State Energy connected to the sale. He
wanted this a transaction that was done by somebody that
was not related to Tri-State or that they couldn’t identify
—that anyone could not identify as to who bought the
stock, so Rubin made out his own cheek for $2200.
[688] And he gave it to Jerry Marshall with the instruc-
tions to buy 100 shares of stock. I believe the price was
$20, and that this price appeared in the pink sheets. Rubin
never received any stock for this transaction. Rubin knew
the trader, the Jerry Marshall brokerage company was a
man named Al Reeves, and Al Reeves said he never
placed an order for the stock because this stock was not
available, there was no place to buy it for one thing.
Q. This is what Mr. Rubin told you? A. That’s right.
[717] Q. Do you recall what stock it was with with which
Mr. Lipsitz was mentioned by Mr. Rubin? A. American
Leisure.
Q. Do you recall what it was that Mr. Rubin said about
American Leisure?
A. Yes, I do.
Q. Could you tell us what it is? A. Rubin said a lot of
things about American Leisure and one of the things he
said was that 400,000 shares of American Leisure stock
were brought in to Tri-State Energy through Jack Lip-
78a
Thomas Cox—for Government—Direct
sitz and Ira Blue. Lipsitz was apparently the owner of
it, and Ira Blue was the attorney. This stock was used as
collateral at the Bankers Trust Company to secure bank
loans for Tri-State Energy.
[718] Q. Did Mr. Rubin tell you what the price of that
stock had been, if you recall? A. I don’t recall the price
of the stock.
Q. Did Mr. Rubin tell you how the stock was acquired,
if you recall? A. I just recall the general way in which
all the stock was brought in which was that these were all
shell corporations and they were brought in and they
didn’t have any real—
Mr. Bender: I move to strike the answer as un-
responsive, your Honor.
The Court: In other words, you don’t remember
anything specific Mr. Rubin said, is that it?
The Witness: I remember 400,000 shares of
American Leisure were brought in to Tri-State En-
ergy. I remember that American Leisure was
placed—
The Court: Is this something Mr. Rubin told
you?
The Witness: Yes. This stock was pledged in the
bank on collateral for the loans that Tri-State In-
ergy was requiring.
* * *
[723] Q. Did Mr. Rubin tell you anything regarding an
advertisement at Satellite Systems? A. Medwin Benja-
min, I believe that’s his name, placed advertisements in
the International Herald Tribune and in that advertise-
ment he would list a series of stock and one of the stocks
that was listed, was Satellite Systems, and I believe he
79a
Thomas Cox—for Government—Direct
established the price at the last sale as $20 for that stock
and they took that advertisement—when I say “they,”
either Deaton, James or Rubin, they took that up to
Bankers Trust Company and they established the value
of Satellite Systems that was pledged with Bankers Trust
Company, as collateral, a value of $20 a share for that
stock.
[724] Q. And did Mr. Rubin tell you anything regard-
ing his opinion of that value? <A. Well, all along we
discussed this or he discussed it that these were all shell
corporations with stocks that had no inherent value—
Mr. Bender: I move to strike the answer as
unresponsive.
The Court: Can you remember what he told
you or are you telling us the substance of what he
told you or what?
The Witness: Well, in these conversations that
we had, there were 12 conversations or more, he
explained the way Tri-State Energy operated, the
way they took the stock and they went up and
secured the bank loan with the value of the stock, ~
and then he explained where the stocks came from,
what the stocks were and how values were placed
upon the stocks, how they established the value
so the bank could place a value on it, and show
that the collateral was equal to the bank loan or
greater than the bank loan.
Q. Did he tell you anything regarding his opinion of
tk. se values? A. This thing on the International Herald-
Tribune or the value of the stocks in general or what?
He [725] established the value of the stock through his
own efforts. There was a stock, I believe Allstate Life
80a
Thomas Cox—for Government—Direct
Insurance Company, and Deaton wanted to get a price
for the stock.
Mr. Bender: I object to this. I think we are
on Satellite Systems. I don’t know how we got
into Allstate. I don’t think there is any question
about Allstate at this moment, is there?
Q. Do you recall anything on Satellite Systems? A.
Only that it had a price of $20 in the International
Herald-Tribune advertisement, no; and that it was pledged
as collateral for a bank loan for Tri-State Energy.
Q. Do you recall if Mr. Rubin told you how much
Tri-State had paid for Satellite Systems? A. Yes. Satel-
lite Systems and Marlin Investments were obtained from
Medwin Benjamin, and they were the stocks that were
obtained through Peter Crosby who used William Hamil-
ton as an intermediary to deliver the stock.
The Court: Which stock is this again?
The Witness: Satellite Systems and Marlin In-
vestments. Crosby had a conversation with James
to say that he—that Medwin Benjamin had the
stocks and Benjamin was willing to let these stocks
be used as collateral for loans. Benjamin wanted,
I believe, 7 [726] per cent—he wanted a 7 per
cent rental for the stock and if it was not returned
he wanted one-half the bid price of the stock on
a certain day. So Hamilton delivered the stock
to Tri-State Energy or he wanted the stock re-
turned.
Benjamin wanted the stock returned if he didn’t
get those figures. I forget, 7 per cent of the value
8la
Thomas Cox—for Government—Direct
—anyway, Benjamin never received any money for
the stock and he got very upset and he kept call-
ing up and he wanted money for his stock.
Eventually Benjamin sent an individual up to
Tri-State Energy to enforce the demand for money
for the stock and Deaton in turn called upon some-
body else to tell this man that came up—I forget
how it was worded but anyway, to tell him not
to try to get money for the stock.
Q. Did Mr. Rubin tell you who prevailed? <A. Dea-
ton’s man prevailed.
Q. Did Mr. Rubin mention anything to you about pro-
jections? A. Yes, Rubin made the projections for the
company. He would project how much the company would
sell in a given period of time, how much revenue they
could anticipate and so forth.
[727] Q. Did Mr. Rubin tell you anything about an
Owen Oons? A. Yes, he did.
Q. Do you recall what that was? A. Owens Oons was
an attorney who was going through the United States try-
ing to get loans for Tri-State Energy and pledging the
stock that we have been talking about as collateral for the
loans.
Q. Did he indicate whether Mr Oons succeeded in get-
ting loans? A. Owen Oons succeeded, according to Rubin,
in getting somewhere between, I believe, $350,000 and
$500,000 in loans for Tri-State Energy.
Q. Did Mr. Rubin tell you from banks in what part of
the country those loans were obtained? A. One was the
Bank of Alburquerque, and he mentioned banks in Florida
and I believe another state.
82a
Thomas Cox—for Government—Direct
Q. Did Mr. Rubin tell you anything regarding stock
of a company called Management Dynamics, that you re-
call? A. He mentioned Management Dynamics, yes.
Q. Do you recall what he said? A. That was another
stock that they brought in to Tri-State Energy and I for-
get the terms, and I forget how he brought it in.
[728] Mr. Bender: How he brought the conver-
sation in or how he brought the stock in?
The Witness: The term is Rubin’s, he brought it
into Tri-State Energy, it’s not mine.
Q. Is there anything that would refresh your recollec-
tion about Management Dynamics? A. That also would
be in the notes here.
Q. Would you please take a moment to look at them.
That is Government Exhibit 66 for identification, which
are the notes you are referring to, Mr. Cox? A. The notes
I am referring to are 66 for identification, yes.
[729] I see a reference here to Management Dynamics,
and [ think it refreshes my memory of what happened
with Management Dynamics.
% ok a
All right, your recollection is refreshed. You can look
for the date later. A. Right, yes, I do.
Q. And do you recall what it was? A. Rubin said that
James brought negotiated Management Dynamics and that
is what the note said. I recall, and it should be here in
the rest of it, that Tri-State Energy bought a certain
amount of shares of Management Dynamies for $140,000.
They took Management Dynamics and they pledged it at
Bankers Trust Company.
83a
Thomas Cox—for Government—Direct
Then the company itself, Management Dynamics, could
not account for 900,000 shares so the SEC, the Securities
and Iixchange Commission, said to stop trading in the
stock.
Then since the stock became restricted, it [730] was not
good collateral at the bank. So Tri-State, either Rubin
or James, went to the president of Management Dynamics
and,—I jumped a little ahead of myself. This was gotten
through two people, Freddie Remick, and some guy named
Gottlieb, and they had a brokerage commission of $40,000,
and the value of the stock was $100,000. So the president
of Management Dynamics agreed to give them back
$100,000, but they couldn’t get the other $40,000 because
he had never received it and this was a brokerage com-
mission.
So then Rubin went back to Bankers Trust Company
and went back and saw Keating and told Keating he
wanted Management Dymanics returned to him and he
would substitute another stock for it.
Q. Did Mr. Rubin tell you the reason he gave Mr. Keat-
ing for wanting it returned? A. The reason he—that he
told Keating?
Q. Yes. A. He wanted the stock back?
Q. Yes. A. No, he didn’t explain that the trading in the
stock was stopped and I forget the reason he gave Keat-
ing, but the reason he gave us for doing this was in order
to keep the Bankers Trust Company loan in good [731]
standing, that it was not secured by collateral that was not
acceptable to the bank.
Q. I’m not sure I understand your last answer.
Is it your testimony that he told Mr. Keating that the
stock was not traded or he told Mr. Keating anything
else? A. He told Mr. Keating something else. He did not
give Keating the real reason why he wanted the stock
back.
84a
Thomas Cox—for Government—Direct
Mr. Bender: I object to that and move to strike
it out unless we can get really what the conversa-
tion was. It’s a conclusion on his part.
The Court: Is this something Mr. Rubin told
you?
The Witness: This is something that Rubin told
me.
Mr. Bender: You mean those were the words
that he told him that he didn’t give Mr. Keating
the real reason or—
The Court: Is that it?
The Witness: The word “real” may not be ap-
propriate there. He did not give Keating the rea-
son that Rubin had for taking the stock back.
sa * a
[819] Q. If you go back to page 7, isn’t it a fact that
just preceding that there are notes which indicate that he
was asked about Satellite, he was asked about Marlin,
he was asked about Hamilton, Peter Crosby; isn’t that
correct?
Isn’t that correct, sir? A. No, I—I don’t read it that
way.
Q. What’s your recollection? A. My recollection is that
they pledged Marlin Investment at Bankers Trust Com-
pany and then after they pledged it, the company Marlin
found there were 900,000 shares of stock unaccounted for
and they asked the SEC to prohibit trading in the stock
which meant that the stock then [820] pledged at Bankers
Trust was no longer good collateral for the loan. So
then Rubin went up to Bankers Trust Company, got the
stock back from Keating and substituted another stock
for that.
85a
Max Englander—for Government—Direct
Q. Mr. Cox, isn’t it a fact that Mr. Rubin told you
guys that in his opinion at the time you interviewed him
these certificates of stock were “shit”? A. That’s right.
Mr. Bender: Forgive me, your Honor, but that’s
a quote. I mean, it is right in the notes, so I
apologize to anybody who is offended by it.
Q. Isn’t that the way it appears in the notes? A. Does
that mean it’s restricted?
Q. No, but the word I used, which I am blushing at,
isn’t that what the note says? A. Yes.
[926] Max Eneianner, called as a witness on behalf of
the government, having first been duly sworn, testified
as follows:
(Direct Examination)
[939] A. The next document is Exhibit 122 which is the
pink sheet referring to the bank computer network stock
value which was circled and this was referred to in my
report, in the text of my report under “Investments, Part
2B.”
Q. Which exhibit are you referring to? A. Exhibits
96 and 97.
Q. What date is the pink sheet? A. It looks like July
12, 1972.
Q. And Exhibit 123? A. 123 refers to All States Life
Insurance Company which is the pink sheet which gives
me what you can buy the stock for and what you can sell
the stock for.
86a
Charles Leeds—for Government—Direct
Q. Can you tell its date? <A. It looks like July 12,
1972,
Q. Would you describe for us how you went about the
preparation of the July 11th balance sheet and the report
dated as of July 18, 1972, which accompanied it? A. Well,
the text is July 18th and the reason the text was not
written until July 18th is because I was waiting for the
letter from the Chelsea National Bank. That letter was
dated July 18th and that confirmed the amount of cash
that was reflected on the balance sheet. The other items
I had received on July 11th since my report was as of
that date, I used the pink sheets for the purpose of
[940] commenting what those stocks were worth as of
that day but on the balance sheet they were reflected at
cost only.
All the other items that we were going under the er-
hibits were in preparation of that July 11th report.
Q. Each of those items was supplied with the excep-
tion of the letter from Chelsea Bank, it was supplied by
Mr. Deaton? A. Yes.
Q. And the Chelsea Bank letter? A. Was signed by a
Larry L. Bornstein, Senior Vice President.
Q. And was sent directly to you? A. Yes, ma’am.
[1119] Cartes Leeps, called as a witness by the Gov-
ernment, being first duly sworn, testified as follows:
(Direct Examination)
[1120] Q. As associate general counsel of Bankers Trust
in 1973, did there come a time that you attended a meeting
87a
Charles Leeds—for Government—Direct
in May 1973, at which time Mr, C. W. Deaton was present?
A. Yes.
Q. Do you recall who else was present at that meeting?
A. Mr. Gene Brinker, who is a first vice-president of the
bank, William Powderly, who worked with Mr. Brinker,
Steven Fried, who worked in the bank’s 39th Street and
Broadway office, myself, Mr. Deaton, and that is it.
Q. Were you present from the outset of the meeting?
A. I may have arrived seconds after the commencement
of the meeting.
[1121] Q. Do you recall who did most of the talking
at that meeting? A. Mr. Deaton. * * *
* Ok os
[1127] Q. What was the occasion for this meeting? A.
Mr, Deaton was explaining that there was no possibility
of recovering any money from Tir-State Energy Corpora-
tion, which was indebted to the bank for a specific sum
of money at that time, by reason of the fact that Tri-
State did not have any assets or any collectible assets,
but that a corporation in which Tri-State had an interest,
General Oil & Gas, did have some possible assets and if
these assets were exploited, there would be a possibility of
[1128] recovering a certain amount of money to satisfy
or partially satisfy the Tri-State indebtedness to the bank.
But for this purpose Mr. Deaton had indicated that
he would require an additional sum of money and we
all assumed that that was the purpose of the meeting,
to get additional loans from the bank for assumedly
these purposes.
Q. The money, the additional monies that were being
requested for Mr. Deaton personally or for some other
Ssa
Charles Leeds—for Government—Dvrect
business? A. It wasn’t made entirely clear but I was
under the impression that he wanted to borrow these
menies through the corporate vehicle, Tri-State.
Q. As had been done before? A. Yes. He was al-
ready a guarantor for Tri-State so he was also looked
upon as personal vehicle of collection by the bank.
Q. Do you recall if there was any discussion of leases
at that meeting? A. I can’t say specifically. It is just
that at one particular time I interrupted Mr. Deaton
and I asked him whether the leases with regard to the
assets he was talking [1129] about, and I wasn’t cer-
tain at that moment just what assets he had in mind,
were still available or whether or not they had expired.
He had indicated that they did expire, but he didn’t
think there would be any problem in getting them re-
instated or reviving the leases.
Q. And what again was the date of this meeting? A.
The date was May 14, 1973.
Q. As a result of the meeting, did the bank extend
further loans to Tri-State Energy? <A. No.
Q. Did you, as of that time, commence a lawsuit against
Tri-State Energy? A. Shortly thereafter.
Q. Approximately how much money in total did the
bank recover as to the total loans it had extended to
Tri-State Energy?
Mr. Bender: I object to that as far as it being
beyond the period that we mentioned and not bind-
ing upon Mr. Rubin.
The Court: Overruled.
A. $2,500.
Q. $2,500? A. Yes.
[1130] Q. And the loans were 475 thousand? <A. Yes.
89a
John E. Pinto, Jr—for Government—Direct
[1203] Joun E. Piyto, Jr., called as a witness by tlie
Government, being first duly sworn, testified as follows:
Direct Examination
[1211] Q. Directing your attention to July, that is ad-
vancing a month from June Ist, did you ever have any
conversations regarding the financial problems and possi-
ble solutions at North American Planning? A. Yes, I
did.
Q. With whom did you have such conversations? A.
With both Mr. Goldenberg and Mr. Rubin.
Q. Can you recall if any proposals were advanced by
North American to solve its problems in July? A. Yes,
in July we received a financial statement from North
American Planning for the month end June 30, 1972,
and on that financial statement we noted that there was
an increase in the firm’s capital of approximately $190,000
and upon review of the financial statement we found that
the reason for that increase was that the firm had sub-
ordinated 10,000 shares of All States Insurance Company
of Alabama. We, at that point, had some questions about
the All States Insurance Company of Alabama from a
liquidity point of view and thereafter had conversations
both with Mr. Rubin, Mr. Goldenberg regarding that.
Q. Would you relate to us the substance of those con-
versations regarding All States? A. May I refer to my
notes on this? [1212] A. Yes, if you refer to any notes
would you indicate their number. I believe you will find
a four digit number in the corner of each. A. Okay.
This is 83615AAA,
90a
John E. Pinto, Jr—for Government—Dtirect
Q. If you, rather than reading from the notes, can
refer to them to refresh your recollection and then testify.
A. Okay. On July 14 I spoke to Mr. Goldenberg re-
garding the firm’s net capital for the period ending June
30. If the 10,000 shares of All States Insurance were
given full value the firm would have been in compliance
with the net capital rule. One of the things that you
have to consider when reviewing for net capital is the
liquidity of the assets.
The net capital basically is a liquidity rule, how rapid-
ly and how quickly can these assets be converted to cash.
In reviewing the 10,000 shares of All States I reviewed
the pink sheets to determine whether there were any
marketmakers in the security and upon reviewing I found
that there were two marketmakers in the pink sheets
and as was our standard procedure at that time for
large blocks of stock in a limited number of market-
makers we surveyed the two marketmakers to determine
how liquid this position was.
[1213] In other words, they as marketmakers and as a
marketmaker, I mean this is a broker dealer who stands
ready to buy and sell a security and he publishes his quo-
tations in what is called the pink sheets, at least at this
time we are talking about the pink sheets.
Basically the pink sheets are really an interdealer quo-
tation system. It is a place broker dealers go to publish
what their quotes are to say I am willing to buy and sell
at these prices.
So we looked at the pink sheets and found that the two
broker dealers that were in the sheets were only in on
the bid side and. the bid side means they were only looking
to buy shares.
They were not on both sides of the market.
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John E. Pinto, Jr.—for Government—Direct
We found that through conducting the survey of the two
marketmakers that there was very, very little trading ac-
tivity in the security and, as a matter of fact, we made a
determination that of the 10,000 shares of All States only
200 shares could be considered as an allowable asset for
net capital purposes.
That was brought about by the fact that between the
two marketmakers who had been in the sheets for six
weeks or so they had only done 100 shares between them.
[1214] Q. Continue with your discussions.
& * &
A. I advised Mr. Goldenberg that based on our determina-
tions as to the liquidity of the 10,000 shares of All States
that we would not be abie to give them a liquid asset
value for it and based on that determination the firm was
not in compliance with the SEC’s net capital rule for the
end of June.
The ramifications of that could have been that we would
have requested that the firm cease doing business [1215]
in securities.
Mr. Goldenberg rseponded by stating that he had two
alternatives at this point, one of which was to sell the
10,000 shares of All State back to the issuer and convert
that cash into assets for the firm or as an alternative take
the 10,000 shares of All States, pledge them as collateral
for loan at a bank and then put that money which is re-
ceived by collateralizing the loan into the firm as capital,
thereby increasing the firm’s net capital.
These were the two positions. He also raised the ques-
tion or the possibility of North American Planning’s in-
volvement with 2.5 million tons of coal. He expected some
half million dollars in some sort of commissions as a re-
sult of a sale of that coal and he said that that half mil-
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John E. Pinto, Jr.—for Government—Direct
lion would also be coming into the firm and would in-
crease the firm’s net capital.
* * *
[1219] Q. Did you discuss the All States at any other
time? A. On July 19th I spoke to Mr. Goldenberg. I
was calling to find out the relationship between Tri-State
and All States. I was advised at that point that Tri-
State had invested $1 million in All States Insurance and
in return for that Mr. Goldenberg believed the firm had
received stock and part ownership in all States Insurance.
So that according to Mr. Goldenberg, there was a defi-
nite relationship between Tri-State and All States In-
surance. The reason why I was asking the question is
based on my discussion with one of the market makers,
I determined that there were only 120 thousand shares of
All States Insurance outstanding in total. Of that 120
thousand, there were only about 1,300 that were publicly
traded in the hands of the investors.
My question came as to the marketability, not from
the point of view of liquidity at this point, but were these
restricted shares, was there any legend on these shares
that would prohibit the seller or the owners of the shares
from going into the marketplace and selling them.
So my purpose in asking the question, one of the factors
in determining whether it is restricted stock, would be
the relationship between the owner of the shares and the
[1220] issuer itself.
In this case, based on my discussions, there appeared
to have been a relationship between Tri-State and All
States Insurance.
I think that basically covers the All States.
Q. Did you discuss that possible restriction with any-
body else? A. I discussed the restriction in the trading
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John E. Pinto, Jr.—for Government—Direct
of the shares with Mr. Goldenberg. I am just looking for
the date. I discussed them with Mr. Goldenberg and
subsequently had a conversation with Mr. Rubin. On
July 19th I had this conversation with Mr. Goldenberg.
Right after that I talked to Mr. Rubin and although my
memorandum does not specifically say that I reiterated
everything that I had just discussed with Mr. Goldenberg,
my recollection of the fact is that I would have reviewed
what I had just discussed with Mr. Goldenberg because
of the relevance and importance of whether or not these
shares were restricted shares.
Q. I believe you said that your question was occasioned
by the fact that there might be only 12 or 13 hundred
shares in the hands of the public, is that correct? A. Yes,
ma’am.
Q. Did you understand that that in some way might
effect marketability? Was that your understanding at
the [1221] time? A. Yes, that would definitely have meant
that there was a very, very thinly traded market for the
shares, In other words, if there is only 12 or 13 hundred
shares in the publie’s hands that is freely tradeable, that
is the fullest extent of what can be traded without any
kind of restrictions on the sale of the securities. So that
would have severely impacted the ability to sell those
shares.
Q. Handing you what has been marked as Government’s
Exhibit 87 for identification, a photocopy of a document.
A. This is a copy of the subordination loan agreement which
was filed by North American Planning with the SEC with
a copy to the NASD dated June 30, 1972 wherein Tri-
State Energy was subordinating the 10,000 shares of the
common stock of All States Insurance Company to which
they attributed a value of $190 thousand.
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John E. Pinto, Jr.—for Government—Direct
Q. By whom does that appear to be signed? A. The
lender is C. Deaton—I can’t read the middle initial, and
the borrower for North American Planning is signed by
Eugene Goldenberg.
Ms. Neugarten: At this time the government
offers Government’s Exhibit 87 for identification
into evidence as Government’s Exhibit 87.
Mr. Bender: Is this also on background, your
[1222] Honor, or is this for the truth of the con-
tents of this agreement? If it is, I object. If it
is just for background, then I don’t see any reason
for it. I don’t know what it is put in for.
Ms. Neugarten: The government has urged
throughout the trial and the indictment urges that
All States stock was later pledged as collateral at
Bankers Trust by Tri-State, including at that point
Mr. Rubin, and that the government’s contention
is that Mr. Rubin should have known from his con-
versations with Mr. Pinto something about All
States.
This is the documentation which led to the con-
versation with Mr. Pinto. And it places a value,
according to Mr. Deaton and Mr. Goldenberg, on
the stock, of what they were telling to the NASD.
That goes in as background of a conspiracy that
starts at Tri-State weeks later, only a few weeks
later.
* * *
[1230] @. Now, is there a difference in marketability
between restricted stock and unrestricted stock? <A. Yes,
most definitely. As I mentioned previously, restricted
stock, there are many procedural steps, there are a whole
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John E. Pinto, Jr—for Government—Direct
time period for which you must hold the stock or rela-
tionship questions, all of which must be resolved before
somone can sell restricted shares.
The SEC has adopted a rule, it is Rule 144, which spe-
elfically addresses the sale of restricted securities. Freely
tradeable securities are very simple. You go to the market-
place in which the stock trades and you sell it without
any course of delays or encumbrances.
Restricted shares, that is not the case. It is a rather
involved process to sell restricted shares, and in some
cases they cannot be sold. ;
Q. Now, you mentioned pink sheets. A. Yes.
Q. Could you tell us what the pink sheets are as best
you understand? A. Pink sheets are an interdealer quo-
tation system, wherein broker-dealers, who are making
markets, as I mentioned before, broker-dealers who are
advertising their bid and asked prices, the prices at which
they are representing they are willing to buy and sell,
they put these quotations in [1231] this interdealer quo-
tation system for purposes of generating buy and sell
orders.
Q. And which is the bid and which is the asked? A.
The bid is the price at which they are willing to buy, and
the asked is the price at which they are willing to sell.
Q. And to whom are pink sheets available? A. They
are available to ail broker-dealers, I know. And I think.
you can subscribe to get pink sheets even if you are a
member of the public, if I am not mistaken. I’m not cer-
tain about that.
96a
John E. Pinto, Jr—for Government—Redirect
[1255] Redirect Examination
Q. Do you recall being asked in cross-examination, Mr.
Pinto, whether you had firmly concluded one way or an-
other whether the All States stock was restricted? A.
Yes, Ma’am.
Q. Now, what was it that led you to believe that it
might be restricted? A. During my conversations with
one of the marketmakers I determined that there were
a total of 120,000 shares in total that were outstanding
in this particular security of which only 1300 were in
the public’s hands. The fact that we were talking about
10,000 shares of All States when there were only 1300
out in the public hands, I did not come to the very
difficult mathematical conclusion that there were not enough
shares in the public hand to fill the 10,000 shares that
were being subordinated to the firm.
I, therefore, immediately raised the inquiry [1256] that
if only 1300 are in the publie’s hands, the other at least
8700 shares are not in the public hands and, therefore,
raises a question as to whether they were freely trad-
able.
In addition to that, I subsequently determined that there
was a relationship between All States Life and Tri-
State. That would raise even a further question as to
whether the shares were restricted because even if an
individual purchases on the New York Stock Exchange
a freely tradable security, but his relationship with the
issuer is of a control nature, those shares may, in
fact, become restricted by that relationship.
So both of those conclusions, the number of outstand-
ing, the number of freely tradable versus the 10,000
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Alfred Reeves—for Government—Direct
that were being subordinated and also the question at
least that was raised as to the relationship between
the issuer, All States, and the lender, Tri-State.
[1266] Atrrep Reeves, called as a witness on behalf of
the government, having first been duly sworn, testified
as follows:
Direct Examination
*, * *
[1269] Q. Now, did there come a time in October
of 1972 when you had a conversation with Jerry Mar-
shall about All States stock? A. Yes, there was.
Q. And do you recall the substance of that conver-
sation? A. As he had done in the past when he se-
lected a stock for the house to trade, he would tell
me that he had a particular stock. In this particular
case he said had a new ease for the house to trade All
States Life Insurance Company of Alabama.
He gave me a stack of papers which I will use to
file a 211 application with the National Quotations Bu-
reau in order to get the stock listed in the pink sheets.
Q. Now, did there come a time that the stock was
in fact listed at your behest in the pink sheets? A.
Yes, it was.
Q. And do you recall approximately when that was?
A. Approximately late October, 1973. I’m sorry, 1972,
I think ’72.
Q. Now, do you recall whether—that was after your
conversation with Mr. Marshall? A. I recall it to be
no more than two weeks. Normal procedure, when you
file an application with the [1270] National Quotations
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Alfred Reeves—for Government—Direct
Bureau, they do whatever analysis they would normally
do to determine whether the stock qualified for the pink
sheets, and if they did, then they immediately notify
you that it does qualify, and you are then free to
list that stock with your broker-dealer name in the pink
sheets.
Q. Now, did Mr. Marshall tell you why he wanted the
stock listed in the pink sheets? A. He said he had
an order on the stock.
Q. Did he indicate the amount? A. 100 shares.
Q. And did you have any further conversation with
him regarding that order? A. I assumed at the time
that since he had an order to buy the stock that the
correct way of putting the stock in the sheets would
be to bid for the stock, but he told me he wanted to make
a two-sided market in the stock, offering the bid—hav-
ing a bid and an offer in the stock.
Q. Now, do you recall—strike that.
Do you recall how the stock appeared the first day
it was listed in the pink sheets? A. The market was
to be 20 bid, 22 offered.
Q. And do you recall whether you had any conver-
sation at any point with Mr. Marshall regarding the
way the [1271] stock was listed in the pink sheets? A.
We talked about—actually I talked about—he told me
what to do—I took issue with him—when you put a
market in the stock, it generally indicates that you are
willing to buy and sell at the prices which you are list-
ing in the pink sheets, and I warned him of the fact
that by giving an offer of 22, that should somebody
eall up, another broker would be the type of person that
would call, and ask for a market, and I gave him 20/22,
and once I gave that market, I am obligated to sell
him 100 shares if he wishes to buy it, and should we
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Alfred Reeves—for Government—Direct
have to sell somebody 100 shares at 22, I warned him
that if the stock was not readily available in the mar-
ket, and since we were the only market makers to be
in that stock, I didn’t see, couldn’t see, where we would
be able to find 100 shares, and I warned him that he
could suffer a loss because of it, and that the firm,
since it was marginally capitalized, it could jeopardize
the net capital of the firm and perhaps cause its sus-
pension.
Q. And did he do anything in response to your advice?
A. He just said, “Leave the market at 20/22. Let’s see
what happens.”
Q. Was there ever a point at which the stock was listed
without a price by you in the pink sheets? [1272] <A. Yes.
From time to time—let me tell you the procedure that is
used to create each day’s quotation.
They provide computer cards to each firm that had the
firm’s code already punched into it. You would then write
the name of the stock and the market that you wished to
have show in the pink sheets on that. You then sent it to
the National Quotations Bureau on any given day, and
that would be the quotation you would show for the next
day in the pink sheets.
Initially, at the beginning, maybe the second, third or
fourth day, I don’t remember which, I didn’t put a quote.
I put the card in but I did not put a quote on it because
I was still apprehensive about putting a two-sided market.
In fact, I think it was the second day that we prepared
the sheets, I didn’t put a market in because I didn’t think
he fully realized the jeopardy he was putting himself in as
a firm.
The following day when the quote did not appear, he
brought it to my attention immediately, and insisted that
a two-sided quote be made at all times.
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Alfred Reeves—for Government—Direct
After that, from time to time, just through its called
order, that because of the business of a particular day, I
would forget to put all the cards in so that not only All
States would be missing but other would be missing [1273]
there were days when just the stocks that we were very
active in got filled out and sent in and the ones that were
inactive weren’t sent in, but there was no rhyme or rea-
son why the stock was listed or not listed on those par-
ticular days after the first miss.
Q. Well, did Mr. Marshall continue to instruct you to
list the stock? A. Right. Every time that I missed, he
would always bring it to my attention.
Q. And tell you to put it in again? A. Right.
Q. Now, you said that you went in on both sides of the
market. What do you mean by that? A. In the pink
sheets—let me just start from the beginning and explain
what the pink sheets are for.
There are stocks that are not listed on the New York
Stock Exchange or the American Stock Exchange or any
other exchange. Many of these companies are in effect
listed in the pink sheets, and merely what it does is to tell
ail the brokers who subscribe to the sheets that you have
an interest in a particular stock.
If the stock qualifies, the name of the stock appears
alphabetically in the sheets, and all the brokers who are
interested, either on the buy side, the sell side, or [1274]
both, are listed underneath the name of the stock.
I forgot the point I was going to make.
Q. Okay.
Now, how can
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