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1 2 ATTORNEY GENERAL STATE OF NEW YORK 3 ----------------------------------------x 4 In re 5 GOTHAM PARTNERS INVESTIGATION

6 ----------------------------------------x 7 8 9 CONTINUED EXAMINATION of May 28, 2003 10:30 a.m.

10 WILLIAM ACKMAN, held at the office of The 11 Attorney General of the State of New 12 York, 120 Broadway, New York, New York, 13 before Debbie Zaromatidis, a Shorthand 14 Reporter and Notary Public of the State 15 of New York. 16 17 18 19 1138
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1 2 APPEARANCES: 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 STATE OF NEW YORK OFFICE OF THE ATTORNEY GENERAL ELIOT SPITZER 120 Broadway New York, New York 10271 BY: ROGER WALDMAN, ESQ. LYDIE PIERRE-LOUIS, ESQ. CHARLES T. CALIENDO, ESQ. MARC MINOR, ESQ. 1140
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COVINGTON & BURLING, LLP Attorneys for Gotham Partners 1330 Avenue of the Americas New York, New York 10019 BY: AARON R. MARCU, ESQ. JENNA M. MINICUCCI, ESQ.

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2 W I L L I A M A C K M A N, resumed. 3 CONTINUED EXAMINATION 4 BY MR. WALDMAN: 5 Q. Last time you testified that

6 you met with Alice Schroeder I think 7 before the report was issued. 8 9 10 A. Q. A. Yes. Who exactly did you meet with? I met with Alice, Viney Saqi, a

11 fellow by the name of Charles -- he is 12 quoted in my report, so I could find the 13 name for you if you would like, and I 14 would say another one or two other 15 people, whose names I don't remember. 16 17 18 19 Q. A. Q. A. Did you meet at Morgan Stanley? Yes. How long did you meet? A couple of hours, two, two and 1142
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20 a half hours maybe, maybe three. 21 22 Q. A. Who set up the meeting? I contacted Alice to see if she

23 would meet with me. She agreed to meet. 24 We set up a time. 25 Q. Well, in that conversation, why

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2 did you say you wanted to meet with her? 3 A. I originally left her a

4 voicemail. I didn't reach her initially, 5 and then she called me back, left me a 6 voicemail saying that she was going to 7 look into my references, that she didn't 8 want to be part of any short seller 9 scheme, but she would check on my 10 references, and I told her to call Byron 11 Wean, who is a very well-regarded person 12 at Morgan Stanley, whom I have known for 13 years, who sort of put a word in saying 14 that she should at least take a meeting 15 with me, and that I was a legitimate 16 person, and then it was scheduled I think 17 through her secretary and at her office. 18 MR. WALDMAN: I'm sorry. Could

19 you swear in the witness again. 1144

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20 W I L L I A M

A C K M A N,

21 having first been duly sworn by a Notary 22 Public of the State of New York, was 23 examined and testified as follows: 24 Q. Mr. Ackman, you recall the

25 warnings I gave you at the beginning of

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2 the examination about possible perjury, 3 when perjury might occur, and that 4 anything you say might be used against 5 you? 6 7 A. Q. Yes. Would you like me to read them

8 again to you? 9 10 A. Q. No. So then the meeting was in the

11 morning or afternoon? 12 13 A. Q. Afternoon I think. Tell me what happened at the

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

16 remember another guy from the meeting 17 telephonically. I think his name is 18 William Wilt. He used to work for one of 19 the rating agencies. He was patched into 1146
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20 the meeting. I presented my findings on 21 MBIA. I had a draft of the report in 22 front of me, and I used it as kind of a 23 guide to walk through everything through 24 special purposes vehicles to what was in 25 the special purpose vehicles to CDOs, to

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2 meeting with the insurance department, 3 and, you know, I answered their 4 questions. I went over all the salient 5 issues about the company. 6 Q. I am going to hand you what has

7 been marked as Attorney General Exhibit 8 1, which is your report on MBIA, and ask 9 you to turn to the overview. 10 The draft that you had with

11 you, did it differ in any material 12 respect in terms of the overview of 13 opinions and conclusions? 14 A. I don't think I had written the

15 overview yet. It was kind of a 16 preliminary round draft. 17 Q. Did any part of the report in

18 draft form at that point differ 19 materially from what you published? 1148
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20

A.

I don't really know exactly

21 what stage the report was in at the time 22 I met with her. It definitely was, you 23 know, tightened up over time plus more 24 sections were added. Some sections were 25 taken out. I don't know which one I had

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2 with me when I met with her, but the 3 overview I did -- it was really the 4 last thing I did after the report was 5 written. 6 Q. You did discuss the SPVs,

7 right? 8 9 A. Q. Yes. And what did you tell her about

10 the SPVs? 11 A. I walked her through each of

12 the companies that I was able to identify 13 that had borrowed money from one of the 14 SPVs, what the basic terms of those 15 facilities were, and then brief, 16 descriptive information about each of the 17 companies, you know, their market cap, 18 what business they were in. The same 19 kinds of things that are discussed in the 1150
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20 report. 21 Q. With respect to the points you

22 made in the report, is there anything 23 that you recall now that you added with 24 respect to the SPVs after you met with 25 her?

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1 2 3 4 5 6 Q. A.

W. ACKMAN Nothing specifically, no. MR. MARCU: I am sorry. Nothing specifically that you recall? THE WITNESS: Correct. What did she or her team ask

7 questions about? 8 A. I don't remember specific

9 questions. I mean she -- we had kind 10 of an interactive presentation where 11 periodically you she might -- she or 12 someone in her group might stop me and 13 ask a question about something. 14 Q. Well, did you discuss triple A

15 at all? 16 17 A. Q. Yes. What did you tell her about

18 triple A? 19 A. That it had $3 billion of 1152

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20 commercial paper outstanding. 21 Q. And did you talk about your

22 concerns about the liquidity problems 23 that triple A might cause to the company? 24 25 A. Q. Yes. And what did you tell her?

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1 2 A.

W. ACKMAN I don't remember my specific

3 words, but I told her it had $3 billion 4 of commercial paper outstanding, and that 5 if the company had trouble rolling over 6 that commercial paper, it would I think 7 have a significant effect on their 8 business, and I also told her that I 9 didn't think that $3 billion of 10 commercial paper debt was consistent with 11 a -- I don't remember my precise words 12 to her, but I summarized the basic facts 13 of triple A, that the assets in triple A 14 were not particularly high quality 15 assets. I gave her examples. They were 16 supported by commercial paper, and I 17 thought there was significant risk as a 18 result of that. 19 Q. Did you talk about the 1154
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20 liquidity risk for MBIA that you thought 21 was created by the commercial paper? 22 23 24 A. Q. A. Yes. What did you tell her? I told her that if they

25 couldn't roll any of the commercial

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2 paper, they had to draw on the liquidity 3 facilities, and there is always a risk 4 that those facilities might not be 5 drawable, and but even if they were 6 drawable, I told her that I thought that 7 just the short-term nature of that much 8 debt coming due could put the company in 9 a very awkward position financially. 10 Q. Well, did you talk about your

11 belief that CP conduit liquidity 12 facilities typically have two outs which 13 allows banks not to fund? 14 A. I don't know if I had that

15 information when I met with her. I don't 16 remember if I told her that or not. 17 Q. You didn't have that

18 information? 19 A. I don't know if I was aware -1156

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20 I did have a conversation with Alice. I 21 don't remember if it was at that meeting 22 or later, but there was a conversation 23 with her where I did review those outs. 24 I am not sure it was at that meeting 25 because I remember -- the reason I

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2 remember that is that she offered to me 3 that this issue about a bank requesting 4 an audit of the value of the assets in 5 the SPV before they fund, that was a 6 concept that I got from her. Now, I 7 don't remember that coming up at the 8 meeting I had with her, but I do remember 9 having a conversation with her about 10 that. 11 Q. You had another conversation

12 with her between the the meeting and the 13 time the report came out? 14 15 16 17 A. Q. A. Q. That's correct. In person or on the telephone? The telephone. And who was on the telephone

18 call? 19 A. Myself and herself. 1158

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20

Q.

And is that the only

21 conversation you had with her between the 22 time you had the meeting with her and the 23 time the report came out? 24 A. I don't know if it was the only

25 conversation. There may have been more

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2 than one. I remember a specific 3 conversation. 4 Q. All right. Let's talk about

5 that specific conversation. 6 What did she say to you and

7 what did you say to her? 8 A. Well, I had -- I think I

9 called her to follow-up on the meeting, 10 and it was probably two or three days 11 after I met with her, and she told me 12 that she had called Jay Brown, the CEO of 13 MBIA, and had reviewed some of the 14 findings of my report with him, and she 15 said -- I said: Well, what is your 16 assessment of the company in light of 17 your conversation with him? 18 She said: Let's put it this

19 way: Morgan Stanley has lost confidence 1160

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20 in management, and then she gave me a 21 couple of specific examples of some of 22 the things he had said on restructurings. 23 She said that Jay called them, and she 24 thought it was almost humorous, 25 logistical refundings was his euphemism

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2 for restructuring, and then she said that 3 Morgan Stanley was more concerned about 4 the impact on the capital markets of the 5 company's failure than the failure of the 6 company itself, and those were the basic 7 subjects. 8 Q. What did you understand that

9 statement to mean? 10 A. I think that she thought that

11 the -- this company was indicative of a 12 broader issue in capital markets, that 13 there is a lot of debt that is guaranteed 14 by financial guarantors. You know, over 15 a trillion dollars of the debt in the 16 capital markets is guaranteed by three or 17 four companies, and if my analysis for 18 MBIA is correct, then if these companies 19 fail, it could have a very negative 1162
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20 effect on various subsegments of the 21 capital market. 22 Actually, she talked about --

23 in particular she talked about the impact 24 on some of the subprime issuers of debts 25 like some private lenders like auto

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2 lenders and subprime home equity lenders. 3 Q. Now, your report came out on

4 December 9? 5 6 A. Q. Yes. How long before that did you

7 have this conversation with Alice? 8 A. It was I believe in

9 mid-November. I could certainly get the 10 -- I should be able to come up with the 11 date by looking at the calendar, but I 12 met with her. It was within one to three 13 days after speaking to her, business 14 days. I don't remember exactly what day 15 the meeting was. I don't know. If we 16 met on Friday, it was Monday, Tuesday or 17 Wednesday. Something like that. 18 19 Q. A. What else did she say to you? In that conversation? 1164
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20 21

Q. A.

Yes. I asked her if she was going to

22 write on the company, and she said that 23 they were probably going to put out some 24 kind of note -- I think she told me 25 that they were putting out a note that

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2 morning on the company. I spoke to her 3 early, like 8:30, and I think that 4 morning they were putting out a report, 5 and she told me that -- you know, that 6 they had either just filed it or it would 7 be available very shortly. 8 9 10 Q. A. Q. And did they? Yes. Was that in your production to

11 us? 12 A. Yes. I asked her if -- I

13 guess I should let my lawyers answer what 14 was in the production because they 15 produced it. 16 17 18 19 MR. MARCU: If it was in the files, we produced it. I can't say specifically whether I remember this morning if we produced it, but if it 1166
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20 21 22 23 24 25

was a note that we have and didn't produce it, we will produce it. THE WITNESS: I am confident we produced it. It is -MR. MARCU: We will just go forward.

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1 2 3 Q.

W. ACKMAN THE WITNESS: Okay. Incidentally, the draft of the

4 report that was before you when you spoke 5 to Alice, was that a hard copy? 6 7 8 9 10 11 12 13 14 15 16 17 18 Q. A. Q. A. Yes. Does it still exist? If it did, we gave it to you. MR. MARCU: Just answer the question. A. That is the answer. MR. MARCU: The question was does it still exist. A. I don't know. MR. MARCU: Yes, no, or I don't know. THE WITNESS: Okay. Did you maintain a file that had

19 drafts of the report in it? 1168

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20 21

A. Q.

No, not a physical file. But did you maintain a file,

22 electronic file that had drafts of the 23 report? 24 A. I know that we had some copies

25 that were earlier versions of the report

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2 I believe that were on -- that were in 3 our electric file. 4 5 Q. A. Under what heading? Under MBIA report or company

6 analysis MBIA. 7 Q. Have you produced to us

8 everything in that file? 9 10 A. Q. Yes. Did you at any time purge that

11 file? 12 A. Get rid of earlier -- purge

13 the file. 14 15 16 17 MR. MARCU: What do you mean by "purge"? A. Q. Yes. Did you have a policy with

18 respect to keeping or deleting drafts? 19 A. I think we had -- we didn't 1170

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20 have any kind of official policy, but I 21 think we -- we generally eliminate 22 early versions of the report as we 23 replace them with more updated versions 24 of the report. 25 Q. Incidentally, did you give

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2 Alice the draft that you had? 3 4 A. Q. No, I did not. Let get back to the telephone

5 conversation. 6 7 A. Q. Sure. I think you told us that you

8 commented about restructuring. 9 10 A. Q. Yes. And that the company or Morgan

11 Stanley had lost confidence in the 12 management, and that she was more worried 13 about the effect on the capital markets 14 than on the company or words to that 15 effect. Something like that. Whatever 16 your prior testimony is will bein the 17 record. I am just trying to recall the 18 general topics. 19 A. Yes. 1172
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20 21

Q. A.

What else did you say? I asked her if she was going to

22 downgrade the stock, and she said that 23 she couldn't tell me, you know, what they 24 were going to do with respect to that, 25 and I think that is when she told me they

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2 had put out a report that morning, and 3 that I should take a look at it. 4 Q. Did she comment on any of the

5 specifics other than restructuring? 6 A. I think she gave me a -- she

7 basically told me that there were -8 she thought we were right. 9 10 Q. A. Right about what? That our assessment of MBIA was

11 correct and that nothing she learned from 12 management, you know, led her to believe 13 that we were wrong, and in fact, you 14 know, the conference they had 15 telephonically with management or her 16 call with Jay Brown had -- you know, she 17 said let's put this way: Morgan Stanley 18 has lost confidence in management. That 19 was kind of her overall aassessment. 1174
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20

Q.

I understand that was her

21 overall aassessment. 22 Did she confirm any specific

23 items in your report? 24 A. Nothing I can remember other

25 than the restructuring comment.

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1 2 3 4 5 6 Q. A. Q. A. Q.

W. ACKMAN Nothing about CDOs? No. Nothing about SPVs? No. Nothing about regulatory

7 problems? 8 9 10 11 A. Q. A. Q. No. Nothing about reserves? No. Before we shift back to the

12 meeting, you said you may have had other 13 telephone calls with her. 14 15 A. What makes you think so? Well, I definitely had more

16 telephone calls with her subsequent to 17 that call. I don't know, you know, 18 precisely when those occurred relative to 19 my meeting and my releasing the report, 1176
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20 so I definitely had calls afterwards. 21 You asked me did I speak with her from 22 that point between then and the December 23 9 release of the report. I just don't 24 remember exactly when those calls were. 25 Q. Well, tell me how many calls do

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2 you remember whether or not they were 3 subsequent. 4 A. I probably had spoken to her

5 four or five times. I would say three to 6 five times subsequent to that call I just 7 spoke about. 8 9 Q. A. The first conversation -The first conversation after

10 that? 11 Q. After that, did you call her or

12 did she call you? 13 A. I also had some E mail

14 correspondence with her, so I am -15 16 A. MR. MARCU: Could you -I am just trying to remember. I

17 don't remember, you know, the order of 18 any calls I had with her. 19 Q. What do you remember about what 1178
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20 was said in the telephone calls? 21 A. I remember she called me after

22 the Attorney General investigation was 23 announced, and she told me that she 24 wouldn't be able to speak to me any more 25 on the advice of her lawyers. She told

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2 me that she thought she might get dragged 3 into this and end up being, you know, my 4 defense in terms of providing evidence 5 that we were right, and she apologized 6 for not being able to take my calls in 7 the future. So that was one call. 8 Q. Well, we know there were no

9 calls after that, right? 10 A. That's correct. That is why it

11 was easier to remember that one. 12 Q. Well, what did she say or what

13 was said in telephone calls prior to 14 that? 15 A. I spoke to her after she

16 released her second report. She released 17 a report prior to my release. I think it 18 was called "Headline Risk Remains," and 19 it talked about Gotham releasing a 1180
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20 report. Her next report was kind of 21 "Gotham's Concerns Warranted." I spoke 22 to her prior to her release of that 23 report. Now I remember because I gave 24 her the what I would call dare to be 25 great speech.

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1 2

W. ACKMAN What I mean by that is I knew

3 she was under a lot of pressure not to 4 downgrade the stock because Wall Street 5 doesn't like to downgrade stocks, and I 6 said, you know, I tried to -- I said: 7 Look, I really want you -- I hope you 8 can write what you really believe, and 9 she assured me that she would, you know, 10 write an accurate report, and one thing 11 she said to me that I thought was kind of 12 strange is she said the Morgan Stanley 13 rating system, the way it works is 14 regardless of what you think of a 15 particular stock your rating has to 16 reflect where you think the stock will be 17 over the next 12 months or something, and 18 even if you think -- she thinks it is 19 not a great investment, if the market is 1182
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20 going to value it differently from the 21 way she thinks about it, she has to set 22 -- she has to give it a rating equal to 23 what she thinks the stock will do, 24 not -- we had a discussion about the 25 whole rating system, and we both really

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2 agreed, if that is really the case, that 3 is absurd, and she said that she was 4 lobbying at Morgan Stanley to just get 5 rid of ratings for stock because she just 6 thought they were not useful. So we had 7 a discussion about that. 8 She said to me that she did not

9 want to be the one that lit the match 10 here. Some expression like that, sort of 11 -- she said she didn't want to be the 12 catalyst for the company's failure, and 13 she gave me the impression that if 14 she -- that is where I felt that she 15 wasn't going to downgrade it because I 16 got the sense that if she -- she felt 17 that if she downgraded it, somehow she 18 would be a catalyst for the company's 19 demise. So it was that conversation, and 1184
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20 then she released a report. 21 Q. How did that conversation come

22 about; did you call her; did she call 23 you? 24 A. I mean I -- I think I

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

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2 she probably called me back. I don't 3 think I -4 5 Q. A. Why did you call her? I called her to see what she

6 thought of my report. 7 8 9 Q. A. Q. What did she say? She thought -Did you ask her what do you

10 think of my report? 11 12 13 A. Q. A. Yes. What did she say? She thought it was very well

14 done. 15 16 Q. A. That is all she said? She said that they were going

17 to be writing a piece on the -18 analyzing the report in greater detail. 19 Q. Did she say anything else? 1186
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20

A.

That is when we got into the

21 discussion about ratings. 22 Q. Now, that conversation occurred

23 shortly after within a few days of your 24 issuing a report, right? 25 A. I don't remember the exact time

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2 line. It was between the time she issued 3 her second report and the time of 4 producing my report. 5 Q. In any event, were there any

6 conversations between the time she called 7 after her meeting with management and 8 this call, which was shortly after your 9 report came out? 10 11 A. Q. I don't remember. You spoke to her subsequent to

12 that? 13 14 15 A. Q. A. I believe so, yes. When was the next occasion? I checked in with her probably

16 in January. It was before her next 17 report came out, shortly before. 18 19 Q. A. How long was that conversation? Not long. 1188
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20

Q.

Anybody on the call except you

21 and her? 22 23 A. Q. No. What did she say to you and

24 what did you say to her? 25 A. I think there were a couple of

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2 significant developments with respect to 3 MBIA and affiliated companies, 4 Americredit was going through a credit 5 crisis, and I think I called her to bring 6 those issues to her attention. I may 7 have also sent her an E mail summarizing 8 some of those points, but I don't 9 remember -- again, you could look up 10 the dates for those documents. 11 And, you know, I asked her if

12 she was going to follow-up further, and 13 then she said that -- that they 14 probably were going to write again, and 15 she was pretty cryptic about, you know, 16 what, if anything they were going to say. 17 MR. WALDMAN: Would you mark

18 this please as the next exhibit. 19 (Exhibit 14 marked for 1190

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20 identification.) 21 22 Q. (Document handed to witness.) I show you Exhibit 14 and ask

23 you if you have seen it before. 24 25 A. Q. Yes. What is this?

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1 2 A.

W. ACKMAN This is an E mail to Alice

3 Schroeder where I wrote her -- that I 4 forwarded to Henny Sender at the Wall 5 Street Journal. 6 7 Q. A. Henny Sender is who? Henny Sender is a reporter at

8 the Wall Street Journal who wrote a story 9 on MBIA. 10 Q. Now, it says, "Call me when you

11 have a chance. I am too inpatient to 12 write at the moment." 13 A. Sorry. This was an E mail from

14 Henny Sender to me of an E mail that I 15 had forwarded to her from Alice 16 Schroeder. 17 Q. Did you call Henny Sender or

18 after? 19 A. I am sure I did. We have 1192

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20 spoken many times. 21 Q. No. Did you call her in

22 response to this E mail? 23 24 A. Q. Probably. The original message, the

25 message with it is what?

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1 2 3 A. Q.

W. ACKMAN The message from her? You sent a message to Sender

4 saying FYI? 5 6 A. Q. Yes. Correct. Which sent to her your message

7 to Alice Schroeder of November 6, 2003? 8 9 A. Q. Correct. Which in turn said that very

10 few of the facts concerning the company 11 had been put in Henny Sender's column, 12 right? 13 14 A. Q. Yes. And then she sent you a message

15 "Call me when you have a chance. I am 16 too impatient to write at the moment." 17 18 19 A. Q. A. Correct. Did you call her? Yes. 1194
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20

Q.

What did you say to her and

21 what did she say to you? 22 23 24 A. Q. A. I don't know. You have no idea? I spoke to Henny Sender many

25 times. I don't --

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1 2 Q.

W. ACKMAN But this is in response to you

3 have attacked her column. You sent her 4 an FYI. She said call me when you have a 5 chance, and you don't remember any 6 discussion with her that discussed her 7 column and your comments to Schroeder 8 about it? 9 A. I don't think she -- I didn't

10 mean this as an attack on her column, and 11 I don't think she interpreted it that 12 way. 13 Q. Did you have a conversation

14 with her which dealt with your E mail to 15 Alice Schroeder? 16 A. In Henny -- I don't know. I

17 mean Henny had suggested that I call 18 Alice, so I forwarded this to Henny to 19 show her that I had contacted Alice. 1196
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20

Q.

When did she tell you or

21 suggest to you that you call Mrs. 22 Schroeder? 23 A. Probably a few weeks prior to

24 my calling her. 25 Q. How did that come up?

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1 2 A.

W. ACKMAN She had -- one of the people

3 that she had spoken to in doing her 4 analysis on MBIA was Alice Schroeder, 5 and she said that she was by far the best 6 analyst on the street on the company, and 7 she said that you might want to talk to 8 her. 9 Q. Now, the date of your E mail to

10 Alice Schroeder is November 6, right? 11 12 A. Q. Yes. Now, with this in mind, how

13 many days after this E mail did you have 14 a meeting? I call your attention to the 15 next to last or the last paragraph and 16 first sentence and second sentence which 17 says you would like to meet with her as 18 soon as possible. 19 A. It was probably within a week 1198
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20 or ten days of this E mail, and I can get 21 you the exact date from my file if you 22 would like. 23 24 25 Q. A. Q. What file? The calendar we sent you guys. Let's return to the meeting.

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1 2 3 4 5 A. Q. A. Q.

W. ACKMAN With Alice? With Alice. Okay. You told me you made a

6 presentation to her? 7 A. Her and a number of other

8 people. 9 Q. Her and a number of other

10 people? 11 A. Charles Schorin by the way is I

12 think the name of the Charles. 13 Q. You told me they asked

14 questions? 15 16 A. Q. Yes. What else do you remember about

17 the meeting? 18 A. I remember that it was -- I

19 think it probably started around 3 or 4 1200

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20 o'clock because it was dark outside by 21 the time the meeting finished. It was in 22 a conference room at Morgan Stanley. 23 There were five or six people from their 24 side of the room. There were two other 25 people from my firm there.

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1 2 3 4 Q. A. Q.

W. ACKMAN Who was that? David Klafter and Greg Lis. By the way, is Klafter still

5 employed by your firm? 6 A. He is now an employee of the

7 partnership as opposed to -- he is just 8 handling legal work for the partnership 9 directly in place of other counsel. He 10 is no longer an employee of the 11 management company, but we do -- we 12 give him office space. We pay his 13 healthcare. 14 15 16 Q. A. Q. What about Lis? No. And do you have any idea where

17 Lis works now? 18 A. He just took a job at a hedge

19 fund, the name of which I don't remember. 1202

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20 21 22 23 24

Q. A. Q. A. Q.

Do you know where he lives? Yes. Where? West End Avenue. Do you know his telephone

25 number?

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1 2 A.

W. ACKMAN 663-3524. It is his home

3 phone, but I am happy to get you a phone, 4 his contact information, if you would 5 like it. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 MR. MARCU: If you are interested in serving a subpoena, we would be happy to accept service. MR. WALDMAN: When and if you tell me that he retained you, then I will consider whether I will serve it on you. Have you been retained yet by him? MR. MARCU: When and if I tell you, you will know whether I have been retained by him. MR. WALDMAN: So I assume you have not yet been retained by him. 1204
(67 of 565)

20 21 22 23 24 25

Therefore, it would be inappropriate to serve a subpoena on you, and it might be inappropriate for you to represent him, but I will leave it to you as an attorney, the conflict situation.

1205
(68 of 565)

419

1 2 Q.

W. ACKMAN Do you remember the substance of

3 any of the questions that they asked? 4 5 A. Q. No. Do you remember anything about

6 the meeting other than you made a 7 presentation and the details you gave me 8 about the presentation and that they 9 asked questions? 10 A. I do remember at one point I

11 read a part of a transcript of a 12 conference call where Charles Schorin 13 asked a question to management about 14 whether they used fair value accounting 15 or market model, whether they -- they 16 use mark to market value in determining 17 their fair values, and they pointed out 18 to me that the person who asked the 19 question was Charles Schorin, who had 1206
(69 of 565)

20 been in the early part of the meeting and 21 had left. 22 Q. How did you come to read that

23 to them? 24 A. I read it to them because I

25 thought it was relevant to the

1207
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W. ACKMAN

2 discussion. 3 A. It was -- actually I ended up

4 quoting it in the report, so -5 Q. What was the discussion, if you

6 can remember it, about the mark to market 7 issue? 8 A. We were discussing our mark to

9 market estimate of losses on CDOs. I 10 told them how we came up with a number, 11 and then we conjectured as to why the 12 company had such smaller numbers, and it 13 was our view that they were using mark to 14 model as opposed to mark to market 15 accounting, and I quoted from the recent 16 shareholder quarterly call, which implied 17 that they were using models to come up 18 with numbers as opposed to market values. 19 Q. What about the matter of 1208
(71 of 565)

20 whether credit defaults that are not 21 synthetics should be marked to market at 22 all? 23 A. I don't believe we discussed

24 that at that meeting. 25 Q. Well, that was pretty

1209
(72 of 565)

421

W. ACKMAN

2 significant, wasn't it? 3 4 5 6 7 MR. MARCU: Are we talking about CDOs? MR. WALDMA: We are talking about CDOs. A. I guess I was much more focused

8 on the economics of their mark to market 9 issues, not too much the accounting for 10 them. So again I don't -11 Q. One changed the number

12 completely in terms of your estimated 13 loss, didn't it, quite a bit? 14 A. No. No. Their estimated

15 losses don't change whether they are 16 required to mark to market or not from an 17 economic standspoint, only from a 18 reported, GAAP or accounting standpoint. 19 My -- the reason why I went to the 1210
(73 of 565)

20 dealers to get the quotes was to see what 21 their economic loss was. I mean it is 22 possible we may have discussed the 23 accounting issue. I just don't remember 24 it coming up. 25 Q. Well, I think you testified to

1211
(74 of 565)

422

W. ACKMAN

2 me last time that your belief that CDOs 3 needed to be marked to market as well as 4 synthetics came from Alice Schroeder's 5 report? 6 A. That is one of the places where

7 it was -- where I began to focus on the 8 issue. 9 10 Q. A. What were the others? Recently I have done a lot more

11 work on this issue. 12 Q. Never mind recently. Let's

13 talk about before you issued your report. 14 A. I did very limited -- Alice

15 Schroeder was my primary source. 16 17 18 Q. A. Q. Was there any other source? No, not that I can remember. And you didn't discuss this

19 with her in your meeting? 1212

(75 of 565)

20

A.

I don't remember discussing it

21 with her in the meeting. 22 Q. What about this belief you had

23 that if commercial paper was guaranteed 24 by MBIA, the commercial paper of triple 25 A, did you talk about that at the

1213
(76 of 565)

423

1 2 meeting? 3 4 5 A. Q. A.

W. ACKMAN

No. How come? I didn't believe it was the

6 case then. 7 Q. You did not believe it was the

8 case then? 9 10 A. Q. Correct. Sometime between November 15 or

11 so and the issuance of the report on 12 December 9 you came to believe that was 13 the case? 14 15 A. Q. Correct. And how again did you come to

16 believe that was the case? 17 A. When we were fact checking the

18 report, David Klafter and Greg Lis and I 19 went through every sentence in the 1214
(77 of 565)

20 document, and David Klafter would ask me 21 what was your source for that. 22 23 24 25 MR. MARCU: No. Let's not talk about what your conversation was with him. THE WITNESS: Okay.

1215
(78 of 565)

424

1 2 A.

W. ACKMAN We would go through the

3 document, and a sentence would come up, 4 and we had a conference room with the 5 whole -- fifteen boxes worth of 6 documents, and I would get the relevant 7 source, and show it to David and Greg to 8 show that the report was correct. 9 When we got to the -- in the

10 overview where I said that they had 11 guaranteed -- in the original version of 12 the document that they had guaranteed the 13 liquidity facilities, Greg and David 14 convinced me based on the language in the 15 report, which said MBIA guarantees the 16 liquidity providers to the SPV, that that 17 language meant both the commercial paper 18 and liquidity facilities, so at that 19 point, which was I would say days before 1216
(79 of 565)

20 the release of the report, I made the 21 change. 22 Q. Before we leave the meeting, do

23 you remember anything else about what was 24 discussed in this two-hour meeting? 25 A. I mean I did most of the

1217
(80 of 565)

425

W. ACKMAN

2 talking in the meeting, and I walked 3 through the issues in the report, and 4 there were, I would say, periodic 5 questions where an issue might come up or 6 where Alice might have a comment about 7 something, but I don't really remember, 8 you know, what those questions -- other 9 than the one that I remembered about 10 Charles Schorin, I don't remember 11 specifics. 12 13 14 15 16 17 18 19 MR. WALDMAN: With your permission, there was inadvertently a line drawn on Exhibit 7, which I would like to remove. I note that. I am showing counsel Exhibit 7. MR. MARCU: You mean the pencil line in the margin there? MR. WALDMAN: Correct. 1218
(81 of 565)

20 21 22 23 24 25

MR. MARCU: I have no objection. I don't know what that document is frankly. MR. WALDMAN: Exhibit 7 is the 10 K and the part of the 10 K that has the annual report.

1219
(82 of 565)

426

1 2 3 4 5 6 7 8 9 10

W. ACKMAN MR. MARCU: I will certainly take your representation, and I have no problem with that. MR. WALDMAN: We will take a short break. (Recess taken.) BY MR. WALDMAN: Q. A. I believe -Roger, I actually remembered

11 something that Alice said at the meeting. 12 I just wanted to give it to you. 13 She said to me at the meeting

14 that her -- sort of as by way of 15 explanation, Morgan Stanley could never 16 have done the kind of work that I did on 17 MBIA because she covers 26 stocks, and as 18 a result she can't devote the resources 19 that I devoted to writing a report on 1220
(83 of 565)

20 MBIA, and she also told me I think that 21 her department was being cut back and 22 that she was losing her resources, and 23 then we had kind of had a general 24 discussion about that subject matter. 25 MR. WALDMAN: Can you read back

1221
(84 of 565)

427

1 2 3 4 Q.

W. ACKMAN where we left off before the break. (Record read.) The best you can recollect,

5 what is it that Greg said to you that 6 convinced you that guaranteed, MBIA that 7 is, guaranteed the commercial paper? 8 A. I am not certain whether it was

9 Greg or David, but one of them just went 10 to the actual language, and explained to 11 me -- by liquidity facilities, you know, 12 they asked is the commercial paper buyer 13 a liquidity provider to the SPV. I said 14 yes, and then he said then we should 15 clarify this to say both liquidity 16 facilities and the commercial paper 17 buyers. 18 19 Q. A. And what did you say? I said okay. It sounds right. 1222
(85 of 565)

20

Q.

And how long before the report

21 was published did this conversation take 22 place? 23 A. It was within a day or two or

24 three of the -- of the report being 25 issued. This was kind of our final

1223
(86 of 565)

428

W. ACKMAN

2 review of the document. 3 Q. Did you check with anybody else

4 as to whether that interpretation was 5 correct? 6 7 8 A. Q. A. No. How come? I thought it was -- the

9 interpretation was correct, and I trusted 10 Greg, and David Klafter is a lawyer. 11 Q. Let me show you Exhibit 7 and

12 ask you if you can to tell me what they 13 pointed to you or what was pointed to you 14 as the source of the interpretation? 15 A. Now, the document they gave me

16 was the actual annual report, so this is 17 a different document. 18 Q. The annual report starts I

19 believe in that document on page 29. 1224

(87 of 565)

20

Excuse me. Let me point it out

21 to you. 22 A. Actually I think that whole

23 thing is the annual report. 24 25 MR. MARCU: May I have a minute to discuss a privilege question

1225
(88 of 565)

429

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 A. Q. A. Q. A. Q.

W. ACKMAN with Mr. Ackman, please? MR. WALDMAN: Sure. MR. MARCU: We are going to step out for a second. (Witness and counsel confer outside the room.) (Witness and counsel return to the room.) MR. WALDMAN: Can you read back the question. I think there is a question pending. (Record read.) Page 7. Page 7 of the report? Of the annual report. This is page 7 of 63? Yes. Would you read the language 1226
(89 of 565)

20 that was pointed to? 21 A. Sure. This is the third full

22 paragraph. "Pursuant to insurance 23 policies issued by MBIA, all the 24 investments of triple A are 25 unconditionally irrevocably guaranteed as

1227
(90 of 565)

430

W. ACKMAN

2 to principal and interest when due. In 3 addition, full amounts due to liquidity 4 providers under various agreements are 5 unconditionally and irrevocably 6 guaranteed." 7 8 9 10 11 Q. A. Q. A. Q. That is it? Yes. That is all they pointed to? Correct. Did they discuss any other

12 paragraphs or parts of paragraphs in the 13 agreement that might cast light on the 14 issue? 15 16 17 18 19 A. No. MR. MARCU: Mr. Waldman, we are trying to be careful to preserve the attorney-client privilege and at the same time not to interfere at all 1228
(91 of 565)

20 21 22 23 24 25

with your effort to gather the facts, and I would just ask, and I appreciated your previous question a few questions ago when you asked about Greg Lis, and then Mr. Ackman actually answered by reference to both Mr. Lis,

1229
(92 of 565)

431

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

W. ACKMAN who is not a lawyer, and Mr. Klafter, who is the general counsel or was of Gotham Partners, but if we could try to, as you did, if we could try to continue to be careful about distinguishing between the conversations with lawyers and nonlawyers, it will facilitate our ability to preserve the privilege, if it is appropriate. I am not taking the position at this point that the previous conversation that you elicited was protected by the privilege, but I don't want to -- I don't want to inadvertently expose any privileged communication. So if you could take care of it in that respect, I would 1230
(93 of 565)

20 21 22 23 24 25

appreciate it. MR. WALDMAN: Well, our position is that to the extent a privilege applies, it has been waived. MR. MARCU: In what respect has it been waived?

1231
(94 of 565)

432

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

W. ACKMAN MR. WALDMAN: He has testified to the substance of the conversation and the substance of the advice, and I am now inquiring into the details. A waiver occurs when you testify as to the substance of advice given you from counsel as to that advice. MR. MARCU: I was not able to intervene because your question related to Mr. Lis, and the answer that came out related to both of them, and my point to you is that, and certainly that was not a deliberate attempt to waive the attorney-client privilege even with respect to this one conversation -MR. WALDMAN: I am not talking about that QA. I am talking about 1232
(95 of 565)

20 21 22 23 24 25

prior to that when he said Mr. Klafter and Mr. Lis convinced him. MR. MARCU: Your position is that that was a waiver of the privilege? MR. WALDMAN: Yes.

1233
(96 of 565)

433

1 2 3 4 5 6

W. ACKMAN MR. MARCU: Then you take the risk, if that was your position, and I will continue to assert the privilege as appropriate. Q. What, if anything, did Mr.

7 Klafter say in this meeting? 8 9 10 11 12 13 14 15 16 17 18 19 Q. THE WITNESS: Am I allowed to answer the question? MR. MARCU: If the question calls for legal advice, advice you got from your lawyer, then you should not answer the question. MR. WALDMAN: First of all, I haven't heard any legal advice given. MR. MARCU: How would I know what was said in the conversation? MR. WALDMAN: Fine. What did Mr. Klafter say, if 1234
(97 of 565)

20 anything, about this paragraph? 21 22 23 24 25 MR. MARCU: Objection. Instruction not to answer the question. MR. WALDMAN: Whether or not it was legal advice?

1235
(98 of 565)

434

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

W. ACKMAN MR. MARCU: I don't know what the answer would be, Mr. Waldman. MR. WALDMAN: Why don't you confer with your client and find out and then see if you are going to assert the privilege. MR. MARCU: Very well. Would you bring the exhibit with you, so we can confer, please. (Witness and counsel leave the room.).) (Witness and counsel return to the room.) MR. WALDMAN: There is a pending question. Please read it. (Record read.) MR. MARCU: I withdraw my objection and then the instruction 1236
(99 of 565)

20 21 22 23

because the question does not call for legal advice. It was imparted from Klafter to Ackman. A. Basically we went through the

24 report sentnece by sentence. When we got 25 to the portion of the report that says

1237
(100 of 565)

435

W. ACKMAN

2 MBIA guarantees liquidity providers, he 3 asked me where in that document did I use 4 to confirm that fact. I went to this 5 annual report. I showed him this 6 language, and then he asked me are the 7 commercial paper buyers liquidity 8 providers to the SPV. I said: Yes. He 9 said: Then if that is correct, then you 10 should change the language to reflect 11 that both the -- that both the 12 commercial paper buyers and that the 13 liquidity facilities are guaranteed by 14 MBIA. Greg Lis agreed with that 15 interpretation, and we changed the 16 document to reflect that fact. 17 Q. Does the draft of the document

18 that you were fact checking exist? 19 A. I don't know. 1238

(101 of 565)

20 21 22 23 24 25

MR. WALDMAN: I am going to prepare a subpoena for Mr. Klafter, and I am going to assume that you are going to represent him. We would call for his appearance tomorrow. MR. MARCU: Tomorrow?

1239
(102 of 565)

436

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

W. ACKMAN MR. WALDMAN: Tomorrow. MR. MARCU: I will accept service after I speak to Mr. Klafter, and he authorizes me to. I would be happy to get back to you very shortly. In fact, if you want to take a break, I can do that, but I don't know about the scheduling. MR. WALDMAN: No, he is going to appear tomorrow. MR. MARCU: Well, we will discuss that later. (Recess taken.) MR. WALDMAN: Mr. Marcu. MR. MARCU: I couldn't reach Mr. Klafter. MR. WALDMAN: It is our view that you cannot represent him because 1240
(103 of 565)

20 21 22 23 24 25

there is a conflict of interest between the client you represent and him, which I think I will discuss with you off the record rather than on the record, but since we had this interchange on the record about your

1241
(104 of 565)

437

1 2 3 4 5 6 7 8 9 10 11

W. ACKMAN representing him I wanted to put that on as to where we stand, and we can have a further discussion on it. MR. MARCU: I don't see any need to respond at this point except to say that the fact that I haven't responded shouldn't be construed as any agreement with that. A. Mr. Waldman -THE WITNESS: Sorry. Can I

12 speak? 13 14 15 MR. MARCU: Yes, unless it is about that subject. A. No, I just want to make sure I

16 am clear on what took place, which is 17 that as part of our kind of I will call 18 it sentence by sentence review of the 19 document David Klafter asked me where the 1242
(105 of 565)

20 evidence was for the section. I showed 21 it to him in the annual report. He asked 22 me whether, you know, commercial paper 23 buyers were liquidity providers to the 24 SPV. I told him that they were, and Greg 25 Lis agreed, and he said then you should,

1243
(106 of 565)

438

W. ACKMAN

2 you know, change the document to reflect 3 that both are guaranteed by MBIA, and I 4 agreed with the change, and I made it, as 5 did Greg. 6 7 8 9 10 11 12 13 Q. All right. MR. WALDMAN: We will have to go off the record for a minute. (Discussion held off the record.) MR. WALDMAN: Back on the record. Q. During the last day of your

14 examination, I referred to Exhibit 11, 15 which was an E mail to Henny Sender, 16 which has within it in an E mail from 17 Alice Schroeder to you, and I directed 18 your attention to the second paragraph 19 where you stated -1244
(107 of 565)

20 21 22 23 24 25

MR. MARCU: Could we have a copy of the E mail, please? Q. A. Q. A. Yes, here is Exhibit 11. This is today. No, this is a different one. No, this is the same one you

1245
(108 of 565)

439

W. ACKMAN

2 gave me today. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 same. 17 Q. In any event, I pointed last MR. MARCU: If Exhibit 11 is the same -A. This is the one I got today. MR. MARCU: What is the Bates number on it? Is it 044113? MR. WALDMAN: Right. MR. MARCU: I think that is also the one that you marked as Exhibit 14 today. I am assuming that it is identical. I don't know if it is. I am sorry. It is the same Bates number. MR. WALDMAN: Yes, it is the

18 week to the last sentence in the second 19 paragraph which talked about "Violates 1246
(109 of 565)

20 the New York State insurance 21 regulations." 22 23 A. Q. Yes. And I asked you the basis for

24 your conclusion, and you said "On the 25 basis of my and my general counsel's

1247
(110 of 565)

440

W. ACKMAN

2 analysis of the law, on the basis of 3 statements made in various research 4 reports written on the industry by 5 Moody's and other brokerage firms, and 6 most significantly based on the advice 7 that was given us by the former general 8 counsel of the New York State Insurance 9 Department, whose is name is Bonnie 10 Steinberg and who is a lawyer today at 11 Fried Frank." 12 Now, what was your analysis of

13 the law? 14 A. Well, I am not a lawyer, but

15 there is a fairly strict prohibition 16 against insurance companies generally not 17 guaranteeing -- using insurance company 18 capital to guarantee derivatives. I 19 think there is actually an outright 1248
(111 of 565)

20 prohibition. A credit derivative is a 21 derivative. 22 MBIA guarantees those

23 derivatives through an SPV called 24 LaCrosse Financial Products. LaCrosse 25 Financial Products is described as an

1249
(112 of 565)

441

W. ACKMAN

2 orphan subsidiary, which means that the 3 equity of this orphan subsidiary is owned 4 by a nominee or charity, but that entity 5 itself does not have the financial 6 wherewithal to provide the guarantees for 7 these derivatives. So, you know, it is 8 my -- my understanding was this was 9 just a -- actually someone referred to 10 it as a fig leaf. You know, MBIA is -11 their insurance company guarantees these 12 derivatives. There is an intermediary 13 entity that doesn't have sufficient net 14 worth or capacity to provide the 15 guarantees. So in my view it is a fairly 16 clear violation of the law, certainly the 17 spirit of the law, and, you know, whether 18 it -- you know, the technical elements 19 of the law, I am not the right person to 1250
(113 of 565)

20 ask. 21 Q. And then I asked you what

22 Bonnie Steinberg had told youm and there 23 was an objection on privileged grounds. 24 What I want to ask you now is

25 did she advise you in writing or orally?

1251
(114 of 565)

442

1 2 3 4 5 A. Q. A. Q.

W. ACKMAN Orally. By telephone or in person? By telephone. Did you ever pay her for

6 providing that advice? 7 A. I don't know, but I suspect

8 that -9 10 11 12 13 14 15 MR. MARCU: That is it. You don't know. MR. MARCU: Could we go off the record for a moment. (Discussion held off the record.) Q. Did you ever retain her to

16 provide services, legal services to the 17 company? 18 19 A. Q. We attempted to. Tell me about that. 1252
(115 of 565)

20

A.

When we originally called her,

21 we were contacting her to get her. She 22 had been recommended to us as an expert 23 in New York State Insurance Law, and her 24 having been the prior general counsel we 25 thought it was a good idea, and we

1253
(116 of 565)

443

W. ACKMAN

2 brought her this issue. I guess David 3 Klafter and I contacted her, and she gave 4 us her kind of initial reaction of the 5 issue. 6 7 8 9 10 A. MR. MARCU: I don't want you to go into any of the substance of the conversation. THE WITNESS: I understand. And she said she wanted to think

11 about it, and she called back I think 12 David and told him what she thought, and 13 then we had a call with her where she 14 proposed to -15 16 17 18 MR. MARCU: That is -THE WITNESS: It is not giving advice or anything. A. She was going to come with us to

19 a meeting. She was going to come with us 1254

(117 of 565)

20 to a meeting that we had scheduled with 21 the New York State Insurance Department, 22 and she knew the people who we were 23 scheduled to meet with, and she thought 24 it would enhance our credibility. 25 I think we spoke to her on

1255
(118 of 565)

444

W. ACKMAN

2 Friday, and I think our meeting was the 3 following week, and the day before the 4 meeting she called I guess David Klafter 5 and told him that she could not represent 6 us. 7 8 9 10 11 12 13 14 15 16 17 18 19 Q. MR. MARCU: Were you on that call? THE WITNESS: No, this is what David Klafter told me. MR. MARCU: That is enough. What did David Klafter tell you? THE WITNESS: It wasn't legal advice. It wasn't as far as I know. You want me to tell you what it is first? MR. MARCU: Yes, I don't know what he said. Whisper it in my ear, so we can stop wasting time. 1256
(119 of 565)

20 21 22 A.

(Witness confers with counsel.) MR. MARCU: All right. After consulting with some of

23 her partners in the structured finance 24 group, they would not let her represent 25 us because Fried Frank did not want to be

1257
(120 of 565)

445

W. ACKMAN

2 representing someone whose interests were 3 adverse to MBIA's in light of the large 4 amount of business the structure finance 5 group does with MBIA. So she declined to 6 come to the meeting, and that was the 7 last conversation we had with her about 8 the subject on any subject as far as I 9 know. 10 Q. Now, you also said after that

11 you had also sought advice from Sullivan 12 & Cromwell? 13 14 A. Q. Yes. I asked you who at Sullivan &

15 Cromwell, and you mentioned Tonly Coletta 16 and then an Asian American woman who does 17 insurance related law for Sullivan. 18 19 A. Q. Yes. Did you retain Sullivan & 1258
(121 of 565)

20 Cromwell to give you advice on this 21 issue? 22 A. I don't know what retained

23 means. 24 Q. Well, at the time you spoke to

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

1259
(122 of 565)

446

W. ACKMAN

2 they already providing legal services to 3 the firm? 4 5 6 A. Q. Yes. Sullivan & Cromwell. And what were those legal

7 services? 8 A. Well, Sullivan & Cromwell was

9 representing us on other matters at the 10 time that I called them about MBIA. 11 Q. Did they ever render a bill to

12 you for whatever they did with respect to 13 MBIA? 14 15 A. Q. Yes, they did. You said you relied on advice

16 from Sullivan & Cromwell, and I asked you 17 who at Sullivan & Cromwell, and you 18 identified the Asian American woman. 19 What advice did she give you? 1260
(123 of 565)

20 21 22 23 24 25

MR. MARCU: Objection. Instruction not to answer. MR. WALDMAN: I believe he can say he was relying on advice and then not state what the advice was.? MR. MARCU: Yes.

1261
(124 of 565)

447

1 2 Q.

W. ACKMAN The conversation you had with

3 Bonnie Steinberg, the initial 4 conversation, which I believe you said 5 she gave you some preliminary thoughts. 6 7 8 9 10 11 A. Q. A. Q. A. Q. Correct. How long was the conversation? Thirty minutes. Anybody else present? David Klafter. During your meeting with Alice

12 Schroeder, did you speak at all about the 13 matter referred to in an E mail, 14 specifically "We believe they are in 15 violation of New York State insurance 16 regulations"? 17 18 19 A. Q. A. Yes. What did you say? We described -1262
(125 of 565)

20 21 A.

MR. MARCU: What did you say? I described what the -- how

22 MBIA guarantees credit facilities through 23 an intermediate entity, which was an 24 orphan subsidiary, Lacrosse Financial, 25 which was an orphan subsidiary, and I

1263
(126 of 565)

448

W. ACKMAN

2 told her of our meeting at the Insurance 3 Department where we were asked multiple 4 times by I guess people who worked at the 5 Insurance Department are you sure MBIA is 6 using insurance company capital to 7 guarantee credit derivatives, in which I 8 interpreted as their not being aware that 9 this was going on, and I -- I think I 10 told her that I didn't believe they could 11 do indirectly what they are not permitted 12 to do directly. 13 Q. And what did she say, if

14 anything? 15 16 17 18 19 A. Q. MR. MARCU: She, Ms. Schroeder. MR. WALDMAN: Correct. I don't remember. Did you mentioned that you had 1264
(127 of 565)

20 consulted either Sullivan & Cromwell or 21 Fried Frank or both? 22 23 A. Q. I am not sure. Did you tell her what the

24 position of Sullivan & Cromwell and/or 25 Fried Frank was on this issue?

1265
(128 of 565)

449

1 2 3 4 5 A.

W. ACKMAN I don't know. MR. WALDMAN: Would you mark this, please. (Exhibit 15 marked for

6 identification.) 7 8 Q. (Document handed to witness.) Let me take that back from you

9 for a moment. 10 11 12 MR. WALDMAN: Would you mark this, please. (Exhibit 16 marked for

13 identification.) 14 Q. Showing you what has been

15 marked as Exhibit 16, I ask you if you 16 have ever seen it before? 17 18 19 A. Q. A. Yes. What is it? It is a photocopy of a Meridian 1266
(129 of 565)

20 Funding Company medium-term note 21 prospectus, which looks like it has my 22 underinings on it. 23 Q. This came from the files of

24 Gotham Partners, correct? It has a Bates 25 stamp number on it.

1267
(130 of 565)

450

1 2 3 4 A. Q.

W. ACKMAN Yes. Bates stamps 6506 to 6654. Now, you had this before you

5 before you wrote your report, correct? 6 7 A. Q. Yes. During your last examination

8 you spoke about put rights? 9 10 A. Q. Correct. What, if anything, in this

11 agreement led you to believe that the 12 holders of the medium-term notes had put 13 rights? 14 A. If you turn to page 12, if I

15 can read the third sentence of the first 16 paragraph, it says, "If a surety event 17 has occurred and is continuing, the 18 principal and premium, if any, and 19 interest on the notes shall become due 1268
(131 of 565)

20 and payable immediately, and the trustee 21 and under certain circumstances holders 22 will have the right to direct the 23 exercise of remedies under the indenture 24 and the security agreement, but payment 25 under the insurance policies may not be

1269
(132 of 565)

451

W. ACKMAN

2 accelerated without the consent of the 3 guarantor except in the case of insurance 4 policies related to each series of notes 5 issued on or before November 5, 1999, 6 which may be accelerated upon the 7 occurence of a surety event." 8 And it is those notes that were

9 issued prior to November 5, 1999, which 10 may be accelerated upon the occurence of 11 a surety event, I was referring to with 12 respect to the puttable notes. 13 Q. Let me direct your attention to

14 Exhibit 1 again, which is your report. I 15 direct your attention to the next to last 16 paragraph on page 23. 17 18 A. Would you read it, please. "This same analysis is likely

19 to hold true to a less significant degree 1270

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20 for the SPVs that are funded by MTNs for 21 these MTN holders often have put rights 22 in the event of default by the financial 23 guarantor on any of its guarantee 24 obligations." 25 Q. Now, you knew exactly what the

1271
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W. ACKMAN

2 holders of MTN notes put rights were? 3 A. Yes, in this -- in Meridian

4 Funding. 5 Q. Right. Meridian is where the

6 medium-term notes were, correct? 7 A. Meridian Funding as well as

8 three other SPVs. 9 Q. The vast majority of them are

10 in Meridian, right? 11 12 A. Q. Correct. All but a very small number are

13 in Meridian, correct? 14 A. I am not sure sure that is

15 correct. 16 Q. We agree except for Meridian,

17 for the majority of the MTNs, there are 18 no put rights except with respect to 19 notes issued prior to November 5, 1999? 1272
(135 of 565)

20 21

A. Q.

Correct. Why didn't you put that

22 qualification in? 23 A. Because I was advised -- let's

24 put it this way: There is a 25 confidentiality stipulation in the

1273
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W. ACKMAN

2 Meridian prospectus, and -- which says 3 that -- which we concluded that we 4 couldn't include specific facts from that 5 prospectus unless we had -- we were 6 able to get them from another source. So 7 while I would have preferred to put the 8 detail here, we concluded in light of the 9 confidentiality stipulation that we had 10 to take it out. 11 Q. What other source did you get

12 it from then, the statement that is 13 there? 14 A. I didn't -- I didn't get it

15 other than general, you know, market 16 knowledge. There is no specific source 17 for that information other than that that 18 prospectus, although actually there is an 19 analyst report on it written by Deutsche 1274
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20 Bank, which may have given me some of 21 this information, so I would have to 22 check that to give you an accurate 23 answer. 24 Q. Did you get the offering

25 memorandum for Meridian?

1275
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454

1 2 3 4 5 6 7 A. Q. A. Q. A. Q.

W. ACKMAN Is that your question? Yes. Did I get it? Yes. Yes. Did it say anything about put

8 rights? 9 10 A. Q. Yes. Do you know what percentage of

11 the medium-term notes were issued on or 12 before November 19, '99? 13 14 15 A. Q. A. I can calculate it. Please do. If you turn to page 18, there

16 is a capitalization table. I can 17 estimate what the number is. It is about 18 a billion and a quarter out of 4. 4 19 billion, which is about a little more 1276
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20 than 25 percent. 27 percent, 28 percent, 21 something like that. 22 Q. Now, the notes were supported

23 by receivables or some underlying 24 mortgage, some underlying asset, right? 25 A. Yes.

1277
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455

1 2 Q.

W. ACKMAN The ones issued before 1999,

3 November 1999, were of course more 4 seasoned than the ones issued since, 5 right? 6 A. You mean they had been

7 outstanding longer? 8 9 10 Q. A. Q. Yes. Yes, by definition. And what, if anything, is the

11 relation between the likelihood of 12 default and the length of time 13 outstanding? 14 15 16 A. Q. A. On these medium-term notes? Yes. None. I am not sure I

17 understand your question. I mean longer 18 term notes have a higher probability of 19 defaulting than shorter term notes, but 1278
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20 the put right exists in the event that 21 MBIA -- in the event of a surety event, 22 which is I think a default on the part of 23 MBIA on any of its other obligations, not 24 specifically of these obligations. 25 Q. Now, what was the number you

1279
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W. ACKMAN

2 told told me was the total of the 3 floating rate that was prior to November 4 '99? 5 A. A billion and a quarter

6 approximately. 7 Q. Now, in here somewhere it tells

8 you what a surety event is, right? 9 10 11 12 13 14 A. Q. A. Q. A. Q. Correct. Where is that? Where is that? Yes, where is that. 6540 it looks like. Yes. Well, now there are three

15 surety events, right? 16 17 A. Q. It appears to be. The first is the failure to pay

18 if any 1997 Euro notes are outstanding, 19 the failure of the guarantor to make 1280
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20 payments on the CapMAC surety bond or any 21 insurance policy or any other bond or 22 financial guarantee insurance policy. 23 A. I am not sure that is a -- I

24 am not sure that is exactly what it says. 25 Q. In any case, the first one is

1281
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W. ACKMAN

2 limited to the situation as of the time 3 this 1997 note is still outstanding, 4 right? 5 A. No, I don't believe that is

6 correct. 7 8 9 10 Q. A. Q. A. What is your interpretation? What is my interpretation? Of A. It says the failure of CapMAC

11 or the guarantor if any 1997 Euro notes 12 are outstanding, otherwise the failure of 13 the guarantor to pay when and as 14 required. My interpretation of that is 15 that if either CapMAC or the guarantor 16 defaults when the '97 Euro notes are 17 outstanding this clause applies, but if 18 that is not true, then you look to the 19 failure of the guarantor if there is no 1282
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20 notes outstanding. 21 22 Q. All right. Did you make any analysis of

23 the likelihood of the surety event A -24 25 A. Q. I mean --- occurring.

1283
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458

1 2 A.

W. ACKMAN When you say analysis, can you

3 -- you mean explain when it -- our 4 assessment of MBIA is that the company is 5 not what it appears to be, and that if it 6 is downgraded, it may fail. It is hard 7 to give you a precise probability for 8 whether that will occur, but that is the 9 event -- that is at least one of the 10 events that would trigger any of the 11 three of these default provisions. 12 I think the other one that we

13 were focused on is the New York State 14 Insurance Department, if it were to deem 15 the guarantees of CDOs as inconsistent 16 with the law or in violation of the law, 17 the first thing they will do is 18 invalidate the policy, which means they 19 wouldn't perform on a guarantee that they 1284
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20 have with respect to CDOs, which could be 21 a trigger as well in my understanding for 22 these surety events. 23 So I mean again it is hard to

24 come up with a precise probability, but 25 in light of our understanding that they

1285
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W. ACKMAN

2 were in violation of New York State 3 Insurance Law, we thought there is 4 frankly a decent chance that the New York 5 State Insurance Department would 6 invalidate those policies, which in turn 7 would increase the possibility that a 8 triggering event might take place. 9 Q. If there were a downgrade, how

10 in your analysis would that cause a 11 surety event? 12 A. Well, it depends on the reason

13 for the downgrade. 14 15 Q. All right. What reason for a downgrade

16 would cause any of the surety events? 17 A. Well, if, for example, the New

18 York State Insurance Department were to 19 conclude the guarantees or CDOs were 1286
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20 invalid and that in turn would invalidate 21 the policies, I suspect the investment 22 banks that bought those policies from 23 MBIA would probably sue for damages equal 24 to what they felt they lost in terms of 25 the benefit of te bargain when they got

1287
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W. ACKMAN

2 those policies. You know, $75 billion of 3 these obligations are outstanding. The 4 -5 6 7 Q. A. That is one. That is one. There would -- you know, if

8 they were to take a loss in their 9 portfolio, on their CDO portfolio of a 10 significant size, which in turn would 11 cause a downgrade and would also threaten 12 their financial viability, that could 13 also cause a surety -14 Q. Let's stop there. When you say

15 take a loss on their CDO portfolio, what 16 do you mean? 17 A. If the company were forced to

18 recognize a loss either by on a mark to 19 market basis or actually write a check 1288
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20 out of pocket basis, you know, where the 21 company acknowledged that there was a 22 loss in their CDO portfolio anywhere near 23 an order of magnitude like we described, 24 I think that might trigger an event as 25 well.

1289
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461

1 2 Q.

W. ACKMAN Let's just take the forceD to

3 mark to market. How would that trigger a 4 surety event? It wouldn't we can agree 5 stop them from making a payment on their 6 guarantees, right? 7 A. It really depends. I mean the

8 company's investment portfolio is 9 comprised largely of MBIA and other -10 the best quality assets or at least the 11 best perceived quality assets which they 12 would use to meet -- to make a payment 13 on a guarantee are comprised mostly of 14 MBIA guaranteed and Amback guaranteed and 15 FSA guaranteed obligations, and I suspect 16 that the circumstances in which MBIA was 17 forced to mark to market its CDO 18 portfolio would be the same circumstance 19 that Amback and FSA were forced to mark 1290
(153 of 565)

20 to market their portfolio, which would in 21 turn cause a downgrade of each of the 22 respective companies. MBIA buys 23 insurance from Amback, and Amback buys 24 insurance from MBIA, and so their fate is 25 tied together.

1291
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462

1 2

W. ACKMAN So the event of a mark to

3 market loss could cause a downgrade, 4 could cause their derivative providers to 5 require them to post incremental 6 collateral, could cause their $3 billion 7 in commercial paper buyers to decide not 8 to roll over commercial paper. 9 I mean this is -- as long as

10 this thing is triple A rated and sailing 11 through unnoticed, this company is fine. 12 The moment it is downgraded, it is no 13 longer fine. It is really -- the 14 business is at significant risk because 15 the entire enterprise depends on that 16 triple A rating, their investment 17 portfolio, their ability to revolve their 18 commercial paper, their ability to borrow 19 money, collateral for derivatives, I mean 1292
(155 of 565)

20 it is one connected nexus of -21 Q. Your position is that if they

22 were required to mark to market their 23 CDOs, that they would be unable to pay 24 amounts payable under an insurance policy 25 or other surety bond or financial

1293
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W. ACKMAN

2 guarantee insurance policy issued to for 3 the benefit of the creditors of Meridian? 4 A. I didn't say it is a certainty.

5 I said that that is a circumstance in 6 which they might not be able to make good 7 on these obligations. Absolutely. 8 Q. The obligations are to pay

9 principal and interest when due? 10 A. And plus, you know, a billion

11 and a quarter of people who have the 12 right to demand payment immediately if 13 there is a surety event. 14 Q. I know, but we are saying that

15 the surety event is the failure to pay. 16 17 A. Q. Okay. There is no acceleration if

18 they make the payments. 19 A. I don't think it is just 1294

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20 failure to pay on these obligations. 21 Q. Well, let's take them one at a

22 time. 23 24 25 A. Q. A. Okay. These obligations. Okay.

1295
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464

1 2 Q.

W. ACKMAN Principal and interest when

3 due? 4 5 A. Q. On Meridian Funding. On Meridian Funding, on

6 medium-term notes whether Meridian 7 Funding or not. 8 9 A. Q. Okay. All right. They are amortized,

10 are they not? 11 A. They are not amortized, but

12 they come due periodically. 13 14 Q. All right. And your position is if they

15 had to mark to market their CDOs, they 16 would not be able to pay the notes when 17 due? 18 A. Let me be clear. Not just

19 marking to market. If they had to mark 1296

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20 to market at the numbers that the dealers 21 have estimated their losses are, I think 22 it could cause a failure of the company, 23 a bankruptcy of the company, a severe 24 liquidity crisis to the company, and as a 25 result they may not be able to pay any of

1297
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W. ACKMAN

2 their obligations, and they may choose 3 instead to file for bankruptcy because, 4 as I explained, it is an interconnected 5 -- all of these things are connected. 6 Their investment portfolio is triple A 7 largely because the triple A obligations 8 in that portfolio are guaranteed by 9 themselves. Okay. 10 I happen to think that is a

11 fiction. They are guarantees for them. 12 It is of no value obviously. They are 13 reinsurers. You know, their investment 14 portfolios are filled with obligations 15 that are guaranteed by MBIA. Their 16 commercial paper buyers are relying on 17 that triple A rating, so that if they 18 were forced tomorrow to take a 5 billion 19 dollar mark to market loss or even a 2 1298
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20 billion dollar loss in their CDO 21 portfolio, I believe it could cause a run 22 at a bank of MBIA. 23 Q. If they took a loss we are

24 talking about? 25 A. Mark to market or realized?

1299
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466

1 2 Q.

W. ACKMAN Let's take mark to market

3 first. 4 5 A. Q. Sure. You didn't say anywhere in your

6 report that you thought they were going 7 to take anything like a 2 billion dollar 8 realized loss, did you? 9 A. I did say that my view was that

10 the mark to market value of these CDO's 11 is the market's best expectation of what 12 loss they will eventually bear on these 13 securities when they come due. 14 Q. You did have, however, say very

15 clearly in your report that those mark to 16 market values are not an indication they 17 were ultimately going to get a loss of 18 that size; is that correct? 19 A. That's correct, and the market 1300
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20 -21 Q. And that is because they held

22 them and didn't market them, right? 23 24 25 A. MR. MARCU: Sorry. No. MR. MARCU: I didn't

1301
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1 2 3 4 5 6

W. ACKMAN understand the question. Q. A. Q. A. They held them to maturity? No, that is not -You didn't know? No, I know they hold them to

7 maturity, but that is not why they may or 8 may not take the loss. Whether or not 9 they have the loss is a function of what 10 happens between now and the time they 11 become due. 12 Q. Yes, whether there are

13 defaults. 14 15 A. Q. Continued defaults, yes. So far there have been

16 virtually none, right? 17 A. No, there have been many

18 defaults in their CDO portfolio. In 19 fact, most of the overcollateralization 1302

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20 and the CDOs they did in '96 through '98 21 is gone as a result of defaults. 22 23 Q. A. You know that to be a fact? Based on what Moody's said,

24 yes. 25 Q. When did Moody's say this?

1303
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1 2 3 A. Q.

W. ACKMAN January. Regardless of what Moody's

4 said, when you wrote this you had no 5 knowledge? 6 7 8 9 10 A. Q. A. Q. A. No, I absolutely did. You did? Yes. Sure. From what? The third quarter operating

11 supplement. The third quarter operating 12 supplement said the company had 1 billion 13 8 of CDOs that were below investment 14 grade. 15 16 Q. A. Right. Moody's and S&P do not mark a

17 CDO below investment grade unless all or 18 substantially all of the 19 overcollaterization is gone. That is the 1304
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20 kind of the standard for downgrading a 21 CDO to below investment grade. 22 23 Q. A. A billion out of how much? A billion 8 out of 30 billion

24 of cash CDOs and 45 billion of synthetic 25 CDOs, but effectively almost all of the

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W. ACKMAN

2 ones issued, the early ones, '96 through 3 '98 ones. 4 Q. Let's just talk about a mark to

5 market loss. 6 7 A. Q. Sure. Through a mark to market loss,

8 that is not a realized loss; right? 9 10 A. Q. By definition, yes. No requirement to increase

11 reserves, right? 12 A. No requirement to increase

13 accounting reserves, although that is one 14 of the factors that you are supposed to 15 consider in marking -- in creating 16 reserves, the trading values of the 17 investments, but it is management's 18 judgment as to whether to take a reserve 19 or not. 1306
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20 21 22 23 24

Q. A. Q. A. Q.

And it reduces income? Yes. Cash flow remains the same? Yes. Therefore, ability to make

25 payments remains the same?

1307
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470

1 2 A.

W. ACKMAN It depends on what else is

3 going on. 4 5 Q. A. If there is no downgrade? If there is no downgrade and

6 the market perceives that the company's 7 credit quality hasn't changed, they 8 should be able to continue to make 9 payments, but in my opinion if they are 10 forced to take a mark to market loss of 11 the magnitude that the dealers have 12 estimated, I think that will have a very 13 Draconian effect on the company's 14 perceived credit quality whether the 15 rating agencies downgrade them or not. 16 MR. WALDMAN: All right. It is

17 close to 1 o'clock. I think we ought to 18 break for lunch. 19 (Luncheon recess: 1:00 p.m.) 1308
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20 21 22 23 24 25

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1 2 3

W. ACKMAN AFTERNOON SESSION 2:10 p.m. A C K M A N, resumed.

4 WILLIAM

5 CONTINUED EXAMINATION 6 BY MR. WALDMAN: 7 Q. Now, you mentioned before the

8 break Amback and I believe one or more 9 other insurers. 10 11 A. Q. FSA. Is Amback another monoline

12 insurer? 13 14 A. Q. Yes, it is. Is FSA another monoline

15 insurer? 16 17 18 A. Q. A. Yes. Do they have SPVs? Yes. Different SPVs, but they

19 have SPVs, yes. 1310

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20

Q.

Do they have SPVs funded

21 largely through commercial paper? 22 23 24 25 A. Q. A. Q. No. Medium -Medium-term notes. Medium-term notes, so that is

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W. ACKMAN

2 their bankers? 3 4 A. Q. Correct. Do they have orphan subjects

5 subsidiaries? 6 7 A. Q. I don't know. Do they have any dealings in

8 CDOs? 9 10 A. Q. Yes. What are Amback's dealings in

11 CDOs, as you understand it? 12 A. Similar profile to MBIA. You

13 know, cash CDOs beginning in around '96, 14 synthetic CDOs beginning in around 2000. 15 It is slightly smaller as a percentage of 16 their guaranteed portfolio in the case of 17 Amback. 18 19 Q. A. What about FSA? I think it is slightly larger 1312
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20 as a percentage of their portfolio, but 21 they exited the business sometime in the 22 fall of last year, so I don't know if 23 they are still -- you know, what their 24 percentage of their overall business is. 25 Q. Did they mark to market cash

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473

1 2 CDOs? 3 4 A. Q.

W. ACKMAN

I don't know. And that is Amback that you

5 don't know. What about FSA? 6 7 8 9 A. Q. A. Q. I was answering for FSA. What about Amback? I don't believe so. What makes you think they

10 didn't? 11 A. What makes me believe that they

12 don't? 13 14 Q. A. Yes. Amback had a conference call

15 recently, which I read a transcript of, 16 and they talked about the mark to market 17 loss in their synthetic CDOs portfolio, 18 and there was no mention of a mark to 19 market loss in their cash CDO portfolio. 1314
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20

Q.

It is your understanding that

21 FSA does mark its cash CDOs to market? 22 A. No, I don't know what their

23 practice is. 24 Q. I want to read to you from a

25 portion of your prior testimony. I asked

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W. ACKMAN

2 you about whether you had taken any steps 3 to verify your view that cash CDOs had to 4 be marked to market, and you answered 5 that the most information you could find 6 on this issue is in a number of research 7 reports written by Morgan Stanley, and 8 then I am paraphrasing I asked you about 9 Morgan Stanley. You said it didn't say 10 anything specifically about MBIA's CDO 11 portfolio, but it did speak specifically 12 about the issue with respect to cash CDOs 13 generally, and then you referred me to 14 page 31 of your report, which is Exhibit 15 1, and you quoted from the report the 16 same quote that you have on page 31. 17 18 A. Q. Okay. Now, what in that quote led you

19 to believe that it was speaking 1316

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20 specifically about this issue, that is 21 mark to market with respect to cash CDOs? 22 A. The sentence that reads,

23 "Credit default swaps and the guarantees 24 on collateralized debt obligations are 25 credit derivative instruments for

1317
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W. ACKMAN

2 accounting purposes." Collateralized debt 3 obligations refers to both cash CDOs and 4 synthetic CDOs. That is what MBIA does. 5 They guarantee cash and synthetic CDOs. 6 Q. And you thought that she meant

7 by that all CDOs must be marked to 8 market, right? 9 10 11 A. Q. A. All guarantees -All guarantees? Because they are derivatives

12 should be marked to market under FASB 13 133. 14 Q. And you I believe testified

15 that you looked at FASB 133? 16 17 A. Q. Yes, I did. And that was your conclusion

18 from FASB 133? 19 A. Well, in terms of timing, I 1318

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20 have looked at FASB 133 in considerable 21 detail more recently. I don't know if I 22 looked at the precise language of FASB 23 133 at the time that I did the report. 24 Q. I stand corrected. I think

25 according to your testimony you made that

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W. ACKMAN

2 qualification the last time. 3 4 A. Q. Okay. So at the time your belief was

5 solely on the basis of this quotation 6 that you put in the report? 7 A. I wouldn't say that. I would

8 say that as a general matter, it is my 9 own interpretation of the differences 10 between the two. In addition to Alice's 11 quote, you know, it is my own 12 understanding of a cash CDO versus a 13 synthetic CDO, you know, and obviously 14 what Alice thinks is -- I considered 15 seriously as well. 16 Q. And then I questioned you and

17 asked you whether in your meeting you 18 asked her whether it was her view that 19 cash CDOs as well as synthetics must be 1320
(183 of 565)

20 marked to market, and you answered no. 21 22 A. Q. Okay. You understood that this was an

23 accounting question, right? 24 25 A. Q. Yes. Who are your auditors?

1321
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477

1 2 3 A. Q.

W. ACKMAN Ernst & Young. Did you ask Ernst & Young

4 whether cash CDOs as well as the 5 synthetics must be marked to market? 6 7 8 A. Q. A. I did not. Why not? I just didn't do it. I mean I

9 think if you read my report my point is 10 that regardless as to whether these 11 things need to be marked to market or 12 not, and we can find the specific 13 language, what is relevant is the 14 economic -- the economics, not the 15 accounting. The accounting affects 16 presentation, but it doesn't affect the 17 economics. 18 MBIA's exposure to loss in my

19 view is -- the best indication of that 1322

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20 exposure to loss is not the accounting. 21 The accounting is inadequate in which in 22 my view cash CDOs are permitted to not be 23 marked to market versus the synthetics. 24 I think the accounting rules are 25 inadequate.

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1 2

W. ACKMAN Here is what I say. "Whether

3 or not the company marks its CDO exposure 4 to market, MBIA is apparently under water 5 by billions of dollars on these 6 investments," and that is the point I am 7 making. 8 9 10 11 12 MR. MARCU: That is quoting from page 31 at the bottom. A. Q. Correct. I understand what it says. In any event, you did nothing

13 to check whether it was true or not that 14 these had to be marked to market? 15 A. Other than, you know, reading

16 Alice' material, correct. 17 Q. Do you have a view or did you

18 have a view as to whether the market in 19 CDOs both cash and synthetic was liquid 1324
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20 or illiquid? 21 A. I think it is hard to make a

22 broad generalization. Depending upon 23 which CDOs, some CDOs are highly liquid 24 and others are not. 25 Q. Well, did you have any view as

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W. ACKMAN

2 to whether MBIA's CDOs were liquid or 3 not? 4 5 6 A. Q. A. Yes. And what was your view? I would say reasonably liquid,

7 you know, with respect -8 9 Q. A. What was that based on? Our ability to buy these

10 derivatives. 11 Q. Do you have any view of what

12 the -13 A. Are you referring -- I

14 apologize, but are you referring to 15 credit default swaps in MBIA? Are you 16 referring to specific guarantees they 17 provided on a certain CDO? When you talk 18 about CDOs, I want to make sure -- an 19 MBIA CDO, do you mean -1326
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20

Q.

I am referring to the CDOs that

21 you believed should be marked to market. 22 23 24 A. Q. A. Okay. And -Liquid or illiquid. I would say generally a liquid

25 market.

1327
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480

1 2 3 Q. A.

W. ACKMAN What does that mean to you? It means to me that there are

4 -- the specific CDOs that are guaranteed 5 by MBIA, you know -- it is, you know, a 6 liquid market. You could go to 7 Bloomberg, and you could pull up a quote. 8 You know, people trade it every day. You 9 know, Microsoft is obviously a liquid 10 security. Whereas for a private CDO 11 guaranteed by MBIA, there isn't an active 12 market for it. You can sell it. You can 13 unwind it. You can find another dealer 14 to put the trade on with, but it is not a 15 -- you would certainly not qualify it as 16 a liquid market. 17 Q. What makes the MBIA CDOs less

18 or more liquid? 19 A. Which -1328

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20

Q.

The ones they own, the ones

21 they have guaranteed, what makes them 22 more or less liquid than other CDOs? 23 A. They are specific guarantees of

24 specific issues. There is not -- there 25 aren't a hundred identical ones that

1329
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W. ACKMAN

2 people trade all the time. You know, 3 MBIA guaranteed a specific CDO in 1998. 4 It has an issuer. It has a certain 5 collection of underlying bonds. It is, 6 you know -- it is unique in a certain 7 sense. There is probably not one 8 identical to it. There are very many 9 similar to it, but when you think about a 10 liquid market you think about identical 11 shares of Microsoft trading on a regular 12 basis or -- fungibility is a word I 13 would use to describe, you know, liquid 14 securities. 15 16 17 18 19 Q. Well, what about -MR. MARCU: The question was MBIA's CDO, the ones that MBIA guaranteed as opposed to other collateralized debt obligations. 1330
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20

A.

The ones guaranteed by Amback I

21 would say are no more liquid than the 22 ones guaranteed of MBIA. The guarantee 23 of a synthetic CDO or a guarantee of a 24 cash CDO, neither one of those markets -25 the market for a guaranteed tranche, i.e.

1331
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W. ACKMAN

2 their ability to go find a replacement 3 guarantor, it is not a -- it is a 4 negotiated market. It is not a market 5 where there is every hour a trade that 6 takes place or every minute. 7 Q. Don't you think this presents

8 some problems in terms of the validity of 9 a mark to market? 10 A. The answer is it is obviously

11 much easier to mark to market Microsoft 12 stock than a CDO. However, there are 13 enough dealers who play in this stuff and 14 if, you know, our methodology for coming 15 up with a value -- first of all, we 16 asked the dealers if they could mark them 17 to market, and they said they could, and 18 they gave us -- we asked for mid-market 19 quotes to account for -- when you have 1332
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20 an illiquid security or illiquid CDO, the 21 problem is that the bid ask spread, the 22 spread between what price we will buy the 23 security at or the price we sell the 24 security at is wide, and as a result if 25 you use the bid or the ask, you can be

1333
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W. ACKMAN

2 overstating or understating the value of 3 the security. That is why we chose to 4 use the mid-market price because we 5 thought it was the fairest way to give an 6 indication of the value of the security. 7 If you think about a liquid

8 market, the bid ask is very small. You 9 know, whether you are using bid or ask, 10 depending on whether it is 3 or 2 percent 11 apart, it doesn't matter. In this 12 market, the bid ask spread could be as 13 much as 10 percent either way. 14 Q. And that to your belief is the

15 only difficulty imposed by the 16 illiquidity? 17 18 19 is? Q. In terms of marking to market. 1334
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MR. MARCU: I am sorry. What

20

A.

I think it is too strong. I

21 think that is probably the most important 22 difference, and also, you know, different 23 dealers are going to give different 24 prices. You know, there is not -- and 25 that is why, you know, I made an effort

1335
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2 to get quotes from more than one dealer 3 because there could be -4 Q. You got two. How many dealers

5 are there? 6 7 8 9 10 A. Q. A. Q. A. For CDOs? Yes. Major dealers? Yes. Six or eight. Something like

11 that. 12 13 Q. A. Who are they? Goldman Sachs, Deutsche Bank,

14 J.P. Morgan, Lehman, Morgan Stanley, 15 maybe Bear Sterns. 16 Q. Would the term float be

17 appropriate in terms of an MBIA CDO? 18 19 A. Q. I don't think so. Can you tell how many are 1336
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20 traded on a particular day? 21 A. No. There is no central

22 marketplace that you can go to to see how 23 many MBIA CDOs. As a basic matter, MBIA 24 buys and holds on to these securities, so 25 there -- in terms of trades and MBIA

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W. ACKMAN

2 guaranteed CDOs, there effectively are, 3 you know, a very small number, the ones 4 guaranteed by them, but what the dealers 5 did is they looked at ones that were not 6 guaranteed by MBIA that were of a similar 7 vintage and similar rate, and with 8 respect to those there is an active 9 market where people are buying or selling 10 those securities or I don't even know if 11 they are called securities -- contracts, 12 you know, on a daily basis, and what the 13 dealers did is they went and looked at 14 similar vintage CDO that traded in the 15 marketplace and used those prices as 16 points of comparison. 17 Q. Do you know how many trades

18 they looked at? 19 A. No idea. 1338

(201 of 565)

20 21 22 23

Q. A. Q. A.

Did you ask them? No. What did you ask them to do? I -- MBIA provided a

24 disclosure in the third quarter operating 25 supplement. That was a new disclosure

1339
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486

W. ACKMAN

2 that gave vintage and notional amounts 3 and other information about their CDO 4 portfolio. I gave it to three dealers. 5 I said, you know, can you tell me what 6 these things are worth, and, you know, 7 can you estimate their values, you know. 8 And I asked them to give me a mid-market 9 kind of a -- either to give me the bid 10 or ask prices, so I could create a 11 mid-market myself or alternatively just 12 to get me mid-market prices for each of 13 these securities. That is what I asked 14 for. 15 Q. Did they give you a written

16 report? 17 A. Lehman gave me an E mail

18 showing the pricing by vintage and rating 19 for each of the various MBIA CDOs. 1340
(203 of 565)

20 Deutsche Bank gave me the same 21 information over the telephone. 22 Q. Did you have any discussions

23 with them as to how they arrived at it? 24 25 A. Q. Yes. What was the discussion first

1341
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487

W. ACKMAN

2 with Deutsche Bank? 3 A. They told me what -- that

4 they thought they would be able to answer 5 my request, and that they were going to 6 use comparable vintage -- what they 7 said was the '96 -- for anyone who is 8 interested in wine, and I am not 9 particularly interested, but it is kind 10 of the same thing. The '82 Bordeaux was 11 a really good year, and let's say the '92 12 Bordeaux is a really bad year. The same 13 kind of thing holds true for CDOs, the 14 vintage tranches of '96, '97, '98, what 15 is in these CDOs, almost all of them had 16 the same percentage of exposure to 17 different companies because the way the 18 rating agencies' model works they require 19 you to have a certain amount of 1342
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20 diversity, and so the amount of diversity 21 is -- what is in the CDOs is the 22 function of who is raising debt at the 23 time the CDOs are recreated, and it is a 24 function of how the Moody's model or S&P 25 model works, since they are forcing you

1343
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488

W. ACKMAN

2 to achieve a certain diversity score in 3 order to get a rating. The result is the 4 '97 and '98 telecom exposure and Enron 5 exposure and a certain amount of Worldcom 6 exposure. Not so much -- maybe Worldcom, 7 and as I result they perform very 8 similarly, not exactly the same, by very 9 similarly because they have a very 10 similar collection of assets. 11 As a result of that, what the

12 dealer said is we are going to do -- we 13 are going to look at comparable -- we 14 don't have specific information or their 15 transactions, but we are going to look at 16 comparable ones trading at the same time 17 and see what they are doing in the 18 secondary market. We are going to use 19 that as our estimation of what they are 1344
(207 of 565)

20 worth. 21 Q. What did they decide was

22 comparable? 23 A. I believe what they told me is

24 they used similar vintage transactions 25 with the same rating, MBIA 1996 triple B

1345
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489

W. ACKMAN

2 one rated CDOs. Then they would look for 3 a 1996 triple B one rated CDO and see 4 where the comparable CDOs traded, and 5 that was going to be their benchmark for 6 value. 7 Q. Could you value MBIA's exposure

8 without knowing what tranche it had? 9 A. Whether they were triple B or

10 triple A, is that your question? 11 Q. Or whether they were super

12 triple A or super grade. 13 A. Rating is very important in

14 terms of their, you know, the -- the 15 value of a triple B rated tranche versus 16 the value of a triple A rated tranche is 17 going to be considerably different, and 18 if you didn't know whether they were 19 guaranteed triple A and triple B you 1346
(209 of 565)

20 would have a tough time getting an 21 estimate. 22 Q. The information you gave them

23 had that information? 24 25 A. Q. Correct. And so what they did, as you

1347
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490

W. ACKMAN

2 understand it, is they said a triple A of 3 this date, one or more, we don't know how 4 many they looked at, right? 5 6 7 8 A. Q. A. Q. Correct. Trades at X. Yes. And, therefore, we assume that

9 you would mark to market, if you were 10 marking to market, MBIA guaranteed CDOs 11 to that price? 12 A. A little more clarity on that.

13 I think what they did was they said what 14 is the bid ask for each of these various 15 securities. So and let's say the 16 security was bid at 80 cents on the 17 dollar, and it was offerred, the offer 18 price was 90 cents. They would take 19 those two numbers, and in the case of 1348
(211 of 565)

20 Lehman they gave me the bid and ask, so I 21 could perform my own average. In the 22 case of Deutsche Bank, they averaged the 23 bid and ask to give me their estimates. 24 Q. Did you ask them or did they

25 tell you the volatility of the CDOs that

1349
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491

W. ACKMAN

2 they were using as their base line? 3 4 A. Q. No. So it could have fallen 20

5 percent since last week, and you wouldn't 6 have known one way or the other? 7 A. Well, I asked for the

8 information as of a specific date. 9 10 Q. A. What was the date? A date, you know, within early

11 December when I got the pricing, and they 12 gave me their values, but these are -13 the ranges or the mid-markets they 14 use -- these are not -- the 15 volatility of this stuff is not up 20 16 percent, down 20 percent in a day. It is 17 not like pork belly futures, if you will, 18 and their estimates were -- I think the 19 bid ask spread is wide enough here that, 1350
(213 of 565)

20 you know, I think they felt comfortable 21 in that the numbers they were giving. 22 Look, I mean you can speak with

23 them directly yourself, but they felt 24 comfortable enough to give me the 25 numbers. You know, I -- they knew that

1351
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492

W. ACKMAN

2 I was going to disclose them in a public 3 document, so I assume that is a pretty 4 strong incentive for them to make 5 sure -- I mean they had no incentive to 6 give me the wrong number I guess is the 7 right way to think about it as far as I 8 know. 9 Q. Did they give you any

10 qualifications when they gave you the 11 numbers? 12 A. No formal qualifications. You

13 know, these are estimates. They are not, 14 you know -- they weren't prepared to 15 buy or sell at that specific price if I 16 showed up with a billion dollars for 17 them. Let's put it that way. 18 19 Q. A. They weren't? No, they were estimates. 1352
(215 of 565)

20 Actually, I don't know the answer to 21 whether they were prepared to buy or sell 22 a billion dollars. I would expect these 23 were really just estimates. They were 24 certainly estimates, and I don't know how 25 much they would be willing to buy or sell

1353
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493

W. ACKMAN

2 on the basis of estimates. 3 4 5 MR. WALDMAN: Would you mark this as the next exhibit, please. (Exhibit 17 marked for

6 identification.) 7 8 9 10 11 Q. A. Q. A. (Document handed to witness.) Do you recognize that document? Yes. What is it? It is a research report written

12 by Morgan Stanley on MBIA dated December 13 16, 2002. 14 15 Q. A. And what is its title? Entitled "Gotham's Concerns-

16 Warranted or Not." 17 Q. I direct your attention to page

18 4 of the report, which is Bates stamped G 19 P 2548. 1354

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20 21

A. Q.

Yes. Would you look at the first

22 full paragraph, the one that says, 23 "Gotham also notes," and read it, please. 24 A. "Gotham also notes that the

25 SPEs could create a liquidity issue for

1355
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494

W. ACKMAN

2 MBIA. After reviewing the structure and 3 workings of the SPEs with the company, we 4 are not as concerned about this issue." 5 6 7 8 9 Q. A. Q. A. Q. Do you remember reading that? Yes, I did. Were you surprised? No. Were you surprised in view of

10 her comment to you before you put out the 11 report that she had gone over your fax 12 with the company and her conclusions at 13 that time? 14 A. No, I mean I don't know if she

15 went over it at that time that I 16 discussed it with her in a high level of 17 detail with the company, but she told me 18 that she thought that we were right. 19 Q. Let me direct your attention 1356
(219 of 565)

20 two paragraphs down, and I am going to 21 read a few sentences and ask you to 22 comment on that. 23 A. By the way, I did remember --

24 I just remembered something from a 25 conversation with her, so at some point

1357
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495

W. ACKMAN

2 if you want to revisit that I can help 3 you. 4 5 Q. A. Please. In my conversation with her

6 prior to her releasing her last report on 7 MBIA, the one where they downgraded the 8 stock, she told me that she had given a 9 copy of the research report to Warren 10 Buffet, and that he had thought our 11 analysis was correct and that he made 12 some fairly negative comments about the 13 financial guarantee business generally, 14 and -15 Q. Anything further that you

16 remember about that conversation? 17 18 A. Q. Not offhand, no. Directing your attention back

19 to her report, "Gotham suggests the mark 1358

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20 to market loss could be in the range of 21 5. 8 billion dollars based on dealer 22 quotes." 23 That is right. The report did

24 suggest that, right? 25 A. That's correct.

1359
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496

1 2 Q.

W. ACKMAN Then she goes on, "However,

3 that range assumes that all CDOs are 4 required to be marked to market; funded 5 CDOs (34 percent of the 66 billion dollar 6 portfolio) are not considered derivatives 7 and, therefore, would not qualify for 8 mark to market accounting." 9 10 11 A. Q. Do you see that sentence? I do. How do you think she was able

12 to determine that funded CDOs are not 13 considered derivatives and, therefore, 14 would not qualify for mark to market 15 accounting? 16 A. I am sure this is what the

17 company told her. 18 Q. You think that she just put in

19 what they told her without checking it? 1360

(223 of 565)

20 21

A. Q.

I don't know. Anyway, you now know, do you

22 not, that funded CDOs are not considered 23 derivatives and, therefore, would not be 24 qualified for mark to market accounting? 25 MR. MARCU: He knows?

1361
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497

1 2 3 A.

W. ACKMAN MR. WALDMAN: Yes. I would say that companies have

4 taken the position that they are not 5 derivatives. I happen to disagree with 6 their analysis. 7 Q. Why do they say they are not

8 derivatives by the way? 9 10 11 A. Q. A. Why do they say it? Yes. Why do they say it? They have

12 a huge incentive to say it. 13 Q. No, but they do something more

14 than just say it? 15 A. I am sure they get their

16 auditors to sign off -- there is a 17 financial guarantee scope exemption under 18 FASB 133, and they have been able to 19 convince auditors that guaranteed CDOs 1362
(225 of 565)

20 are financial guarantee contracts, not 21 derivatives, and therefore using that 22 exemption from FASB 133 they don't mark 23 them to market. 24 Q. Now, a funded CDO which is

25 guaranteed, right?

1363
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498

1 2 3 4 5 6 7 A. Q. A. Q. A. Q.

W. ACKMAN Okay. Has an underlying asset? Correct. Right? Correct. As against a synthetic which

8 doesn't? 9 A. No, that is not true. A

10 synthetic CDO has underlying assets just 11 as funded CDOs have underlying assets. 12 It is just the nature is different. 13 14 Q. A. What is the difference? In synthetic CDOs, the

15 underlying assets are credit derivatives. 16 In the cash CDOs, the underlying assets 17 are funded bonds, actual bonds. 18 Q. You don't see any difference

19 between the two? 1364

(227 of 565)

20

A.

No, there is a difference

21 between the two but not a difference in 22 my opinion that is relevant with respect 23 to FASB 133. I am happy to walk you 24 through it. 25 Q. Has anybody but you taken this

1365
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499

W. ACKMAN

2 position with respect to funded CDOs? 3 4 5 A. Q. A. I don't know. You know of none, do you? Correct. Well, I guess my

6 sense was that Alice agreed with the fact 7 that funded CDOs should be marked to 8 market until she wrote this report. 9 Again, this report she keeps saying was 10 written by Viney Saqi, who works for her. 11 12 Q. A. She did not write this? She did not write the report.

13 According to her, she edited the report. 14 She reviewed the report, but it is his 15 report. 16 17 Q. A. When did she tell you that? When I argued with her about

18 things in the report. 19 Q. Like what? 1366

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20

A.

I think there are some errors

21 in the report. Do you want me to point 22 them out? 23 Q. Yes. Well, we will come back to

24 that, the errors. 25 Let me direct your attention to

1367
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500

W. ACKMAN

2 2549 Bates stamp, page 5 of the report. 3 Under the heading "How SPEs Work", the 4 third paragraph on the right-hand 5 sidequotes you. "As for the commercial 6 paper conduit, MBIA guarantees only the 7 payment of principal and interest on the 8 assets purchased (of the receivability); 9 it does not guarantee the payment 10 (receivability) on the commercial paper 11 issue." 12 Did that surprise you when you

13 read it? 14 15 A. Q. Yes, it is false. You are now saying that there

16 is a direct guarantee by MBIA of payment 17 of commercial paper? 18 A. No. She says or he says, "MBIA

19 guarantees only the payment of principal 1368

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20 and interest on the assets purchased." 21 That is false. They guarantee the 22 payment of interest and principal on the 23 assets, and they also guarantee the 24 liquidity facilities, and the CEO of the 25 company has made the same statement in a

1369
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501

W. ACKMAN

2 public forum and denied that they 3 guaranteed liquidity facilities, but if 4 you go to public documents, he says they 5 guarantee liquidity facilities. This is 6 one of the errors in the report, and if 7 Morgan Stanley understood that they were 8 responsible for guaranteeing a 364 day or 9 less liquidity facility, I think they 10 might rethink this paragraph on liquidity 11 issues. 12 I mean I agree that if only --

13 they only guaranteed the assets, it would 14 mitigate the liquidity issues, but they 15 don't. They guarantee the assets, and 16 they guarantee liquidity facilities, and 17 that is a very big difference. 18 Q. Let me call your attention to

19 the carryover paragraph at the bottom in 1370

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20 which there is a discussion of bank 21 credit lines. 22 "Each commercial paper

23 transaction is backed by a bank credit 24 line which can be tapped if the 25 commercial paper does not roll over."

1371
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502

1 2 3 4 A. Q.

W. ACKMAN Do you see that? Yes. Correct. And then it says, "That

5 protects the program from liquidity risk. 6 The bank lines are provided by high 7 quality banks." 8 9 10 A. Q. Do you see that? Yes. Then it says, "Covenant

11 triggers that would preclude MBIA from 12 tapping the bank lines include: One, 13 default by MBIA on a financial guaranteed 14 policy (a time frame has been established 15 during which MBIA could cure this 16 default); two, if MBIA were to file for 17 bankruptcy; 3, if the New York State 18 Insurance Department declared the 19 company's financial guarantee was not 1372
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20 valid." 21 22 23 A. Q. Do you see those? I do. Is there any mention there of

24 an out if the values of the underlying 25 assets are less than the bank credit

1373
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503

1 2 line? 3 4 5 6 A. Q. A. Q.

W. ACKMAN

No. Does that surprise you? No. You already knew that the out

7 wasn't there? 8 9 10 A. Q. A. No. That you were referring to -It doesn't surprise me now.

11 Are you asking me as of today? 12 Q. No. Did this then surprise

13 you? 14 15 A. Q. No. Well, you had referred to an

16 out for inadequacy of receivables in your 17 report, right? 18 A. I quoted I think well-regarded

19 publication on what the typical outs 1374

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20 were, and one of them was the asset 21 values don't exceed the liabilities. 22 Q. But when you read this, you

23 knew that there wasn't one for MBIA, 24 right? 25 A. I don't know.

1375
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504

1 2 3 Q. A.

W. ACKMAN I see. I know what Alice said, and I

4 am sure what she said is what the company 5 told her, but I have not seen the 6 liquidity facility, and until I see it I 7 mean this is a very material liquidity 8 facility to MBIA, extremely material. 9 Okay. Under the SEC rules they are 10 required to file with their 10 K all 11 material bank facilities, which include 12 in my opinion this document. It is not 13 there. They never filed. They didn't 14 disclose it until 2001. If it is so 15 important to MBIA to get this right, why 16 didn't they make this disclosure in their 17 10 K. Excuse me for the question. 18 Excuse me for the rhetorical question, 19 but I would love to see this magical 1376
(239 of 565)

20 liquidity facilities. They may be the 21 only three outs, but I didn't have it, so 22 I used the best source that I could come 23 up with. 24 Q. Did you ever seek from MBIA a

25 copy of the liquidity facility?

1377
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505

1 2 A.

W. ACKMAN I did not. I did recently,

3 yes. 4 Q. And I think we established last

5 time that you never asked them about what 6 outs there were? 7 A. No. As I explained, this issue

8 arose after the company already knew that 9 I was short the stock, and my opportunity 10 I thought to talk to them about the 11 report was when I met with the CEO, and 12 he refused to answer any questions about 13 the company. 14 Q. You are quite sure that he

15 refused to answer any questions about the 16 company? 17 A. He said I am not here to talk

18 about facts. I am here to talk about 19 process, and he had no interest 1378
(241 of 565)

20 whatsoever in talking about the report. 21 Zero. 22 23 24 25 Q. You did -MR. MARCU: Why don't you just state what you heard and saw as opposed to what was in someone's head.

1379
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506

1 2 Q.

W. ACKMAN Well, either at the meeting or

3 thereafter, a request was made to you for 4 a copy of what you were going to publish 5 in advance, correct? 6 7 8 9 10 11 A. Q. A. Q. A. Q. Correct. And you chose not to -Correct. -- send that to the company? That's correct. Do you think that might have

12 elicited a fact check? 13 A. I don't know what it might have

14 elicited. It might have elicited a 15 lawsuit. It might have elicited an 16 injunction. You have to understand that 17 the meeting I had with them was a very I 18 would say threatening meeting, and at 19 that point my view is the company viewed 1380
(243 of 565)

20 us as being at war with them. I didn't 21 think I would get anything from them, and 22 based on their disclosures since it is 23 very clear to me that they are not so 24 much focused on the truth in my opinion. 25 Q. You believed they could get an

1381
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507

W. ACKMAN

2 injunction against your publishing? 3 A. I didn't know what they could

4 do, but it was -- I didn't -- I 5 didn't think it was to my advantage, and 6 we talked about it with our lawyers, and 7 we talked about -- I talked about it 8 with Alice. It was her recommendation 9 that I not send them the report. 10 11 Q. A. When did she you that? When I told her about the

12 meeting. 13 Q. Well, was that in a telephone

14 call you told her about that? 15 16 A. Q. Yes. What did you tell her about the

17 meeting? 18 A. My general sense of the

19 meeting, the CEOs statement that they are 1382

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20 not here to talk about facts, and I am 21 pretty sure I said something along the 22 lines of -- I don't remember exactly 23 whether I told her this, but he 24 threatened me. 25 Q. What about their request for a

1383
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508

W. ACKMAN

2 copy of the report and her response that 3 she advised you not to send it to them? 4 5 A. Q. She said that analysts -First what did you say to her,

6 and then we will get to what she said? 7 8 A. Q. I asked her advice. You said they requested a copy

9 or something like that? 10 11 12 13 14 A. Q. A. Q. A. I think so. And you asked her advice? Yes. And she said to you? She said that you shouldn't

15 send them a copy of the report, but she 16 would encourage me to check any facts 17 that I am not sure about. She also told 18 me that some analysts consider it an 19 ethical breach to share a report and its 1384
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20 conclusions with the company prior to it 21 being released publically. 22 Q. This happened after your

23 meeting with the company? 24 25 A. Q. Yes. And your meeting with the

1385
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509

W. ACKMAN

2 company was when approximately? 3 A. The third week in November I

4 believe, late November. Again, I can get 5 you the exact date if you would like. 6 Q. What were the factual errors in

7 this report? 8 A. It will take me a long time to

9 come up with some of them, but the first 10 one I would point out of materiality is 11 this issue where it says that MBIA 12 doesn't guarantee -- only guarantees 13 the payment of interest in principal and 14 the assets. That is I would say number 15 one. The second one I remember is about 16 how much equity is required. 17 On page 8 it says, "Gotham

18 references that if MBIA were to 19 consolidate the SPEs it would to do so at 1386

(249 of 565)

20 the holding company level." That is not 21 what we said. We said they could 22 consolidate at the insurance company. 23 Well, to be clear MBIA had said

24 to analysts and the analysts said to the 25 public that they would -- if they were

1387
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510

W. ACKMAN

2 to consolidate, they would do so at the 3 holding company level. It was our view 4 that they had to do so at the insurance 5 company level, which is a material 6 difference in terms of the way they have 7 to file their reports with the 8 regulators, the insurance regulators, and 9 it is material om terms of where the debt 10 appears. 11 Further down it says, "As we

12 understand it, the requirement for 13 consolidation could be 10 percent or 14 higher of equity not assets, making the 15 actual investment amount significantly 16 less" and then in parentheses "an 17 immaterial figure by our assessment given 18 that the equity investment in SPEs are 19 generally minimal." This is actually 1388
(251 of 565)

20 incorrect. They are required to put up 21 10 percent of the assets in equity under 22 the new rules, not 10 percent of the 23 equity, so that is also incorrect. 24 Q. Well, were those rules

25 outstanding in December?

1389
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511

1 2 A.

W. ACKMAN Yes, they were. They were --

3 there was a proposed final -- there was 4 a -- the way FASB works is they put out 5 the rules, and there is a comment period 6 before they are final, and they had put 7 out the rules at that time awaiting 8 comment. So based on the information 9 that was available then, which I cited in 10 the report, it was supposed to be 10 11 percent of the assets, and that rule 12 remained unchanged in the final version, 13 so that is also incorrect. 14 Off the top of my head, those

15 are the two most material errors, but I 16 would be happy to walk through it and 17 find -- I think there are probably 18 more. 19 It says -- on page 9 they say 1390
(253 of 565)

20 that the mark to market losses on MBIA's 21 CDOs were 36 million dollars and the 22 number was 9. 6 million. The company 23 provided a subsequent disclosure around 24 this time where they clarified that their 25 35 million of derivative losses were 9. 6

1391
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512

W. ACKMAN

2 for CDOs, and the balance were for other 3 derivatives in their portfolio. 4 I mean, if you care, I will be

5 happy to do it for you. 6 Q. Sure. Why don't we come back

7 to that. 8 A. I think those are the big ones.

9 I didn't find it -- I thought it was 10 generally a very good report. 11 12 13 MR. WALDMAN: Mark this, please. (Exhibit 18 marked for

14 identification.) 15 16 Q. (Document handed to witness.) I show you Exhibit 18 and ask

17 you if you have seen this before? 18 19 A. Q. I have. And this is, is it not, the 1392
(255 of 565)

20 source of the quotation in your report? 21 Let me direct you to it. 22 23 24 25 A. Yes, I think on page 5. MR. MARCU: Page 5 of what? THE WITNESS: Page 5 of this report.

1393
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513

1 2 3 4 5 Q.

W. ACKMAN MR. MARCU: Of this exhibit you mean, Exhibit 18? THE WITNESS: Yes. It has the quotation on page 31

6 of your report, which we previously spoke 7 about. 8 9 10 11 12 13 14 15 16 17 MR. MARCU: Why don't you open to -Q. Exhibit 1. MR. MARCU: Why don't you open your report to page 31. Take your time to compare it. A. Q. A. Q. Yes, "another area of concern." Right. I see the quote. I believe you testified that

18 from this quote you inferred that both 19 cash CDOs and synthetic CDOs needed to be 1394
(257 of 565)

20 marked to market? 21 22 A. Q. Yes. And you also made the point I

23 believe somewhere that MBIA did not mark 24 cash CDOs to market? 25 A. Yes.

1395
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514

1 2 3 4 Q. A. Q.

W. ACKMAN You read this report, right? I did. And you read the underlying

5 portions with special care I take it. 6 That is why they are underlined? 7 A. I probably read the whole

8 thing, but I tend to underline a lot. I 9 don't want to overemphasize the 10 underlinings. Most of the words on the 11 page are underlined actually. 12 Q. Now, after saying that "credit

13 default swaps and the guarantees of 14 collateralized debt obligations are 15 considered derivative instruments for 16 accounting purposes," and then "as such 17 they must be marked to market with 18 resulting gain or loss flowing from net 19 income," you see that in the carryover? 1396
(259 of 565)

20 21 22

A. Q. A.

Yes. What is the next sentence? "Some companies have chosen to

23 disclose this mark to market gain as an 24 operating item while others have included 25 it below the line, non-operating. We

1397
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515

1 2 note" -3 4 Q.

W. ACKMAN

That is all I want there. And then read the first

5 sentence of the following paragraph. 6 A. "Companies that disclose this

7 item below the line, that is Ace, MBIA, 8 and XL, have stated in one form or 9 another that change in the value of the 10 transactions doesn't reflect the 11 underlying economics of the deal." 12 Q. Now, what they are saying there

13 is that MBIA and several other companies 14 do in fact mark CDOs to market and 15 disclose this item below the line, right? 16 17 18 A. Q. A. Okay. So -I am not sure where MBIA

19 discloses it. I don't think they say 1398

(261 of 565)

20 where MBIA discloses it. I am sorry. 21 You are right. Below the line, yes. 22 Q. This item is the mark to market

23 gain or loss, right? 24 25 A. Q. When you say is the -That is what they are talking

1399
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516

W. ACKMAN

2 about when they say "this item"? 3 4 A. Q. Yes. So how could you believe

5 reading that that the position of Alice 6 Schroeder was that cash and noncash CDOs 7 needed to be marked to market? 8 A. It doesn't say that only

9 synthetic CDOs are marked to market. It 10 says all CDOs are marked to market. 11 Q. Right, and it stated that MBIA

12 marks to market below the line? 13 14 A. Q. Right. But you knew for a fact that

15 MBIA only marked to market synthetic 16 CDOs, right? 17 18 19 A. Q. A. I don't -- I don't know that. You don't know that? I know it now. 1400
(263 of 565)

20

Q.

You knew it when you wrote the

21 report? 22 A. I am not sure. Hold on. I

23 understood that MBIA had been telling 24 people that it was not required to mark 25 its cash CDOs to market. That's correct.

1401
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517

1 2 Q.

W. ACKMAN You didn't think that it was

3 telling them that it wasn't required to 4 do it but in fact was doing it anyway, 5 did you? 6 A. No. No. I did not think they

7 were doing it. Alice is not 8 distinguishing here between synthetic and 9 cash. 10 Q. What she is saying is that MBIA

11 marks to market below the line. 12 13 A. Q. Okay. And do you think that she would

14 have said they mark to market without 15 stating there that they don't mark to 16 market the cash CDOs if she thought they 17 had to be marked to market? 18 A. I apologize. I don't

19 understand your question. 1402

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20

Q.

First she says in general

21 credit default swaps have to be marked to 22 market, right? 23 24 A. Q. Agreed. Yes. She doesn't distinguish between

25 cash and noncash, right?

1403
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518

1 2 A.

W. ACKMAN I think I can help you here,

3 Roger. 4 Q. Let me ask my question before

5 you do. 6 7 8 MR. MARCU: Your question was credit default swaps. A. Credit default swaps are by

9 definition not cash. 10 11 Q. A. Okay. And they are synonymous with a

12 synthetic CDO. A synthetic CDO is a 13 credit default swap. So the fact that 14 she said credit default swaps and the 15 guarantees on CDOs implied to me that she 16 was referring to synthetic CDOs and cash 17 CDOs, because the other word for 18 synthetic CDOs is a credit default swap. 19 And if you look at MBIA's 1404
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20 annual report, they don't say synthetic 21 CDOs when they are disclosing their 22 amount of disclosure to synthetic CDOs. 23 They say credit default swaps, so I 24 reasonably I believe interpreted her 25 saying credit default swaps are required

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2 to be marked to market, and cash CDOs are 3 required to be marked to market as her 4 discussing both categories, both 5 synthetic CDOs and cash CDOs. I am happy 6 to show you the -7 Q. How do you explain her

8 statement that some companies and 9 specifically MBIA disclosed this item 10 below the line? 11 A. It is not inconsistent with any

12 -- MBIA did not break down prior to my 13 report how much of their mark to market 14 loss from CDOs was from synthetic and how 15 much was from cash. They provided no 16 disclosure about it. In fact, they 17 lumped their mark to market CDOs in a 18 category called derivatives generally, 19 and they took 9. 6 million dollars which 1406
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20 is a relatively small number in the 21 scheme of things. So Alice had no clue 22 and nobody else did. 23 24 Q. A. 9.6 was the reserve? No, 9.6 also happened to be the

25 mark to market loss.

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520

1 2 3 Q. A.

W. ACKMAN And? 10 million was the reserve. No

4 one knew, okay, until we announced this 5 issue to Alice. People brought it to the 6 company, and then the company started 7 telling analysts that they are not 8 required to mark to market their cash 9 CDOs, and what Alice is saying here, and 10 I mean you can ask her, and she can tell 11 you because I am not speaking for her, 12 but my interpretation of this credit 13 default swap is a synonym for a synthetic 14 CDO. You would never say CDOs and CDOs. 15 Right. They are two separate things. 16 There are credit default swaps, and there 17 are CDOs in the portfolio. That is why I 18 believed and I quoted it as being both 19 she is saying, that both are being 1408
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20 required to be marked to market. 21 22 23 24 25 A. Q. Now you say -THE WITNESS: Can I have the annual report, please. (Document handed to witness.) Yes.

1409
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521

1 2 Q.

W. ACKMAN Now, I think elsewhere in your

3 report you talk about mark to market 4 versus mark to model? 5 6 A. Q. Yes. What in substance did you say

7 about that? 8 A. I mean I would rather go to the

9 -- go to the report. 10 11 Q. A. You have it in front of you. I said that under FASB 133 they

12 are required to mark to market, but the 13 company appears to be marking to model, 14 and then I quoted parts of a conference 15 call transcript, and then I said that -16 17 Q. A. What page are you referring to? This is on page 30 of my

18 report, Bates stamp 42192. They are 19 required to mark to market. We find it 1410
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20 surprising that their unrealized losses 21 are only 35 and a half million. I would 22 have found it more surprising had I known 23 it was 9. 6 million, but there wasn't 24 enough disclosure at the time. I said 25 that the company is using dealer models

1411
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W. ACKMAN

2 rather than dealer quotes. I give a 3 quote of the conference call, and then I 4 talk about how, you know, the guy from 5 Morgan Stanley presses the company on 6 this issue. You know, the company says 7 -- he asked to what extent are you 8 marking, based upon rating changes in the 9 underlying references or are you doing it 10 based upon where the credit defaults, the 11 CDOs, the credit defaults are actually 12 trading? The reason why he is pushing on 13 the issue is because he knows that they 14 are required to be fair value accounting. 15 The answer is we do it

16 quarterly. It is based on a model. It 17 looks at spreads. It looks at ratings. 18 It looks at interest rates. That is a 19 model, and it is pretty clear they are 1412
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20 marking to model. 21 And then the analyst presses

22 again. You are incorporating market 23 activity, and this is kind of a leading 24 question, and the company says yes, and I 25 say, you know, when Mr. Dunn states when

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W. ACKMAN

2 prompted that they are incorporating 3 market activity in the company's pricing 4 values, this is not the same as marking 5 to market. 6 If you look at the company's

7 disclosure in this year's annual report 8 versus what they said in last year's 9 annual report, they changed the language 10 considerably, and I am happy to go 11 through that with you, but it is clear 12 that they have been marking to model, and 13 they more recently -14 Q. Did you ever ask the company

15 anything about their mark to model? 16 17 18 A. Q. A. Not at the time, no. Why not? Again, this was I believe --

19 the last two issues that came up in my 1414

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20 report were the CDOs. I got these mark 21 to market quotes from the dealers shortly 22 before I published the report at which 23 point I realized this was a major issue, 24 but that was also the time that the 25 company knew we were short. I guess, you

1415
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W. ACKMAN

2 know, there is nothing I doubted about 3 the numbers I got from Deutsche Bank and 4 Lehman. 5 Q. Well, can you conceive of a

6 situation in which mark to model would be 7 a better indication of value than mark to 8 market? 9 A. I would say probably not. I

10 mean -11 Q. None? Supposing there are only

12 three trades? 13 A. Models -- I would much rather

14 rely on a trade of a comparable 15 instrument than I would of any model. 16 Q. There is only one trade. Do

17 you like that better than a model? 18 A. Yes, if it is between a willing

19 buyer and a willing seller, yes, 1416

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20 absolutely. All day. 21 Q. You don't think there could be

22 any extraneous influence on the trade? 23 A. A lot less than there is on

24 models performed by management. 25 Q. You don't know that unless

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W. ACKMAN

2 you've looked at the model, right? 3 A. Warren Buffet spent a lot of

4 time in this year's annual letter talking 5 about what he called mark to myth 6 accounting, and of the companies that use 7 models to value portfolios and value 8 build their business very few are still 9 around. Models are inherently subject to 10 human bias whereas a transaction between 11 willing parties is a much better 12 indication of value. 13 Look, I am sure you could come

14 up with a hypothetical example where a 15 model done by the best people in the 16 business is better than one transaction 17 ten years ago. Yes, absolutely, but it 18 is much better here to use comparable 19 transactions in my opinion, and if you 1418
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20 look at the disclosure in the new 10 K, 21 MBIA says they started using market 22 transactions as an indication of fair 23 value. 24 Q. They still use the model,

25 correct?

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526

1 2 A.

W. ACKMAN Apparently they still use the

3 model, but it says they are now 4 incorporating -- I mean if we have -5 6 A. MR. MARCU: The 2002 10 K. Let's go to the 2002 10 K, and I

7 would be happy to show you. 8 9 Q. A. What do you think it is? What I think it is. I think

10 they are being forced to use more market 11 indicators, market input than they had 12 been prior to us writing our report. 13 They still use a lot of modeling. 14 Q. And so do a lot of companies,

15 right? 16 17 A. Q. Who knows. You don't think that they are

18 the only company that uses models? 19 A. I am sure there are others. 1420
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20 Absolutely. 21 Q. What is the rationale for using

22 a model? Have you ever heard of a 23 rationale for using a model? 24 A. The rationale for using a model

25 is that there are illiquid markets, and,

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W. ACKMAN

2 therefore, it is impossible to get real 3 pricing, and, therefore, we have to do it 4 ourselves. 5 Q. And your position is it doesn't

6 matter how illiquid the market, the 7 market is still a better indicia than a 8 model? 9 10 A. For a CDO, yes. Mr. Waldman, can I show you

11 something? 12 13 14 Q. A. There is no question pending. All right. Can I be responsive to what you

15 asked me in the past? 16 17 Q. Not right now. In your testimony last time, I

18 asked you who had seen drafts of the MBIA 19 report, and then you said that Whitney 1422
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20 Tilson was someone who read one of the 21 later drafts of the report. 22 23 A. Q. Yes, I did. Can you give me a date when you

24 shared it with him? 25 A. No, I don't know.

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528

1 2 Q.

W. ACKMAN How long before December 12 is

3 it, the issue date? 4 5 6 Q. A. MS. PIERRE-LOUIS: 9th. 9th. I would have to check the E

7 mails but probably a couple of weeks 8 prior to releasing it. 9 Q. Now, you also said you shared a

10 copy with David Einhorn? 11 12 13 14 A. Q. A. Q. Yes, I believe so. Is that before or after Tilson? I am not sure. Well, regardless of whether it

15 was before or after, approximately how 16 much in advance of the December 9 17 publication date? 18 A. Shortly before. I don't

19 remember exactly. It could have been a 1424

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20 few weeks. It could have been a few 21 days. I don't remember. 22 Q. And why did you send a copy to

23 Mr. Einhorn? 24 A. To get his opinion on the

25 report.

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529

1 2 3 Q. A.

W. ACKMAN Why Mr. Einhorn? He is a very smart money

4 manager, whom I am friendly with, and I 5 respect his opinion. He is also a fairly 6 active short seller. He is used to 7 looking at companies with similar kinds 8 of issues, and I wanted to get his -9 kind of a person who is not as close to 10 it as I was opinion on it. That being 11 said, he -- I had given him the idea of 12 MBIA earlier, so he had research on the 13 company, and, therefore, he was in a good 14 position to give me feedback. 15 16 Q. A. How much earlier? How much earlier did I mention

17 the company to him? 18 19 Q. A. Yes? A few months. 1426

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20 21

Q. A.

In what connection? Sharing ideas with other money

22 managers. 23 24 Q. A. And what did you tell him? You know, I summarized why I

25 thought it was an interesting short, and

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W. ACKMAN

2 I encouraged him to look at it, and I 3 asked him for his feedback. 4 Q. Did he ever give you any

5 feedback? 6 A. He assigned it to another guy

7 in his organization, who did some 8 research on the company and sent me some 9 information that they had dug up. 10 11 Q. A. Who was that fellow? I think his name is James --

12 an Asian American name. I forgot his 13 last name. Ling, something like that. 14 Q. You also said you shared a copy

15 with Seth Carman? 16 17 18 A. Q. A. Yes. When was that? Maybe a week before I released

19 the report. It was pretty close to a 1428

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20 final copy when I sent it to him. 21 Q. How did you happen to share it

22 with him? 23 A. He is a very well-regarded

24 money manager that I have known for a 25 long time. He is one of our limited

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W. ACKMAN

2 partners, and I respect his opinion, and 3 occasionally we share ideas with him. 4 5 Q. A. Now, did he have any comment? Yes, he thought it was -- I

6 didn't speak to him about the report. I 7 spoke to someone else in his organization 8 about the report. 9 10 11 12 Q. A. Q. A. Who was that? I don't remember his name. What did he say? He said he thought it was an

13 excellent report. 14 Q. Then you said you shared a copy

15 with someone at Gotham Credit Partners 16 which included Whitney Tilson, Ian 17 Cummings, and Joe Steinberg got a draft 18 right before we finished the final, and 19 someone. I didn't quite understand that 1430
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20 answer. 21 A. I shouldn't say someone. I

22 shared it with Whitney Tilson, Joel 23 Steinberg, Iam Cummings, Ezra Murkin, and 24 I think that is it. 25 Q. And Gotham Credit Partners was

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W. ACKMAN

2 the entity which bought credit default 3 swaps? 4 5 A. Q. One of, yes. And that was formed for the

6 purpose of taking the position? 7 8 A. Q. Yes, it was. And you sent it to all of them

9 at the same time? 10 11 A. Q. No. How did you come to send it to

12 Ian Cummings? 13 A. I sent them a copy I think the

14 weekend before we released the report. I 15 thought it was almost done in -- and I 16 -- there were still a bunch of typos to 17 correct, but I had promised to get them a 18 copy as soon as we were finished. So I 19 gave them kind of the penultimate copy I 1432
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20 guess, something close to a finished 21 copy. 22 Q. That is true of Cummings and

23 Steinberg and who else? 24 A. Cummings and Steinberg I sent

25 it to at the same time. Ezra Murkin, I

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W. ACKMAN

2 sent him an earlier draft. 3 4 5 Q. A. Q. How much earlier? Maybe a couple of weeks. How did you come to be sending

6 them to Mr. Murkin? 7 A. He is an investor in Gotham

8 Partners. 9 10 Q. A. Did he ask for it? I think I sent it to him to get

11 his opinion on it. I don't think he 12 asked for it. 13 14 Q. A. Now, Leucadia what is Leucadia? Leucadia is a New York Stock

15 Exchange listed publically traded company 16 that has been run by Ian Cummings, the 17 chairman, and Joe Steinberg, the CEO, and 18 they are very well-regarded investors 19 with a great investment track record. 1434
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20

Q.

Now, did you send a separate

21 copy to Leucadia or was that just 22 identifying Cummings and Steinberg? 23 A. It was identifying Cummings and

24 Steinberg. They are Leucadia. 25 Q. Do you know the address of Mr.

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W. ACKMAN

2 Carman at the Baupos Group? 3 A. I can look it up. They re in

4 Boston. I can get you the address, if 5 you would like. Would you like the 6 address? 7 8 Q. A. Yes. Their address is 10 Saint James

9 Avenue, suite 2000, Boston, Massachusetts 10 02116. Would you like a phone number? 11 12 13 14 15 16 Q. A. Q. A. Q. A. Why not. (617) 210-8312. What about Leucadia? Address? Yes. 315 Park Avenue South, New

17 York, New York 10010. Anyone else? 18 19 Q. A. No, not at the moment. Do you mind if we jump to that 1436
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20 thing that I wanted to show you in the 21 annual report? 22 Q. Before we get to that, now

23 other than the persons you've mentioned 24 Einhorn, Karman, Tilson, Cummings, and 25 Steinberg, who else, if anyone, did you

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W. ACKMAN

2 communicate your views of MBIA to? 3 A. I am sure there were more.

4 When the article appeared in the Wall 5 Street Journal, I got calls from all 6 different kinds of people. 7 Q. Let's just confine ourselves to

8 prior to the article appearing in the 9 Wall Street Journal. 10 A. All the Gotham Credit Partners

11 people. I gave you a list already. 12 13 Q. A. Yes. Plus one other guy who is --

14 who chose not to invest. His name is 15 Adam Glick. I don't remember the other 16 names or other people. 17 Q. When did you decide to start

18 preparing your report? 19 A. Some time in the fall. I think 1438

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20 around the time that the Wall Street 21 Journal article came out. Either a 22 little bit before that or a little bit 23 after that. 24 Q. Did you tell anybody that you

25 were preparing a report?

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536

1 2 3 4 5 6 A. Q. A. Q. A.

W. ACKMAN Yes. Who? Alice. Who else? The Gotham Credit Partners

7 investors, people in my office, my wife. 8 9 10 Q. A. Q. What about Einhorn? I may have. Of course, he knew when you

11 sent him a draft. That is for sure? 12 13 14 15 16 A. Q. A. Q. A. Absolutely. Did he know before that? Probably. What about Karman? I talked to him pretty late,

17 maybe -- I don't talk to Seth very 18 often. I think I spoke to him maybe the 19 week before I published the report, but I 1440
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20 think Morgan Stanley wrote a piece saying 21 we were writing a report, so it was 22 pretty widely known that we were writing 23 a report. 24 Q. Now, you wanted to add

25 something to the prior record.

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537

1 2 A.

W. ACKMAN Just a small point I wanted to

3 point out to you in the annual report 4 where they referred to credit default 5 swaps, and the reference is to the -6 if you look on page 48, which is Bates 7 stamped 10693, they refer to credit 8 default swaps of 17 billion 540 million. 9 This is in the -- this is my copy of 10 the annual report. 11 12 13 14 15 16 17 18 19 MR. MARCU: It has the same Bates number. Did you recite the Bates page, Bates number? THE WITNESS: Right, but this is a different copy. That is their document. The physical annual report -Q. A. What page of the annual report? It is 48 of the actual annual 1442
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20 report. 21 22 23 24 25 MR. MARCU: It may be paginated differently. THE WITNESS: No, it looks like it should be the same. MR. MARCU: Okay.

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538

1 2 A.

W. ACKMAN I might be able to find it in

3 that document if you give me -- show me 4 my copy of it. 5 6 7 8 9 MS. PIERRE-LOUIS: I think it is in the financial portion. THE WITNESS: That is fine or the annual report portion. A. It is probably on 48 of that,

10 somewhere on or near 48. I can find it 11 if you -12 Q. In any case, why don't you read

13 what you think is relevant. 14 A. What is relevant I think is

15 that it says they have a table, which is 16 on page 48, in the right column, which 17 lists their derivative exposure, and 18 instead of calling their majority 19 derivative exposure synthetic CDOs, they 1444
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20 refer to it as credit default swaps 21 rather than synthetic CDOs, and the 22 marketplace thinks of synthetic CDOs as 23 the words are used interchangebly. That 24 was a just a small point. 25 MR. WALDMAN: We will take a

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539

1 2 3

W. ACKMAN three-minute break. (Recess taken.)

4 EXAMINATION BY MR. CALIENDO: 5 Q. We are going to shift gears a

6 little bit and talk about Prepaid Legal 7 Services, Inc. Is that the correct name? 8 9 A. Q. I think so. How did the idea for Gotham's

10 investment in Prepaid come about? 11 A. David Berkowitz came up with

12 it. I don't know where he got the idea. 13 Q. Did you have any role in

14 preparing the research recommendation 15 that was published by Gotham on Prepaid 16 Legal Services? 17 A. I mean I read it. A read, you

18 know, kind of a near final version, but 19 other than that, no. 1446
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20

Q.

Did you provide comments on any

21 drafts of those reports? 22 23 A. Q. Possibly, but small ones. So what was Mr. Berkowitz' role

24 in preparing the Prepaid Legal report, if 25 you know?

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540

1 2 A.

W. ACKMAN He was the principal author.

3 He did all the analytical work. He 4 reserved it. He wrote it. 5 Q. To your knowledge, was there

6 anyone else involved in the actual 7 drafting of the Prepaid report? 8 A. I think David Klafter was

9 actively involved particularly with the 10 section that was on litigation. 11 12 Q. A. Anyone else at Gotham? I think they were -- I think

13 just the two of them. 14 15 16 Q. A. Q. Anyone else outside of Gotham? I don't know of anyone. Anyone at Prepaid Legal

17 Services? 18 A. I think David spoke to the

19 company. I don't know exactly what he 1448

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20 spoke to them about or, you know, what he 21 used or whether he spoke to them about 22 what was in the report or not. 23 Q. Do you know why Gotham

24 published the Prepaid recommendation on 25 the Internet?

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541

1 2 3 4 A. Q. A.

W. ACKMAN Yes. Why? One of my investors recommended

5 that we meet with the CEO of 6 TheStreet.com because he felt the company 7 had made a lot of progress, and we might 8 be interested in making an investment in 9 TheStreet.com, which is a publically 10 traded company. 11 12 13 14 15 16 17 18 19 MR. MARCU: Before we go off on a tangent, are you asking specifically why it was published on the Internet as opposed to -- I think the answer Bill is giving is as to why they decided to do the report at all, and I wanted to make sure you were talking about the same thing. Q. My question is: Why did you 1450
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20 publish the Prepaid recommendation on the 21 Internet? 22 A. The answer is we met with the

23 CEO of TheStreet.com at the suggestion of 24 one of our investors to hear about their 25 company, and David sat in on the meeting

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W. ACKMAN

2 and TheStreet.com had written a series of 3 negative articles about Prepaid Legal 4 Services, and David expressed his 5 frustration to the CEO of about how 6 one-sided their analysis of the company 7 was, and the CEO suggested that we write 8 a counterpoint that they would publish on 9 TheStreet.com, and David wrote a 26-page 10 report as a counterpoint, and 11 TheStreet.com would only accept a 12 four-page report. So what he did was he 13 wrote an executive summary of the report, 14 and then linked it to the full report on 15 our web site. 16 17 Q. A. You said -And that is why he put it on

18 the Internet. 19 Q. You said one of your investors 1452

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20 recommended that you speak with the CEO 21 of TheStreet.com; is that correct? 22 23 24 A. Q. A. Yes. Who is that? Dr. Martin Peretz. His first

25 name is Martin.

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543

1 2 Q.

W. ACKMAN And the CEO of TheStreet.com is

3 Jim Kramer; is that correct? 4 A. No. I am not sure of his name.

5 Tom Clark maybe although I -- I am not 6 sure, and there might be a -- I think 7 that might be it. 8 Q. You mentioned Adam Glick

9 earlier. Who is Adam Glick? 10 A. Adam Glick is a -- runs a

11 family office for his family, and he 12 manages his family money, and he is 13 someone that we have shown ideas to over 14 time, and David recently went to work for 15 him. 16 17 Q. A. David who? David Berkowitz. He is working

18 for him sort of part time right now. 19 Q. So David Berkowitz no longer 1454
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20 works for Gotham Partners LP? 21 A. He is still one of the general

22 partners of the partnership, but in that 23 neither one of us are earning a living 24 right now, he is now working elsewhere. 25 I am not sure if he is still drawing a

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W. ACKMAN

2 salary yet, but I think he intends once 3 we wrap up this investigative stuff to 4 work there full time. 5 Q. What company does Adam Glick

6 work at if it is a company? 7 8 9 10 11 12 13 14 A. Q. The Jack Parker Corporation. The Jack Parker Corporation. MR. CALIENDO: I want to mark as Exhibit 19 a one-page document, which bears Bates stamp number GP 052538, and it appears to be an E mail and a reply to an E mail. (Exhibit 19 marked for

15 identification.) 16 17 Q. (Document handed to witness.) Have you had a chance to take a

18 look at that, what has been marked as 19 Exhibit 19? 1456

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20 21 22 23 24

A. Q. A. Q. A.

Sure. Do you recognize it? Yes. What is it? It is an E mail from me to

25 David.

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545

1 2 Q.

W. ACKMAN Would you read into the record

3 please the message from Mr. Berkowitz to 4 you? 5 A. "Polmedica moving to the big

6 board. Up four dollars today." 7 Q. And now would you read the

8 reply that you sent to Mr. Berkowitz? 9 A. "I'm sorry. I like the Prepaid

10 fraud better. Frauds work better when 11 they are cash flow negative." 12 Q. You used the word Prepaid, but

13 what is actually stated there is PPD. Is 14 that the stock symbol for Prepaid? 15 16 A. Q. It is. What fraud were you referring

17 to in that first sentence of your reply 18 to Mr. Berkowitz' E mail? 19 A. It was a joke. Polymedica is a 1458
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20 company that David had done a lot of 21 research on. A lot of people have 22 accused the company of being a fraud, and 23 David did a lot of work on it. He liked 24 the stock. I did my home work on it, and 25 I wasn't a hundred percent comfortable

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W. ACKMAN

2 with it. So we never made that 3 investment. 4 Prepaid is also another company

5 that a lot of short sellers, you know, 6 have called a fraud, and that was, you 7 know, kind of the joke of the E mail. 8 Obviously we like Prepaid Legal. We own 9 a ton of stock in the company, and it is 10 cash flow positive as opposed to cash 11 flow negative. It is a bit of the banter 12 I would say in the office. 13 14 Q. Let me make sure I understand. So why do frauds work better

15 when they are cash flow negative? 16 A. When it says "frauds work

17 better," if you are shorting a fraud -18 shorting a company that is fraudulent, it 19 tends to -- it is a better bet if the 1460
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20 company is burning up cashing than if it 21 is generating cash. 22 23 Q. A. Was that the case with Prepaid? Prepaid is generating cash, so

24 it is a pretty bad short in our opinion. 25 We were long Prepaid, not short, so --

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W. ACKMAN

2 you generally don't want to short 3 companies that are hugely cash flow 4 positive, and Prepaid Legal is a hugely 5 cash generating company. 6 Q. So by saying "frauds work

7 better when they are cash flow negative" 8 you are suggesting that the PPD fraud 9 would work better because it was cash 10 flow negative or am I misunderstanding? 11 A. No, you are misunderstanding.

12 Prepaid is not a fraud. We don't believe 13 it is. It is a company that has been 14 accused by short sellers of being a 15 fraud. To the extent you are shorting 16 companies, it is preferential to short 17 companies that are cash flow negative as 18 opposed to ones that are cash flow 19 positive. 1462
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20

We never could understand why

21 shorts were so excited about shorting 22 Prepaid because it is a highly cash 23 generative business, and they buy back 24 their stock with their cash flow. It has 25 a lot of characteristics we like to see

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W. ACKMAN

2 in this business. We don't think of 3 Prepaid as a fraud. We wouldn't own the 4 stock. It was one of our biggest 5 positions at the time we owned it. 6 Q. Did Mr. Berkowitz ever respond

7 to this E mail? 8 9 A. Q. I don't know. Did you ever have a

10 conversation with him about it? 11 12 A. Q. No, not that I could remember. So you sent him this E mail and

13 never discussed it again? 14 A. It is not a particularly

15 substantive E mail. He was making fun of 16 the fact that I told him -- I killed 17 the investment in Polymedica because I 18 wasn't comfortable with the company. He 19 was kind of tickling me with the fact 1464
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20 that stock I said he shouldn't -- we 21 shouldn't buy was up a lot. So he was 22 going to give me a hard time about it, 23 and I told him I like your Prepaid fraud 24 better, and fraud was meant in a 25 euphemistic fashion; i.e., because we

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W. ACKMAN

2 were obviously long the stock. 3 Q. So I am not sure I understand

4 why this would be funny. Can you just 5 elaborate on that? 6 A. You don't understand my

7 relationship with David which is probably 8 why you don't understand the sense of 9 humor. 10 11 12 13 14 15 16 17 18 19 MR. MARCU: Why don't you explain when you said to David in this E mail I am sorry I like the Prepaid fraud better -THE WITNESS: Yes. MR. MARCU: -- what did you mean by that? THE WITNESS: The translation is David is complaining to me in this E mail that a stock that he liked and 1466
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20 21 22 23 24 25

wanted to buy I killed because I thought there was -- I wasn't comfortable. The company might be a fraud. MR. MARCU: When you say you killed it --

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1 2 3 4 5

W. ACKMAN MR. CALIENDO: Mr. Marcu, I will follow-up with questions, but I appreciate it. A. David and I when we put an

6 investment in the portfolio, we both have 7 to agree. David liked Polymedica. I 8 didn't. I wasn't comfortable with the 9 numbers. It had too much hair on it, if 10 you will. 11 Prepaid is another company that

12 has hair on it in the sense that a lot of 13 short sellers -- short sellers were all 14 over Polymedica and said it was a fraud. 15 The FBI was investigating it. There were 16 all kinds of statements about Polmedica. 17 I couldn't discern the truth. 18 Prepaid I jokingly referred to

19 as a fraud because again it is a company, 1468

(331 of 565)

20 and I should put fraud in quotes, it is a 21 company that a lot of money managers are 22 short. It has the highest short on the 23 New York Stock Exchange, and my statement 24 isfrauds work better when the are cash 25 flow negative, and it is my allusion to

1469
(332 of 565)

551

W. ACKMAN

2 the fact that I believe Polymedica is a 3 cash flow negative company. I am not 4 sure. It is a kind of statement that if 5 you are going to short frauds, short ones 6 that are cash flow negative as opposed to 7 cash flow positive. 8 So the allusion to the word

9 fraud is kind of a joke, but we do have 10 an interesting sense of humor between the 11 two of us. We have been partners for ten 12 years, and we kind of make fun of each 13 other. That is the right way to describe 14 it. 15 16 17 18 19 MR. CALIENDO: I would like to mark as Exhibit 20 a one-page document, which contains a series of E mails and bears Bates stamp numbers GP 050796. 1470
(333 of 565)

20

(Exhibit 20 marked for

21 identification.) 22 23 Q. (Document handed to witness.) Have you had a chance to look

24 at it? 25 A. Yes.

1471
(334 of 565)

552

1 2 Q.

W. ACKMAN Who is Kathleen Pinson that is

3 referenced in the E mail? 4 A. This is an E mail -- Kathleen

5 I think is like a person in the human 6 resource department at Prepaid Legal 7 Services. 8 9 Q. A. And who is Randy Harp? Randy Harp I believe is the COO

10 of the company. 11 Q. And this E mail or the top E

12 mail reflected on this page is from Mr. 13 Berkowitz to you, and it seems to me to 14 be a direction to you to Kathleen Pinson 15 at a particular phone number. 16 17 18 19 A. Q. A. Do you agree with that? Yes. Did you contact her? No. 1472
(335 of 565)

20 21

Q. A.

Why not? This is -- Gift-

22 Certificates.com is a company that we 23 have an investment in. 24 25 Q. A. Right. It is a company that is in the

1473
(336 of 565)

553

W. ACKMAN

2 incentives business, and they sell 3 incentives to corporations to help 4 motivate employees to meet sales goals 5 and other kinds of achievements. David 6 had mentioned to this chief operating 7 officer at Prepaid that this is a good 8 product that you can use to motivate your 9 sales force. Jerry Vener is the head of 10 sales for GiftCertificates.com or was at 11 the time, and I was asking David who he 12 should -- who Jerry should follow-up 13 with in order to sell GiftCertificates, 14 and David gave me the contact name, which 15 is Kathleen Pinson, and I forwarded it or 16 I gave it to Tim Barefield. 17 Q. So you never spoke to Kathleen

18 Pinson? 19 A. No, not to my recollection. If 1474

(337 of 565)

20 I spoke to her it was only to give her an 21 introduction, but I don't think I spoke 22 to her. 23 Q. It seems to me that Mr.

24 Berkowitz is also giving you a direction 25 to please copy Mr. Harp on all

1475
(338 of 565)

554

W. ACKMAN

2 correspondence. 3 4 A. Do you agree with that? Yes, I think again I passed

5 these directions on to Tim Barefield. 6 The idea was when the company contacted 7 -- when you are in the sales business 8 and you are selling a product over the 9 phone, it is very helpful to have an 10 introduction to a company, and the 11 purpose of this was for Jerry Vener to be 12 be able to call Prepaid Legal saying he 13 was calling at the suggestion of the 14 chief operating officer, and the chief 15 operating officer asked to be contacted, 16 so that he knew to make sure that this 17 person was responsive I guess. 18 Q. Did you ever correspond with

19 Mr. Harp? 1476

(339 of 565)

20 21 22 23 24 25

A. Q. A.

No, I have met him once. Once? Yes, I believe so. MR. CALIENDO: I would like to

mark as Exhibit 21 a multiple page document bearing Bates stamp numbers

1477
(340 of 565)

555

1 2 3 4 5

W. ACKMAN GP 050758 to 778, and it appears to be an E mail from Mr. Berkowitz to Mr. Ackman and Mr. Klafter. (Exhibit 21 marked for

6 identification.) 7 8 Q. (Document handed to witness.) My first question is: Do you

9 recognize that document? 10 11 12 A. Q. A. Yes. What is it? It looks like a draft of the

13 research report that David wrote on 14 Prepaid. 15 Q. And if you turn to the second

16 page, the title of the report is "Why We 17 Love Prepaid Legal Services (and why we 18 think Herb Greenberg and Melissa Davis 19 are wrong)." 1478
(341 of 565)

20 21 22

A. Q. A.

Yes. Who is Herb Greenberg? Herb Greenberg is a reporter

23 for TheStreet.com who has written many 24 negative articles about the company, and 25 Melissa Davis also is a reporter who was

1479
(342 of 565)

556

W. ACKMAN

2 written many negative articles on 3 Prepaid. 4 5 6 7 8 9 10 11 12 MR. CALIENDO: I would like to mark as Exhibit 22 a multipage document bearing Bates stamp numbers GP 051497 to 527. It appears to be an E mail from Mr. Klafter to Mr. Berkowitz with a CC to Mr. Ackman. Q. I ask you if recognize that

document. (Exhibit 22 marked for

13 identification.) 14 15 A. (Document handed to witness.) It looks like a later version

16 of the report. Although I should check 17 -- I don't remember what the last date 18 was. 19 MR. MARCU: The question is: 1480
(343 of 565)

20 21

Do you actually recognize it? A. I mean it looks like an E mail

22 -- I mean it is an E mail from David 23 Klafter to David Berkowitz in which I was 24 copied, and it attaches a copy of the 25 report.

1481
(344 of 565)

557

1 2 3 Q. A.

W. ACKMAN Do you recall receiving that? I don't specifically recall

4 receiving it, but I am sure I did. 5 Q. The E mail states "Attached is

6 the draft." Let me back up and say the E 7 mail is from Klafter. 8 It says "Attached is a draft.

9 I have done an EX" -10 11 12 13 A. Q. A. Q. Executive. -- "summary of just over 3 PGs. Pages. "I am sure it needs editing. I

14 am sure it has a bunch of smaller changes 15 I have not had a chance to make. I'll 16 leave my markup on my desk. I will be in 17 Delaware TR." 18 19 A. Q. Tomorrow. "And I hope to be back at my 1482
(345 of 565)

20 office at" -21 22 A. Q. 4 o'clock. It says "I have done an

23 executive summary of just over three 24 pages." 25 Did Mr. Klafter to your

1483
(346 of 565)

558

W. ACKMAN

2 knowledge prepare this executive summary? 3 A. He says he did, and I am sure

4 he did. 5 Q. Do you have any knowledge of

6 whether he did or he didn't? 7 8 A. Q. No. He says, "I'll leave my markup

9 on my desk." 10 11 12 13 14 A. Q. A. Q. Did you ever see that markup? I don't think so. Do you know where it is today? No idea. You said earlier that Mr.

15 Klafter no longer works for Gotham 16 Partners Management Company. 17 18 A. Q. Right. And that he does legal work for

19 Gotham Partners LP? 1484

(347 of 565)

20

A.

That's correct and the other

21 funds. 22 23 24 25 Q. A. Q. A. And the other funds? Yes. Which other funds? Gotham Partners III LP, Gotham

1485
(348 of 565)

559

W. ACKMAN

2 Partners International, and he is also 3 helping with respect to this -- your 4 document production, things with respect 5 to the AG's investigation. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 MR. WALDMAN: Let me interject a question. Is he an independent lawyer? THE WITNESS: Yes, he is. MR. WALDMAN: With no connection with the company other than that of attorney for the company in certain areas? THE WITNESS: I mean -- no connection. I mean he shares office space with us. We pay his health insurance because he wasn't able to get health insurance on his own, and we provide some secreterial support. 1486
(349 of 565)

20 21 22 23 24 25

MR. CALIENDO: I would like to mark as Exhibit 23 a multiple page document bearing Bates stamp numbers GP 051460 to 490. It appears to be an E mail from Mr. Berkowitz to Mr. Ackman and to Mr. Klafter.

1487
(350 of 565)

560

1 2

W. ACKMAN (Exhibit 23 marked for

3 identification.) 4 5 Q. (Document handed to witness.) The question is: Do you

6 recognize that document? 7 A. It is as you described it, and

8 again I don't remember specifically 9 receiving this document, but I am 10 confident that I did. 11 Q. Can you turn to the second page

12 please and read the title of the report? 13 A. "A Recommendation for Prepaid

14 Legal Services." 15 Q. Do you agree with me that is

16 different than the title that was on the 17 prior draft that we looked at on Exhibit 18 22? 19 A. Yes. 1488
(351 of 565)

20

Q.

Do you know how it came to be

21 that the title was changed as it was in 22 Exhibit 22 to a recommendation for 23 Prepaid Legal Services, Inc. in Exhibit 24 23? 25 A. Yes.

1489
(352 of 565)

561

1 2 3 Q. A.

W. ACKMAN Why? Explain it to me. The one big comment I had about

4 the report is I felt that it was too 5 personal. I think David was not happy 6 with the work that had been done by Herb 7 Greenberg and Melissa Davis, and he wrote 8 kind of -- I just felt it wasn't in our 9 interest to attack two reporters of the 10 TheStreet.com. So I encouraged him to 11 focus, talk about TheStreet.com as being, 12 you know, a monolithic enterprise writing 13 reports as opposed to the specific 14 authors of the report because I thought 15 it got us nothing and would only upset 16 the reporters. 17 Q. So I am understanding it was

18 your idea to change the title to "A 19 Recommendation for Prepaid Legal 1490
(353 of 565)

20 Services"? 21 A. It wasn't my idea to change the

22 title. My idea was not this part of the 23 title. My idea was that -- I didn't 24 talk about the title specifically. 25 My -- my big comment to David on the

1491
(354 of 565)

562

W. ACKMAN

2 report was that I felt it was too ad 3 hominem. It was too personal to Herb 4 Greenberg and Melissa Davis, and no one 5 cares about Herb Greenberg and Melissa 6 Davis. They care about Prepaid Legal 7 Services, and I thought any reference to 8 the report should be to TheStreet.com. 9 The title was David Klafters idea. 10 Q. So you didn't choose the actual

11 words for the title? 12 13 A. Q. I did not. And do you know whether Mr.

14 Berkowitz chose the actual words? 15 16 A. Q. No, I do not. Do you know whether Mr. Klafter

17 chose the actual words? 18 19 A. I assume it was one of the two. MR. MARCU: But you don't 1492
(355 of 565)

20 21 22 23 24 25

know? THE WITNESS: But I don't know. MR. CALIENDO: Mark as Exhibit 24 a one-page E mail from Mr. Berkowitz to Mr. Ackman. It bears Bates stamp numbers GP 050703.

1493
(356 of 565)

563

1 2

W. ACKMAN (Exhibit 24 marked for

3 identification.) 4 5 6 Q. A. (Document handed to witness.) Do you recognize that document? Same as before. I mean I don't

7 remember specifically receiving it, but I 8 am sure I did. 9 Q. If you look at the bottom,

10 there is what appears to be an E mail 11 from you to Mr. Berkowitz that says, "Did 12 you get my comments on PPD?" 13 14 A. Q. Yes. What comments were you

15 referring to there? 16 A. Apparently I made some comment

17 in the executive summary and a couple of 18 other, you know,language changes. 19 Q. How did you make those 1494
(357 of 565)

20 comments? 21 22 23 A. Q. A. In writing. In a handwritten form? Yes, I marked up a printed

24 version of the document. 25 Q. And do you know --

1495
(358 of 565)

564

1 2 3 4 5 6 Q.

W. ACKMAN MR. MARCU: Do you specifically remember that or is that your -THE WITNESS: Yes. Do you know where that markup is

7 today? 8 9 A. Q. I don't know. I have no idea. Do you remember what your

10 comments were? 11 A. No I think they were primarily

12 language changes. My big comment, and I 13 don't know if it -- this comment -14 the comments I made here, if this draft 15 already reflected my comments with 16 respect to Berkowtiz' -- Herb Greenberg 17 and Melissa Davis, but my big comment was 18 to take out any reference to Melissa 19 Davis or Herb Greenberg and replace that, 1496
(359 of 565)

20 you know, with as written in 21 TheStreet.com, and I may have had other 22 comments. I just don't remember 23 precisely what they were. 24 Q. Did you comment on the full

25 report as well as the executive summary?

1497
(360 of 565)

565

1 2 A.

W. ACKMAN I probably did both, yes,

3 although, I am not sure. I mean it 4 implies from his E mail that I did both, 5 and, therefore, I assume I did both. 6 Q. Tell me everything you did to

7 look for documents responsive to the 8 Attorney General's subpoena in this case. 9 A. David Klafter in our office

10 organized document production, and he I 11 guess reviewed the subpoenas with us. 12 13 14 15 16 17 18 MR. MARCU: Do you want to know what Mr. Ackman personally did or do you want him to tell you the sort of story about what the whole firm did? Either one is fine. I just wanted to -Q. For right now I want to know

19 what you did. 1498

(361 of 565)

20

A.

I did whatever David Klafter

21 told me to do, which was: Do you have 22 any documents in your office that are 23 responsive to this subpoena? If so, give 24 them to me. Go through your E mails, you 25 know, deleted E mails, sent E mails, you

1499
(362 of 565)

566

W. ACKMAN

2 know, that are responsive to the 3 following request and put them in a 4 folder labeled AG. Sort them by company 5 name or other, and that is what I did. 6 You know, do you have any documents at 7 home? I went home. I looked for 8 documents at home. I brought in whatever 9 I had at home. I gave them to David. 10 You know, I went on the computer, showed 11 him which files I kept -- we have kind 12 of a central database, and information is 13 kept by company, you know, Gotham sort of 14 global. A section called company 15 analysis and then sort of each company 16 that we do work on we create a folder, 17 and we have a folder for MBIA, one for 18 Prepaid, one for First Union, one for 19 FarmerMac, and I showed him where I kept 1500
(363 of 565)

20 it, and I gave it to him. We have a tape 21 backup for our computer, and we had -22 we had a firm come in and restore to our 23 -- I think the way the delete folder 24 works on the E mail is after it gets -25 you know, every certain period of time it

1501
(364 of 565)

567

W. ACKMAN

2 automatically flushes the contents, so 3 that the hard drive doesn't get fixed up, 4 you know, filled up, but we have I think 5 a daily or weekly tape drive that takes a 6 download of everything that is on the 7 machine, and we -- and David went back 8 and had a firm called RFA, which is our 9 outsourced computer firm, take the stuff 10 that was re -- restore the tape drive 11 stuff on to our main computer, so I would 12 have access to all of my E mails, and 13 that is basically it. 14 Q. And you have a computer at home

15 you mentioned? 16 A. The computer at home is linked

17 to the office, and I have a small amount 18 of stuff on my own machine, which I gave 19 to David as well, but I am able to access 1502
(365 of 565)

20 the office filing system from my home PC. 21 So I generally keep all of my files, you 22 know, organized on the computer kind of 23 in the office hard drive as opposed to my 24 home hard drive. 25 Q. You said I have my own machine?

1503
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568

W. ACKMAN

2 What do you mean by your own machine, 3 your own computer? 4 A. A PC at home. It is linked to

5 the office, so that I can get into my 6 file in the office. 7 Q. Do you have a separate computer

8 that is not linked to the office? That is 9 what I understood you to say. 10 11 A. Q. No, I do not. And this company was called

12 RFA? 13 14 A. Q. Yes. Did they attempt to restore

15 deleted E mails on your home computer? 16 A. No, I get the same E mails at

17 home that I do in the office. I have an 18 AOL account, but it does not -- I don't 19 use it -- I used it a couple of years 1504
(367 of 565)

20 ago when I couldn't access my home E 21 mails -- my work E mails at home, but I 22 basically stopped using it when we were 23 able to get access a couple of years ago. 24 I can go on to a computer now and get my 25 E mails anywhere from another machine,

1505
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569

W. ACKMAN

2 but I did -- also as part of this, I have 3 an AOL address called willack@aol.com, 4 and I went back to see if I could get 5 anything there. But on AOL, the E mails 6 sort of disappeared after a time, so I 7 didn't have any old E mails there. 8 Q. So this company RFA didn't

9 undertake any effort to restore E mails 10 that you sent through your AOL account or 11 that were somehow linked to your office 12 from your AOL account? 13 A. The answer is I don't know

14 precisely what AOL did. David Berkowitz 15 is a good person to talk about that 16 because he managed that with David 17 Klafter. 18 Q. I think you said you don't know

19 what AOL did. You mean RFA? 1506

(369 of 565)

20

A.

RFA. I wouldn't have E mail on

21 my AOL address because I rarely used it. 22 Q. Whatever you did have, you

23 reviewed and produced to the extent they 24 were responsive? 25 A. The only AOL E mails I was able

1507
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570

W. ACKMAN

2 to come up with were ones which had been 3 sent to myself in the office or ones 4 where I had sent to someone else from my 5 home machine like last year -- there 6 was a time in early '02, if I remember 7 right, that I couldn't access my -8 there was something wrong with access at 9 the office. So I used AOL to send an E 10 mail to Allison Cowan at The New York 11 Times, and she wrote me back, and I have 12 a copy of the -- I actually couldn't 13 recover the E mail that I had sent, and I 14 wanted it because I thought it was a good 15 summary of the FarmerMac events, and she 16 -- and she forwarded it to me, so I 17 could get a copy of it, but I don't think 18 there is anything -- I don't use my AOL 19 account unless there is some kind of an 1508
(371 of 565)

20 emergency like my PSP contact is broken, 21 and I want to send an E mail. 22 Q. So I am clear, you looked at

23 your AOL account for E mails that you may 24 have sent or received that were not -25 A. Correct.

1509
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571

1 2 Q.

W. ACKMAN -- that were not routed to your

3 office? 4 A. Correct, and there was zero, so

5 the only AOL E mails that we have 6 produced are ones that are the kind we 7 got indirectly because I -- you know, I 8 sent something to someone else who 9 responded to me, and that is why -- I 10 can only think of one, which is this 11 Allison Cowan E mail. 12 13 14 Q. A. Q. Getting back to Exhibit 24. Yes. Mr. Berkowitz replied to your E

15 mail saying, "yes... David K. and I did 16 not like the changes to the executive 17 summary... The rest seemed fine." 18 Do you recall what changes to

19 the executive summary that Mr. Klafter 1510

(373 of 565)

20 and Mr. Berkowitz didn't like? 21 22 A. Q. No. Do you recall why they didn't

23 like them? 24 25 A. Q. No. Do you recall any conversations

1511
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572

W. ACKMAN

2 that you might have had on that topic? 3 4 A. Q. No. Did you forward a copy of the

5 Prepaid research recommendation to Mr. 6 Tilson? 7 8 9 10 11 it? 12 A. For the same reason I got his A. Q. A. Q. I think I may have. Why? To get his input on it. Why did you want his input on

13 input on the other reports we wrote. I 14 think he is a good writer. He is another 15 money manager, and he is a friend, and I 16 just wanted his -- he was pretty 17 negative on Prepaid Legal. So, you know, 18 I wanted him -- to hear what a negative 19 person might say about a report that we 1512
(375 of 565)

20 think was a positive report. 21 Q. Why was he negative on Prepaid

22 Legal? 23 A. I think he -- he believes in

24 in Herb Greenberg. Herb Greenberg has a 25 great track record in terms of

1513
(376 of 565)

573

W. ACKMAN

2 identifying shorts, and he just didn't 3 like the idea of betting against Herb 4 Greenberg. 5 Q. Did you have discussions with

6 Mr. Tilson about why he was negative on 7 Prepaid Legal? 8 A. Exactly the reason I just

9 described. I don't think he has done any 10 independent work on the company. 11 Q. You don't think Mr. Tilson has

12 done any independent work? 13 14 A. Q. At the time, I don't think so. How many discussions would you

15 say you had with Mr. Tilson about why he 16 was negative on Prepaid Legal? 17 A. A couple. I mean I --

18 periodically I would recommend that he 19 take a look at it because I think that 1514
(377 of 565)

20 David has done or had done very good work 21 on the company, and, you know, I don't 22 know -- every time the stock got crushed 23 because some negative article came out, I 24 would say you might want to look at it. 25 We liked it at 25, and now it is 16. You

1515
(378 of 565)

574

W. ACKMAN

2 know, you should take a look at it, and 3 then Whitney might comment I know. I 4 think you guys are smart, blah, blah, but 5 I just don't -- you know, I am not 6 comfortable. Herb Greenberg, he is -7 Herb doesn't go after a company like 8 this, and it is rare that he is wrong and 9 that kind of thing. 10 11 Q. You said you might. Are you talking about a

12 specific conversation that had you with 13 Mr. Tilson? 14 A. I have had conversations like

15 that with Whitney, you know, a couple of 16 conversations. Not those exact words but 17 along those lines. 18 Q. Do you recall the specifics of

19 the two conversations that you had with 1516

(379 of 565)

20 Mr. Tilson or not? 21 A. I am not sure it was two,

22 three, or one conversation, but the 23 conversations we had about Prepaid 24 are -- are similar to what I described. 25 I have no idea what the specific words

1517
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575

W. ACKMAN

2 are or what else we discussed in the 3 conversation. 4 Q. To your knowledge, did Mr.

5 Tilson's view of Prepaid ever change? 6 7 A. Q. No. And I know we touched on this

8 last time, but I just want to be clear. 9 Mr. Tilson, Whitney Tilson is

10 not an investor in any Gotham 11 partnership, correct, individually? 12 13 A. Q. Personally, no. The fund that he runs is called

14 what? 15 A. Tilson Capital Partners, Tilson

16 Growth Fund, something like that. 17 Q. And that fund is an investor in

18 one of the Gotham partnerships, rights? 19 A. Correct. 1518

(381 of 565)

20 21 22

Q. A. Q.

Which one is that? Gotham Credit Partners I LP. And Mr. Tilson's fund is not an

23 investor in any other Gotham partnership; 24 is that right? 25 A. I think he is an investor in

1519
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576

W. ACKMAN

2 one of the GiftCertificate.com entities, 3 but I am not sure. 4 Q. Which are the

5 GiftCertificate.com entities? 6 A. There are entities that are

7 called -- one is called Gift Certificate 8 Partners, and others called Gotham 9 Ventures I, II, III, IV, V. He is an 10 investor in one or more of those entities 11 I believe. 12 Q. But Gotham Partners LP is not a

13 Gift Certificates P entity to use your 14 words? 15 A. No GiftCertificates.com is a

16 private company that we invested in 17 directly through the fund, and we formed 18 several entities that made investments in 19 the company. Those entities are called 1520
(383 of 565)

20 Gotham Ventures, and I think one is 21 called Gift Certificates Partners. 22 Whitney is an investor in one or more of 23 those funds. Not Whiten personally but 24 one of the funds that he manages. 25 Q. He manages more than one fund?

1521
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577

1 2 3 A. Q.

W. ACKMAN Yes. Do you know what the names of

4 of each of the funds are? 5 A. No, but I think he has an

6 offshore fund and an onshore fund, and I 7 think he has a venture capital fund. 8 Tilson Ventures I think it is called. 9 Q. I think you testified last time

10 that is it Susan Blackman Tilson that is 11 Whitney Tilson's wife? 12 13 A. Q. Yes. She I think you said was an

14 investor in one of the Gotham 15 partnerships? 16 A. Yes, she was an investor years

17 ago. She withdrew from the fund, but you 18 can't withdraw from the special situation 19 subaccount investments, so she is -1522
(385 of 565)

20 continues to be an investor in those 21 special situations subaccount entities 22 until those entities liquidate their 23 assets. So she is not an investor in the 24 majority of the funds, just in a couple 25 of the private investments, segregated

1523
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578

W. ACKMAN

2 investments sort of thing. 3 Q. Was she an investor in any fund

4 that had a position in Prepaid Legal 5 Services? 6 7 A. Q. No. And when did she withdraw from

8 the fund or elect to withdraw from the 9 fund? 10 A. A few years ago when Whitney

11 started his fund. I think that that is 12 when they withdraw and invested in his 13 fund. 14 15 16 17 18 19 MR. CALIENDO: I would like to mark as Exhibit 25 a one-page E mail bearing Bates stamp numbers GP 051866, and it is an E mail from Mr. Ackman to Mr. Berkowitz and then Mr. Berkowitz' reply. 1524
(387 of 565)

20

(Exhibit 25 marked for

21 identification.) 22 23 Q. (Document handed to witness.) Have you had a chance to take a

24 look at that document? 25 A. Yes.

1525
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579

1 2 Q.

W. ACKMAN Your E mail to Mr. Berkowitz

3 said, "Please put your exec summary and 4 link on VIC form for PPD. Thanks." 5 Actually, what is the VIC that

6 is referred to in that E mail? 7 A. It is a web site,

8 ValueInvestosClub.com. 9 Q. And when you said exec summary,

10 what were you referring to? 11 A. The executive summary of

12 his -- I think the thing that he posted 13 on TheStreet.com web site which was kind 14 of the abridged version of the report. 15 Q. What were you referring to by

16 the link? 17 A. That he should provide a link

18 to the web site, so that people could get 19 the full version of the report if they 1526
(389 of 565)

20 wanted to read more. 21 22 23 Q. A. Q. Link to GothamPartners.com? Correct. Mr. Berkowitz replied to your E

24 mail, and he said done? 25 A. Yes.

1527
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580

1 2 Q.

W. ACKMAN So do you know whether in fact

3 the executive summary was posted on 4 ValueInvestorsClub.com? 5 A. I don't know exactly what was

6 posted on ValueInvestorsClub.com, but it 7 was, you know, something close to the 8 executive summar. He may have modified 9 it somewhat to fit the format of the web 10 site. 11 Q. Did you ever go to

12 ValueInvestosClub.com to see what was 13 posted there? 14 A. Yes, not to see what we had

15 written but to see what other people had 16 written. 17 Q. Did you have occasion to see

18 what may have been posted by Gotham on 19 that ValueInvestosClub.com? 1528

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20

A.

I mean I don't want to get too

21 technical. The executive summary is a 22 very specific document. I don't know if 23 that document ended up on VIC. I never 24 like did a comparison to see if this is 25 exactly what we had posted but something

1529
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581

W. ACKMAN

2 close to executive summary. In the 3 format of the web site, you describe the 4 idea, and then you describe the catalyst, 5 so it doesn't fit exactly to put the 6 exact executive summary. So my guess is, 7 but I don't know, that he may have 8 modified it somewhat and put it on the 9 site, but I am not sure. 10 Q. I want to be clear because you

11 are bringing up a good point that I am 12 going to get to. 13 There are three documents. One

14 is the full report prepared by you said 15 Mr. Berkowitz on Prepaid Legal Services. 16 Another is the executive summary, which 17 we saw in an earlier E mail that was or 18 at least purports to be have been drafted 19 by Mr. Klafter, and then the third is the 1530
(393 of 565)

20 I'll call it a rebuttal that appeared on 21 TheStreet.com. 22 23 A. Q. Yes. Do you agree with that, that

24 there are those three documents that are 25 in existence?

1531
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582

1 2 A.

W. ACKMAN I think so, although I think

3 the executive summary might be -- I 4 don't remember if it was attached to the 5 full report or whether it was a separate 6 document. 7 Q. So getting back to Exhibit 25,

8 do you know whether Mr. Berkowitz in fact 9 posted TheStreet.com rebuttal on 10 ValueInvestorsClub.com or he posted the 11 executive summary as I referred to it on 12 ValueInvestorsClub.com? 13 14 15 16 A. Q. A. Q. I don't know. You don't know? No. What was the reason that you

17 wanted the Prepaid executive summary link 18 posted on ValueInvestorsClub.com? 19 A. ValueInvestorsClub.com is a 1532
(395 of 565)

20 password-protected site for sophisticated 21 money managers, and I thought it was a 22 good piece of research. They gave a 23 5,000 dollar a week award for the best 24 idea of the week, and it is also -- it 25 is a different audience than

1533
(396 of 565)

583

W. ACKMAN

2 TheStreet.com's web site, which is a more 3 -- it is just a different audience. So 4 just to get the broadest possible 5 dissemination or at least to get a 6 dissemination to a group of money 7 managers and a shot of winning $5,000, 8 which we did not win unfortunately. 9 Q. Were there any other reasons

10 that you wanted both the summary and link 11 posted on ValueInvestosClub.com? 12 13 14 15 16 17 18 A. None that I could think of. MR. CALIENDO: I would like to mark as Exhibit 26 a multiple page document that has no Bates stamp numbers, and it reads across the top -- that is it. (Exhibit 26 marked for

19 identification.) 1534
(397 of 565)

20 21 Q.

(Document handed to witness.) Have you had a chance to read

22 Exhibit 26? 23 24 25 A. Q. A. Yes. Do you recognize that document? I recognize sort of portions of

1535
(398 of 565)

584

W. ACKMAN

2 it, but I don't -- I don't recognize 3 the document in its entirety, but I -4 5 Q. Go ahead. What do you recognize the

6 portion to be? 7 A. It looks like a printout of the

8 VIC web site posting of Prepaid plus some 9 kind of questions asked by various people 10 on the web site. Yes, I think that is 11 what it is. 12 Q. If you look at the top line on

13 the first page. 14 15 16 17 A. Q. A. Q. Yes. It refers to by Bill 204. Yes. Do you know what that refers

18 to? 19 A. Yes. 1536

(399 of 565)

20 21

Q. A.

What does that refer to? That is my user name on the VIC

22 web site. 23 24 25 Q. A. Q. Do you know who John 771 is? No. Do you know who WRT 233 is?

1537
(400 of 565)

585

1 2 A.

W. ACKMAN That is I -- I believe it is

3 Whitney Tilson. 4 5 6 7 8 9 10 11 12 13 14 15 Q. A. Q. A. Q. A. Q. A. Q. A. Q. A. Do you know who NISH 697 is? No. How about Quentin 720? No idea. How about JM 671? No idea. How about Round 291? No idea. How about Bedrock 346? I don't know. No idea? It sounds like David Rocker,

16 but I don't know. 17 Q. What makes you say it sounds

18 like David Rocker? 19 A. The fact that it has rock, D 1538

(401 of 565)

20 rock in the name and the tone of the 21 comment, but I have no idea who it is. 22 By the way, it is my password,

23 but I did not post this on VIC. I mean 24 it is my user name, but I did not post it 25 on VIC.

1539
(402 of 565)

586

1 2 3 Q. A.

W. ACKMAN Who did post it on VIC? David Berkowitz. So the

4 responses from Bill 204 on here I believe 5 are David's. 6 Q. So anything that is written

7 here you didn't write. Is that what you 8 are saying? 9 A. I have to check. I mean I may

10 have posted one comment here. I mean I 11 can go through them one by one. I think 12 these are -- the ones here look like 13 all David's. 14 Q. If you could please go through

15 them one by one and let me which ones you 16 wrote and which ones David wrote. 17 18 A. Q. From 204 -Let me just start if you would

19 just identify the page of the document? 1540

(403 of 565)

20

A.

Okay. There is a reference --

21 I am sorry. What am I supposed to do? 22 23 24 MR. MARCU: Just count the pages. A. 6, on the bottom of page 6,

25 12/26, 10:47 a.m. to Bill 204 plus from

1541
(404 of 565)

587

W. ACKMAN

2 bill 204, this looks like David because 3 it contains stuff that I didn't know. 4 And then I guess two pages letter on the 5 top of the page, that looks like David as 6 well. 7 8 Q. A. Okay. I think those are the only two

9 from him, and I think they are both -10 they are both his. 11 Q. If we go back to the first

12 page. 13 14 15 16 A. Q. A. Q. Yes, this is his post. The first page? The whole first section. Through the fifth page is David

17 Berkowitz' post? 18 19 A. Q. To the top of page 5, yes. And then on page 5, the one to 1542
(405 of 565)

20 Bill from John, did you receive that post 21 or was that Mr. Berkowitz? 22 A. I mean the -- I don't know

23 what David received or didn't receive. 24 At some point, I looked on the site and 25 saw the posts. So it is not like you --

1543
(406 of 565)

588

W. ACKMAN

2 you don't get an E mail. You kind of 3 have to go on line and check it out. 4 Q. I think you said one of these

5 might be your posts. Which one is that? 6 A. I have a vague recollection of

7 responding to one of these posts, but I 8 don't recognize any of these posts as my 9 response because I -- I don't know the 10 -- I don't know the company well enough 11 to give these answers. There is some 12 slight possibility that this last post to 13 Bill 204 from Bill 204, the last one I 14 mentioned, where I may have gotten the 15 information from David, and then I put it 16 on the computer. That is -- you know, 17 I don't remember precisely. 18 Q. So you have no specific

19 recollection of that? 1544

(407 of 565)

20

A.

I have a recollection of

21 posting something, responding to one of 22 the posts on TheStreet.com. I have a 23 recollection of talking to David to get 24 some answers to questions, so that I 25 could do it. I believe this may be it

1545
(408 of 565)

589

W. ACKMAN

2 here, this brief post, but I am not sure. 3 It is information I got from David. If I 4 posted it, it is information that I got 5 from David. If it is David, it is David. 6 Q. Well, let me ask you a

7 question. How do you know that these 8 were posts from David? 9 A. Because he is the only one who

10 has my password to VIC. I can tell from 11 the nature of the response that -- no 12 one at Gotham is capable of answering 13 these questions. 14 Q. So you have no reason to doubt

15 that these posts were made on 16 ValueInvestosClub.com? 17 18 A. Q. No, no reason to doubt it. Do you know in fact that they

19 were? 1546
(409 of 565)

20

A.

I don't know in fact that they

21 were. I know there were posts made. I 22 know -- I know he put a report on -23 again I asked him to post something. I 24 know he posted something. I don't know 25 exactly what he posted. This looks like

1547
(410 of 565)

590

W. ACKMAN

2 the kind of thing that he would have 3 posted on Value Investors Club. The 4 questions and answers look like something 5 that would appear on Value Investors 6 Club. I believe that it is extremely 7 unlikely that this wouldn't have appeared 8 on Value Investors Club. I can't tell 9 you exactly. 10 Q. Did Mr. Berkowitz have a user

11 name on Value Investors Club to your 12 knowledge? 13 14 15 16 17 18 19 A. Q. A. No, he does not. Did anyone else at Gotham? No. MR. CALIENDO: I would like to mark as Exhibit 27 a two-page series of E mails bearing Bates stamp numbers GP 052136 to 137. 1548
(411 of 565)

20

(Exhibit 27 marked for

21 identification.) 22 23 Q. (Document handed to witness.) I ask you do you recognize that

24 document? 25 A. Yes.

1549
(412 of 565)

591

1 2 3 Q. A.

W. ACKMAN What is this? David Rocker was given an

4 opportunity to respond twice to our 5 report, and he wrote two reports, which 6 according to David were filled with 7 factual inaccuracies, and David wrote a 8 response to David Rocker's report and 9 submitted it to TheStreet.com. 10 TheStreet.com wouldn't publish our 11 version, our response, and we thought it 12 was particularly egregious because David 13 Rocker owns 10 percent of the 14 TheStreet.com, and we thought in light of 15 his ownership and in light of the fact 16 that they didn't disclose him as an owner 17 of TheStreet.com at a minimum we should 18 be given an opportunity to respond to it. 19 David was livid that they are 1550
(413 of 565)

20 so biased in our view against the company 21 that they let an insider who owns 10 22 percent of the business write a response 23 and not disclose the fact that he is a 10 24 percent owner of the TheStreet.com, which 25 we think is a material thing that the

1551
(414 of 565)

592

W. ACKMAN

2 reader should know and not give us a 3 chance to provide a response. 4 So my suggestion was call the

5 CEO and say look we think this is bad 6 policy and if they still don't let us 7 post it on the web site, then we should 8 put it on ours. 9 Q. Did you post it on your web

10 site? 11 12 13 A. Q. A. No. Why not? I don't know. It may have

14 gotten -- it looks like it was fairly 15 late in the day here. We filed MBIA on 16 Monday, and that is when it kind of got 17 exciting at Gotham, so I don't know why 18 we didn't post it on our web site. 19 Q. So after this, you never 1552
(415 of 565)

20 pursued it? 21 A. We didn't -- after this,

22 correct. I didn't. I didn't ask David. 23 He may have called the CEO. I don't know 24 or not. 25 Q. Let me correct the record.

1553
(416 of 565)

593

W. ACKMAN

2 When I said this, after sending this E 3 mail to Mr. Berkowitz in Exhibit 27, you 4 didn't pursue it further? 5 6 A. Q. That's correct. You mentioned that David Rocker

7 didn't disclose his ownership in 8 TheStreet.com. 9 10 A. What makes you say that? The E mail David sent to me

11 says this seems to be the final word even 12 after they printed two more negative 13 pieces yesterday, one of which quoted 14 Rocker as a short. There was 15 interestingly no mention of TheStreet.com 16 ownership. So I am taking -- I didn't 17 -- I didn't look at it myself, but I am 18 relying on David telling me that that is 19 the case. 1554
(417 of 565)

20

Q.

So you didn't independently

21 verify whether or not Mr. Rocker had 22 disclosed his ownership interest in 23 TheStreet.com prior to sending your 24 response to that E mail in Exhibit 27? 25 A. That's correct. I know he has

1555
(418 of 565)

594

W. ACKMAN

2 disclosed in earlier articles he had 3 written that he has an ownership, but 4 apparently when he is quoted vis-a-vis a 5 negative story he was not cited as being 6 an owner of the company. 7 8 9 10 MR. CALIENDO: I would like to mark as Exhibit 28 a one-page document bearing Bates stamp numbers GP 086314. (Exhibit 28 marked for

11 identification.) 12 13 14 Q. A. (Document handed to witness.) Do you recognize that document? I don't recognize the document,

15 but it looks like something close to what 16 was on our web site where you could learn 17 about Prepaid Legal Services. 18 Q. When you say "something close,"

19 what makes you say "something close"? 1556

(419 of 565)

20

A.

I -- I don't know -- I

21 can't remember. I don't know exactly 22 what was on our web site. It looks like 23 what I remember to be on our web site, 24 but I don't know enough about the work to 25 know if it is exactly the same or whether

1557
(420 of 565)

595

W. ACKMAN

2 this is an early draft or, you know -3 Q. Is there anything specifically

4 that you could point to in Exhibit 28 5 that would give you pause about whether 6 or not this is exactly what appeared on 7 your web site? 8 A. No. I just don't -- I mean I

9 don't have a photographic memory. 10 Q. Next to the sentence A

11 Recommendation for Prepaid Legal 12 Services, Inc.," it has a date of 13 November 20, 2002. There is actually two 14 entries like that. 15 16 A. What does that date indicate? The date we put the report on

17 the web site. I don't know. The day we 18 published the report. Something like 19 that. 1558
(421 of 565)

20

Q.

So you are guessing. You don't

21 know? 22 A. I don't know. I assume it is

23 one of those two things, but David would 24 know better than I. 25 Q. If we look at the last

1559
(422 of 565)

596

W. ACKMAN

2 paragraph, it says, "In its reports, 3 Gotham, an investment manager in New York 4 City, presents its research analysis and 5 conclusions about Prepaid Legal Services, 6 Inc. These reports detail our opinions 7 and the bases for them. To fairly assess 8 these reports we urge the reader to 9 consider each report in its entirety 10 including our disclaimers. For further 11 information, please contact us by E mail 12 at Research@GothamPartners.com." 13 It mentions disclaimers. What

14 disclaimers is that referring to? 15 A. I think there was a disclaimer

16 on the report. 17 18 Q. A. On which -That said, you know, we own the

19 stock. Something like that, how many 1560

(423 of 565)

20 shares we own. That we own the stock. 21 We might sell the stock. I don't know. 22 Something like that. 23 Q. Were there any general

24 disclaimers on your web site other than 25 what may have appeared on either the

1561
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597

W. ACKMAN

2 Prepaid Legal research recommendation, 3 the MBIA report or the FarmerMac report? 4 5 6 7 A. Q. A. Q. I don't know. Do you remember any? No. Do you have any reason to think

8 that there were any disclaimers other 9 than those disclaimers that may have 10 appeared on the reports? 11 12 A. Q. I really don't know. So you have no reason to think

13 that there were any such disclaimers on 14 the web site? 15 16 17 18 19 A. Either way I would say. MR. CALIENDO: I want to take a little bit of a break. (Recess taken.) MR. CALIENDO: I would like to 1562
(425 of 565)

20 21 22 23 24

mark as Exhibit 29 a one-page E mail from Mr. Tilson to Mr. Ackman, Mr. Berkowitz, and Mr. Klafter bearing Bates stamp numbers 050683. (Exhibit 29 marked for

25 identification.)

1563
(426 of 565)

598

1 2 3 Q.

W. ACKMAN (Document handed to witness.) Have you had a chance to look

4 at Exhibit 29? 5 6 7 8 9 A. Q. A. Q. A. Yes. Do you recognize it? Yes. What is it? Whitney had written a post on

10 Value Investors Club, which I think in 11 the original one is in the thing that you 12 -- I looked at before, so it might be a 13 useful reference. 14 Q. When you same the thing you

15 looked at before, you are referring to 16 Exhibit 26? 17 A. That looks like it. And David

18 Berkowitz was very upset about it because 19 he called Prepaid one of the most hated, 1564
(427 of 565)

20 vilified companies whose stocks are 21 considered toxic waste. 22 23 Q. Stop right there. When you say he called, who are

24 you referring to? 25 A. Whitney called Prepaid one of

1565
(428 of 565)

599

W. ACKMAN

2 the most hated, vilified companies whose 3 stocks are toxic waste, and David 4 complained to me that was really rude for 5 him to say this about Prepaid and just 6 unnecessary, and I told Whitney that 7 David was upset about it, and he proposed 8 to the guy who runs the site to -- to 9 change his post to the one that he -10 or modified as reflected here. 11 Q. When you said here, you are

12 referring to? 13 A. Yes, Gotham posted this on Real

14 Money because it is hard to have a 15 dialogue there. So let's have one here. 16 Can you tell me anything more about the 17 possibility of additional lawsuits 18 including any that may not have been 19 announced? I don't know what was 1566
(429 of 565)

20 switched out, but I remember that this 21 language about it being toxic waste David 22 Berkowitz took offense to. 23 Q. When you said "this language,"

24 you are referring to the fifth page of 25 Exhibit 26 and which paragraph?

1567
(430 of 565)

600

1 2 A.

W. ACKMAN Okay. Now this, from here to

3 here -- no, I believe I am not sure 4 this is Whitney's post because this says 5 John 771. So Whitney had a post on 6 TheStreet.com. That may have begun at 7 this point where he called it toxic waste 8 or some -- or this may be what this guy 9 may be quoting from, and Whitney -- and 10 David said it is fine if you don't have 11 to like my ideas, but it is rude for you 12 to say that my idea is toxic waste or 13 some other fairly damning phrase, and 14 Whitney had the guy on the site take out 15 the offensive stuff. The the guy who 16 runs the site took out the offensive 17 language. 18 Q. Who is the guy who runs the

19 site? 1568
(431 of 565)

20 21

A. Q.

I don't know his name. But he is a friend of Whitney

22 Tilson's? 23 24 25 A. Yes, apparently. MR. MARCU: Do you know that he actually made the change on the web

1569
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601

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 site?

W. ACKMAN

THE WITNESS: I don't know that he did, but he says that he did. MR. MARCU: Well, don't just say that. Because it says it in the document doesn't mean it is true, and you will make your examiner think you know that. All you are doing is reading this. You are saying at least that part of it? THE WITNESS: Whitney told me the he had them change the site. I never checked to see if they did or not. Q. So the mistake or as you

17 understood it the mistake that Mr. Tilson 18 is referring to in the E mail in Exhibit 19 29 was this comment he made about toxic 1570
(433 of 565)

20 waste; is that right? 21 A. I don't remember the exact

22 words. It was something along those 23 lines where he said, you know, he called 24 Prepaid toxic waste or some other fairly 25 derogatory comment, and David thought it

1571
(434 of 565)

602

W. ACKMAN

2 was sort of an ad hominem, offensive 3 thing to say and rude. I called Whitney 4 and told him, and Whitney went to the guy 5 who runs the site and asked him to remove 6 the offensive language. 7 Q. Was there any other mistake

8 that you understood Mr. Tilson to be 9 referring to? 10 11 A. Q. No. Any other part of the mistake

12 that you understood him to be referring 13 to? 14 15 16 17 18 19 A. No. MR. CALIENDO: I would like to mark as Exhibit No. 30 a multipage document bearing Bates stamp numbers GP 050508 to 509, and that is Exhibit 30. 1572
(435 of 565)

20

(Exhibit 30 marked for

21 identification.) 22 23 Q. (Document witness.) I don't need you to read the

24 whole document. First of all, after you 25 had a chance to look at it, tell me

1573
(436 of 565)

603

W. ACKMAN

2 whether you recognize it. 3 4 5 A. Q. A. Yes. What is it? It is an article that appeared

6 on January 8 in the Wall Street Journal 7 written by Henny Sender and Gregory 8 Zuckerman about Gotham Partners entitled 9 "Gotham is Snared by Sand Trap." 10 Q. And did Ms. Sender interview

11 you for this article? 12 A. I don't think I agreed to be

13 interviewed for the article, but I think 14 she quoted actually largely incorrectly 15 from a Harvard Business School conference 16 where I spoke at the conference. 17 Q. Well, did you speak to her

18 about this article prior to its 19 publication or not? 1574

(437 of 565)

20

A.

Yes, but I did not speak to her

21 on the record. 22 23 Q. A. What does that mean? What it means is I didn't give

24 her any quotes that she could use in the 25 article.

1575
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604

1 2 3 -4 5 A. Q. Q.

W. ACKMAN So you didn't authorize her to

Quote me on anything. Tell me about the conversation

6 that you had with Ms. Sender before this 7 article was published, about this 8 article. 9 A. There was an article the

10 previous day in the Wall Street Journal 11 about Gotham Partners winding up its 12 fund. It was on page C 8 of the Wall 13 Street Journal. Not that many people saw 14 it. It wasn't as horrible as it could 15 have been. Okay. 16 I was not happy about the

17 article. Henny called me the next day 18 and said -- or that day that other 19 article came out and said they don't 1576
(439 of 565)

20 think it is good enough. I said what do 21 you mean? And she implied to me that MBIA 22 was not happy with how negative the 23 article was and the positioning of the 24 article, and that she was being required 25 to write another story on us that was

1577
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605

W. ACKMAN

2 more visible and more negative. 3 4 Q. A. And what -And this was -- I said I

5 can't believe we are worth another story 6 on the same subject in the Wall Street 7 Journal, and she said, you know, I don't 8 call the shots here. 9 Q. Was that the entirety of your

10 conversation? 11 A. She ran a few things by me,

12 and, you know, I did my best to -- at 13 this point I think we were working with a 14 PR firm. My lawyers didn't want me 15 talking to her. She is very persistent, 16 and I took her call, you know. 17 We had an argument about

18 whether she needed to write this story or 19 not, and I remember one thing she checked 1578
(441 of 565)

20 with me, which bothered me. It is -21 it is not relevant frankly, but she 22 quoted me as something like saying that 23 my goal is to manage 100 billion dollars, 24 and that was not what I said, and she 25 sort of quoted me. It says, "Mr. Ackman

1579
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606

W. ACKMAN

2 who only months ago said his goal was to 3 have a hundred billion on a compound 4 basis under management before he 5 retired," and what I said at the Harvard 6 Business School conference was my goal 7 was to compound the investments of the 8 fund such as that the fund grew to a 9 hundred billion dollars in 30 years or 10 something like that. It bothered me. 11 Other people wouldn't care so much, but I 12 thought it was an inaccurate 13 characterization of what I said. 14 Q. Let's go to the page marked GP

15 50508. 16 A. One more point on the article.

17 She tried to make it sound like these 18 were contemporaneous quotes that I had 19 given her, but a lot of the article was 1580
(443 of 565)

20 something from an event that happened two 21 months earlier, and she took quotes out 22 of context and put them in the article 23 which bothered me. 24 25 Q. I am sorry. Go ahead. If you look at the second full

1581
(444 of 565)

607

W. ACKMAN

2 paragraph on that page. 3 4 A. Q. Yes. The last sentence that appears

5 in parentheses. It says, "It was later 6 reported in the media that Gotham had 7 been selling Prepaid stock, even as it 8 was touting it on its web site. Mr. 9 Ackman point out that a disclaimer noted 10 that Gotham could alter its position at 11 any time." 12 13 A. Q. Yes. First of all, did you tell Ms.

14 Sender that, that a disclaimer noted that 15 Gotham could alter its position at any 16 time? 17 18 A. Q. I may have. And do you remember doing it

19 one way or another? 1582

(445 of 565)

20 21 22 23 24

A. Q. A. Q. A.

I am pretty sure that I did. What disclaimer -I -Go ahead. I also don't agree that we were

25 touting this on our web site, but that is

1583
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608

W. ACKMAN

2 a different subject. 3 Q. I move to strike that. That is

4 not what I asked you. 5 6 7 MR. MARCU: Just answer his questions. Q. What disclaimer were you

8 referring to? 9 A. There was a disclaimer in the

10 executive summary on TheStreet.com that 11 said that our position size could change 12 at any time. 13 Q. Now, you talked earlier about

14 the differences between the executive 15 summary and the article as it appeared on 16 TheStreet.com. 17 18 19 A. Q. Do you remember that? Yes. Which were you referring to, 1584
(447 of 565)

20 the article that appeared on 21 TheStreet.com or the executive summary 22 that was posted on your web site? 23 A. I was referring I believe to

24 TheStreet.com, although I think at the 25 time I didn't realize that they were

1585
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609

1 2 different. 3 4 5 6 7 8 9 10 11 12 13 14

W. ACKMAN

MR. MARCU: Do you know that? THE WITNESS: Yes. I mean I know now that they are different. MR. MARCU: Do you remember what you were referring to? THE WITNESS: Yes, I was referring -- I thought both -- I thought our executive summary is what appeared on TheStreet.com with the disclaimer that I was referring to. Q. Wait a second. If you look at the sentence, it

15 says, "It was later reported in the media 16 that Gotham had been selling Prepaid 17 stock even as it was touting it on its 18 web site." On its web site is what I 19 want you to focus on. 1586
(449 of 565)

20 21

A. Q.

Okay. "Mr. Ackman points out that a

22 disclaimer noted that Gotham could alter 23 its position at any time." 24 I want to ask again did you

25 tell Ms. Sender that there was a

1587
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610

W. ACKMAN

2 disclaimer on your web site that stated 3 Gotham could alter its position at any 4 time? 5 6 A. Q. I don't believe so. So what did you tell her about

7 a disclaimer? 8 A. I told her that there was a

9 disclaimer that said we could alter our 10 position at any time. 11 Q. And you didn't tell her

12 anything about it being on your web site? 13 A. I didn't specify the location,

14 no. 15 Q. And at that time when you made

16 that statement, you weren't sure whether 17 or not TheStreet.com article appeared on 18 your web site; is that correct? 19 A. The answer is I didn't know 1588
(451 of 565)

20 there was a difference I don't believe 21 between TheStreet.com web site and our 22 web site, but I know that -- I know 23 that now. 24 Q. So at the time that you talked

25 to Mr. Sender, you didn't know if there

1589
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611

W. ACKMAN

2 was a difference between TheStreet.com 3 web site and Gotham Partners' web site? 4 5 6 A. Q. A. No. I think that is what you said? The fact that there was a

7 disclaimer, the disclaimer was different 8 on TheStreet.com from what appeared on 9 our web site. 10 11 12 Q. A. Q. So you did know -No. At that time, you didn't know

13 that the disclaimer was different on your 14 web site than it was in the article that 15 appeared on TheStreet.com? 16 17 A. Q. That's correct. Now, I just want to be

18 absolutely clear that what I am going to 19 mark now as Exhibit 31 is the disclaimer 1590
(453 of 565)

20 that or is the document containing the 21 disclaimer that you are referring to in 22 Exhibit 30. 23 24 25 MR. CALIENDO: So if you could mark this document as Exhibit 31, please. I.

1591
(454 of 565)

612

1 2

W. ACKMAN (Exhibit 31 marked for

3 identification.) 4 5 A. (Document handed to witness.) I mean I could -- it is hard

6 for me to remember what I precisely knew 7 on a particular date. That is why I want 8 to be cautious, you know, on January 8 9 versus some other date. I don't know 10 exactly. I knew that it was on 11 TheStreet.com. I am not certain I knew 12 at the time that it was not on our web 13 site. 14 Q. When you say at the time, you

15 mean at the time you made this statement 16 to Ms. Sender? 17 A. Correct, and I don't know when

18 she is quoting -- what day she is 19 quoting me from either. I had many 1592
(455 of 565)

20 conversations with Henny over this 21 several-week period when this whole -22 when the story broke in the Wall Street 23 -- in the New York Times about Prepaid. 24 Q. I understand, but I am not

25 concerned about the date she was quoting

1593
(456 of 565)

613

W. ACKMAN

2 you. I am asking about what you told her 3 when you had this conversation. 4 A. I told her there was a

5 disclaimer that said that we could sell 6 our shares at any time, and what I am not 7 certain about is whether I knew at that 8 time that I told her that that the 9 disclaimer on our web site was different 10 than the one on TheStreet.com. 11 Q. Let's get back to what I have

12 marked as Exhibit 31. I am going to ask 13 you first do you recognize that? 14 15 16 A. Q. A. Yes. What is it? It is an E mail from David

17 sending me the Prepaid article. 18 Q. Could you turn the page. The

19 Prepaid article that you just referred to 1594

(457 of 565)

20 is attached. What is the title of the 21 article? 22 A. "Opposing View of Bull defense

23 Prepaid Legal." 24 Q. And it says "by David P.

25 Berkowitz," correct?

1595
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614

1 2 3 A. Q.

W. ACKMAN Correct. And it says "to TheStreet.com"

4 underneath it? 5 6 A. Q. Correct. Tell me what your understanding

7 of this article is as far as where it 8 appeared. 9 10 A. Q. It appeared on TheStreet.com. Did it appear anywhere else to

11 your knowledge? 12 A. Most of this same article

13 appeared on our web site and appeared on 14 the Value Investors Club web site. 15 Q. When you say most of this

16 article, do you mean in some sort of 17 summary fashion or the actual text of the 18 article as it appears on Exhibit 31? 19 A. I mean I can do a word by word 1596
(459 of 565)

20 comparison. 21 22 23 24 MR. MARCU: The question is whether you even know what, if any, differences there were. A. I don't know precise

25 differences, but this is similar to our

1597
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615

W. ACKMAN

2 executive summary. Many of the words are 3 same. I don't know what has been 4 excluded. I don't know what has been 5 added. 6 Q. In the form that appears in

7 Exhibit 31, are you aware one way or 8 another whether this article as it 9 appears in Exhibit 31 was posted on 10 Gotham's web site? 11 A. The article did not appear on

12 our web site. 13 14 15 Q. A. Q. It did not? Right. You are absolutely certain of

16 that? 17 18 A. Q. Yes. Turning to the last page of

19 Exhibit 31, it is Bates stamp number GP 1598

(461 of 565)

20 051787. Take a look at that. 21 22 A. Q. Yes. Is that the disclaimer you were

23 referring to when you told Ms. Sender 24 that a disclaimer noted that Gotham could 25 alter its position at any time?

1599
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616

1 2 3 A. Q.

W. ACKMAN Correct. Getting back to Exhibit 30,

4 which is the Henny sender article, on 5 page 050508, in the forth full paragraph, 6 the second sentence says, "By 7 mid-November, investors had asked for 50 8 million dollars back out of Gotham's 9 liquid 155 million dollar fund". 10 Did you tell Ms. Sender that in

11 or around January 8, 2003? 12 13 14 15 16 17 A. Q. A. Q. A. Q. I don't believe so. I -I don't know actually. You don't remember? I don't remember. I unnecessarily qualified that.

18 Did you tell her that at any time? 19 A. I may have. 1600
(463 of 565)

20 21

Q. A.

Why do you say you may have? Because she asked me why --

22 she asked me about the Prepaid Legal 23 situation, you know, why did we sell the 24 stock, and I told her it had nothing to 25 do with our lack of belief in the

1601
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617

W. ACKMAN

2 research report or its accuracy or 3 confidence in the company, and I 4 explained to her everything that happened 5 from -- over that month period. 6 7 Q. A. What did you explain to her? Basically, we were fine in

8 terms of -- we had a new investor who 9 was investing 60 million dollars in the 10 fund, and we had about 50 million dollars 11 of withdrawals. The new investor is Ezra 12 Murkin and funds that he controls. We 13 were negotiating that deal at the end of 14 last year, and we shook hands with him on 15 making that investment. 16 When the First Union deal broke

17 up on December 6, I had to tell Ezra that 18 we couldn't take his money, and we 19 considered taking his money in a separate 1602
(465 of 565)

20 fund. We ultimately decided we couldn't 21 take it at all. At which point the 22 combination of not taking in that new 23 capital plus the 30 million dollars of 24 cash we were going to generate from the 25 First Union closing on December 12 put us

1603
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W. ACKMAN

2 in a position where the only thing we 3 could do was basically suspend 4 redemptions in line of the partnership, 5 so I explained that to her. 6 Q. Did you explain anything else

7 to her or is that the sum and substance 8 of what you explained to her? 9 A. That is the substance of what I

10 told her. 11 Q. Do you remember telling her

12 anything else specifically? 13 A. That, you know, she was very

14 unhappy -- she -- the editors of the 15 Wall Street Journal are very anti hedge 16 fund, and she told me that she got a lot 17 of criticism from her editors as a result 18 of this article that appeared in The New 19 York Times because, you know, she had 1604
(467 of 565)

20 written a story on MBIA and, you know, 21 where a hedge fund had provided her 22 information, and now that same hedge fund 23 is selling a stock when it -- when it 24 wrote a research report that was 25 positive, and she said she got a lot of

1605
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W. ACKMAN

2 criticism for it, and she wanted to 3 understand what had happened, and we 4 explained it to her, and she understood 5 the explanation, and I explained to her 6 why we couldn't publically explain what 7 was going on. 8 So I told her the problem with

9 our publically disclosing that we are 10 winding up, so that people could take 11 advantage of our, you know -- look in 12 our list of positions and assume that we 13 are going to be selling them. Just like 14 when Tiger Management wind up, you know, 15 its hedge fund, shorted all the stocks 16 that they owned, assuming that they could 17 cover at a lower price, and that is the 18 substance of what I told her. 19 Q. Do you recall explaining 1606
(469 of 565)

20 anything else to her? 21 22 23 A. Q. A. About this subject? About any subject. I have talked to Henny Sender

24 many times. 25 Q. I mean in this particular

1607
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W. ACKMAN

2 conversation. 3 4 5 6 A. Q. A. Q. No. So that is it? I think so. You mentioned a potential new

7 investor? 8 9 10 A. Q. A. Yes. Ezra Murkin? Yes. New in the sense that he

11 is already an investor, but he was going 12 to increase his investment very 13 significantly and buy a piece of our 14 business. 15 Q. How did the idea for an new

16 investment by Mr. Murkin and his funds 17 come about? 18 A. I had been talking to Ezra over

19 a long period of time about working with 1608

(471 of 565)

20 him going forward in some kind of more 21 formal capacity than his just being a 22 personal investor in the fund, and he had 23 expressed an interest in me or David and 24 I some day -- he was thinking about 25 retiring, and he manages a billion dollar

1609
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621

W. ACKMAN

2 fund, and he was looking for kind of an 3 exit strategy for himself personally, and 4 we talked in the context of that about 5 his making a large investment in our fund 6 and possibly over time transitioning the 7 management of his funds to us. 8 Q. So when did you first have that

9 conversation with him? 10 A. I don't remember the first day,

11 but we -- our discussions got more 12 serious as the year progressed, and we 13 talked a lot in the fourth quarter of 14 '02. 15 16 Q. Let me work backwards. You said you shook hands with

17 him on a potential 60-million dollar 18 investment in the fund? 19 A. Yes. 1610

(473 of 565)

20 21 22 23 24

Q. A. Q. A. Q.

On what date did that occur? Mid-November. Mid-November of 2002, right? Right. Now, you said you shook hands

25 with him.

1611
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622

1 2

W. ACKMAN Was there ever a binding

3 agreement entered into by Mr. Murkin 4 and/or his fund to make an investment in 5 Gotham of 60 million dollars? 6 A. No, but we were working on --

7 we were about to start drafting it. 8 Q. Had you started drafting any

9 legal documents that might be necessary 10 for him to make such an investment? 11 A. I think we had kind of a

12 summary E mail of terms that we were 13 going to use as a basis for the 14 transaction, and I don't know where that 15 stood in terms of drafting documents, but 16 Ezra is a -- I will call him a man of 17 his word. You know, he had made a 10 18 million dollar investment in the Gotham 19 credit entity on a handshake, and he has 1612
(475 of 565)

20 made other similar investments, a 16 21 million dollar investment, with us on a 22 handshake. He is someone whose hand 23 shake I would say is good, and we weren't 24 even planning to document his investment 25 before the end of the year I don't

1613
(476 of 565)

623

1 2 believe. 3 Q.

W. ACKMAN

When you say you weren't

4 planning to document his investment, 5 meaning he was going to give you the 6 money without any written contract? 7 8 A. Q. I think so, yes. Why do you think he told you

9 that? 10 A. Because we told him we needed

11 the money by January 1, and he told us 12 there wouldn't be any problem. Again, he 13 was going to invest in the fund. He 14 would get all kinds of documents with 15 respect to the investment but not a 16 document with respect to the business 17 deal I mean other than an E mail I would 18 say. 19 Q. Did he tell you that he was 1614
(477 of 565)

20 going to make an investment of 60 million 21 dollars without signing any legal 22 documents? 23 24 A. Q. No, he did not. And you say there is a summary

25 E mail of the terms?

1615
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624

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 -A. Q. A.

W. ACKMAN Yes. Does that still exist? It should. MR. CALIENDO: I would like to get a copy of that. I don't believe we have -MS. MINICUCCI: I don't believe that we produced it, and I don't believe thatit is responsive to any requests that we received. MR. CALIENDO: Off the record. (Discussion held off the record.) MR. CALIENDO: Back on the record. Q. A. Getting back to Exhibit 30. Getting back to your question

1616
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20 21 22 23 24

MR. MARCU: Just answer questions. A. Q. A. I want to be clear. Go ahead. Ezra told us that we would rely

25 on an investment. He did not say that he

1617
(480 of 565)

625

W. ACKMAN

2 wouldn't make it a written contract. 3 Q. He used the words you could

4 rely on the investment? 5 A. In form or substance. I don't

6 know what his exact words were, but we 7 were planning our liquidity in light of, 8 you know -- we would have had to start 9 selling investments were we not -- were 10 Ezra not to have been making this 11 investment with us. 12 So there came a time when we

13 said: Look, we need to know, you know, 14 whether or not the exact ownership you 15 get of our business -- the things that 16 were left open to negotiate that we ended 17 up formalizing in the E mail was the 18 percentage of business he got by making 19 the 60 million dollar -- the discount 1618
(481 of 565)

20 that he got in terms of fees in terms of 21 the 60 million dollars that he was 22 investing in the fund, and those were 23 open negotiations. There wasn't a 24 question as to whether he would make the 25 investment or not. There was some

1619
(482 of 565)

626

W. ACKMAN

2 discussion about how long term a 3 commitment he was going to make. We 4 didn't want to lose his interest in the 5 business if he withdrew his capital. We 6 had a negotiation. We ultimately agreed 7 on a seven-year time horizon for his 8 investment, so he promised -- I don't 9 know the right word. He committed to us 10 he would make the investment subject to 11 our resolving some terms. We resolved 12 the terms in an E mail, and it was our 13 expectation that we would take in the 14 capital until the first First Union 15 transaction blew up. 16 Q. You said you would need to sell

17 investments if he didn't make an 18 investment; is that correct? 19 A. Yes. 1620

(483 of 565)

20 21

Q. A.

Why was that? Because it is very important in

22 a fund to maintain -- not let -- when 23 someone withdraws capital from the fund, 24 and there is no one coming in to replace 25 investments, the fund can get too large

1621
(484 of 565)

627

W. ACKMAN

2 because if you lose 60 million of 150 3 million withdraws, all of your investment 4 will -- you know, a 10 percent 5 investment becomes a 15 percent 6 investment, and there are certain levels 7 of concentration that are appropriate for 8 different investments, and in the event 9 -- actually I think we had plenty of 10 liquidity to pay off a retiring partner, 11 but it would have left the fund in a much 12 more highly concentrated position with 13 respect to certain investments like 14 Prepaid. Prepaid was our biggest 15 position. It was 13, 15, percent of 16 capital. All of a sudden, if you 17 withdraw funds, it backs up to 22 18 percent. You have to take new money, and 19 you keep the positions in the same size. 1622
(485 of 565)

20 You add to those positions, and money 21 gets withdrawn. You would rejigger the 22 portfolio to take into consideration the 23 changing capital. So, you know -- and 24 January 1 is the date of the termination 25 with respect to how much concentration we

1623
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628

W. ACKMAN

2 are going to have in any of these 3 investments. We don't have to send money 4 to people until January 30, but our 5 performance from January 1 to January 30 6 is going to be based on our concentration 7 in Prepaid and other investments as of 8 the beginning of the year assuming that 9 capital had exited the fund, if that 10 makes sense. 11 Q. Getting back to Exhibit 30,

12 take a look again at page 050508. The 13 sentence in the fourth paragraph down, 14 which states, and again I will read it, 15 "By mid-November investors had asked for 16 50 million dollars back." 17 Let me stop right there. By

18 mid-November 2002, had investors in the 19 Gotham partnerships asked for 50 million 1624
(487 of 565)

20 dollars of their investments back? 21 A. I don't know if that was just

22 -- that was overall or just the Gotham 23 Partners LP Fund, but it is an order of 24 magnitude. Correct. 25 Q. So, in other words, the 50

1625
(488 of 565)

629

W. ACKMAN

2 million dollars could have been what 3 investors had asked for back -4 5 A. Q. Out of Gotham --- with respect to only Gotham

6 Partners LP? 7 A. It could have been, but it also

8 could have been Gotham I, Gotham III and 9 offshore. I am not sure. 10 11 Q. A. You don't know? I don't know offhand. Again,

12 order of magnitude is the correct number. 13 Q. I am not sure I understand.

14 Order of magnitude? 15 A. It is approximately the right

16 number. 17 Q. But the right number for Gotham

18 Partners LP or all the funds? 19 A. Both. 1626

(489 of 565)

20 21 22 23

Q. A. Q. A.

So you are just not sure? Correct. Okay. It may be 60 million dollars

24 overall for all of the funds. It may be 25 50 million for all of the funds. It may

1627
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W. ACKMAN

2 be -- Gotham is by far the biggest. 3 So, you know, I don't know if that 50 4 just relates to the Gotham Partners LP or 5 50 relates to Gotham Partners LP, Gotham 6 III and the offshore. 7 Q. But regardless of what it may

8 be, and we will look to see what it may 9 be, you didn't tell this to Henny Sender 10 at any time? 11 12 13 A. Q. A. No, I may have. You may have? Yes. I don't know if I told

14 her at the time of that article, but when 15 I explained to her the whole Prepaid 16 thing, I told her that we had gotten 17 significant redemptions. I don't know if 18 I told her the precise number, et cetera. 19 Q. I stand corrected. You did say 1628
(491 of 565)

20 at the time of this article. I 21 apologize. 22 It says "out of Gotham's liquid

23 155 million dollar fund." 24 In or around January 2003, was

25 Gotham Partners LP one of the Gotham

1629
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631

W. ACKMAN

2 funds liquid to the extent of 155 million 3 dollars? 4 A. I think this refers to the

5 Gotham Partners LP's non-special 6 situation subaccount investments, which I 7 believe was approximately that number. 8 So this was what we call our mark to 9 market capital. I think that is what 10 this is -- I think that is what is the 11 155 million. 12 Q. No, I appreciate what you think

13 she is referring to, but -14 15 A. Q. Right. I am asking separately whether

16 there was any Gotham partnership that was 17 liquid to the extent of 155 million 18 dollars? 19 A. It depends on your definition 1630
(493 of 565)

20 of liquidity. Our liquid fund is our 21 mark to market funds. Those assets have 22 varying degrees of liquids in them. 23 Q. Does that mark to market fund

24 include Prepaid Legal Services? 25 A. It does.

1631
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632

1 2 Q.

W. ACKMAN Now, I am confused because you

3 said the special situations fund. 4 5 6 A. Q. A. Yes. Is it a fund? It is an accounting allocation

7 within -- it is actually part of Gotham 8 Partners LP. It appears in the financial 9 statements for Gotham Partners LP, but 10 from an accounting perspective it is only 11 allocated to investors who were investors 12 at the time the special subaccount 13 investments were made. 14 Q. Was Prepaid Legal Services an

15 investor in investments in the special 16 situations subaccounts? 17 A. No ,it is in the mark to

18 market. It is all in one partnership 19 from a segregated accounting standpoint 1632

(495 of 565)

20 not a legal standpoint I don't think. 21 Q. Is it segregated in terms of

22 the account of the brokerage firm, of the 23 broker that Gotham holds? 24 A. It is all one fund, but the

25 mark to market is allocated to certain

1633
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633

W. ACKMAN

2 investors, and SSAs are allocated to 3 certain investors. Some crossover 4 between the two. You know, most of the 5 investors in the SSA are also investors 6 in the mark to market, but for investors 7 who were withdrawn like Susan Tilson, she 8 is no longer in the mark to market part 9 of the partnership. 10 Q. You do maintain multiple

11 accounts at Goldman Sachs, correct? 12 A. Correct. I don't think there

13 is a separate account labeled SSA. I 14 think that is part of Gotham Partners LP 15 and Gotham Partners III LP. 16 Q. So, in other words, the mark to

17 market positions would not have been 18 segregated necessarily in separate 19 accounts at Goldman Sachs? 1634
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20 21

A. Q.

Correct. And when I say segregated, I

22 mean segregated from the special 23 situations positions? 24 A. I mean I am not actually

25 familiar with the technical details of

1635
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W. ACKMAN

2 Goldman Sachs. 3 Q. If we continue with that same

4 page, GP 050508, it says in the seventh 5 full paragraph, "Initially the two 6 partners weren't concerned. A planned 7 merger between First Union and Gotham 8 Gulf meant that Gulf expected to have 9 access to 33 million dollars of cash 10 before year end that could be used to pay 11 back investors." 12 The question is: Did you tell

13 Henny Sender that? 14 A. Not precisely that, but, as I

15 explained, I told her that we were 16 generating liquidity. That we actually 17 -- I think we had plenty of liquidity in 18 terms of cash to meet redemptions by 19 January 30. It was more the fact that 1636
(499 of 565)

20 that transaction didn't close that 21 complicated our business, and as a result 22 we couldn't take in a new investor of 23 capital, and it put us in a position 24 where we had to sell. It wasn't so much 25 liquidity driven. It was more that we

1637
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W. ACKMAN

2 had to reduce our proportion of our 3 investments in various -- in various 4 investments, so we didn't end up with an 5 unbalanced portfolio on January 1, and 6 then when we realized that we couldn't 7 take in Ezra's money, all of a sudden the 8 remaining investors would be left with a 9 much less liquid collection of assets. If 10 we paid old investors out, people 11 withdrawing with cash, that left the 12 remaining investors with a much less 13 liquid investment of assets, and we met 14 with lawyers and figured out the only 15 thing we could do to not send 50 million 16 dollars to investors was to basically 17 wind down the partnership, and that is 18 what we did. 19 Q. What date was the termination? 1638
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20

A.

I think it was made the Friday

21 before the article appeared in The New 22 York Times about Prepaid Legal. I don't 23 know what that date was. 24 Q. When you said the article that

25 appeared in The New York Times, are you

1639
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W. ACKMAN

2 talking about Gretchen Morgansen's 3 article that appeared in The New York 4 Times business section on Sunday? 5 A. Yes. I mean we were

6 considering it seriously. I don't think 7 we made the formal decision formal. You 8 know, we decided -- we sat down in a 9 room, and we decided what to do. I think 10 we decided Friday. 11 Q. When did you first start

12 considering it? 13 A. The week after the -- after

14 this First Union -- after we lost the 15 -- after the injunction was granted, we 16 started thinking about it. We started 17 meeting with our lawyers to figure out 18 how to -- what we wanted to do was to 19 suspend redemptions, so that we could 1640
(503 of 565)

20 deal with the problem, and then send 21 people back their capital, and then we 22 went -- and then we started reading our 23 agreement, we met with our lawyers, our 24 partnership lawyers, and since our 25 partnership is an old agreement it didn't

1641
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W. ACKMAN

2 have a provision to -- the onshore 3 partnerships did not have a provision 4 which would allow us to suspend 5 redemptions. We said how can we deal 6 with this problem. We don't want to send 7 50 million dollars to exiting partners 8 and leave the remaining partners with 9 much less liquid assets. So the answer 10 to that was to start selling, and no one 11 could complain that they were treated 12 unfairly. 13 Q. When is the first time that you

14 considered selling a portion of your 15 position in Gotham's position in Prepaid 16 Legal Services? 17 18 A. Q. The day we started selling it. That was the first time you

19 considered it? You never discussed it 1642

(505 of 565)

20 prior to that? 21 That was the first time that

22 you considered selling your position in 23 Prepaid Legal? 24 A. It is -- I can't give you --

25 it is hard to give you a precise date. I

1643
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638

W. ACKMAN

2 mean that is when I thought that we 3 started doing it. 4 Q. Well, when was the first day

5 that you discussed it, if you did, with 6 others at Gotham? 7 8 9 10 11 A. Q. A. Q. A. Around then. When you say -The day before, that day. Which day? The decision came down on

12 December 6. We started selling a week 13 later. I don't remember the exact dates. 14 15 16 MR. MARCU: The decision Justice Ramos. A. The first decision came down on

17 December 6. We started selling within 18 six days, seven days of that date. I 19 don't remember the exact date. I mean I 1644
(507 of 565)

20 had many other things I focused on after 21 that decision came down, and within a day 22 or the day we started selling that was 23 the day that I certainly considered it, 24 and we talked about it, David and I 25 talked about it. We decided to sell, and

1645
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W. ACKMAN

2 we sold. I think it all happened on one 3 day. 4 Q. So the first day that you

5 considered selling all or a portion of 6 your position in Prepaid Legal, if I 7 understand your testimony, is at the 8 earliest the December 6 date of Justice 9 Ramos'decision in the First Union/Gotham 10 Gulf merger case? 11 A. That is correct, and I don't

12 think we even thought about it then. 13 Q. So you had no discussions with

14 anyone prior to December 6 -15 16 A. Q. About selling Prepaid? Concerning selling your

17 position in Prepaid in whole or in part? 18 A. I believe yes. I think that is

19 correct. We liked it. 1646

(509 of 565)

20

Q.

And when I say discussions, I

21 just want to be clear whether or not you 22 had any discussions prior to December 6. 23 I am talking about with anyone at Gotham, 24 outside of Gotham? 25 A. Correct. We liked the stock.

1647
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640

1 2 Q.

W. ACKMAN Did you expect to have access

3 to an additional 33 million dollars of 4 additional cash before the end of 2002 as 5 the result of the merger between First 6 Union and Gotham Gulf being consummated? 7 A. We accepted to have access to

8 that as December 6, as much as 33 million 9 dollars, but the number could have been 10 smaller depending on what shareholders 11 elected to do in the transaction. 12 13 Q. A. I am sorry? There were 20 million dollars

14 in loans of Gotham Gulf that were going 15 to be repaid. We owned 12 million 16 dollars in the stock. So that is 33 17 million, and then we committed to back 18 stop the write offering and a note 19 offering, and depending upon, you know, 1648
(511 of 565)

20 what percentage of people elected to 21 exercise their rights and purchase their 22 notes, the more people that -- if 23 everyone exercised or if not everyone, 24 but enough shareholders exercised and 25 oversubscribed, we would have gotten 33

1649
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W. ACKMAN

2 million dollars. If no one exercised, we 3 would have had 12 million, so we didn't 4 -- depending on what, you know, the 5 shareholders elected to do. 6 Q. And with respect to the 12

7 million dollars in stock, you are saying 8 that you had access to it because you 9 would have received the stock, but in 10 order to make it cash you would have to 11 sell it? 12 13 14 A. Q. A. No, I wasn't including that. You were not including that? No, we would have had cash of

15 as much as 33 million and a minimum of I 16 think 11 or 12 million, and depending on 17 -- basically First Union writes the 18 offering, and shareholders were given an 19 opportunity to invest in Gotham Gulf or 1650
(513 of 565)

20 not. We committed to invest 10 million 21 in Gotham Gulf. We had a 40 million 22 dollar offering. To the extent 10 23 million or more of outside people 24 invested, we would have put up zero 25 money. If no one invested, we would have

1651
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W. ACKMAN

2 put up 10 million. The company did a 3 note offering. If no one elected to take 4 notes, we would have bought all of the 5 notes, and we would have gotten 12 6 million -- in instead of cash we would 7 have gotten 12 million of notes and 10 8 million in stock if no one didn't 9 exercise either one. We didn't think it 10 waslikely that no one would exercise. 11 The maximum was 33. The minimum was 12, 12 11, and it could have been anywhere in 13 between depending on what people elected 14 to do. 15 16 17 18 19 MR. CALIENDO: Can I have this marked as Exhibit 32. This is a one-page document bearing Bates stamp numbers GP 035247 which appears to be a posting on the Value1652
(515 of 565)

20 21

Investors.com. (Exhibit 32 marked for

22 identification.) 23 24 A. (Document handed to witness.) This was my post. The others

25 were David's.

1653
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643

1 2 3 4 Q. A. Q.

W. ACKMAN Do you know who Max 685 is? No idea. When you say this is your post,

5 explain to me what it is vis-a-vis your 6 sending a message to someone who uses the 7 user name Max 685? 8 A. The way is works is that each

9 company name -- you can search for a 10 company name by typing the ticker symbol, 11 and then what comes up is a description 12 that a money manager has put as to -13 why they like or dislike -- why they 14 think it is a good long, why they think 15 it is a good short. Then if you look on 16 the bottom here, there is a list of 17 questions and answers, so someone will 18 post a question. Why do you -- I think 19 -- I disagree with your analysis because 1654
(517 of 565)

20 of X. What do you have to say about it. 21 Then you are not obligated to, but you 22 try to respond to comments. Someone, Max 23 685, must have asked a question. I must 24 have logged on, saw his question and 25 responded to the answer, and his question

1655
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W. ACKMAN

2 was probably Have your views on Prepaid 3 changed? 4 Q. And the time that is indicated,

5 the date and time that is indicated at 6 the top, which in this case is January 1, 7 2003 at 9:10 p.m., what does that date 8 and time indicate? 9 A. The time I posted it. I wrote

10 it, and when you click enter, it 11 registers on the site assuming that the 12 time is correct, and it is correct. 13 14 Q. A. I see. So -Max looks like he asked a

15 question with respect The New York Times 16 article at the bottom here, and I 17 answered here. 18 Q. So Max sent his question on

19 December 26, 2002, and you replied on 1656

(519 of 565)

20 January 1, 2003; is that right? 21 22 A. Q. Correct. In the first paragraph,

23 actually, if you would just read the fist 24 paragraph in the record, please? 25 A. "Our views on PPD have not

1657
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645

W. ACKMAN

2 changed. We have however sold some stock 3 for reasons that have nothing to do with 4 PPD. That is we have needed to generate 5 alternative sources of liquidity as a 6 result of the failure of Gotham 7 Gulf/First Union real estate transactions 8 to close." 9 10 11 Q. Do you want me to keep reading? No. Were there any other reasons

12 that Gotham sold? 13 A. The reasons I described, which

14 is portfolio related. You no balance 15 between how much cash we have and how 16 much investment we have in particular 17 investments. We didn't just sell 18 Prepaid. We sold some other investments 19 as well where we thought our holding 1658
(521 of 565)

20 weight would be too high. 21 Q. As of January 1, 2003, had

22 Gotham sold its entire Prepaid position? 23 A. No, I think about half. You

24 can -- you can look it up. 25 Q. And as of January 1, 2003, did

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2 you intend to sell the rest of your 3 Prepaid position? 4 A. I think we announced we were

5 winding up, so we were intending to sell 6 the position. I don't know -- we 7 didn't have a specific schedule, you 8 know, that we were going to sell it 9 under, but it was -- you know, we were 10 going to sell everything ultimately 11 depending on price obviously. 12 Q. Well, did you intend as of

13 January 1, 2003 to sell the balance of 14 your Prepaid position as of a particular 15 date? 16 17 A. Q. No. You had no date in mind as to

18 when you might sell the rest of your 19 Prepaid position at the time you wrote 1660
(523 of 565)

20 this or made this post? 21 A. Correct. I mean David was

22 primarily handling the disposition of the 23 Prepaid shares. Usually the person in 24 our shop who buys the stock is 25 responsible for selling the stock, but,

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2 you know, we didn't have a specific date 3 that we wanted to sell it by. 4 Q. And who is the person in your

5 shop that was responsible for making 6 those decisions? 7 A. I would say primarily David,

8 although I would certainly have some 9 input on it if I felt his decisions were 10 wrong. 11 12 13 14 Q. A. Q. A. What was Mike Weiss' position? Mike Weiss is our CFO. Mike Weiss is the CFO? Yes, and he occasionally will

15 execute orders. He will sell stocks. 16 David will say sell or I will tell Mike 17 to sell X shares of Prepaid, and he will 18 go do it with the broker. 19 Q. Did Gotham have a trader? 1662
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20

A.

No, but Mike and Nick Botta

21 effectively started performing those 22 kinds of things for us around, you know, 23 this time. 24 Q. And who would actually

25 communicated with the brokers, if anyone;

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W. ACKMAN

2 would it be Mike or Nick Botta? 3 A. Mike and David Berkowitz. It

4 would depend if David called directly or 5 asked Mike to do it. We don't have a 6 person who formally does it. 7 Q. Is there anyone else who would

8 be involved like a trading assistant or 9 someone along those lines? 10 A. No, the only people that trade

11 any securities are Mike, Nick, myself, 12 and David Berkowitz. 13 14 15 16 17 18 19 MR. CALIENDO: Mark as Exhibit 33 a one-page E mail from Mr. Ackman to David Klafter and David Berkowitz that forwards an E mail from Mr. Tilson to Mr. Ackman. It is bears Bates stamp numbers GP 051755. (Exhibit 33 marked for 1664
(527 of 565)

20 identification.) 21 22 Q. (Document handed towitness.) Have you had a chance to look

23 at Exhibit 33? 24 25 A. Q. Yes. Can you tell me what it is,

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649

1 2 please? 3 A.

W. ACKMAN

It is an E mail from Whitney

4 Tilson giving me I would say friendly 5 advice on the Prepaid situation and 6 dealing with the press and the public 7 generally. 8 Q. Did you ever reply to this E

9 mail? 10 A. I don't know. If I replied to

11 it, we would have given you a copy of it. 12 Q. Do you remember one way or

13 another whether you replied to this E 14 mail? 15 A. Not by E mail. I may have

16 spoken to him about it. I am sure I 17 spoke to him about it. 18 Q. Do you remember speaking to him

19 about it? 1666

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20

A.

I don't remember any

21 conversation or whether I had one or not, 22 but it seems like the kind of thing I 23 would respond to. I just don't know. 24 Q. What makes you say like it

25 seems like the type of thing that you

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W. ACKMAN

2 would respond to? 3 A. I may have responded to it. I

4 may not have responded to him. It is a 5 fairly strong letter from him. It is the 6 kind of thing -- you know, as a friend, 7 I might have talked to him. 8 Q. But you have no specific

9 recollection of having talked to him 10 about this E mail? 11 12 A. Q. This E mail, no. Did you talk to Mr. Berkowitz

13 about it? 14 15 A. Q. Yes. Do you remember that

16 conversation? 17 A. I spoke to David Berkowitz and

18 David Klafter about this. 19 Q. How many times did you speak to 1668
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20 Mr. Berkowitz about it? 21 22 A. Q. Probably once. Do you remember any more

23 conversations than one? 24 25 A. Q. No. When did that conversation take

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1 2 place? 3 A.

W. ACKMAN

I don't know exactly, but I

4 suspect not so long after this E mail was 5 sent. 6 Q. And what did you say to Mr.

7 Berkowitz in that conversation and what 8 did he say to you? 9 A. I discussed the relative merits

10 of his idea, and I was very frustrated 11 during this period with not being able to 12 respond to the public, the media. 13 Q. Why weren't you able to respond

14 to the media? 15 A. Well, without giving away

16 attorney-client privilege, as I have 17 become sophisticated in understanding, 18 after consulting with my attorneys we 19 decided to not respond in the media. 1670
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20 21

Q. A.

And why did that frustrate you? Because I was confident that if

22 people knew what really had happened, 23 they wouldn't think we were bad and evil 24 as the -- the analogy here is made to 25 Grubman and Blodgette. I think Grubman

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W. ACKMAN

2 and Blodgette have absolutely nothing to 3 do with what happened here, and it kills 4 me to have people -- to the extent 5 people really think that, it bothers me 6 that I can't defend myself, and I think 7 if people understood what had happened to 8 Gotham they would get it or they would 9 have gotten it. 10 Q. Let me get back to the

11 conversation you had with Mr. Berkowitz. 12 I think I asked what did you say to him 13 and what did he say to you, and I 14 interrupted you. So why don't I let you 15 finish. 16 A. The answer is I don't remember

17 specifically what I said to him. We had 18 a general conversation about the merits 19 of this. You know, I argued I believe in 1672
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20 favor of being more public and responding 21 to the media, and I think where we ended 22 up is we called the lawyers to get their 23 advice, and we ended up not responding. 24 Q. Did you talk to anyone else

25 other than Mr. Klafter and Mr. Berkowitz?

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1 2 3 4 5 6 7 A. Q. A. Q. A. Q.

W. ACKMAN Maybe my wife. About this E mail? Pardon me. My wife. Anyone else? My father. When did you talk to your

8 father? 9 10 A. Q. Probably around the same time. What did you say to him and

11 what did he say to you? 12 A. I just explained how frustrated

13 I was that I wasn't able to respond 14 publically to the article, and, you know, 15 I -- I had explained to him and our 16 limited partners, you know, we sent them 17 a letter where we explained what happened 18 in the Prepaid thing. Of course, The New 19 York Times or the Wall Street Journal who 1674
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20 got a copy of that letter didn't elect to 21 put those facts in the -- I now 22 remember something. The Wall Street 23 Journal got a copy -24 25 MR. MARCU: He asked a question what did you tell your

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1 2 3 4 5 father.

W. ACKMAN

THE WITNESS: I know. I want to clear up something I said before. A. Henny Sender got her information

6 for that article because MBIA gave her a 7 copy of the letter that we had written to 8 our partners on December 12, and you had 9 asked where she got the information on 10 Prepaid. That is where she got the 11 information on withdrawals. That is 12 where she got that information. So I 13 don't believe I gave her, you know, the 14 50 million dollar number. I believe she 15 got that from the letter that we sent to 16 our partners. 17 Q. I appreciate the clarification,

18 but had you finished telling me what you 19 discussed with your father? 1676
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20

A.

Just, look, I am -- my dad

21 asked me if I was getting good advice 22 from my lawyers. I told him that I 23 believed that I was. 24 Q. Did you tell him what the

25 advice was?

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1 2 A.

W. ACKMAN I told him that we were not

3 talking to the press, and I want to -4 look, I am not an expert in this 5 attorney-client privilege thing, so -6 Q. I know, but I want you to

7 answer my question. Did you tell him the 8 advice that you got? 9 A. I may have. With respect to

10 talking to the press, I may have. Yes. 11 12 Q. A. When say you may have, why? Because I may have. I don't

13 know for sure that I did or that I 14 didn't. 15 Q. What makes you think that you

16 did? 17 18 19 MR. MARCU: Charlie, it is his father for goodness sake . MR. CALIENDO: I understand 1678
(541 of 565)

20 21

that. A. Because I tell my father the

22 truth. 23 Q. So you are telling me you

24 shared the legal advice that you got with 25 your father?

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1 2 A.

W. ACKMAN I may have. I don't know that

3 I did. 4 5 6 7 8 9 10 11 12 13 MR. MARCU: Do you remember that you told your father what the lawyers told you? THE WITNESS: No, I told him we were not talking to the press. I don't remember if I told him it was our lawyers' advice or not. Q. A. Q. But you may have? I may have. Absolutely. My question is: What makes you

14 think that you may have? 15 A. Because I may have. Okay. I

16 am open with my father. I tell him what 17 I think, and if there was some reason -18 if he asked me why I am doing whatever, 19 and it had been the lawyers' advice at 1680
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20 the time, I probably would have told him, 21 and I am not sure that I spoke to my 22 father about this subject, but I spoke to 23 my father about a lot of things at the 24 time. So I may have told him why I 25 wasn't talking to the press. I just

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W. ACKMAN

2 don't know for sure. 3 Q. Did you speak to your father

4 about any of the other legal advice that 5 you may have gotten other than with 6 respect to not responding to the press? 7 8 A. Q. Not that I am aware of. The first line of this from Mr.

9 Tilson says, "The more I think about it 10 the more I think you are getting terrible 11 advice," and it continues. 12 What advice did you understand

13 Mr. Tilson to be referring to in this E 14 mail? 15 A. I suspect the advice to stay

16 quiet, to not talk to the press. 17 Q. Did you tell Mr. Tilson what

18 advice you got from your lawyers? 19 A. I don't know. I may have. 1682
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20

Q.

What makes you think you may

21 have? 22 A. Because I may have told him why

23 we weren't talking to the press. I don't 24 know for sure that I did. Ask him. I am 25 sure you will.

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1 2 3 4 5 -A.

W. ACKMAN By the way, the advice -MR. MARCU: Bill, just answer

I want to talk. The advice not

6 to talk to the press came from our PR 7 guy, who was hired by our law firm, but 8 he was our principal advisor with respect 9 to dealing with the media, and he 10 recommended that -11 12 13 14 15 16 17 18 19 MR. MARCU: Could you please stop talking about communication between you -MR. CALIENDO: Mr. Marcu, please,. MR. MARCU: No, I am instructing him as a lawyer you are not to talk about communications between your lawyer's agents and you. Period. 1684
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20 21 22 23 24 25

That is an instruction. As a matter of law, it is a privileged communication, and he should not be talking about it. MR. CALIENDO: That is fine if you are instructing him on the basis of privilege.

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1 2 3 4

W. ACKMAN MR. MARCU: I am sorry. That is the only reason I was intervening. Q. Now, you say your lawyers hired

5 -- what is publicist's name again? 6 7 8 9 10 A. Q. A. Q. A. We had two. Owen Blitz Silver? Right. Who was the other one? Ziffs recommended him to us,

11 and he was helping us at the time, and 12 then our law firm recommended we hire a 13 firm called Joel Frank, a guy by the name 14 of Andy Brimmer, who started representing 15 us. I don't remember precisely when he 16 started versus when Owen wasn't working 17 with us, but Owen Blitz Silver is the 18 Ziffs PR guy, and he was helping us deal 19 with the press I think at this time. 1686
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20 21 22

Q. A. Q.

Joel Frank is who? Is a PR firm. That is the name of the firm as

23 opposed to an individual? 24 25 A. Q. I think it is both. And Andy Brimmer?

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1 2 A.

W. ACKMAN Works for Joel Frank, and I

3 think he was working with us until our 4 lawyers hired this other firm, Joel 5 Frank, and I think I am pretty sure he 6 was working with us at this time, and his 7 advice was not to talk to the press and 8 that he would handle the relationship 9 with the media. So I am more comforted 10 that the advice I got was from a -11 from Owen Blitz Silver than from a lawyer 12 for what it is worth. 13 Q. Did Gotham ever repost the

14 Prepaid report on its web site after it 15 was removed? 16 17 18 19 A. Q. A. Q. No. How about the FarmerMac report? No, none. Not the MBIA report either? 1688
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20 21

A. Q.

Correct. After it was taken down, did

22 did ever come back up again? 23 A. No, it was just a blank page.

24 We took it down the morning after the 25 article in The times.

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1 2 Q.

W. ACKMAN You are referring to the

3 Gretchen Morgansen article? 4 5 A. Q. Correct. Are you certain that it was

6 taken down the morning after the article 7 appeared? 8 A. Correct. It came down on

9 Sunday. We took down the site at 7 in 10 the morning on a Monday. 11 Q. Why are you so sure about the

12 date and time? 13 A. Because I remember we made a

14 decision to take down the site. 15 16 17 Q. A. Q. When was that decision made? I don't know. That weekend. Was a decision made or is it

18 fair to say that the decision was made 19 after the Gretchen Morgansen article came 1690
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20 up? 21 A. I believe so, but I am not

22 sure. 23 Q. Are you telling me that you

24 were considering taking your site down 25 prior to the Gretchen Morgansen article

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W. ACKMAN

2 coming up? 3 4 it. 5 6 7 MR. MARCU: Just answer for yourself, Bill. A. I didn't think about it. I A. I don't think we thought about

8 didn't -- we have had much bigger things 9 to think about than the web site. 10 11 12 13 14 15 16 17 18 19 1692
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MR. CALIENDO: We are going to adjourn the deposition to June 4 and continue at that time. (Time noted: 6:10 p.m.)

20 21 22 23 24 25

WILLIAM ACKMAN

Subscribed and sworn to before me this day of , 1996

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

W. ACKMAN CERTIFICATION

I, DEBBIE ZAROMATIDIS, a Shorthand Reporter and a Notary Public, do hereby certify that the foregoing witness, WILLIAM ACKMAN, was duly sworn on the date indicated, and that the foregoing is a true and accurate transcription of my stenographic notes. I further certify that I am not employed by nor related to any party to this action.

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20 21 22 23 24 25 DEBBIE ZAROMATIDIS

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664

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 21 22 23 24 18 19 20 17

W. ACKMAN EXHIBITS

EXHIBIT 14 15 16 E mail

DESCRIPTION 411 449

PAGE

Document

Meridian Funding medium-term note prospectus 449

Research report by Morgan Stanley 12/26/02 Document GP 052538, E mail GP 050796, series of E mails 551 555 556 560 493 512 544

GP 050758 through 778 GP 051497 through 527 GP 051460 through 490 GP 050703 563

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20 21 22 23 24 25

25 26 27 28 29 30

GP 051866

578 583 590

Multiple page document GP 052136 through 137 GP 086314 GP 050583 594 597

GP 050508 through 509

602

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 31 32 33

W. ACKMAN E X H I B I T S (CONTINUED)

Disclaimer GP 035247 GP 051755

612 642 648

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W. ACKMAN LITIGATION SUPPORT INDEX

DIRECTION TO WITNESS NOT TO ANSWER Page Line Page Line

(NONE)

REQUEST FOR PRODUCTION OF DOCUMENTS Page Line 624 5 Page Line

INFORMATION TO BE FURNISHED Page Line Page Line

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QUESTIONS MARKED FOR A RULING Page Line Page Line

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