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Charles E. Hurwitz’s chances of collecting huge monetary sanctions from the Federal Deposit Insurance Corp. just got a whole lot better. A long-awaited decision by an administrative law judge in favor of Hurwitz, a businessman in Houston, and two of his companies, provides powerful ammunition for their effort to collect sanctions from the FDIC in a related suit pending before U.S. District Judge Lynn Hughes of Houston. “We always felt we had a very strong motion for sanctions. Certainly the recommended decision improves that position,” says Richard Keeton, a partner in Andrews & Kurth in Houston who is a longtime lawyer for Hurwitz. “It certainly supports our view that there was never anything to this to begin with,” says Jacks C. Nickens, another lawyer on the Hurwitz team. Hurwitz and his companies are fighting a long-running, two-pronged effort by federal regulatory agencies to collect hundreds of millions from them in connection with the failure of United Savings Association of Houston in 1988. The bailout cost the government $1.6 billion. The FDIC filed suit against Hurwitz in 1995 in federal court in Houston, seeking to recover money lost in the thrift failure. The Office of Thrift Supervision brought a similar action several months later against Hurwitz and his companies MAXXAM Inc. and Federal Development Co., five former officers in the thrift, and United Financial Group, a holding company chaired by Hurwitz that owned United Savings. The holding company went bankrupt and paid the government $9.45 million, and the five officials settled for a total of $1.03 million. That left Hurwitz, MAXXAM — the company that owns Kaiser Aluminum Corp. and Pacific Lumber Co. — and Federated Development as defendants in the OTS proceeding. But more than two years after the OTS hearing ended, Judge Arthur L. Shipe of the OTS issued a 248-page recommended decision on Sept. 12. He finds in the defendants’ favor on 12 counts of relief and turns down the OTS’ request for restitution totaling $821 million and civil penalties of $4.6 million. Shipe’s recommendation goes to the thrift agency’s director, Ellen Seidman, for a final order, although her successor is likely to be the one to consider it. President George W. Bush has nominated California banker James Gilleran for the job. It will take several months for a final order. Lawyers for the OTS requested extra time, and their response is not due until January. But Shipe’s recommendation paves the way for stepped-up activity in the FDIC suit, where Hurwitz and his companies have counterclaimed, alleging the FDIC is paying the OTS to pursue the administrative proceeding. Hurwitz’s lawyers filed the counterclaim in May 2000, alleging the FDIC does not have authority under the Economy Act to pay another agency to do something it could not do itself. Hurwitz’s lawyers allege the FDIC paid the OTS to bring administrative claims against him. FDIC lawyers want Hughes to dismiss the counterclaim, and they argue in pleadings that the OTS enforcement actions are authorized by law and FDIC reimbursement is authorized by the FDIC Act. But of particular interest to lawyers in Texas, Hurwitz, MAXXAM and Federated have also filed a motion for sanctions, seeking actual damages of about $40 million — the money spent in defense costs for the two suits. (Nickens says they haven’t ruled out seeking additional sanctions from other parties.) Hurwitz alleges in the motion for sanctions that the FDIC knew its claims lacked merit, but filed them anyway and enlisted the OTS to bring the same claims in an administrative hearing. Hurwitz and his lawyers have long contended he was sued because of political pressure in the early-to-mid 1990s from environmentalists who wanted Hurwitz to turn over acres of virgin old-growth redwood trees in California’s Headwaters Forest owned by Pacific Lumber in a debt-for-nature swap. (In 1999, Hurwitz sold the land to California and the federal government for $450 million and put in place a conservation plan for additional land.) But time and discovery have yielded more support for Hurwitz’s argument. For instance, in August 2000, Hurwitz’s lawyers filed a supplemental motion for sanctions alleging that documents recently made public prove the FDIC sued him to create a “debt” that could be paid for with redwood trees that Pacific Lumber owned in California. The lawyers allege in the motion that while the FDIC’s position is that it didn’t take the debt-for-nature proposal seriously, newly public documents suggest otherwise. And in January, Hurwitz’s lawyers filed another supplemental motion for sanctions, alleging that documents that became public during hearings in December 2000 before the U.S. House of Representatives Committee on Resources support Hurwitz’s contention that he was sued because of the debt-for-nature proposal. The committee’s staff report, released in June 2001, suggests the FDIC and the OTS should withdraw their suits against Hurwitz and his companies. The 46-page report ends with the line: “Integrity of the bank regulatory system demands nothing less.” But in a memorandum opposing Hurwitz’s motion for sanctions, lawyers for the FDIC say Hurwitz is taking evidence out of context. “Rather than present a bona fide legal argument, Hurwitz again seeks to use this court to advance his political and public relations agenda,” they wrote in February 2001. In August, FDIC lawyers asked Hughes to ignore the congressional report. “It has no probative value; it was drafted as a partisan attack on the FDIC; it is an attempt to manufacture evidence where none exists,” they wrote. Robert DeHenzel Jr., a lawyer for the FDIC in Washington, D.C., who is working on the suit against Hurwitz, did not return a telephone message by press time Oct. 11. But in the wake of Shipe’s lengthy report, Hurwitz’s lawyers filed another supplemental motion for sanctions, arguing that the recommendation supports their motion for sanctions and counterclaims. J. Kent “Kenny” Friedman, MAXXAM’s general counsel, says Shipe’s decision vindicates Hurwitz’s claims “up and down the line.” F. Thomas Hecht, a partner in Ungaretti & Harris of Chicago who is on the FDIC’s team in the Houston suit, says he does not know how Shipe’s decision will affect the suit. “It is a recommendation, and so I think the FDIC is evaluating what its options are, as I think the OTS is,” says Hecht, who refers further comment to DeHenzel. ‘COMPLETE, TOTAL VICTORY’ The hearing before Shipe lasted 119 days over an 18-month period ending in March 1999. In his detailed recommended decision and findings of fact, Shipe shot down the government’s case. He found for the defendants on all 12 claims for relief, including allegations Hurwitz controlled United Savings, the defendants failed to maintain the net worth of United Savings, they mismanaged portfolios of mortgage-backed securities and high-yield bonds, and mismanaged some real estate transactions that resulted in losses to the thrift. In his findings of fact, Shipe recommends dismissal of all of the allegations against Hurwitz and his companies, and finds the defendants were not unjustly enriched. Richard Stearns, a deputy chief counsel at the OTS, refers questions to an agency spokesman, who declines to comment. But Nickens, the lead defense attorney in the OTS proceeding and a partner in Houston’s Clements, O’Neill, Pierce, Nickens & Wilson, says Shipe’s recommendation clearly supports Hurwitz’s view that the government claims were not meritorious. Hurwitz says he’s pleased with Shipe’s ruling, but adds he’s suffered an injustice. He says the government clearly underestimated his willingness to fight. “This should never happen to anybody — ever,” Hurwitz says. “We spent a lot of money, but I don’t know how else you fight something like this with the government with [its] unlimited time and unlimited money,” he says. Hurwitz and his lawyers contend it’s extraordinarily unusual for a judge who works for the OTS to rule against the agency. “That’s not a forum that’s very favorable to the defendant. The administrative law judge is paid by the agency … . The rules of evidence are much less restrictive than in a trial setting,” says Bill Isaac, a former chairman of the FDIC who testified at the congressional committee hearings. He says Shipe’s recommendation is a “complete, total victory” for MAXXAM. Isaac, who headed the FDIC from 1978 to 1985 and now works as a consultant to the banking industry, says Hurwitz should never have been sued. Issac believes Shipe’s recommendation could lead to changes in how officials at the FDIC and OTS conduct themselves. “For example, they had scores of meetings apparently before they decided to bring the suit and after they brought it, with people in the administration, and people from the Congress and environmental groups and the like … to discuss whether to bring this suit,” he says. Notes Isaac, “I find that very troubling, that the FDIC would have a single meeting with anybody not in the agency about potential litigation.”

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