background of m mccarty - expert witness · background of m mccarty appendix 3 - page 1...

BACKGROUND OF M MCCARTY

Appendix 2 -

CONFIDENTIAL

APPENDIX 1

Michiel C. McCarty Curriculum Vitae

MICHIEL C. MCCARTY Chief Executive Officer and Chairman

M.M. DILLON & CO., LLC

One Sound Shore Drive

Greenwich, CT 06830

Tel: (203) 569-6823

PROFESSIONAL EXPERIENCE

M.M. Dillon & Co., LLC 2009-Present

Chief Executive Officer, Chairman and Founding Partner

Founding Partner of the firm, which was spun out of CRT Capital, and serve as its CEO and

Chairman. M.M. Dillon operates as an independent investment banking firm for corporations.

M.M. Dillon provides financial advisory services related to mergers and acquisitions,

restructurings and financings. Head of the operating and compensation committees with

approximately 25% of time to supervisory activities.

CRT Capital Group LLC 2003-2008

Head of Investment Banking

One of the three partners involved in managing the overall business, which included an active

public issuing business with 44 public equity transactions and 13 debt transactions completed in

four years. Additionally, CRT Capital included a 52 person sales and trading operation, 18

research professionals and 20 administrative personnel all interacting with 1,800 institutional

clients trading fixed income and equities. Headed the commitment committee and oversaw all

corporate fund raising with approximately 25% of time devoted to supervisory activities.

Gleacher Partners LLC

(Gleacher Natwest Inc., Gleacher & Co.)

1996-2003

Managing Director

One of the senior partners managing Gleacher, a boutique investment bank involved in M&A,

private placements, restructurings and public fund raising. From January 1996 to February 1999,

Gleacher was also involved in equities and debt sales, research and trading. Headcount at

Gleacher varied between 50 and 450 people. Involved in the commitment process and the

oversight of placements and securities activities, with approximately 25% of time devoted to

supervisory activities.


Appendix 2 -

CONFIDENTIAL

MICHIEL C. MCCARTY (continued)

SG Warburg & Co., Inc. 1991-1995

Managing Director, Head of U.S. & Latin America Investment Banking, Member of the Group

Management Committee and Member of the Group Executive Committee

Served as the head of the management committee of the U.S. subsidiary of this integrated UK

investment bank. The U.S. subsidiary had 500-750 people, with sales, trading, research and

investment banking activities involved in debt, equity and derivative markets. Ran the

commitment process for all fund raising and oversaw the placement activity for all fund raising,

including over 100 public offerings in four years with approximately 50% of time devoted to

supervisory activities. Head of U.S. and Latin America Investment Banking and on the Group

Management Committee and Group Executive Committee.

Dillon Read & Co. Inc. 1979-1991

Managing Director, Head of Equity and Debt Issuing Committee, Member of the Management Committee

Executive in charge of all equity and debt issuance by corporate clients and headed the screening

and commitment process for all new fund raising. Jointly oversaw the sales and placement

activity for equities and debt, which numbered over 70 public offerings over five years, with

approximately 25% of time devoted to supervisory activities. Responsible for International

Investment Banking and the Telecom and Technology sector.

Citicorp, NA 1975-1979

Vice President, Merchant Banking Group

Involved in the origination and placement of debt securities for corporate clients and the

execution of mergers and acquisitions and restructurings. I devoted approximately 10% of my

time to supervisory activities.

EDUCATION

The Wharton Graduate School of Business, University of Pennsylvania, M.B.A., 1975

Vanderbilt University, B.A. in physics with honors, 1973

PROFESSIONAL CERTIFICATIONS

FINRA series 7, 24, 63


Appendix 3 - Page 1

CONFIDENTIAL

APPENDIX 2

Michiel C. McCarty Expert Witness Experience

Michiel C. McCarty Expert Witness Experience – Last Four Years

In MPM Silicones LLC et al

Case No. 14-22503 (RDD)

Adversary Proceeding

No. 14-08227 (RDD)

United States Bankruptcy Court

Southern District of New York

Testimony, Expert Report

In Duke Energy Corporation

2013

Case No. A-12-CA-009-SS

The United States District Court

For The Western District Of Texas

Austin Division

Deposition, Expert Report

In re Hillcrest IV, LLC

December 2012

Cause No. DC-11-13282

District Court Of Dallas County, Texas

162nd Judicial District

Expert Report

In re Verizon Communication, Inc.

October 15 – October 26, 2012

Case No. 3:10-CV-1842-G

United States Court for the Northern District of Texas – Dallas Division

FINRA hearings, three cases involving CRT Capital

2011-2012

- Expert witness regarding investment banking related topics

In re Molecular Insight Pharmaceuticals, Inc.

January 14, 2011 (trial), May 5, 2011 (trial)

Case No. 10-23355

United States Bankruptcy Court, Eastern District of Massachusetts –

Boston


Appendix 3 - Page 2

CONFIDENTIAL

M.M. Dillon & Co.

Expert Witness

Credentials

Fall, 2014

M.M. Dillon & Co.

CONFIDENTIAL

M.M. Dillon

M.M. Dillon- Selected Expert Witness Experience

https://www.primus.ca/

http://www.momentive.com/home.aspx

http://www.google.com/url?url=http://auocoms.com/cbre-logo&rct=j&frm=1&q=&esrc=s&sa=U&ei=pPEaVPepCo_bsASKqIGABw&ved=0CBgQ9QEwAQ&sig2=_wlrMsEoiom56eZUP1LTCQ&usg=AFQjCNGuZmh-OqfH_ECmagjRF9O20X_xLA

http://www.google.com/url?url=http://drcaos.com/alcatel-tambien-quiere-un-poco-de-html5/&rct=j&frm=1&q=&esrc=s&sa=U&ei=AvIaVKjtG-fGsQTzjoLYDA&ved=0CBgQ9QEwAQ&sig2=bHhiaQIUJQ227qLR3DHT-Q&usg=AFQjCNFTTv08PHZxmZfBbV471HRVBHvhxQ

http://www.google.com/url?url=http://semiaccurate.com/2014/09/08/intel-launches-grantley/&rct=j&frm=1&q=&esrc=s&sa=U&ei=2vIaVOrfDtfCsAT-nYLoDg&ved=0CBYQ9QEwAA&sig2=Xc9QVwLA8fB6PEjpyUYVcQ&usg=AFQjCNGiPYQGIFEM-NDx_1QuKbtAGSZzFg

http://www.google.com/url?url=http://globalaccessibilitynews.com/2012/07/04/credit-suisse-to-make-banking-services-accessible-for-persons-with-disabilities/&rct=j&frm=1&q=&esrc=s&sa=U&ei=UvUaVJrwH8iTsQSg3IHgAQ&ved=0CB4Q9QEwBA&sig2=mZ4CwY8nyJIbKmSaBherSg&usg=AFQjCNG3lGhuIEKjve5RSeOHJ7tYQLfYWA

http://www.google.com/url?url=http://www.missouricitytx.gov/index.aspx?NID%3D344&rct=j&frm=1&q=&esrc=s&sa=U&ei=l_UaVOvNCK7jsATkgYLgCA&ved=0CBoQ9QEwAg&sig2=wbXMzfSTWHVipKcqQPb52w&usg=AFQjCNF6AU1aETALzv6VwK238xcxIX5dsA

M.M. Dillon

Michiel Michiel McCarty Background. McCarty –

The Wharton School of

Finance and Commerce–

MBA, Finance , 1975

Vanderbilt University – BA

Physics with honors, 1973

University Lecturer

• Dartmouth

Tuck School

• University of

Pennsylvania Wharton

School

• Vanderbilt University

Owen School

• Vanderbilt University

School of Law

• University of Chicago

Booth School

Education Employment

2009 – Present

• M.M. Dillon & Co.

• Chairman & CEO

2003 – 2008

• CRT Capital Group

LLC

• Managing Director

• Head of Investment

Banking

1996 – 2003

• Gleacher & Co. LLC.


• Head of Issuing

1991 – 1995

• SG Warburg & Co.


• Head of North and

South America

Investment Banking

1979 – 1991

• Dillon Read & Co. Inc.


• Head of Client

Financings

1975 – 1979

• Citicorp NA- Merchant

Banking Group

• Vice President

Selected Clients

Telecom

• ATT

• NYNEX

• Bell Atlantic

• MCI

• GTE/Sprint

• PacTel

• Deutsche Telekom

• Verizon

Technology

• AMD

• IBM

• Intel

• Ericsson

• Alcatel

• Wang Computers

• NCR

Other

• Fannie Mae

• Blue Green

• Westway

• Marriott

• Disney

Experience

Equity Offerings

Debt Offerings

Convertible Securities

High Yield Debt

Leveraged Finance

Distressed Securities

Mergers & Acquisitions

Fairness Opinions

Spin-offs

Investment Banking

Management

Due Diligence Committees

Expert Testimony

Principal Investing

M.M. Dillon

M.M. Dillon- Expert Witness Experience M McCarty

In re MPM Silicones, LLC et al

August 2014

Case No. 14-22503 (RDD)

United States Bankruptcy Court

Southern District of New York

In re Duke Energy Corporation

March 2013

Case No. A-12-CA-009-SS

The United States District Court

For The Western District Of Texas- Austin Division

In re CBRE Hillcrest IV, LLC

December 2012

Cause No. DC-11-13282

District Court Of Dallas County, Texas- 162nd Judicial District

In re Verizon Communication, Inc.

October 15 – October 26, 2012

Case No. 3:10-CV-1842-G

United States Court for the Northern District of Texas – Dallas Division

FINRA hearings, three cases involving CRT Capital

2011-2012 New York based Arbitration Hearings

In re Molecular Insight Pharmaceuticals, Inc.

January 14, 2011 (trial), May 5, 2011 (trial)

Case No. 10-23355

United States Bankruptcy Court, Eastern District of Massachusetts – Boston

M.M. Dillon

Michiel Randall Lambert Background. McCarty –

Kellogg Graduate School

of Management at

Northwestern University–

MBA, 1987

University of Michigan

Ross School of Business–

BA Business Administration

1979

Professional Qualifications

• Charter Financial

Analyst (CFA)

• Certified Public

Accountant (CPA)

• FINRA licenses- 7, 63

and 24

• Bankruptcy Liquidation

Trustee

• Bankruptcy Litigation

Trustee


2009 – Present


• Senior Managing

Director

• Head of Restructurings

2007- 2008

• CRT Capital Group

LLC


• Head of Restructurings

2005 – 2006

• Saybrook Capital

• CEO

1997 – 2004

• Chanin Capital

Partners


• Head of NY and

London offices

1988 – 1996

• BDS Securities.


• Head of Trading

Selected Clients

Restructurings

• Delphi Corp

• Sinclair

Broadcasting

• Constar

• Primus

• TOUSA

• Federal Mogul

• Adelphia

• Refco

• Footstar

• Global Crossing

• Hayes Lemmerz

• Safety Kleen

• Comdisco

• Sunbeam

Testimony

• Intel

• Mirant

• Semi-Tech

• Grove

• Southmark

Experience

Debt Offerings

High Yield Debt

Leveraged Finance


Restructurings

Solvency Opinions

Spin-offs

Trade Credit


Expert Testimony

Principal Investing

Trading and Sales

M.M. Dillon

M.M. Dillon- Expert Witness Experience R Lambert

Lambert Litigation Testimony

Intel

Primus Telecommunications Group, Inc.

Federal Mogul Corporation

Primus Telecommunications Group, Inc.

Mirant Litigation Trust

Adelphia Communications

Drypers

Grove Worldwide

Stellex

Paragon Trade Brands

Paul Harris Stores

Southmark

Year

2014

2009

2007

2007

2006/2007

2004

2001

2001

2000

1999/2003/2005

1992

1989

M.M. Dillon

M.M. Dillon- Expert Witness Legal References

Counsel References

Ken Eckstein

Phil Anker

Ray Guy

Gerry Pecht

Matt Stammel

Jeff Sabin

James Weingarten

Hector Gonzalez

Nancy Delaney

Firm

Kramer Levin

Wilmer Cutler

Weil Gotshal

Fulbright (Norton Rose)

Vinson & Elkins

Bingham

Williams & Connolly

Dechert

Curtis

M.M. Dillon

M.M. Dillon Selected Expert Witness Summaries

Credit Suisse v

Highland

Retained by Weil Gotshal, counsel for the Defendant Credit Suisse as an expert witness in the areas

of investment banking, capital markets and private equity related to the cases of financing several

luxury planned resort communities involving Highland Capital Management the Plaintiff. The

transactions in question had total value of over $7 billion with damage claims in excess of that number

Momentive

Performance Materials

Retained by Dechert for the Defendant The Bank of New York Mellon Trust Company for those who

hold the debt of Momentive Performance Materials, as an expert witness in the areas of investment

banking, capital markets and private equity in connection with the issuance by MPM of $1.1 billion of

Senior Secured Notes as part of the 2012 refinancing of the leveraged buyout of MPM by Apollo

Duke/

Crescent Resources

Retained by Fulbright counsel for the defendant Duke Energy Corporation as an expert witness in

the areas of investment banking, capital markets and private equity related to the spin off transaction

of Crescent Resources involving the Litigation Trust as the Plaintiff. The transaction in question had

aggregate value of over $4 billion with damage claims in excess of that number

Verizon/

IDEARC

Retained by Wilmer Cutler as counsel for Defendants Verizon Communications to provide expert

testimony in the areas of investment banking, capital markets and private equity related to the spin off

of IDEARC Media from Verizon involving U.S. Bank National Association as the Plaintiff. The

transaction in question had a total aggregate value of over $14 billion with claimed damages in excess

CBRE v

Highland

Retained by Vinson & Elkins as counsel for the defendant CBRE as an expert witness in the areas of

investment banking and capital markets related to the refinancing of the Lake Las Vegas real estate

project with Highland Capital as Plaintiff. The project in question had an aggregate value in excess of

$1.0 billion with damage claims exceeding $550 million

MIPI v

Secured Lenders

Retained by Kramer Levin counsel for the debtor in possession MIPI as an expert witness in

investment banking and restructurings and advisor to the company related to a dispute between the

debtor and it’s secured lenders during the bankruptcy process and a potential cram down of the

secured lenders by new equity holders

Intel v

Lehman

Retained by Williams & Connolly as counsel for Intel Corporation as an expert witness in

investment banking to testify related to litigation on the subject of Lehman’s cost of funding while

Lehman was in liquidation mode after filing bankruptcy. The amounts in question exceeded $1 billion

M.M. Dillon

M.M. Dillon Broad Product Capability

M.M. Dillon can

provide truly

objective advice and

structure innovative

solutions for its

clients across all

traditional areas of

investment banking

We currently offer

this broad capability

of product offering

that is not available

to smaller more

narrowly focused

boutiques to a

diverse set of

corporate clients

Advisory

Private Equity

● Venture, Emerging Growth and

Recapitalizations

Private and Public Debt

● Investment Grade

● High Yield

● Convertible

● Mezzanine

Public Equity

● IPOs

● Follow-Ons and Secondary

Offerings

● PIPEs and RDs


● Buy-Side

● Sell-Side

● Joint Venture

● Shareholder Rights Plans

Restructuring

● Advisory

● Out-of-Court Services

● Stakeholder Representation

● Bankruptcy Services

Fairness / Solvency Opinions

General Advisory

Financings

M.M. Dillon

M.M. Dillon Equity Capital Markets

Since 2004, M.M. Dillon and their senior

professionals have led or participated in

over 40 IPOs and secondary offerings,

representing approximately $30 billion in

gross proceeds with over 70% as lead or

co-lead manager

Seasoned bankers with deep domain

expertise advise clients on preparation,

positioning and marketing

Expertise in structuring, pricing and

execution of equity offerings

• Access to global small-, mid- and large-cap

investors

• Interaction with a large universe of Hedge

Funds

• Deep relationship with hundreds of Private

Equity Funds

M.M. Dillon’s senior

professionals bring

deep public market

expertise and sector

knowledge to its

corporate clients

Solazyme, Inc.

$227,182,500

Initial Public Offering

Selling Group Participant

Selected Transactions

Co-Manager

$102,637,500


SemiLEDs Corporation

HCA Holdings, Inc.

Co-Manager

$3,786,000,000


Kips Bay Medical, Inc.

$16,500,000


Co-Manager

RDA Microelectronics, Inc.

Co-Manager

$77,625,000


MakeMyTrip Limited

Selling Group Participant

$125,856,000

Secondary Offering

Co-Manager

$5,000,000,000

Series B Preferred Stock

Co-Manager

$18,140,100,000


General Motors Company General Motors Company

Sole Manager

$53,562,654

Secondary Offering

Synthesis Energy Systems,

Inc.

Co-Manager

$91,547,730


Alpha & Omega

Semiconductor, Ltd.

Co-Manager

$195,443,286


Net Logic Microsystems Inc.

Book-Running Manager

$20,600,000

Secondary Offering

Primus Telecommunications

Group Inc.

M.M. Dillon

Strong Private Placement, PIPE and Registered Direct Capability

• Traditional private equity for early-, mid- and

later-stage private companies

• Capital for expansion, acquisition or

recapitalization

• Access to multiple investor channels: venture

capital, private equity, hedge funds / crossover

and strategic

Traditional Private

Placements

PIPEs &

Registered Directs

SPACs &

Special Situations

• Privately-marketed transactions for public

companies

• Target investors include mutual funds and

hedge funds

• Special purpose investment vehicles to facilitate

an acquisition of an operating company or assets

• Reverse mergers with publicly-listed shell

companies, often with a simultaneous capital

raise

M.M. Dillon offers its

corporate clients the

full spectrum of

private capital

solutions involving:

Private Equity,

Hedge Funds,

Traditional Long

Only Managers and

High Net Worth

Individuals

http://www.emsglobal.com/index.html

http://www.neurohitech.com/index.html

http://en.wikipedia.org/wiki/File:Vion_Pharmaceuticals_Logo.gif

http://www.circlehealth.co.uk/home.php

M.M. Dillon

Well-Established Middle Market Financial Advisory Franchise

• Exclusive sales

• Buy-side advisory

• Joint venture and licensing

• Takeover defense


Restructuring Advisory

• Debtor advisory

• Creditor advisory

• In-court and out-of-court services

• Solvency opinions

M.M. Dillon’s

financial advisory

capabilities

encompass M&A,

restructuring and

general advisory

engagements

We build long-term

relationships with

our clients by

providing truly

objective and expert

advice in all

assignments

We seek to serve as

our clients’ trusted

advisor and assist

them in building and

realizing shareholder

value

SelectedTransactions

National Patent

Development Corporation

QuantaSol Ltd.

Sale of QuantaSol to

JDS Uniphase

Financial Advisor

Molecular Insight

Pharmaceuticals, Inc.

Takata Corporation

New Penn Motor

Express, Inc.

Syntiron, LLC

Sinclair Broadcast

Group Inc.

Primus Telecommunications

Group Inc.

Shermen WSC Acquisition

Corp.

Constar International Inc. Arcadia Resources, Inc. Environmental Power

Corporation

Financial Advisor Financial Advisor

Sale of assets of its Home

Health Equipment business

Sale of its Industrial Staffing

business

Financial Advisor

Financial Advisor

Financial Advisor

Financial Advisor

Financial Advisor

Financial Advisor

Financial Advisor to Official

Committee of Unsecured

Creditors

Financial Advisor

Financial Advisor

Restructuring

Sale of its Five Star Products

division to The Merit Group

Licensing Advisory

Restructuring

$500,000,000

$200,000,000

Restructuring

$830,000,000

Acquired the Westway division

of ED&F Man

Restructuring

$575,000,000

Fairness & Valuation

• Fairness opinions

• Portfolio valuations

• Special committee advisory

M.M. Dillon

M.M. Dillon Ranked Restructuring Advisory Practice

The following slides discuss the services that M.M. Dillon’s Restructuring Advisory Group

can provide to companies and investors to help maximize the value of their investments in

a difficult market environment

M.M. Dillon’s Restructuring Advisory Group professionals have over fifty years of

experience in financial restructuring and have completed more than $100 billion dollars in

transactions

M.M. Dillon's’ services include:

● Distressed capital raising

● Exchange offers

● Pre-packaged filings

● Debtor-side advisory

● Distressed asset sales

● Fairness and solvency opinions

Targeted clients include:

● Middle market companies

● Bankruptcy estates

● Noteholder committees

● Creditor committees

● Equity committees

M.M. Dillon’s

IB team of

professionals

competes

with all of the

major

restructuring

advisory

firms.

The group

has deep

experience

working for

debtors,

creditors and

equity

committees

M.M. Dillon

M.M. Dillon Bankruptcy Related Services

DIP Financing Assess the need for, analyze the terms of, and procure debtor-in-possession

financing prior to or after a bankruptcy filing

Chapter 11 Plan of

Reorganization

Analyze, construct, negotiate and confirm consensual or contested plans of

reorganization

Sale or Purchase of Assets,

Claims or Entire Company

Analyze, structure, negotiate and close a sale or purchase of assets, claims,

corporate segments, or the entire company, pursuant to Section 363 or for a

tender offer or plan of reorganization

Litigation Support and

Expert Testimony

Provide financial analysis and advice in Chapter 11 litigation matters, such as

fraudulent conveyance, preference actions and contingent claims, and provide

expert testimony by senior professionals on these issues and the other matters

Post-Emergence Financing Arrange new post-reorganization financing through existing creditors or new

investors

Market Making and Research

of New Securities

Trade and make markets in post-reorganization securities

Raise New Equity and Debt

for Companies with Improving

Credit

Find lower cost financing through capital markets as a company’s credit quality

improves. Provide market-based exit strategies for holders of post-reorganization

securities

M.M. Dillon

Sea Dragon Healthcare Partners, L.P. (“SDHP”) is based off the investment

track record of its Managing Partner Danny Frank, who has successfully

invested over $400 million in both private and public healthcare companies

over the past decade

Top decile performance

$400 million aggregate capital infused

9 portfolio investments

5 liquidity events

1 write-off

Right size fund / investments

Capital size enough to be able to match company needs and tied to key

milestones

Leverage skill base to investment needs (advisory / board seat / strategic /

regulatory)

Enough capital to help affect change if / as needed (public)

One-stop shopping for critical capital / advisory (Dillon)

Defined opportunities in the pipeline

Can lead investments / partner or co-invest

Quick turnarounds

Sound fundamental approach

Large market opportunities

Defined risks / capital needs / not crossing a huge technological hurdle / not

looking for “revolution” but rather high probability evolution

Working capital for expansion / growth

Managing Partner Track Record

As of 3/31/11 SDHP

Multiple on Invested Capital 1.9x

Substantially Realized Investments

IRR(1)

Gross IRR(1)

Total Return Target 2x – 3x

Cambridge Associates VC Benchmark

(2000-2009)

Healthcare/Biotech 8.4%

Healthcare Devices 4.8%

Pharmaceuticals 13.3%

(1) To be disclosed verbally

M.M. Dillon Private Equity- Healthcare

M.M. Dillon

SDHP is part of Dillon and thus benefits from the Healthcare concentration of

the banking professionals focused in the target areas of investment

Investment Banking Healthcare Coverage

Medical Devices

Healthcare Services

Biotechnology

Specialty Pharmaceuticals

Benefits of integration with Dillon

Larger footprint of contacts

Capital markets and transaction knowledge base

Investment opportunity pipeline

M.M. Dillon Private Equity- Healthcare

M.M. Dillon

Five Year History Integrated IB Success Inside of CRT

32

30

11

Financing

18

16

15

13

11

53

10

6

4

IB Revenue Product Focus

Geographic Focus Industry Focus

Total of 73 closed fee producing transactions

Spread between all three major products

IB total fees of over $130 million in five years

EBITDA of $40 mm with Comp of $85 mm divided

$45 Banking, $20 mm Floor & $20 mm Research

Floor and Research also paid for Trading Volume

Restructuring

Advisory

North America

South America

Asia

Europe Energy

Other

Technology,

Media, Telecom

Industrials

Healthcare

M.M. Dillon

Five Year History Integrated IB Success Inside of CRT

13

11

6

5

3

$1,486

$577

$474

$362

$143

25

18

16

$3,140

$776

$220

Financing (# Deals by Type) Advisory (# Deals by Type)

Financing Transaction Value Advisory Transaction Value

Restructuring

Buy/Sell-Side

Advisory

General Advisory

Equity Private

Placements

Initial Public

Offerings

Follow-on/PIPEs

Convertible Debt

Offerings

Debt (excl.

Convertibles)

Equity Private

Placements

Initial Public

Offerings

Follow-on/PIPEs

Convertible Debt

Offerings

Debt (excl.

Convertibles)

Buy-Side

Advisory

Sell-Side

Advisory

General Advisory

M.M. Dillon

M.M. Dillon Investment Banking Professionals

Heartland Industrial Partners

Morgan Lewis Githens & Ahn

Smith Barney Harris Upham

50 Years

Senior Managing Director at

Heartland Industrial Partners

Founder and Managing Director

at Morgan Lewis Githens & Ahn

CRT Capital Group LLC

UBS Warburg

PaineWebber

34 Years

Managing Director in M&A Group

at UBS Warburg

Head of M&A at PaineWebber

Royal Bank of Canada

Bank of America

Smith Barney

36 Years

Head of Energy Banking at RBC

Head of Energy Banking at

Bank of America

Head of Energy Banking at

Smith Barney

5 Gems Strategic Advisory

Aureon Labs

JC Decaux

13 Years

Co-Founder of Aureon Labs

Head of Strategy and Chief

Technology Officer of JC

Decaux

Chanin Capital

Duff & Phelps

15 Years

Vice President at

Chanin Capital Partners

Vice President at Duff & Phelps

Michiel McCarty Head of Banking

Gleacher Partners

SG Warburg

Dillon Read

39 Years

Managing Director at Gleacher

Head of U.S. & Latin America

Investment Banking at SG

Warburg

Houlihan Lokey

AXA Financial

JP Morgan

11 Years

Corporate Strategy Advisor at

AXA Financial

Associate, Energy Group at

Houlihan Lokey and JPMorgan

John Beneke Chief Financial Officer

Morgan Stanley

Merrill Lynch

25 Years

Managing Director in Morgan

Stanley Finance Division

Controller for Morgan Stanley

Global Investment Banking

Ducker Advisory

Thomas Weisel Partners

Morgan Stanley

25 Years

Head of Advisory at Ducker

Worldwide

Automotive Equity Research

Analyst at Thomas Weisel

Partners and Morgan Stanley

2 Years

Bridgewater Associates

CRT Capital

11 Years

Vice President

Bridgewater

Caris & Company

Life Science Partners

Credit Suisse, Goldman Sachs

22 Years

Managing Director of Life

Sciences at FBR Capital Markets

Biotechnology Equity Research

Analyst at Credit Suisse and

Goldman Sachs

Novartis Pharma

Workscape

IMS Healthcare

21 Years

Chief Financial Officer of Novartis

Pharma, Workscape and IMS

Healthcare

GE Financial Staff

Multiple Boards of Directors

CRT Capital Group LLC

Salomon Smith Barney

30 Years

Managing Director Salomon

Smith Barney High Yield and

Leverage Finance Capital

Markets

Doug Harvey Managing Director

Cerberus Capital Management

Fidelity Investments

32 Years

Managing Director at Cerberus

Capital Management

Founding Manager of Fidelity

Special Situations / Strategic

Value Fund

George Bickerstaff Managing Director

Doug Harvey Managing Director

Michael Espinal Senior Vice President

Carl Miller Senior Vice President

Ryan Fitzgerald Analyst

Chris Hepler Senior Vice President

Bob Hastings Advisory Director

Chad Weiss Advisory Director

Olivier Saidi Managing Director

Michiel McCarty Chief Executive Officer

John Beneke Chief Financial Officer

Scott Merlis Managing Director

Jeff R. Swarz, Ph.D. Managing Director

Daniel Frank Head of Asset Management

Perry Lewis Advisory Director

Randall Lambert Managing Director

CRT Capital Group

Saybrook Capital

Chanin Capital

35 Years

Head of Restructuring at CRT

Head of New York and London at

Chanin

Head of Sales & Trading at BSG

M.M. Dillon

M.M. Dillon Selected Restructuring Experience

$50,000,000

Distressed Refinancing

Financial Advisor

December 2007

$200,000,000

Restructuring

Financial Advisor to the Company

February 2009

$80,000,000

Solvency Opinion

Financial Advisor to the Board of

Directors

July 2006

$20,000,000

Financial Advisory


Directors

September 2007

Financial Advisory

Financial Advisor and agent in debt

repurchase program

December 2008

Financial Advisory

Financial Advisor

August 2007

$1,000,000,000

Financial Advisory

Financial Advisor to Underwriter

Counsel

August 2008

$57,200,000

Solvency Opinion


Directors

February 2007

$35,000,000

Financial Advisory

Financial Advisor to the Shareholder

Counsel

June 2008

$20,000,000,000

Restructuring

Financial Advisor to the Official

Committee of Equity Holders

January 2007

$130,000,000

Debt Exchange


May 2008

$16,800,000,000

Restructuring

Financial Advisor to the Ad Hoc

Committee of Equity Holders

December 2006

$2,000,000,000

Financial Advisory

Financial Advisor to the Majority Equity

Holder

February 2008

Restructuring

Financial Advisor

September 2011

Healthcare Services

Company

Restructuring

Financial Advisor to the Debtors

July 2010

$830,000,000

Restructuring


November 2009

$600,000,000

Restructuring

Financial Advisor to the Debtors

July 2009

$500,000,000

Restructuring

Financial Advisor to Official Committee

of Unsecured Creditors

May 2009

$27,000,000

Debt Restructuring


March 2009

Restructuring

Financial Advisor to the Acquirer of

Distressed Assets

February 2010

Financial Advisory

Financial Advisor

November 2007

Financial Advisory

Financial Advisor

February 2007

$2,700,000,000

Financial Advisory

Financial Advisor to the Asbestos

Insurers

June 2007

Financial Advisory

Financial Advisor

July 2006

http://www.quigleyco.com/index.html

M.M. Dillon

M.M. Dillon Selected Financing Transactions

$8,273,078 $227,182,500 $125,856,000 $5,200,000 $5,000,000 $4,353,900,000

Series A Preferred Stock Initial Public Offering Follow On Offering PIPE Series A Preferred Stock Initial Public Offering

Placement Agent Selling Group Participant Selling Group Participant U.S. Placement Agent Placement Agent Co-Manager

Sep 2011 May 2011 May 2011 March 2011 March 2011 March 2011

$16,500,000 $102,637,500 $77,625,000 $18,140,100,000 $5,000,000,000 $10,000,000

Initial Public Offering Initial Public Offering Initial Public Offering Initial Public Offering Series B Preferred Stock Series B Preferred Stock

Co-Manager Co-Manager Co-Manager Underwriter Underwriter Sole Placement Agent

February 2011 December 2010 November 2010 November 2010 November 2010 October 2010

Undisclosed $345,000,000 $19,200,000 $91,547,730 $195,443,286 $43,000,000

Senior Credit Facility &

Private Placement Convertible Senior Notes Registered Direct Initial Public Offering Follow On Offering Preferred Stock

Placement Agent U.S. Placement Agent Financial Advisor Co-Manager Selling Group Participant Sole Placement Agent

August 2010 May 2010 May 2010 April 2010 March 2010 February 2010

$13,200,000 $2,300,000 $5,500,000 $30,000,000 $115,000,000 £32,000,000

Private Placement Convertible Debt PIPE Registered Direct Revolving Factoring Line Convertible Debt PIPE Equity Private Placement

Joint Lead Manager Lead Placement Agent Co-placement Agent Sole Placement Agent Co-Placement Agent Sole Placement Agent

December 2009 August 2009 March 2009 July 2008 July 2008 June 2008

M.M. Dillon

M.M. Dillon Selected Advisory Transactions

National Patent

Development Corporation

Financial AdvisoryHas been acquired by JDS

UniphaseRestructuring Financial Advisory Financial Advisory The Merit Group

Financial Advisor Financial Advisor to Quantasol Financial Advisor Financial Advisor to Takata Financial Advisor to New Penn Financial Advisor

Pending July 2011 May 2011 January 2010 December 2009 December 2009

$149,000,000 $830,000,000 $600,000,000 has acquired Westway division of $500,000,000 sold its Industrial Staffing

division to

Licensing Advisory Restructuring Restructuring Restructuring

Financial Advisor

Financial Advisor Financial Advisor to Company Financial Advisor to Debtors Financial Advisor to Sherman to the Official Committee Financial Advisor to Arcadia

of Unsecured Creditors

December 2009 November 2009 July 2009 June 2009 July 2009 May 2009

sold assets of its Home Health sold assets of its Home Health $600,000,000 $200,000,000 Financial Advisory $1,000,000,000

Equipment division to Equipment division to

Restructuring Restructuring Financial Advisory

Financial Advisor and agent

Financial Advisor to Arcadia Financial Advisor to Arcadia Financial Advisor to Arcadia Financial Advisor to EMP in debt repurchase program Financial Advisor to

Underwriter Counsel

May 2009 May 2009 March 2009 February 2009 December 2008 August 2008

completed a $35,000,000 $130,000,000 $2,000,000,000 has acquired

consent solicitation S.A. Leão e Irmãos Açúcare Álcool

Financial Advisory Financial Advisory Debt Exchange Warrant Exchange Offer Financial Advisory

Financial Advisor to EMS Financial Advisor to Financial Advisor to Primus Dealer Manager to ATS Financial Advisor to Financial Advisor to

Shareholder Counsel Majority Equity Holder Brazil Ethanol

July 2008 June 2008 May 2008 May 2008 February 2008 January 2008

M.M. Dillon

Contact Information

M.M. Dillon & Co.

One Sound Shore Drive

Greenwich, CT 06830

Tel: (203) 569-6800

www.mmdillon.com

M.M. Dillon & Co.

This presentation has been prepared by M.M. Dillon & Co. (“M.M. Dillon”) for the exclusive use of the party to whom M.M. Dillon delivers this presentation (the “Company”)

using information provided by the Company and other publicly available information. Distribution of this presentation to any person other than the Company and those

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IN THE UNITED STATES DISTRICT COURTFOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

U.S. BANK NATIONAL ( No. 3:10-CV-1842-GASSOCIATION, Litigation Trustee (of the Idearc, Inc., et al. (Litigation Trust, (

Plaintiff, ((

vs. ((

VERIZON COMMUNICATIONS, INC, (VERIZON FINANCIAL SERVICES, LLC, (GTE CORPORATION and JOHN DIERCKSEN (

Defendants. ( October 26, 2012

__________________________________________________________

Volume 9BTranscript of Trial

Before the Honorable A. Joe Fish

__________________________________________________________

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

For the Plaintiff: WERNER A. POWERS DAVID TAUBENFELDHAYNES & BOONE LLP 2323 Victory Avenue, Suite 700 Dallas, TX 75219 Phone: 214/651-5581 Email: [email protected]

NICHOLAS A. FOLEY DOUGLAS BUNCHERJOHN GAITHERNELIGAN FOLEY LLP Republic Center 325 N. St. Paul, Suite 3600 Dallas, TX 75201 Phone: 214/840-5330 Email: [email protected]

CASSIDI L. CASEY, CSR, 214-354-3139UNITED STATES DISTRICT COURT

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For the Defendants Verizon and GTE:

T. RAY GUY WEIL GOTSHAL & MANGES LLP 200 Crescent Court, Suite 300 Dallas, TX 75201 Phone: 214/746-7872 Email: [email protected]

REID M. FIGEL SCOTT H. ANGSTREICH KELLOGG, HUBER, HANSEN, TODD,EVANS & FIGEL, P.L.L.C. 1615 M Street, N.W., Suite 400 Washington, D.C. 20036Email: [email protected]: [email protected] Telephone: (202) 326-7900

PHILIP D. ANKERWILMER CUTLER PICKERING HALE AND DORR LLP 7 World Trade Center 250 Greenwich StreetNew York, New York [email protected] Telephone: (212) 230-8800

For the Defendant John Diercksen:

E. LEON CARTER J. ROBERT ARNETT, II CARTER STAFFORD ARNETT HAMADA & MOCKLER, PLLC 8150 N. Central Expressway, Suite 1950 Dallas, Texas 75206 Telephone: (214) [email protected]@carterstafford.com

Reported by: Cassidi L. Casey1100 Commerce Street, Rm 15D6LDallas, Texas 75242214-354-3139Email: [email protected]


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MICHAEL MCCARTY

DIRECT EXAMINATION

BY MR. ANKER:

Q Good afternoon, Mr. McCarty.

A Good afternoon, Mr. Anker.

Q Have you been retained by the defendants to have

provide expert testimony in this case?

A Yes, I have.

Q Mr. McCarty, I want to ask you some questions

about your educational and employment background. Have

you created a demonstrative to help with that background?

A Yes, I have.

Q And DD 6.1. First

provide your educational back

A Starting in the lef

educational background, I rec

in physics with honors from i

that with a masters of busine

Wharton School of Finance, Un

1975.

Q Mr. McCarty, what d

A I'm an investment b

Q How long have you b

A My entire career, t

Q Without accounting

CASSIDI L. CASEY,UNITED STATES

MCCARTY - DIRECT - ANKER 7

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o

g

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e

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b

CD

f all, can you briefly

round?

-hand column which is my

ived an undergraduate degree

Nashville and then followed

s administration from the

versity of Pennsylvania in

you do for a living?

nker, Mr. Anker.

en an investment banker?

irty-seven and a half years.

low by blow what you have

SR, 214-354-3139ISTRICT COURT

Administrator

Typewritten Text

1

Michiel C. McCarty – Personal Background

The Wharton School of Finance and Commerce– MBA, 1975

Vanderbilt University – BA Physics with honors, 1973

University Lecturer

• Dartmouth Tuck School

• University of Pennsylvania Wharton School

• Vanderbilt University Owen School

• Vanderbilt University School of Law

• University of Chicago Booth School


2009 – Present


• Chairman & CEO

2003 – 2008

• CRT Capital Group LLC


• Head of Investment Banking

1996 – 2003

• Gleacher & Co. LLC.


• Head of Telecom and Technology

1991 – 1995

• SG Warburg & Co.


• Head of North and South America Investment Banking

1979 – 1991

• Dillon Read & Co. Inc.


• Head of Telecom and Technology

1975 – 1979

• Citicorp NA- Merchant Banking Group

• Vice President

Clients

Telecom

• ATT

• NYNEX

• Bell Atlantic

• MCI

• GTE/Sprint

• PacTel

• Deutsche Telekom

• British Telecom

• Level 3

Technology

• AMD

• IBM

• Intel

• Ericsson

• Alcatel

• Wang Computers

• NCR

• Great Nordic

• NetTest

• Monolithic Memories

Other

• Fannie Mae

Experience

Equity Offerings

Debt Offerings

Convertible Securities

High Yield Debt

Leveraged Finance



Fairness Opinions

Spin-offs

Investment Banking Management


Expert Testimony

Principal Investing

Defendants’ Demonstrative

DD 6.11U.S. Bank v. Verizon

3:10-CV-1842-G

done for thirty-seven and a half years? Can you briefly

recount your history?

A In the second column I have the full list. I

won't take the time of the Court to go through everything.

But my first investment banking job was with Citi Corp,

coming out of Wharton in 1975. Citi Corp at the time was

the largest financial institution in the world. During

that period, I had my first expert testimony and my first

telecommunications transaction. --

I left Citi Corp in 1979 to join Dillon Read

which was a major bracket investment bank which was

designated as one of the top ten investment banks in order

to be able to do a focus on telecom and technology

companies where I set up one of the first telecom media

technology groups in the early 1980's and headed it

throughout.

I left Dillon Read in 1981 to join SG Warburg,

the largest investment bank headquartered outside the

United States to take over their North and South American

operations and also head their TMT practice worldwide.

I left Warburg to join Gleacher Partners in 1996

also heading the telecom media and technology sector and

being one of the managing partners.

My present employment comes out of a firm that I

left Gleacher to go to, CRT Capital Group, which the



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initials stand for credit research and trading. And that

firm specialized in trading debt securities with

institutions such as head funds and private equity groups.

I took over their investment banking practice and became

one of the managing partners.

I spun my investment banking practice out of CRT

Capital in 1970. I presently have that business. I'm

Chairman and CEO of what I have now renamed M.M. Dillon

and Company

Q I think you said you spun the practice out in

1979. Did you mean that?

A I misspoke. 2009.

Q Over the course of your thirty-seven years have

you had experience working with companies in the

directories space?

A Yes, my first experience was in 1981. I was

hired by Pacific Telecom, better known as Pactel. It was

one of the seven regional Bell operating companies.

Nicknamed the Baby Bells. The Pactel business was the

only one of the R box that was not wholly owned by AT&T.

This was pre-divestiture AT&T. And I was hired to

negotiate the minority purchase by AT&T of Pactel,

approximately 10 per cent of the common equity and 20

percent of the preferred equity. As part of that, I

valued the directories business of Pactel which covered



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the West Coast of the United States, as part of the

overall valuation of Pactel in that purchase.

Q Do you have other experience with the

directories business?

A I do. As my third column, which I skipped in my

background, I have dealt with I believe six of the seven

regional Bell operating companies, all of whom have

directories businesses. In addition to that, I have dealt

with independents such as Sprint which is a twenty-year

client of mine which has a directory business they have

now sold. And several foreign operations: British

Telecom, Deutsche Telecom, France Telecom, all of whom

have directories businesses I have worked on.

Q Mr. McCarty, there has been a lot of testimony

in this case about the financing for the spin, which

aspect is high yield bonds. Have you had experience

dealing with high yield note or bond offerings?

A I have. I established the high yield business

while I was at Gleacher, and while I was at Dillon Read,

both of which included the origination of high-yield note

offerings and the sales, trading and research of those. I

have also overseen operations at Warburg and CRT Capital

in those areas.

Q Do you have experience with respect to high

yield note offerings from the lender's perspective as



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distinguished from the borrower's perspective?

A I do. I have worked inside of three money

center banks -- Citi Corp and UBS which was the purchaser

of Warburg and RBS which was ultimately was the purchaser

of Gleacher. Inside each of those three money center

banks I have worked from a lender's and investor's

standpoint on both leveraged finance and high-yield notes.

Q Are you familiar with the term "leveraged loan"?

A I am.

Q And there has been testimony in this case about

the secured credit facility, Term Loan A and Term Loan B

revolver. In your parlance, do you describe them as

leveraged loan?

A The Term Loans A and B would fall into the

leveraged category for me.

Q An do you have experience from a borrower's,

issuer's and lender's perspective dealing with those

loans?

A I do. Three telecom experiences. I helped

Sprint, MFS -- which stands for Metropolitan Fiber

Systems -- and Level 3 Communications, another fiber

network company, raise tens of billions of dollars of

leveraged loans for the build out of their three networks.

Q Have you had experience working on credit

committees at banks considering whether to approve



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participation in leveraged loan or high-yield debt

offerings?

A I have. I have been on commitment committees

since I made partner at Dillon Read in 1985. So for

twenty-seven years I have been part of the commitment

process with both high-yield and leveraged loans and other

transactions. The majority of those committees I have

headed.

Q Are you familiar with the term a "deal captain"?

A I am. It's traditionally in our business a

managing director in an investment bank who has primary

responsibility for a transaction.

Q Have you ever served as a deal captain?

A Pretty much every transaction since 1984 I have

been a deal captain.

Q Can you give the Court an aggregate amount of

money raised in those transactions?

A It would be in the hundreds of billions of

dollars.

Q Have you had any experience in your career

dealing with spin-offs?

A I have. In my business, every transaction or

potential transaction involves an unsolicited offer, a

spin-off transaction is analyzed as an alternative or

enhancement of value, and I have done dozens of



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assignments for clients in that. And I have also looked

at spins in very much as a common everyday occurrence.

Q The left-hand column of DD 6.1 indicates

university lecturer. Can you briefly recount your

experience in teaching?

I have a continuing lecturing opportunity at both of my

alma maters. At Wharton School I have been a case

presenter which in case method is what they call the

person running through the case. I have been a lecturer

in capital markets, investment banking, restructuring

distressed markets and other issues. And at Vanderbilt I

have been a lecturer at the Owen School which is the

business school and the school of law on various subjects.

Beyond my alma mater, I have been a lecturer at Tuck

School of business and the Booth School of Business of

University of Chicago.

Q Have you ever testified with regard to matters

of investment banking?

A I have.

Q How many times?

A It's not a majority of my career. The majority

of my career by far is doing transactions, but I would

guess more than a dozen times.

Q Have you ever been excluded by a court from

providing expert testimony?



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A No I have not.

MR. ANKER: Your Honor, we would move

Mr. McCarty as an expert in investment banking, lender and

due diligence and spin-off transactions.

THE COURT: Counsel for the plaintiff want to be

heard on that?

MR. KEATING: Your Honor, as with earlier times

that they have asked for this certification, we still

don't believe it's necessary under the rule. I do not

believe that he has identified any subject area that is

really the proper area of expert testimony. It's a fact

about what actual lenders did as due diligence. Your

Honor has heard investment bankers who were involved in

the spin-off come in and say this is what we did in due

diligence.

With all respect to Mr. McCarty, he wasn't

involved in the spin-off. So this is just a means of

bringing in a retained witness to speculate about what

lenders did rather than presenting those lender's

testimony or the documents from the lender's files that

document whether they did due diligence or not to the

Court.

THE COURT: I don't know what testimony

Mr. McCarty will be giving in this case is. So that

remains to be seen. And I'll evaluate it when I hear it.



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But based on what I have heard so far, I will recognize

Mr. McCarty as an expert in the area of investment

banking.

BY MR. ANKER:

Q Mr. McCarty, did you prepare an expert report in

this matter?

A I did.

Q And did you opine on certain subjects?

A I did. I had three principal subjects that I

addressed in my report.

Q Did you bring a demonstrative that outlines in

the most high level those three subjects?

A I do have a summary of my conclusions which

includes those three subjects.

Q Why don't you identify this summary for your

personal opinions.

A These are very high level summaries of the three

conclusions I came to. First area that I was asked to

look at was for the participants in the transaction, their

degree of sophistication, and what I became aware of is

these are the lead banks and hedge funds in the world

almost all of who did I deal with on a daily basis. So by

definition they truly are sophisticated.

The second area I dealt with is their

familiarity with the structures of the types of securities



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and the sector that we're talking about here, and the

types of securities are very, very large marketplace which

my desk trades in and every other desk in the Wall Street

trades in. So by definition everyone is very familiar

with them. Spin-offs are very common and the sector is

one which -- The directory sector has been around for over

a hundred years of which I have known it for thirty years.

It's very well known.

The final conclusion I was asked to look at was

the lenders and their due diligence and was it appropriate

given the transaction and could I draw any conclusions

from that transaction, and I did. I think I looked at

278,000 pages of production including due diligence from

all the lenders, and I concluded that the lenders in the

transaction would have had to have determined that Idearc

was worth more than its amount of debt. And in my report

I refer to it as a significant equity cushion.

MR. KEATING: Your Honor, if I may now interject

my objection. I will leave it to the Court to decide

whether Points 1 or 2 are of use or assistance to the

Court. But Point Number 3 is what I was referring to when

I made my objection before. I do not believe this is the

appropriate area for expert testimony. I don't believe

the foundation has been laid to render such opinions

anyway, and it's just speculation.



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THE COURT: Well, I understand your objection,

but I will overrule it and hear the testimony

MR. ANKER: Mr. McCarty, I probably should have

done this before getting into the substance. I apologize

for getting into a housekeeping matter.

BY MR. ANKER:

Q How are you being compensated in this matter?

A As a normal expert, on an hourly rate.

Q Is your compensation at all dependent upon the

substance of the opinions you give?

A No, it does not.

Q Does it at all turn on the outcome of this

matter?

A No, it does not.

Q How many hours have you and your team devoted to

this matter?

A My firm in total has approximately--

Q Do you have a sense of your total billings in

this matter?

A Including an estimate for the trial here, it's

about 1.9 million dollars.

Q And have you attended throughout the trial?

A I have with the exception of Thursday

afternoon's session last week and Friday. I missed those

for a client engagement.



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Q Mr. McCarty, we're going through these

conclusions. But before we go into the substance of them,

can you outline for the Court what steps you took, what

work you and your team did to prepare your report?

A First I need to describe my team. When asked to

do the assignment and after deciding I had the skills and

the interest to do this, I had to put together a team of

people. I took five people from my organization who are

experienced investment bankers, one a managing director

like myself who has spent a majority of time --

twenty-five years -- in the restructuring space; a senior

vice president experienced banker; a vice president who's

a twelve-year experience banker; an associate; and an

analyst. So those five people along with me came into the

case. I assigned various tasks, and we started examining

the documents.

Q Other than examining the documents, did you do

any other work as part of your own due diligence?

A We did. Any time I go back and look at a

transaction that's occurred in the past, I have to be

sure -- Even though I was in the capital markets in 2006,

I have to make sure that we put ourselves back in the

frame of mind of 2006. So I took myself and my team back

and examined 2006 in detail on transactions, capital

markets and all the issues associated with it.



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Q Did you review any deposition testimony?

A I did. I reviewed all the deposition testimony

from all of the bankers who were deposed, all of whom I

know from the telecom sector. I know their bosses. And

then I reviewed selected other depositions.

Q Among the documents in this case are documents

from various lenders. Have you and your team reviewed all

of those documents?

A We have. We have reviewed every document we

could identify as being produced from lenders, and the

number is like 278,000 pages of documents.

Q Who wrote your report, Mr. McCarty?

A I wrote the report.

Q Let's take a look at the document production.

Did you prepare a demonstrative that shows the production

or summarizes the production by the lenders in this case?

A I did.

Q DD 6.3, can you explain this demonstrative

chart?

A This is an attempt on my part to put on one page

the production and relevant statistics associated with

that production for the lenders we could identify in the

case. And we have done it alphabetically here. And so

you have 16 parties listed on the left in bold and then

next to it the number of pages they produced. Not



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3

Idearc Investors Producing Documents

Notes:(1) Carlyle valuation dated 1/10/07(2) Wachovia documents produced by Wells Fargo(3) Percentage of lenders (based on dollars invested) producing documents that also provided evidence of independent valuation analyses

Allocation

Investor Pages Produced Valuation ($ millions) Revolver ($ millions) TL/A ($ millions) TL/B ($ millions) Notes ($ millions)

Barclays 3,593 17,441 15.9 96.1 0.0 36.0

Blackrock 124 14,465 0.0 0.0 85.0 90.0

Blackstone 2,788 12,500 0.0 0.0 60.0 0.0

Carlyle1 3,566 13,476 0.0 0.0 70.0 4.0

Citibank 4,900 14,391 15.9 96.1 30.0 0.0

Credit Suisse 12,707 12,479 10.2 61.8 107.0 4.5

Golden Tree 14,028 12,765 0.0 0.0 20.0 0.0

Goldman Sachs 12,505 12,500 13.7 83.3 15.0 25.0

Halcyon 570 20,620 0.0 0.0 20.0 0.0

JP Morgan 194,015 12,480 17.8 108.2 5.0 8.0

Loomis Sayles 381 14,115 0.0 0.0 25.0 15.0

Morgan Stanley 7,380 12,500 10.2 61.8 79.0 25.0

RBS 4,381 14,500-16,000 10.2 61.8 0.0 0.0

UBS 24,435 12,500 10.2 61.8 125.0 97.0

Wachovia n/a2 14,820 10.2 61.8 5.0 38.0

Wells Fargo 326 12,615 0.0 0.0 20.0 2.0

% of Total $ Allocation Represented 45.7% 45.7% 14.0% 11.7%

% of Investors Producing Valuations3 100.0% 100.0% 71.2% 75.2%

Mean Valuation 14,057

Valuation Range 12,479-20,620



3:10-CV-1842-G

surprisingly, J.P. Morgan is the lead left as producing

the most. If you totaled it -- I don't think we totaled

it here. That's the 278,000 pages that I referred to.

The columns on the right are the dollar amounts that they

actually invested. We have the word "allocation" here.

This is allocated out due to the oversubscription for each

of the institutions by the different tranches, revolver,

Term Loan A and Term Loan B and notes.

Q Mr. McCarty, there is a column, also the second

column, "Valuation." Can you explain that column?

A In going through the documents and the different

memos, this is the valuation that we found as determined

by each of the institutions and included in their internal

documents, and so we have taken and highlighted those.

Since I thought we would be discussing them for each of

the institutions there are actual numbers, and these are

in the millions. So that's 17.4 billion to start, and it

goes all the way down. We have then taken those numbers,

and this is one institution that produced a range RVS, and

we took that mid-point and produced a range for those

institutions.

MR. KEATING: Objection. Move to strike.

Hearsay, lack of foundation. Rule 701 and 702,

undisclosed expert opinions.

THE COURT: Overruled.



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BY MR. ANKER:

Q What was the mean of the valuation for all of

these creditors?

A Among these 16 institutions, these 16

institutions provided a little less than half the Term

Loan A. So this is a fairly good sample of the providers

of the Term Loan A. The mean valuation was over 14

billion dollars in their own internal documents.

Q And the valuation range for Idearc of these

lenders was from what to what?

A On the low end, the lowest institution valued at

12.479 billion. And at the high end, 20.6 billion

dollars.

THE COURT: This figure valuation, are we talk

about the enterprise value?

THE WITNESS: Yes, I should have been clearer.

This is the total enterprise value.

MR. ANKER: My apologies, your Honor. I should

have been clearer in my question as well.

BY MR. ANKER:

Q Mr. McCarty, there has been a fair amount of

testimony about the structuring of the financing. Did you

prepare a demonstrative?

A I did.

Q DD 6.4. Mr. McCarty, very briefly take us



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4

Idearc Initial Capitalization

Pro Forma Capitalization

($ in millions)

Tranches Maturity Interest Rate AmountFundedAmount

x LTM 09/30/06Adj. EBITDA(1)

Revolver 5 years LIBOR + 1.5% $250 $0 0.0x

Tranche A term loan 7 years LIBOR + 1.5% $1,515 $1,515 1.0x

Tranche B term loan 8 years LIBOR + 2.0% $4,750 $4,750 3.0x

Total senior secured debt $6,515 $6,265 4.0x

High yield notes 10 years 8.00% $2,850 $2,850 1.8x

Total debt $9,365 $9,115 5.8x

Notes:(1) LTM Adjusted EBITDA as of 09/30/06 was $1.576 billion. EBITDA adjusted to reflect impact of the sale of Hawaii operations in May 2005 and commercial printing operations that werediscontinued in March 2006 and employee related costs associated with the voluntary separation program offered in the fourth quarter of 2003. Pro forma to reflect transfer of pension assets on a fully funded basis.

Source: Idearc Inc. Form 10 dated 11/01/06.



3:10-CV-1842-G

through this chart?

A I'll be very brief because I think your Honor

has a good understanding of the components here. This is

just breaking it out so that when I later talk about the

pieces I'm using the same terminology. So the revolver,

what I call the Tranche A term loan and the Tranche B term

loan. And it has the rate and maturity. This is

different than Ms. Kearns said which was tenor. We refer

to it maturity on the banking side. That's the ultimate

maturity.

On the far right, I don't think anyone did go

through this piece by piece. This is a very typical

structure for a leveraged loan that I have see. The first

Tranche A which we call pro rata because it goes to the

commercial banks is one times EBITDA, and that's fairly

normal. You take one turn of leverage to the banks.

The next tranche, Term B, is three turns of

leverage, three times on its own, and that's very normal

for the Term B institutional portion which is the nonbank

portion. That's four turns of leverage to the secured

loans, and that's very normal. Almost standard in our

industry.

The high-yield notes are 1.8 here.

So the total leverage of 5.8 is consistent of

those parts, and I'll talk to those parts.



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13:57

13:58

THE COURT: Could I interrupt and ask another

background question. We have already covered it, but I

would like to go back. You used the term "leveraged

loans." I thought that reflected debt. So leverage alone

almost sounds like a redundancy. Can you explain that to

me?

THE WITNESS: It does seem to an outside party

as redundant. But when you refer to leveraged loans, you

are talking about loans below investment group. So if you

are talking about an investment bank loan where the

borrower is rated in the triple or above level, then they

just call those loans, commercial loans, or bank loans.

So the shorthand in our industry if you are talking about

the leveraged finance industry here, including high yield

and leveraged loans, it's because the rating is below

investment grade.

BY MR. ANKER:

Q Mr. McCarty, there has been a fair amount of

testimony about the oversubscription. Have you created a

demonstrative with respect to the oversubscription of the

financing?

A I did. And I have some detail on this because I

did hear the testimony reference, but I don't think any of

it was fully complete, and I consider oversubscription

from my business standpoint to be the best indicator of



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13:59

14:00

market acceptance.

Q DD 6.5. Explain this chart to the Court?

A I created this because I did think there was

some confusion from the testimony. Let me define

oversubscription so there is no confusion. The blue bars

in each of these segments consist of the amount that

Idearc was offering to the public. So in the case of the

first column, that's 1.765 billion that was offered. The

green bar next to it has a dark portion with the dotted

line. That would be if the demand in the marketplace

equals exactly the amount offered. The lighter green

above it is the amount that the market had as demand

beyond what was being offered. So in this case 1.165

billion of demand beyond it. I boxed down to bottom

because this is how we in shorthand on the street use it.

That's really the demand factor, if you will, 1.66 times.

That means there is a 66 percent interest in buying the

security beyond what is being offered. So for the Term

Loan A -- and I put the revolver in it because they are

sold as a package -- there was a demand for 66 percent

beyond what was offered. B was 37 percent beyond what was

offered.

The third set of columns may be the most

important. It's one that I thought didn't get a lot of

good description from the last few witnesses. This is the



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14:00

14:01

5

Revolver (1) and Tranche A Term Loan

Tranche B Term Loan High Yield Notes TOTAL

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

MarketDemand

$1,765

$2,930

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

MarketDemand

$4,750

$6,508

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

MarketDemand

$2,850

$9,975

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

MarketDemand

$9,365

$19,412

1.66X 1.37X 3.50X 2.07X

Final Amount

Final Amount

Final Amount

Final Amount

Market Demand for Idearc Debt – “Oversubscription”

(1) Revolver was undrawn at closing.Source: “Guterman email” to Cliff Wilson dated 12/07/06 (JPMIDEARCTR-00148515).

$1,165

$1,758

$7,125$10,047



3:10-CV-1842-G

high-yield notes, and the high-yield notes -- just to put

them in perspective -- are the most junior in capital

structure, the closest to equity And they are highest risk

No security. Very, very difficult to collect. And the

people here I think indicate the most interest. Here,

three and a half times oversubscription is a very dramatic

oversubscription for any deal in high yield. The idea of

the 250 percent beyond the amount offered to me is

indicative of what the market thought. So overall two

times the high-yield note to me is the most significant.

Q What conclusion did you draw from this

oversubscription?

A My conclusion is the market accepted this deal

enthusiastically. They understood it. Otherwise, they

wouldn't have done it. The pricing was appropriate, and

the structure was appropriate.

Q You talked about putting yourself back in 2006.

In 2006, were these loans unusual in their structure?

A No, these are very, very common place.

Q Did you prepare a demonstrative about the state

of the loan market or credit markets for high-yield debt

and leveraged loans in 2006?

A I did, and personally because I thought there

was confusion about whether this was a short-term market

or a market that had peaked.



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14:02

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Q DD 6.6. Mr. McCarty, before you explain this,

let me just ask you when you look at the bottom bar, "U.S.

Leverage Loan and High-yield Issuance," what percentage of

the loans there are for investment grade companies?

A Zero.

Q So this is all below investment grade. Can you

explain this chart?

A Again, I put this together because I thought

there was some confusion from the different experts and

testimony. The dark bar is the leveraged loan side. The

lighter tan bar is the high-yield side. We generally

think of it as combined. It shows from 2002 to 2007, a

year after the deal, there was a very steady progression

in the size of the market. In 2007, it had gotten quite

large. If we take 2006 and take a quick look at it, I

think Idearc would have been about 1.2 percent of the

leveraged loan and high-yield market. So you asked the

question was this very common. There was 98.8 percent

larger amounts raised by other parties in the marketplace.

Q Just so we get the figures in the record, I see

this is in billions. So what was the total amount of

leveraged loans in 2006?

A 2006 for the leveraged loans, 612 billion. And

142 billion for the high-yield piece.

Q What was the level of default? Back in 2006,



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14:03

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6

U.S. Leveraged Markets 2002 - 2011

Source: Bloomberg; Fitch Ratings; Thomson Reuters.

*As determined by underwriting volume(1) All listed institutions participated in Idearc transactionSource: Bloomberg.

$265

$329

$480 $501

$612

$689

$294$239

$376

$566

$121$173 $182

$153 $142 $144

$52

$156

$282

$220

$0

$100

$200

$300

$400

$500

$600

$700

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

($ in

billio

ns)

Leveraged Loans

High Yield Bonds

Rank Underwriter Mkt Share (%) Amount ($mm) # Issues

1) JP Morgan 19.5 $118,023 359

2) Bank of America 14.4 $87,407 421

3) Citi 10.2 $61,998 141

4) Credit Suisse 6.7 $40,655 164

5) Wachovia Corp 6.6 $40,142 191

6) Goldman Sachs 5.8 $35,317 146

7) Deutsche Bank AG 5.0 $30,530 102

8) Lehman Brothers 3.6 $22,091 73

9) Morgan Stanley 3.5 $21,468 67

10) Merrill Lynch 3.5 $21,289 100


1) JP Morgan 14.6 $21,653 115

2) Citi 12.9 $19,199 92

3) Credit Suisse 10.6 $15,795 82

4) Merrill Lynch 9.8 $14,608 67


6) Bank of America 8.2 $12,210 83



9) Goldman Sachs 5.4 $8,070 46

10) UBS 4.9 $7,318 40

U.S. Leveraged Loan and High Yield Issuance

Banks Most Active in the 2006 U.S. Leveraged Loan Market(1) Banks Most Active in the 2006 U.S. High Yield Loan Market(1)



3:10-CV-1842-G

what was the level of default on the loans that had been

issued in the prior years in 2006?

A Well, again, it's a really key number. It's one

that we look at all the time on a daily basis to try to

get the feeling of the market and how they view things.

Here, in 2006, the default rate approached what I called

zero. It was 0.4 percent default rate. The historical

average was around 4.8 percent. So more than ten times

larger was the average, and just going to the end of chart

in 2009 the default rate got to 108.8 percent. So this

was a very low default rate historically and obviously

versus what happened in 2008 very low.

Q Were you in court when Ms. Taylor testified?

A I was.

Q And when you were in court when she testified

that spin-offs were unusual?

A Yes. The way I remember she testified is they

weren't illegal, unethical, but they were uncommon.

Q Let's focus on uncommon part. Is that opinion

in your experience as a banker for thirty-seven years

accurate?

A No, I agree with the first two. The third one

is they are very common. I use them on a daily basis.

The market uses a lot of them. They understand them.

It's a standard corporate finance tool to try to manage



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14:05

14:06

shareholder value.

Q Did you create a demonstrative for the Court to

try to capture the level of spins?

A I did.

Q And go to DD 6.7. Explain this to the Court?

A Again, this is taking a complex subject like

spin-offs and trying to put it on one page. I have taken

a period of time from 2001 to 2006 and looked at all the

spin-off transactions that were publicly announced and

completed. And there were 424 of them which fits my

definition there were of a lot of them. And the 270

billion dollars equity value. So again here using the

equity value of Idearc in thirty days post-trading which

is how I usually measure equity value on new issues,

again, it's very small. Below 2 percent of total value.

Q Mr. McCarty, just to be clear, Judge Fish asked

you a few moments ago about whether the valuations were of

enterprise value. Here you are not capturing enterprise

value but rather the much smaller equity value. That is

the value of the debt, correct?

A That's correct. There are some spin-offs that

have different types of capital structure depending on

their business. So to look at spin-offs you need to look

at equity value which is what we did here, both in the

categories on the left and the sum total up at the top.



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14:06

14:07

7

Spin Off Transactions

Most Active Advisors on US Spin-offs 2001-2006Advisor Mkt Share (%) Equity Value ($mm) # Deals

1 Morgan Stanley 45.9 123,740 222 Goldman Sachs & Co 36.8 99,108 133 JP Morgan 34.0 91,632 154 Lazard Ltd. 20.9 56,451 45 Citi 18.9 50,990 96 Bank of America 15.6 42,131 157 Evercore Partners Inc. 12.6 34,028 38 Lehman Brothers 9.9 26,560 69 Houlihan Lokey 2.3 6,104 5

10 Credit Suisse 1.0 2,581 511 UBS 0.9 2,325 412 CIBC 0.5 1,307 113 Deutsche Bank AG 0.4 984 114 IBI Corporate Finance Ltd 0.4 984 115 Merrion Stockbrokers Ltd 0.4 984 116 Peter J Solomon Co 0.2 635 1

Note: Participants in Idearc debt highlighted in yellow

2001-2006 U.S. Spin-Off Volume by Deal SizeDeal Size (Equity Value) # Deals Equity Value ($ billions)

> $10.0 billion 6 119.6

$5.0 billion – $10.0 billion 11 76.1

$1.0 billion – $5.0 billion 21 51.2

$500 million – $1.0 billion 16 12.1

< $500 million 370 10.6

Total 424 269.6

424 spin-off transactions were completed from 2001 to 2006, representing nearly $270 billion in aggregate equity value

9 of the top 16 spin-off advisors participated in the Idearc transaction

30 spin-offs with equity values greater than $100 million were completed in 2005 and 2006, all of which had tax-sharing agreements

It was common for spin-off transactions to include both secured and unsecured debt in financing packages

Source: BloombergDefendants’ Demonstrative


3:10-CV-1842-G

One of the other things I might want to point out here

since its colorful is I highlighted in yellow the

institutions in the right portion that were involved in

the Idearc spin. So Number 1 through 13 have all yellows.

There are four that don't have yellows; they are white.

And those are lead advisors that are active in the spin

business. It might be helpful for the Court to know that

none of those have debt desks. So they don't do sales,

trading or research of debt. So they wouldn't be able to

participate in the Idearc deal or the last three either.

They don't have debt desks. So of the top advisors and

spins, all of them were involved in Idearc.

Q When you say involved, involved in what way?

A In this case they were involved in the

transaction putting up money, investing in Idearc.

Q They were lenders to Idearc?

A They were.

Q Mr. McCarty, are you aware that one of the

issues the plaintiff has raised is about tax sharing

agreements?

A Yes, I listened to the testimony and read all

the complaints.

Q Did you do any analysis to see whether Tax

Sharing Agreements were common in connection with

spin-offs?



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14:08

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A I did.

Q And have you prepared a demonstrative on that?

A I have.

Q And DD 6.8. Can you explain this to the Court?

A I tried to create a comparable group here. The

previous slide was about all spins. Some were quite small

or have other rationale. Here, I took all spin-offs in

the two years that this transaction was gestating, 2005

and 2006, and looked at all announced and completed spins

in those two years who had more than 100 million dollars

of value. So this resulted in the 30 names which are on

here.

Q I see the Idearc transaction appears about the

middle. Am I reading that right, Mr. McCarty?

A Yes, if you look under the shaded one in the

middle above Broadridge and below Fidelity, you will have

Idearc which is again -- I switched back. This is equity

value. So 3.9 billion dollars of equity value puts it

pretty much in the middle of the thirty in terms of

ranking. So it's not down towards the bottom and not up

towards the top. There are some very big ones.

Q Of these 30, how many of the spins involve Tax

Sharing Agreement between the parent entity and its

subsidiary being spun off?

A 100 percent of them. I knew the answer before



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8

U.S. Spin-Off Transactions 2005-2006

U.S. Spin-Offs Over $100 Million – 2005-2006

Spinco ParentEquity Value

($ in millions)Tax Sharing Agreement

Viacom Inc CBS Corp $31,689 YESCovidien PLC Tyco International Ltd $21,360 YESTyco Electronics Ltd Tyco International Ltd $19,009 YESSpectra Energy Corp Duke Energy Corp $17,260 YESWestern Union Co. First Data Corp $16,799 YESDiscover Financial Services Morgan Stanley $15,785 YESAmeriprise Financial Inc American Express Co $8,885 YESWyndham Worldwide Corp Cendant Corporation $6,561 YESEmbarq Corp Sprint Nextel Corp $6,417 YESRealogy Corp Cendant Corporation $6,106 YESTim Hortons Inc Wendy’s International Inc $4,114 YESDiscovery Holdings Co Liberty Media Co $4,0331 YESFidelity National Title Group, Inc. Fidelity National Financial Inc $3,942 YESIdearc Inc Verizon Communications Inc $3,912 YESBroadridge Financial Solutions Automatic Data Processing Inc $2,897 YESMueller Water Products Inc Walter Energy Inc $2,194 YESHanesbrands Inc Sara Lee Corp $1,819 YESAssisted Living Concepts Inc Extendicare Real Estate Investment $1,307 YESMariner Energy Inc Forest Oil Corp $1,068 YESTreeHouse Foods Inc Dean Foods Co $906 YESVerigy Ltd Agilent Technologies Inc $858 YESACCO Brands Corp Beam Inc $857 YESLive Nation Entertainment Inc Clear Channel Communications $759 YESFidelity National Title Group, Inc. Fidelity National Financial Inc. $745 YESSally Beauty Holdings Inc Alberto-Culver Co $678 YESTronox Inc Kerr-McGee Corp $421 YESAtlas America Inc Resource America Inc $371 YESTravelCenters of America LLC Hospitality Properties Trust $287 YESdELiA*s Inc Alloy Inc $181 YESOmega Flex Inc Mestek Inc $104 YES

(1) Data from ThomsonOne.

Source: Bloomberg; SEC filings.

Note: Includes spin-off transactions announced in 2005 and 2006 with equity size greater than $100 million. Hospitality Properties Trust spin-off of Travel Centers of America LLC was conducted as a taxable distribution to Hospitality Properties Trust shareholders.



3:10-CV-1842-G

you asked the question. I have done a bunch of spin-offs.

I have never done a major spin-off without a tax sharing

agreement. And I guess parenthetically, I have never done

a deal where I have had a tax sharing agreement on a

transaction and not failed to get around to do a deal. I

have always been able to do a transaction without

limitation. So as a banker, it means absolutely nothing

to me in terms of having a tax sharing agreement. It

doesn't limit me or my client.

Q When you say your client, are you referring to

the spun-off entity subsequent to the spin being able to

engage in merger and acquisition transactions?

A Yes, both the spin as in all three boxes. They

all show them. And also my previous client, the parent --

I even had one for Ninex which is one of the predecessors

of Verizon, and I think Ivan Seidenberg is one of its

first CEO's was that year and the second year. We spun

off its cable businesses and within two years we merged it

with another cable business with no tax. I'm not a tax

expert, but the tax lawyers found a way to complete the

transaction without any issue.

Q Let's change subjects a moment. Have you

studied and examined the identities of the lenders in the

transaction?

A I have.



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Q And have you done so separately for the Term

Loan A from the Term Loan B to the high-yield notes?

A I did. I thought it would be logical to break

them into the constituent parts. The revolver in the

Tranche Term Loan A I combined together because they were

single buyers, but I have broken them by components.

Q Have you brought a demonstrative with respect to

the lenders.

A I have.

Q And can you turn to 6.9. Can you identify this

document for the Court?

A This is the totality of the buyers of the

combined revolver and Term Loan A. It's 28 institutions

who bought the entire amount, 1.765 billion.

Q Mr. McCarty, over your career, have you worked

with any of these institutions?

A I have. You look at the list I have worked at

Number 5, Citibank; Number 9, UBS; and Number 11, Royal

Bank of Scotland.

Q Have you with respect to other institutions on

this page dealt with them in transactions?

A I have. I went back and looked through it. The

bottom two, State Bank of India and Calyon, I haven't done

transactions with. I thought I hadn't done one with

Mizuho. But as I looked into it, Mizuho was the product



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14:12

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of three Japanese banks that were merged. The largest was

Industrial Bank of Japan which I have done deals with. So

technically, I have only not done business with two.

Q Let's put the two aside. Are you familiar with

the credit possibilities of the other 26 banks?

A Obviously the three I worked for I have sat on

committees. I have presented to the committees, and I

have gotten approval. Let's take those three out and

leave the other 23. Those other 23, I have participated

in transactions with. I have sold transactions,

structures to them and have been involved directly with

their credit committees.

Q Are you familiar with the term "a money center

bank"?

A Yes.

Q And what is a money center bank?

A It's a designation of a major institution that's

usually based on a regulatory basis. But it defines the

major sophisticated banks in the world.

Q Of the banks listed, let's put Calyon and State

Bank of India aside. Of the other 26, how many are money

center banks?

A They would all be.

Q Based on your experience dealing with these

institutions, do you have a view as to their financial



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sophistication?

A Yes, as commercial banks go, these are the most

sophisticated in the banks. They are dominate in the

banking market, and they have existed for a long period of

time. So they are very sophisticated.

Q Let's look at the chart with respect to the Term

Loan B investors. 6.10. And I think Mr. McCarty, does

this list go over to Page 6.11?

A Yes, we couldn't have the print be acceptable

and have it on one page. So the 206 purchasers of the

Tranche B term loans have been broken into two pages.

Q Mr. McCarty, what experience do you have with

these institutions or what familiarity do you have?

A I have done business with 85, 90 percent of

them. If you take the top 50, I have probably done

business with all of them. My tradings desk has traded

with all of them. My trading desk trades with 1,650

funds. All of these are on that trading list. I think I

mentioned at Gleacher I set up a direct loan purchasing

vehicle. I had three partners that I hired to do that at

Gleacher. The three of them now manage at Number 75

Orhill; Number 68, GLG Partners; and Number 40, Greenwich

Capital. So anecdotally I know those three people. They

used to work for me.

Q Were you finished with your answer?



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A The 206 people are people that I deal with every

day.

Q Do you have familiarity with their credit

approval processes?

A I do. These are somewhat different. Commercial

banks are very formalized because they are regulated, and

so the bank regulators examine the commitment process of

commercial banks. These are not commercial banks. These

are funds set up to buy these types of loans. But even

though they are not as formalized as a commercial bank, I

tend to think they take it much more seriously because the

people who own these funds are the partners that make the

investment decisions. And they are only paid if they have

returns above the threshold level. So I find these much

more serious in terms of evaluating risk versus return.

Q And do you have an opinion as to their level of

sophistication based upon your experience in dealing with

them?

A These are the best of the best. These are

absolutely the top tier.

Q And you will see, for example, the 9th entry is

BlackRock Group of funds. Where does BlackRock range in

asset managers in the world of debt?

A Well, I did range these by the amount they

bought. So Pemco and Eaton Vance which are the first two



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are the highest. Here you have BlackRock at Number 9 at

85. BlackRock is the world's largest buyer of fixed

income securities. So used to be PIMCO which on this page

is Pacific Investment Management Company but I'll call it,

but PIMCO is now Number 2 and BlackRock is Number 1.

Q Can we take a look at -- Did you also prepare a

demonstrative with respect to -- Did you take a look at

these institutions in terms of -- Can we go to 612 to 613.

And can you describe these charts to the Court?

A These are the high-yield note investors, and

again, I had to break it on two pages. There is 239 of

them. There is about a 40 percent overlap. So you will

see people like Eaton Vance will be on both pages. You

will notice a lot of names. They may change the way they

were reported. Like Number 9 is PIMCO. It's Pacific

Investments. So there is about a 40 percent overlap

between Term B and Term A investors. BlackRock would be

in both.

Q Have you dealt with a substantial number of

these institutions who purchased the high-yield notes?

A Probably the same thing. 85, 90 percent of

these I have dealt with personally, and my desk has dealt

with 100 of them.

Q Do you have familiarity with their credit

approval process?



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A Very much.

Q Based on your experience, are they financially

sophisticated?

A Again, I think I heard Ms. Nason use the word

QIB's. By definition these are QIB's. They manage more

than 100 million dollars in a fund. They are not

individuals. These are very -- I think Andrew Decker used

the best term that we use on the street. These are big

boys. So when we refer to big boys, sophisticated large

scale investors in the marketplace, these are the biggest

of the big boys.

Q Let's try to provide some sense of how big they

are. Did you take a look to see where these institutions

ranged among global asset managers?

A Yes, I did.

Q And did you prepare a demonstrative with respect

to that issue.

A I did.

Q And can we turn to DD 6.15. Can you explain

this chart to the Court?

A This chart and the next chart, we tried to put

some perspective on the biggest ranked by either asset

size or revenue investors in the world. And here the top

50 measured by assets in the world in 2006 at the time of

issue starting with UBS, my old employer, is the largest,



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15

Top 50 Global Asset Managers at YE2006

Manager Market Total AssetsIdearc

Investor

1 UBS Switzerland $2,452,475 X

2 Barclays Global Investors U.K. $1,813,820 X

3 State Street Global U.S. $1,748,690 X

4 AXA Group France $1,740,000 X

5 Allianz Group Germany $1,707,665 X

6 Fidelity Investments U.S. $1,635,128 X

7 Capital Group U.S. $1,403,854 X

8 Deutsche Bank Germany $1,273,500 X

9 Vanguard Group U.S. $1,167,414

10 BlackRock U.S. $1,124,627 X

11 Credit Suisse Switzerland $1,092,906 X

12 JPMorgan Chase U.S. $1,013,729 X

13 Mellon Financial U.S. $995,237 X

14 Legg Mason U.S. $957,558

15 BNP Paribas France $817,482 X

16 ING Group Netherlands $792,162 X

17 Natixis France $769,981

18 AIG Global Investment U.S. $730,920 X

19 Credit Agricole France $704,367 X

20 Aviva U.K. $700,789 X

21 Northern Trust Global U.S. $697,166 X

22 Goldman Sachs Group U.S. $693,049 X

23 Prudential Financial U.S. $616,047 X

24 Morgan Stanley U.S. $606,476 X

25 HSBC Holdings U.K. $595,000 X

Manager Market Total AssetsIdearc

Investor

26 Wellington Management U.S. $575,492 X

27 Societe Generale France $556,890

28 Fortis Group Belgium $556,200 X

29 Franklin Templeton U.S. $552,905 X

30 Bank of America U.S. $542,977 X

31 MetLife U.S. $527,700 X

32 Generali Group Italy $523,726

33 Aegon Group Netherlands $477,611 X

34 Prudential U.K. $477,000 X

35 Old Mutual South Africa $468,232

36 INVESCO U.K. $462,600 X

37 Legal & General Group U.K. $455,955

38 MassMutual Financial U.S. $455,723 X

39 Nippon Life Insurance Japan $439,671

40 TIAA-CREF U.S. $405,647

41 Ameriprise Financial U.S. $397,000

42 Rabobank Group Netherlands $378,125 X

43 Sun Life Financial Canada $374,535

44 Zenkyoren Japan $364,776

45 Manulife Financial Canada $355,256

46 Mitsubishi UFJ Financial Japan $351,189 X

47 T. Rowe Price U.S. $334,698 X

48 Unicredito Italiano Italy $328,043

49 Hartford Financial U.S. $327,500 X

50 Zurich Financial Services Switzerland $310,003

Source: Watson Worldwide Global 500 Ranking 2006; “Guterman email” including attachment to Cliff Wilson on 12/07/006 (JPMIDEARCTR_00148515). Note: Included as an Idearc investor if investment was direct through the asset manager or an affiliated entity. BNP involvement through post-transaction acquisition of Fortis.

($ in millions)



3:10-CV-1842-G

based in Switzerland, and we listed them by asset size

down to the 50th which is Zurich Financial.

Q And what is the significance of the "X" in the

right-hand column on the two sets of charts?

A The "X" denotes that they were investors in the

Idearc deal. So if I look at it right, 34 of 50 largest

global asset managers in the world were investors in

Idearc.

Q Let's look at another chart. DD 6.6 for a

moment. Mr. McCarty, one thing I don't think we talked

about were the two charts at the top. Can you explain

those to the Court?

A I can. And I broke it up between leveraged

loans and noninvestment grade loans. On the left, the top

10 arrangers in the marketplace. Arrangers are the people

who actually manage the placement of the securities. And

on the right, the top 10 high-yield arrangers. And there

is some difference between the two. Usually based on

balance-sheet size.

Q Can you explain how many of the lenders or the

underwriters on the chart on the left with respect to

leveraged loans participated in the Idearc transaction?

A All 10. 100 percent.

Q Of the ones on the right of the chart in the

high-yield loan market, what percent of those participated



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6

U.S. Leveraged Markets 2002 - 2011

Source: Bloomberg; Fitch Ratings; Thomson Reuters.

*As determined by underwriting volume(1) All listed institutions participated in Idearc transactionSource: Bloomberg.

$265

$329

$480 $501

$612

$689

$294$239

$376

$566

$121$173 $182

$153 $142 $144

$52

$156

$282

$220

$0

$100

$200

$300

$400

$500

$600

$700

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

($ in

billio

ns)

Leveraged Loans

High Yield Bonds


1) JP Morgan 19.5 $118,023 359

2) Bank of America 14.4 $87,407 421

3) Citi 10.2 $61,998 141

4) Credit Suisse 6.7 $40,655 164

5) Wachovia Corp 6.6 $40,142 191

6) Goldman Sachs 5.8 $35,317 146




10) Merrill Lynch 3.5 $21,289 100


1) JP Morgan 14.6 $21,653 115

2) Citi 12.9 $19,199 92

3) Credit Suisse 10.6 $15,795 82

4) Merrill Lynch 9.8 $14,608 67


6) Bank of America 8.2 $12,210 83



9) Goldman Sachs 5.4 $8,070 46

10) UBS 4.9 $7,318 40

U.S. Leveraged Loan and High Yield Issuance

Banks Most Active in the 2006 U.S. Leveraged Loan Market(1) Banks Most Active in the 2006 U.S. High Yield Loan Market(1)



3:10-CV-1842-G

in the Idearc transaction?

A 100 percent.

Q Let's look at one other chart. DD 6.16. Can

you explain this chart to the Court.

A Again, we try to take a different cut here.

Instead of assets ranging by their investment banking and

corporate banking revenue, these are the rankings in 2005

and 2006 of the top people by revenue. Goldman Sachs was

the largest. I think I heard Ms. Kearns say that J.P.

Morgan is the largest. Every bank wants to be the largest

in something. But J.P. Morgan is not the largest in terms

of revenue. Goldman Sachs was. So these are the top 30

institutions in the world by revenue.

Q Some are shaded yellow and some are not. What

is the significance of the yellow?

A Here the yellow denotes people who participated

in the Idearc transaction. So I think it would be

accurate to say 21 of the top 30 people ranged by revenue

participated in the Idearc deal.

Q Let's change subjects for a moment and walk

through the credit approval process. Can you describe an

overview for the Court of the general approval process for

a bank, these money center banks that are participating in

a Term Loan A and revolver facility as of 2006?

A It's a very serious process. It's one that came



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16

Financial Institution Ranking by Corporate and Investment Banking Revenue 2005-2006

Shown is a table of the top 30 financial Institutions ranked by corporate and Investment banking revenues in 2006.

These financial Institutions accounted for approximately $460 billion in combined revenues in 2006.

This represented a 21% increase over 2005.

Rank Financial Institutions 2005 ($ in millions) 2006 ($ in millions) ‘05-‘06 % Change

1 Goldman Sachs 1 $22,282 $33,371 502 JP Morgan Chase 23,640 28,186 193 Citigroup 23,863 27,187 14 4 GE Commercial Finance 20,646 23,792 15 5 Deutsche Bank 19,830 23,506 196 Bank of America 20,600 22,691 107 UBS2 18,143 21,607 198 Morgan Stanley 15,673 21,562 389 Royal Bank of Scotland (RBS) 15,949 18,944 19

10 Merrill Lynch 13,844 18,917 3711 Mitsubishi UFJ Financial Group 18,091 18,806 412 Credit Suisse 12,506 16,346 3113 Barclays3 12,133 15,964 3214 Lehman Brothers 12,701 15,166 1915 ICBC Bank 14,150 14,796 516 HSBC 11,511 13,637 1817 China Construction Bank 11,293 13,374 1818 Bank of China 9,456 11,489 2219 Société Générale4 8,206 10,369 2620 UniCredit5 9,404 10,104 721 BNP Paribas6 7,998 9,873 2322 Shinhan Financial 7,179 9,177 2823 Bear Stearns 6,751 8,398 2424 Kookmin Bank 6,473 7,989 2325 Lloyds TSB 7,088 7,763 1026 ABN Amro7 6,779 7,663 1327 Bank of Communications8 5,692 7,505 3228 ING 6,733 7,291 829 Wells Fargo 6,149 7,234 1830 Crédit Agricole9 5,549 6,854 24

TOTAL $380,366 $459,561 21%

*Investors in Idearc credit highlighted in yellowSource: McKinsey Global CIB 50Report, August 2007.

Notes: (1) Includes securities services revenues from Asset Management and Securities Services division; excludes pretax profits, which cannot be split out from asset management profits. (2) Includes Investment Bank and Business Banking Switzerland; excludes corporate banking revenues from Global Wealth Management and Business Banking segment. (3) Includes Barclays Capital and Barclay's UK Business Banking divisions. (4) Includes results from Securities Services and Online Savings, as most of the revenues in this division stem from securities services. (5) Excludes securities services revenues from Global Business Services, which cannot be split out. (6) Involved through post-transaction acquisition of Fortis. (7) 2006 data is revenue estimate reported in an investor presentation. (8) Reported gross revenues. (9) Revenues from Specialized Financial Services are excluded because the division also includes revenues from retail and small-to-midsize enterprises.



3:10-CV-1842-G

out of the regulatory side. It involves an independent

group within the bank that has no connection to the

borrower. So an independent credit analysis group with no

connection to the bankers who cover the borrower, have to

provide an independent credit report where they look

through the credit aspects of the company, the securities

being offered, the covenants and collateral in the

industry sector, and they have to prepare an analysis that

is then distributed to at least four, if not five,

sections of the bank. And then they call a meeting of the

senior parties in the bank. It's a process that is very

daunting for a first time banker to ever go through. It's

very critical. They take it very seriously, and it's

reviewed by regulators. So if a bank makes a major loan

and doesn't have something like this, they are in deep

trouble.

Q You have worked at three such banks and had

experience with others. In your experience, do banks in

making Term Loan A's and participating in revolvers

analyze and reach a judgment as to whether the borrower is

solvent?

A Well, you can see from one of my first charts,

every one of the banks representing 47 percent or 46

percent of Term Loan B's were people who produced

documents. Every one of those valued the business. And



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part of your credit approval process, you value the

business. You can't take or assume the credit looks good.

You have to go through of your own independent valuations.

You don't accept outside valuation. And by doing that

valuation, it has to show the value you feel as an

independent credit analysis of the company exceeds the

assets substantially with a real equity cushion. So if

you go back to the demonstrative, that was 14 billion of

average valuation by those banks, that's very common.

They have to have that in the document. I don't know that

any transaction on a new issue that I have seen that a

commercial bank made a loan where they thought the

valuation was not in excess of the debt.

Q Mr. McCarty, were you referencing your chart

6.3?

A I was. And so you know, if you talk to

Barclay's, which is one of the bigger fixed income buyers

in the United States, they looked at it and said in their

internal credit memo the business of Idearc was worth

17.44 billion dollars on their own independent basis

versus the debt of 9.1 billion. Again, I have never seen

a bank document where they have asked for approval without

that type of analysis.

Q I think in your answer a moment ago you talked

about the banks doing an analysis and concluding the value



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of the business was greater than its assets?

A Sorry. The debt.

Q Mr. McCarty, let's turn to Term Loan B lenders

which we established were not banks but financial

institutions. Can you describe briefly the credit

approval process in those institutions?

A Again, not as formalize. They don't have a

regulatory requirement to produce the documents. But in

my experience they are more rigorous. They have internal

analysts. We called them buy-side analysts as opposed to

the sell-side which is from the investment banking side.

The internal analyst prepares a document recommending or

not recommending the purchase of the security, and it

involves their own internal forecast, their own internal

valuation and their recommendation to purchase usually two

pieces. To purchase a new issue at an institution that

would buy a Term Loan B, they may recommend that they have

buy in the after-market also, and the same is true on high

yield. So it's very demanding. Not as quite formalized.

You don't produce as much paper, but I find it rigorous.

Q Over your career, have you ever seen a lender

fund a Term Loan B facility when the lender believed the

borrower was insolvent?

A No, never.

Q Have you ever seen a lender make a Term Loan B



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without assessing whether the value of the company's

assets exceeded its liabilities?

A No, never.

Q Let's talk briefly about the high-yield notes.

Can you describe the credit approval process for a typical

high-yield note purchasers?

A There is about a 40 percent overlap to the Term

Loan B's. But the ones that just buy high yield, similar

in that they are owned by the partners who their

compensation is totally at risk of whether they make money

or not. So they spend a lot of time at it. Here, the

analysis extends really beyond the typical loan analysis.

Because they are the most junior, most at risk. They have

no security interest in the assets. So they really look

to the total value of the cash flow as opposed to the

value of the assets. In the banking side in Term Loan B,

you have security. Here, they have no security. So they

tend to be much more projection-oriented, much more

future-value oriented, and risk assessment is usually much

more critical in the high-yield group.

Q In your experience have you ever known a person

with experience in the high-yield notes to purchase those

notes at par without making the determination that the

borrower would be solvent?

A The at-par in a new issue, I have never seen



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anybody do that. Obviously, there are people who play in

the distressed marketplace who buy things off of par in

distress, but that's a different situation in Idearc. New

issues I haven't, no.

Q Let's make that clear. Sometimes after a bond

is issued, the company will experience distress, and the

price of the note may be much less than 100 cents on the

dollar, right?

A In some cases, pennies on the dollar, yes.

Q And so it's possible that someone would buy a

note at 2 cents on the dollar, even though the institution

thought the borrower was insolvent if they thought the

ultimate recovery might be for example might be 4 cents on

the dollar?

A All the time, yes.

Q But when you are buying at 100 cents on the

dollar at original issue, have you ever seen a high-yield

purchaser who made such an acquisition without first

determining that the borrower was solvent?

A I have absolutely not.

Q Mr. McCarty, have you prepared a demonstrative

that shows the typical documents and review process by

investors in the sorts of leveraged loans and high-yield

note offerings we have discussed?

A I have.



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Q And DD 6.17. Can you briefly describe this

document to the Court?

A This is my summary of documents I typically see

for a leveraged high-yield loan. It's ranged down from

the SEC Form 10 which we had a huge amount of testimony

about, the offering memorandum for the notes, the

confidential information memorandum or what we call the

CIM for the lenders. There is a difference. The 10 is

prepared by the company with oversight from their counsel

and some participation of the banks. The CIM is prepared

by the banks and their lawyers principally with oversight

from the company and their lawyers. So there is a mix.

The supplemental information is the private-side

forecasts, and the road shows presentations we have

seen -- We haven't seen a lot of industry reports. We

talked about here the industry reports. This sector has a

lot of outside industry reports I have looked at for many,

many years -- Simba, there is Kelsey, several others.

These are people who spend their full time looking at

directories who know a lot more about directories than I

do, and I suppose know a lot more about directories than

even people who own them like Verizon. And we typically

see those in the package.

Q Would those industry reports obviously available

for a fee available to any lender who wanted to acquire



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17

Materials Typically Reviewed for Credit Approval

SEC Form 10

‒ Required when a public company issues a new class of stock through a spin-off.‒ Provides detailed information about the spin-off, and principal risk factors facing the company and the outlook for

the company’s industry Offering Memorandum

‒ A type of prospectus for a bond or other security when the offering is not required to be registered with the Securities and Exchange Commission.

Confidential Information Memorandum for Potential Public Side Lenders in Credit Facility

‒ Summary of the industry and opportunities within the market;‒ Detailed description of the business and its operations;

‒ Financial information including analysis of historical results

Supplemental Confidential Information Memorandum for Potential Private Side Lenders in Credit Facility

‒ Projections of estimates of future financial performance are provided to trading-restricted “private side” investors

Roadshow Presentations

‒ Presentations made by one or more members of the issuer’s management (with the assistance of the underwriters and lead lenders) which typically includes a discussion of the issuer, its business, its management and the securities being offered.

‒ Investors have the opportunity to ask questions and to assess the company, potential investment and management

Analyst Reports, Industry Reports

Corporate/Commercial Agreements



3:10-CV-1842-G

them?

A They were. They are commonly bought by anybody

who buys media companies.

Q You used the term "CIM." Can you describe what

a CIM is?

A Just abbreviation of the confidential

information memorandum.

Q Mr. McCarty, in your career have you worked on

the preparation of offering memoranda and confidential

information memoranda in SEC filings?

A Hundreds of times.

Q Did you look at the Form 10 in this case?

A I did.

Q And did you look at the confidential offering

memoranda in this case?

A I did.

Q And did you look at the confidential memorandum

in this case, the public side and private side?

A I did.

Q And you understand there is an allegation in

this case that they omitted material information. Based

on your experience, how extensive were the risk factors

and other disclosures in the SEC Form 10 offering

memorandum and confidential information memoranda for the

Idearc transaction as compared to your experience in any



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other transaction?

A I have done hundreds of these. So it's a big

group. If I can compare it to even the most complex, I

privatized Fannie Mae when it was originally a

quasi-government organization. It was the largest one

ever filed in the late eighties. I lead managed that. I

was lead left running the transaction. And compared to

that, which is the most sophisticated I have ever done in

my career, this is that type of level. At the very high

end of disclosure, risk analysis, completeness. And it

doesn't surprise me here. And I have done transactions

with J.P. Morgan being lead left and when J.P. Morgan has

been right and me being left, and typically, every time

J.P. Morgan when I have done transactions with them is

what I will call belts and suspenders. Everything is

there.

Q Mr. McCarty, did you as part of your analysis --

You testified you looked at all the credit files of all

the lenders of these documents.

A I did.

Q I don't want to take you through all of them.

We want to the try to get done today. I'm sure the Court

appreciates that. Do you have any that you can provide by

way of examples and generally describe them?

A I gave some thought to it, and there are three I



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thought might be helpful to the Court. You have heard an

awful lot about J.P. Morgan and Bear Stearns which merged

with J.P. Morgan. You have heard from Goldman Sachs and

Morgan Stanley. I decided to go down the tiers. If you

take the Term Loan A, the first tier of the managers, J.P.

Morgan and Bear. And the second tier, what they call are

the arrangers, Barclays and Citibank and B of A. And I

went down to third tier which is not a minor

participation, but below the 100 million dollar range. I

picked out two there that I thought were representative,

Credit Suisse and UBS.

And then I went to the Term Loan B and the

high-yield side and tried to pick out somebody that I

thought would be representative and that would be

BlackRock. So those three are the ones I think would be

helpful

Q What did you find in Credit Suisse's files?

A As expected from the commercial banking side, it

was very, very complete. I think the total number of

pages they produced was almost 13,000 pages. 12,700 in

the production. It had very detailed credit reports and

forecasts and evaluations. But I saw other things in

there that I thought were interesting. They had actually

been doing due diligence and examination of this business

for nine months before they participated. Their



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documented meeting was January 2006. So even though they

were a mid-tier participant, they had been going through

meetings and exploration material for nine months which I

found significant.

Q Did Credit Suisse's files include any documents

concerning a potential private equity investment?

A It did. There was kind of a quick reference to

it. I forget who was giving the testimony. There was a

thing called Project Flare which did catch my attention,

and there were quite a few documents about.

Q DX 816. You may remember there was testimony

about this document as an expression of interest by Apollo

Management, Madison Dearborn and Pacific Group. Are you

with those private equity firms?

A Three of the six largest private equity firms in

the world. And I have done transactions with each of

them.

Q Did Credit Suisse make a presentation to each of

these three institutions?

A They did. It was the reference I made to

Project Flare.

Q Do you view this expression of interest by these

entities as significant with respect to the issue before

the Court of valuation?

A Absolutely. I think it's very important.



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Q Why?

MR. KEATING: Your Honor, I object. He was not

designated on the issue of valuation. It's outside the

area in which he has been designated as an expert.

THE COURT: Overruled. You may answer.

A These are the most sophisticated institutions in

the world. More sophisticated than banks. More

sophisticated than investment banks. So as they go

through and do things, I take them very seriously. I'm

working on two transactions right now with these people.

So when they prepare something like the offer letter they

made to Verizon, I take it as very serious.

Q Mr. McCarty, why do you say that? When I look

at this, it says at the beginning it's a nonbinding

indication of interest to purchase 45 percent of the

directories business?

A Well, in my business these people are in the

business of having to show the transactions. And if they

started showing indications of interest and not pursuing

them, they wouldn't be taken seriously. They would stop

seeing transactions. It's my experience they don't write

letters like this unless they want to try to pursue it.

Now, Verizon declined it, and I understand the reasons

they did. But TPG, Madison Dearborn and Apollo would

never have written this letter unless they wanted to do



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this transaction under these terms.

Q As you understand this transaction, what value

did they imply for the directories business?

A Their offer here is what's called a sponsor spin

where the sponsor of a private equity group comes in and

buys a minority, usually very near 50 percent of the

business, and the parent keeps the majority or nearly 50

percent. And their offering here on that basis, the 12.5

billion dollar valuation for Idearc, they are also

proposing to put 10.1 billion dollars in debt, another

turn of debt than what Idearc did. And significant in my

appreciation of this, they are willing to risk more than a

billion dollars of their own equity. Not other people's

market equity but their own equity.

Q Page 3 of 13. And can you show the Court where

that is evident? First bullet. I'm a page off.

A This describes the structure of what they are

talking about. And they are looking -- They think they

can support 6.5 turns of leverage or 10.1 billion dollars

of debt. And that enhanced leverage would allow Verizon

to increase it's delevering by a billion dollars more than

they were before. So Verizon could take out more money.

And taking into account the sponsor's equity investment

equaling 1.1 billion dollars, I just remember it was more

than a billion dollars. So what they are saying to



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Verizon is we're willing to risk a 1.1 billion of our

equity. We think you can get more cash out than the

spin-off you are doing. That's all very well and good

from their side. Verizon had to look at it from a tax

standpoint and see if it was the right thing to do. To

me, this was a serious offer that had serious money behind

it from serious people.

Q As you understand it, when they are proposing to

put in a 1.1 billion of their equity, would that be senior

in right of repayment or junior in right of repayment to

the 10.1 billion dollars in debt they were proposing to

put on Idearc?

A Junior. It was below the 10.1 billion dollars.

Q Did you take a look as well at the credit memo

prepared by Credit Suisse?

A I did. One more thing I would like to say about

this in terms of seriousness. They hired advisors here.

Lehman Brothers and Credit Suisse. And they hired

Wachtell Lipton. They were ready to move. If Mr.

Diercksen said let's go do this transaction, they would

have done it.

MR. KEATING: Your Honor, I object as

nonresponsive. There was no question posed.

THE COURT: Overruled.

BY MR. ANKER:



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Q One quick look at the credit memo, PX 745. And

I just note or just ask you, Mr. McCarty if we can go to

the bottom of the page. First, you will see it's

submitted by different parts of the bank. Is that common

in connection with the credit approval process?

A It does. It fits what I talked about. These

are the people who submitted it. There is also a group of

four or five different groups who would have approved it.

These are the submitting people, the industry group, media

telecom, the type I run, and leveraged loans which is what

Ms. Nason runs at J.P. Morgan and corporate banking which

is the normal coverage area.

Q And look at the bottom of this page. You will

see that the document is 41 pages. Is that typical for

the length and analysis of a bank for making an investment

in Term Loan A?

A Very much. 30 to 50 pages would be very normal.

Q Let's take a look at UBS. You mentioned you

reviewed their file. What did their file show generally?

A Number one, the deal captain was a guy that

worked for me six years at Dillon Read, Davis Terry, who

runs the media telecom group. And they went through a

full analysis with full downside cases, full valuation and

analysis of the credit both pros and cons. And it was

very, very thorough.



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Q Can we take a quick look at their credit memo,

DX 552, which is admitted in evidence. And you said

typically these memos will be 30 to 50 pages. Am I right,

Mr. McCarty this memorandum analyzing this credit was 71

pages long?

A Yes, I guess my old firm does it longer than

most.

Q And finally, you mentioned that you looked at

BlackRock. Why did you choose BlackRock to look at?

A One, I wanted a party that was both in the A and

high yield. I said there was about a 40 percent overlap.

They are a sophisticated group. Largest buyer in the

fixed income market. So I thought they would be

reasonably representative.

Q And what did you find when you looked at

BlackRock's file?

A Very typical analysis by a nonbank buyer. They

had a single buy-side analyst, Mr. Schwartzman, who were

wrote the document and had looked through all the

different pros and cons of the investments. Looked

through the collateral and all the issues associated with

a B and made a recommendation to buy. In a fund that buys

Term Loan B or high yield, the person -- it isn't the same

as the bank where they agree to fund out of the bank.

There is now another decision process by the portfolio



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managers inside the fund who will take that

recommendation -- They can't buy unless they get a

recommendation to buy. But once they get buy, maybe half

a dozen different portfolio managers at BlackRock may buy

the securities.

Q Mr. McCarty, a couple of concluding questions.

Based on your experience, do you have an opinion -- and

based on your review of the files -- as to whether the

lenders of Term Loan A and the lenders of the Term Loan B

and the purchasers of the high-yield notes formed a

judgment as to whether Idearc was worth more than its debt

as of November 17, 2006?

MR. KEATING: Your Honor, lack of foundation.

He said he only reviewed productions from 16 of the

lenders.

THE COURT: Overruled. You may answer.

A Yes I have formed an opinion.

BY MR. ANKER:

Q And what is that opinion?

A That opinion is that the participants in all the

different tranches and securities viewed the overall

enterprise value of Idearc to be substantially above the

value of its debt by a very large equity cushion.

Q Mr. McCarty, you have been in court, and you

have heard the allegation made that Verizon pulled the



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wool over all of these lenders' eyes. You have been in

this business 37 and a half years. Do you have an opinion

as to whether that's plausible?

A That's one of questions I asked when first

approached to try to take on this assignment. One, the

market is extraordinarily large with a very divers group

of buyers and sellers. And nothing against my ultimate

client, Verizon, but they don't know as much about the

market as the market participants by a very large margin.

They don't know that anybody inside Verizon ever issued

any leveraged loans or issued any debt. It's not

something that Bell operating companies had any experience

with. I view it as totally implausible that Verizon could

have pulled the wool over the eyes of a very efficient,

very large market that I traded in every day.

MR. ANKER: Pass the witness, your Honor.

THE COURT: Counsel for Mr. Diercksen have

questions for Mr. McCarty?

MR. CARTER: No, sir, thank you.

THE COURT: Counsel for the plaintiff?

MR. KEATING: Yes, your Honor. Thank you.

CROSS EXAMINATION

BY MR. KEATING:

Q Mr. McCarty, you were talking about this letter

that Verizon received from a consortium of three parties.


MCCARTY - CROSS - KEATING 56

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First, you said you viewed this as a serious offer. Is

that right?

A Yes, that's correct.

Q It's not an offer at all?

A Yes, it is.

Q Doesn't it say right here in the first paragraph

that it is a "nonbinding indication of interest"?

A In my business it's an offer.

Q Does it say it's a "nonbinding indication of

interest"?

A That's what it says there, yes.

Q And at the time this letter was written, August

10, 2006, the three parties who sent the letter to

Mr. Diercksen only had access at that point to publicly

available information about Verizon's directory business,

right?

A That plus their industry sources and the

availability of what they as private equity people had

which is beyond the normal public availability.

Q They had not yet received access to the data

room that Verizon set up that later lenders went and

looked at. Is that right?

A Correct.

Q They had not yet had an opportunity to meet with

management of Verizon's directory business and ask



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questions about the business. Is that right?

A That's correct.

Q I have seen you in the courtroom. I think you

said you were here all the days, except for last Thursday

and Friday?

A Yes, I think Thursday afternoon and Friday.

Q Were you here last week when Ms. Nason from J.P.

Morgan testified?

A I sure was.

Q And you were here this morning when Ms. Kearns

completed her testimony?

A I sure was.

Q Were you here when Mr. Decker who had been with

Bear Stearns testified?

A I sure was. I know all three of them.

Q And you mentioned that Bear Stearns is now part

of J.P. Morgan?

A Yes.

Q And you heard Ms. Nason and Ms. Kearns testify

about how J.P. Morgan has ongoing business with Verizon,

didn't you?

A Yes.

Q Were you here for Mr. Smith of Goldman Sachs

when he testified?

A Yes.



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Q And did he hear him say Goldman Sachs has

ongoing business relationships with Verizon?

A I sure did.

Q So Goldman Sachs representatives and Bear

Stearns representatives came and testified about due

diligence their firms did, correct?

A Yes.

Q And you are here to testify about what the other

lenders who don't have a business relationship with

Verizon did?

A No. In my knowledge base in operating with Bell

operating companies, they have commercial relationships

with almost every commercial bank on the planet.

Q I think you said you have been paid 1.9 million

for your work on case.

A That's an estimate.

Q Let's talk about information that would have

been available to the lenders who participated in the

spin-off. There is basically -- Would you agree there are

two sources of information they can get? Publicly

available information and information that Verizon

provides to them?

A I would probably say there is a third category

which is private information available at institutions

because of their involvement in the industry or sector.



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Q If Verizon keeps information confidential,

within the confines of its company, there is no way for

those lenders to know that?

A Unless they could suppose it from their

knowledge of the industry, no.

Q Do you agree it's wrong for a borrower to make

misrepresentations to lenders?

A Yes, I agree with that.

Q And in fact, Verizon's contract with J.P. Morgan

and Bear Stearns required Verizon to disclose all material

facts to them, didn't it?

A Yes, it did.

Q You weren't personally involved in the Spin-off,

were you?

A No, I wasn't.

Q So you have no personal knowledge about what due

diligence the spin-off participants did?

A Other than my experience in dealing with Verizon

and its predecessors which I have a very strong impression

about how they do due diligence and disclosure.

Q You didn't witness any of the lenders doing due

diligence on the spin-off?

A I did not.

Q In fact, you were not able to confirm that all

the lenders in the spin-off did due diligence, were you?



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A No, this was not production from every one.

Q How many participated in the spin-off through

the three categories?

A There are 28 banks. 206 in the Term Loan B, and

235 in the high-yield. There is about a 40 percent

overlap between the parties. So you could estimate maybe

as high as 250 or 400 institutions.

Q And you showed us a chart that had a list of the

lenders' who production you reviewed, right?

A Right.

Q And that was 16 lenders?

A That's correct.

Q Out of the more than 350 lenders who did

participated in the spin-off?

A That's correct.

Q So for the other 334 plus lenders, you have not

reviewed any of their internal due diligence documents, if

any exist?

A That's correct.

Q And the documents that you do have are those

that Verizon made available to you?

A I'm not sure if Verizon made them available.

They were on the Kroll System. So I think they were

subject to production in the case.

Q It was Verizon or Verizon's counsel made it



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available to you?

A They were in the Kroll System. I don't know who

did that.

Q Either in your demonstrative or report, it

looked like you listed the names of the lenders, and you

had numbers next to each of lenders' name. It looked like

those corresponded to what's attached to your report. I

would like to ask you about a couple of those. I'm

looking at your senior notes investors.

A Would this be the revolver and Tranche A term

loan investors?

Q The title says "Senior Notes Investors." It was

an appendix to your report starting at Page 77?

A I think it's the same as Demonstrative 6.9.

Q So we have a list here of senior notes investors

--

A I'm sorry. These are the high-yield investors I

believe, the senior notes.

Q So we have a record here, your report is marked

as Plaintiff's Exhibit 1912, and I have on the screen a

page from the appendix of your report at Page 77 of the

appendix. At least in that appendix it has senior

investors on it?

A I'm on the same page now.

Q So we have 239 lenders on the senior notes?



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A That's correct.

Q Let's go down to look at Number 31. If you

could enlarge that for me, please. That's the Teacher's

Insurance, institutional investor, right?

A Right.

Q And that's a pension fund?

A No, it's not. It's an insurance company

actually. It is the investment arm of Teacher's Insurance

which I think is the 8th or 9th largest investor in the

company.

Q You identified a subcategory, didn't you?

A Yes.

Q And it says pension fund next to it, right?

A That's what it says, yes. They invest for

pension funds. It's an investment vehicle of the Teachers

Fund.

THE COURT: Is that the same as TIAA Cref?

THE WITNESS: Yes, that's the same.

BY MR. KEATING:

Q Let's look at Page 61 here. Now, in your

testimony, you talked about a lot of large banks. Here on

166, we have Texas Teachers Pension Fund, right?

A Yes.

Q Who at Texas Teachers performed due diligence?

A Texas Teachers has a fixed income group, and



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it's about six people for the public side, buyers, and

they have a group that does due diligence on them. So as

in Teachers, which is a bigger investor, Texas has a group

that is in charge of that. They do both public and

private. They have a public and private group.

Q What exactly did Texas Teachers Pension Fund do

in due diligence in Verizon's spin-off?

A I don't have documentation. So I don't know.

Q Lender 97, ABP Investment Pension Fund. What

did that pension fund do exactly in due diligence, if any,

during the spin-off?

A Again, I don't have documentation. I'm not

sure.

Q Going up to Number 86 on the same page. GIC

Pension Fund. You don't know what that pension fund did

as far as due diligence in the spin-off, right?

A No.

Q There are other pension funds that are listed on

these other pages of 350 plus investors, right?

A Yes, very typical investors.

Q And you don't know what, if anything, those

investors did in due diligence?

A Other than having sold them a lot of deals in

the past and having experience with that.

MR. KEATING: Pass the witness.


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