EFTA01114935.pdf

JUDICIAL ARBITRATION AND MEDIATION SERVICE NEW YORK, NEW YORK IN THE MATTER OF JAMS Reference No. 1425006537 FORTRESS VRF I LLC and FORTRESS Arbitrator: Hon. Anthony J. Carpinello (Ret.) VALUE RECOVERY FUND I LLC, Claimants v. JEEPERS, INC., Respondent and FINANCIAL TRUST COMPANY, INC. and JEEPERS, INC., Counter-Claimants and Third-Party Claimants CLAIMANTS' PRE-HEARING BRIEF v. FORTRESS VALUE RECOVERY FUND I LLC, Counter-Respondent and D.B. ZWIRN PARTNERS, LLC, D.B. ZWIRN & CO., LP, DBZ GP, LLC, ZWIRN HOLDINGS, LLC, and DANIEL ZWIRN, Third-Party Respondents PAUL, WEISS, RIF1CIND, WHARTON & GARRISON LLP Attorneysfor Claimants Fortress VRF I LLC and Fortress Value Recovery Fund 1 LLC EFTA01114935  TABLE OF CONTENTS Paee Table of Authorities iii Preliminary Statement 1 Statement of Facts 4 The Parties 4 The Highbridge/Zwirn Special Opportunities Fund 5 Withdrawal Rights Under the Partnership Agreement 5 Jeepers's Five Subscriptions for Investments in the Fund 9 The Change to Three-Year Lock-Ups 11 Summary: Jeepers's Withdrawal Schedule 12 Table 1 — Jeepers' s Investment/Subscription Dates and Eligible Withdrawal Periods 12 The Parties' Conflicting Positions About When Investments May Be Withdrawn 12 Table 2 — Jeepers's Theories of Withdrawal Periods 14 The 2005 Confidential Memorandum 15 The Fund's Discovery and Disclosure of Accounting Irregularities 16 Jeepers's Defective Withdrawal Demands 17 Suspension of Withdrawals and Dissolution of the Fund 20 The Parties' 2009 Settlement Agreement 21 Investors Approve New Management of the Fund 22 Purported Termination of the Settlement Agreement 22 The Parties' Claims 23 Payment of Any Potential Monetary Award 23 EFTA01114936  TABLE OF CONTENTS (Continued) Pace Argument 27 I. THE ARBITRATOR SHOULD DECLARE JEEPERS'S WITHDRAWAL DEMANDS VOID AND OF NO EFFECT, OR VALID FOR NO MORE THAN $45 MILLION 27 A. Jeepers's Interpretation of Withdrawal Rights Under the LPA Is Wrong 27 1. The LPA's Language Supports the Fund's Interpretation 28 2. Alternatively, the Language is Ambiguous, and the Extrinsic Evidence All Favors the Fund's Reading 30 a) The Fund's Practice Was to Treat Each Investment as Having its Own Capital Account with its Own Withdrawal Cycle 31 b) Industry Practice Was to Treat Each Investment as Having its Own Capital Account with its Own Withdrawal Cycle 33 Table 3: Illustration of Constraint on Investment Strategy If Investments Were Aggregated for the Purpose of Determining the Withdrawal Cycle 35 B. Jeepers's Withdrawal Demands Were Invalid 36 C. Jeepers's Allegation of an "Oral Agreement" Does Not Hold Up 37 D. The Side Letter Did Not Alter the Withdrawal Cycle for Any of the Investments 40 II. THERE IS NO MERIT TO JEEPERS'S COUNTERCLAIMS 42 A. Jeepers Has No Claim for Promissory Estoppel Because There Was No Promise 42 B. Jeepers Has No Claim for Fraud Because Mr. Zwirn Fully Disclosed All Accounting Irregularities and Made No Misrepresentations to Mr. Epstein 43 C. Jeepers's Claim for Breach of Fiduciary Duty or Negligent Misrepresentation Against Mr. Zwirn and the Other Zwirn Parties 47 III. JEEPERS IS NOT ENTITLED TO PRE-JUDGMENT INTEREST 47 Conclusion 52 ii EFTA01114937  Table of Authorities Paaba CASES Alpine Inv. Partners v. LJM2 Capital Mgmt., LP, 794 A.2d 1276 (Del. Ch. 2002) 48 Am. Gen. Corp. v. Continental Airlines Corp., 622 A.2d 1 (Del. Ch. 1992) 48, 49 AT&T Corp. v. Lillis, 953 A.2d 241 (Del. 2008) 30 BASF Corp. v. POSM H Props. P'ship, LP, 09 Civ. 3608, 2009 WL 522721 (Del. Ch. March 3, 2009) 36 Chrysler Corp. v. Chaplake Holdings, Ltd., 822 A.2d 1024 (Del. 2003) 42 Citadel Holding Corp. v. Roven, 603 A.2d 818 (Del. 1992) 50 Dittrick v. Chalfant, 948 A.2d 400 (Del. Ch. 2007) 30, 31 Hillman v. Hillman, 910 A.2d 262 (Del. Ch. 2006) 48 In re J. P. Morgan Chase & Co. Shareholder Litig., 906 A.2d 808 (Del. Ch. 2005) 46 In re Mesa Ltd. P'ship Preferred Unitholders Litig., 91 Civ. 12243, 1991 WL 262669 (Del. Ch. Dec. 10, 1991) 36 Insitufonn Techs., Inc. v. Insitu, Inc., 99 Civ. 17013, 1999 WL 240347 (Del. Ch. Apr. 19, 1999) 23 Jana Master Fund, Ltd. v. CNET Networks, Inc., 954 A.2d 335 (Del. Ch. 2008) 30 Lazard Debt Recovery GP, LLC v. Weinstock, 864 A.2d 955 (Del. Ch. 2004) 48 Mack v. White, 165 A. 150 (Del. Super. 1933), 48 Osborn v. Kemp, 991 A.2d 1153 (Del. 2010) 30 iii EFTA01114938  TABLE OF AUTHORITIES (Continued) jI gg(§1 Schmeusser v. Schmeusser, 559 A.2d 1294 (Del. 1989) 43 Stephenson v. Capano Dev., Inc., 462 A.2d 1069 (Del. 1983) 43, 45 Strickler v. Sussex Life Care Assocs., 541 A.2d 587 (Del. Super. 1987) 48 Summa Corp. v. Trans World Airlines, Inc., 540 A.2d 403 (Del. Ch. 1988) 49 Sun-Times Media Grp., Inc. v. Black, 954 A.2d 380 (Del. Ch. 2008) 31, 33 United Rentals, Inc. v. RAM Holdings, Inc., 937 A.2d 810 (Del. Ch. 2007) 31, 36 Wacht v. Continental Hosts, Ltd., 94 Civ. 7954, 1994 WL 728836 (Del. Ch. Dec. 23, 1994) 49 STATUTES 6 Del. C. § 17-603 36 6 Del. C. § 17-804 24 6 Del. C. §§ 18-101 et seq 24 6 Del. C. § 18-804 24, 25, 26 OTHER AUTHORITIES Martin I. Lubaroff & Paul M. Altman, Lubaroff & Altman on Delaware Limited Partnerships § 8.1 (2011 Supp.) (hereinafter "Lubaroff & Altman") 24, 25, 26 iv EFTA01114939  Claimants Fortress VRF I LLC ("VRF I LLC") and Fortress Value Recovery Fund I LLC (f/k/a the D.B. Zwirn Special Opportunities Fund L.P.) (the "Fund") (and together with VRF I LLC, "Claimants") respectfully submit this pre-hearing memorandum in support of their claims in this matter and in opposition to the purported counterclaims of Respondent Jeepers, Inc. and Counter-Claimant Financial Trust Company, Inc. ("FTC") (together, "Jeepers"). Preliminary Statement Claimants initiated this arbitration to resolve a dispute inherited when, in June 2009, VRF I LLC became the managing member of the Fund. The dispute centers on whether or not Jeepers, an investment vehicle controlled by Jeffrey Epstein, complied with the rules of the Fund when it attempted to withdraw money from the Fund. Claimants have no direct financial interest in this dispute, as it ultimately affects only the allocation of the Fund's assets as among its investors. Claimants, however, wish to protect the interests of all of the Fund's investors. In particular, Claimants are here to ensure that no investor is given special treatment. Yet, that appears to be what Mr. Epstein is seeking here. While Claimants were not involved in any aspect of the original dispute, they know the rules. They understand the history of the Fund, have reviewed the evidence amassed in this case, and have many years of experience in the hedge fund industry. Based on this knowledge and experience, Claimants believe that Jeepers simply did not comply with the rules and never made a valid request to withdraw its investments from the Fund. Specifically, Jeepers made a demand in November 2006 for the "immediate" withdrawal of $80 million and another demand in February 2007 for the withdrawal of all of its investments in the Fund. Yet, Jeepers never had any right to EFTA01114940 "immediate" withdrawal of any funds, and each of its investments was subject to a two-year rolling "lock-up" that limited withdrawal rights as to each investment. Subject to the rules of the Fund, at the time of Jeepers's $80 million withdrawal demand, Jeepers was only entitled—had it delivered a proper withdrawal notice—to withdraw approximately $45 million, and an even lesser amount at the time of its subsequent request for all of its funds. Thus, the withdrawal requests Jeepers submitted were clearly defective. To avoid this problem, Jeepers has alleged an "oral agreement" providing for a "waiver" of the applicable terms of the Fund's operative documents that was purportedly reached between Mr. Epstein and Daniel Zwirn, an executive at the Fund's former manager, who was, according to Jeepers, in desperate fear of a "run on the bank." The documentary evidence does not support that assertion, nor does it make any sense. There was no "run on the bank" at the time, and Mr. Zwirn would have had no reason for allowing Jeepers to make an - immediate" withdrawal of $80 million when Jeepers had no right to do so. (Indeed, if Mr. Zwirn had been afraid of a "run on the bank," why would he agree to allow Mr. Epstein to withdraw any more money than was absolutely required?) The current status of the Fund is also highly relevant here. Since early 2008, all withdrawals from the Fund have been suspended and will remain so. The Fund's portfolio of assets is frozen and now being liquidated through a dissolution and winding down process that will ultimately distribute net proceeds from that process to the Fund's investors. The result is that any award to Jeepers here will come from assets otherwise available to pay other investors. The Fund currently has two categories of remaining investors: (I) investors who, after making valid withdrawal requests, withdrew from the Fund prior to the 2 EFTA01114941 suspension of withdrawals in February 2008 but still have not been paid in full ("Redeemers")i and (2) investors who did not validly withdraw from the Fund before February 2008 ("Non-Redeemers"). Because they validly withdrew from the Fund prior to the suspension of withdrawals, Redeemers became "creditors" of the Fund for fixed withdrawal amounts ("priority claims"), which do not earn interest, and are entitled to receive distributions in the Fund's winding up in advance of distributions to Non- Redeemers. Non-Redeemers are entitled to a pro-rata share of the Fund's remaining net asset value, which has declined significantly since 2008, after the Fund pays or makes reasonable provision for the Fund's creditors, including satisfaction of the priority claims of Redeemers. As discussed further below, Claimants submit that, pursuant to Delaware law, if any award is made to Jeepers, it should take the form of granting Jeepers a "priority claim" (in the same category as the Fund's Redeemers, and, like Redeemers' claims, without interest) on the Fund's assets as they become available for distribution to Redeemers. Providing Jeepers with anything more than such a priority claim (e.g., a cash award subject to immediate execution) would likely result in a premature "fire sale" of the Fund's assets, thereby further harming other investors. As explained further below, there is a distinction between the date of withdrawal and the date of actual payment of withdrawn amounts. The manager of the Fund has discretion as to when to pay withdrawn investments. As a result, there are a number of investors (the Redeemers) who validly withdrew from the Fund prior to February 2008, but who have still not been paid. 3 EFTA01114942  Statement of Facts The Parties Claimants are related entities. Claimant VRF I LLC, the current managing member of the Fund, is an affiliate of Fortress Investment Group LLC ("Fortress"), a leading global alternative asset manager that raises, invests and manages private equity funds, credit funds, hedge funds and traditional asset management portfolios. Claimant Fund was initially known as the Highbridge/Zwirn Special Opportunities Fund L.P., and subsequently known as the D.B. Zwirn Special Opportunities Fund L.P.; it was initially formed as a Delaware limited partnership. As of June 1, 2009, the Fund converted to a Delaware LW, and, in connection with the conversion, D.B. Zwirn Partners LLC (the "Zwirn Fund GP") withdrew as General Partner of the Fund, and VRF I LLC became the Fund's managing member. D.B. Zwirn Special Opportunities Fund L.P. was then renamed the "Fortress Value Recovery Fund I LLC," the other Claimant here. Respondent Jeepers, Inc. is a U.S. Virgin Islands corporation that is owned and controlled by Jeffrey Epstein, an experienced and sophisticated investor. Jeepers, Inc. is a member of the Fund, having received an assignment of limited partnership interests in the Fund in 2006 from FTC, Jeepers's parent entity, which is another investment vehicle that Mr. Epstein controls. (For ease of reference, Jeepers, Inc. and FTC are both referred to here as "Jeepers.") Third-Party Respondent Zwirn Fund GP was the General Partner of the Fund. Third-Party Respondent D.B. Zwirn & Co. L.P. was the investment manager for the Fund (the "Zwim Investment Manager"). Third-Party Respondent DBZ GP LLC was the general partner of the Investment Manager (the "Zwirn Investment Manager GP"). Third- Party Respondent Zwirn Holdings LLC was a holding company that held interests in the 4 EFTA01114943 Zwirn Fund GP and the Zwirn Investment Manager GP. Third-Party Respondent Daniel Zwirn was the managing member of Zwirn Holdings LLC and managing partner of the Zwirn Investment Manager. (For ease of reference, the term the "Zwirn Parties" will be used here to refer to all Third-Party Respondents; "Mr. Zwirn" will be used to refer to Daniel Zwirn individually.) The Hiehbridae/Zwirn Special Opportunities Fund In April 2002, the Zwirn Investment Manager launched the Highbridge/Zwirn Special Opportunities Fund L.P., a Delaware limited partnership. The Fund's investment objective was to achieve premium risk-adjusted returns by "`chas[ing] illiquidity' wherever it might be found." (Exhibit A at DBZCO_FTC0022754.) The Fund invested, as a general matter, in several types of extremely illiquid investments, including direct debt investments and special assets. The Fund was available only to extremely well- to-do and sophisticated investors, with a minimum initial investment by a limited partner of $2 million. Withdrawal Rights Under the Partnership Agreement Pursuant to the Fund's limited partnership agreement (the "LPA") (Exhibit B) in effect at the time, the right of limited partners to withdraw their investments from the Fund was restricted. Limitations on withdrawal rights are common for hedge funds like the Fund. The ability to lock up capital provides investment fund managers with a stable equity base so that their investment horizons are not unduly constrained, allowing them to invest in the types of illiquid (and potentially more profitable) assets that the Fund purchased. Investors in such funds are willing to sacrifice "liquidity"—that is, their access to their invested capital—to achieve (ideally) higher returns on their investments. 5 EFTA01114944  Such withdrawal rights were particularly important in the case of the Fund, given its focus on illiquid investments and its use of leverage (or financing). The management of the Fund needed to ensure sufficient investment horizons for its illiquid investments to mature and thus allow partners to seek the anticipated returns. Leveraging these investments potentially increased returns, but it also amplified the risk of having limited liquidity. Having to liquidate such investments prematurely (for example, to fund withdrawal requests) could cause serious disruptions to the Fund—and lower returns, given the limited number of purchasers typically in the market for such assets. If market participants became aware of a forced sale of assets by an entity like the Fund, the prices they were willing to pay would normally decline substantially, resulting in a so-called "fire sale." None of this was a secret to the Funds' investors. For example, a May 2003 Confidential Memorandum circulated in connection with an offering of the Fund expressly noted that: "substantial requests for withdrawals by limited partners could induce the Fund to liquidate positions sooner than would otherwise be desirable, which could adversely affect the performance of the Fund." (Exhibit C at DBZCO_FTC0001789.) The memorandum also made clear that "[t]he Fund may borrow money from banks," and that "[s]uch borrowing will increase the Fund's leverage . . . creat[ing] the same risks attendant to purchasing securities on the margin." (Id. at DBZCO_FTC0001787.) Finally, potential investors were advised that "reduction in the Fund's Net Assets, and thus in its equity base, could make it more difficult for the Fund to diversify its holdings and achieve its investment objective." (Id. at DBZCO_FTC0001789.) 6 EFTA01114945  Accordingly, the Fund's LPA provided for various "lock-ups" of investors' capital, subject to certain "window" periods during which withdrawals could be made. Thus, under the LPA, an investor making an investment in the Fund was not allowed to withdraw funds related to that investment, including all associated gains or losses: (a) for a period of at least two years after the limited partner made that investment in the Fund (to be precise, until the last business day of the calendar quarter falling two years after that purchase), and (b) even then, only upon at least 120 days' prior written notice. At the end of that two-year period, the withdrawal "window" would shut and the funds relating to that investment would become ineligible for withdrawal for another two years. Article IX, Section 9.1 of the LPA thus describes the process for making a complete withdrawal of a limited partner's "Capital Account": Complete Withdrawals of Capital Account. Complete withdrawals of a Limited Partner's Capital Account may be made as of the last Business Day of the calendar quarter ending at least two years after the Limited Partner initially purchases Interests and as of the second anniversary of that date thereafter (each, a "Withdrawal Date") upon not less than 120 days' prior written Notice to the General Partner [then, the Zwim Fund GP]. Distributions in connection with complete withdrawals will be payable in the manner provided by Section 9.4(a), 9.7 and 9.8 and will be equal to such Limited Partner's Capital Account on the effective date of withdrawal. Withdrawals may also be made at such other times with the consent of, and upon such terms of payment as may be approved by, the General Partner in its sole discretion. The withdrawal of a Limited Partner shall not dissolve or terminate the Partnership. Article IX, Section 9.2 of the LPA describes the process for making a partial withdrawal of a limited partner's "Capital Account": Partial Withdrawals of Capital Account. Partial withdrawals from a Limited Partner's Capital Account may be made of the last Business Day of the calendar quarter ending at least 7 EFTA01114946  two years after the Limited Partner initially purchases Interests and as of the second anniversary of that date thereafter; provided, however, such partial withdrawal may be made upon not less than 120 days' prior written Notice to the General Partner. Distributions in connection with partial withdrawals will be payable in the manner provided by Section 9.4(b), 9.7 and 9.8, provided that the Limited Partner's remaining Capital Account balance is not less than $2,000,000, which provision may be waived by the General Partner. Partial withdrawals may also be made at such other times with the consent of, and upon such terms of payment as may be approved by, the General Partner in its sole discretion. Each time an investor made an investment in the Fund, it was thus acquiring an "Interest" in the Fund, and the investment that was contributed to acquire that Interest was subject to the withdrawal restrictions of Sections 9.1 and 9.2 from the date the Interest was acquired. As discussed further below, the use of the word "Interests" as opposed to "an Interest" indicates that each investment had its own lock-up rather than one lock-up for all. As an additional restriction on withdrawals, if a substantial number of investors sought to withdraw funds at the same time, the General Partner was authorized to limit the amount of withdrawals payable at that time. In industry parlance, this is called a "gate" and is designed to protect the Fund's ability to operate and manage assets and to prevent a "fire sale" of assets. Specifically, if withdrawal requests for any particular "Withdrawal Date" represented, in the aggregate, more than 20% of the Fund's net asset value, then the General Partner was permitted to reduce the requests pro rata among all the limited partners requesting withdrawals so that no more than 20% of the Fund's net nsset value would be paid out. (LPA § 9.6.) Withdrawals could also be suspended during the existence of any state of affairs as a result of which the General Partner was unable to 8 EFTA01114947 value or dispose of the Fund's assets (or if, in the opinion of the General Partner, it was not reasonably practicable to do so, or would be prejudicial to limited partners to do so). (Id. § 9.7.) Withdrawals could be paid in cash or, in the General Partner's discretion, in kind with securities. (Id. § 9.8.) JeeDers's Five Subscriptions for Investments in the Fund From April 2002 to January 2005, Jeepers made five separate investments in the Fund, totaling $80 million. At the time of each such investment, Jeepers executed a separate Fund subscription agreement that, by its literal terms, "admitted" Jeepers "as a limited partner [to the Fund] as of [the date of the investment]." (Exhibit D at DEZCO_FTC0000712.) The First Investment and Subscription Agreement On April 24, 2002, Jeepers executed a subscription agreement for a $10 million limited partnership interest in the Fund (the "First Investment"). The First Investment was accepted by the Fund on May 1, 2002. On May I, 2002, Jeepers executed the Limited Partner Signature Page to the LPA of the Fund, agreeing to be bound by the terms of the LPA. Under the terms of the LPA and its lock-up provisions, the First Investment was locked up until June 30, 2004; and, a withdrawal could only be made on that date upon 120 days' advance written notice. If timely notice was not given, and a withdrawal was not effected under the terms of the LPA on June 30, 2004, then the First Investment would "lock up" again for another two-year period (and so on). The Second Investment and Subscription Agreement On August 22, 2002, Jeepers executed a second subscription agreement for an additional $10 million limited partnership interest in the Fund (the "Second Investment"). The Second Investment was accepted by the Fund on September 1, 2002, 9 EFTA01114948 and Jeepers again executed a Limited Partner Signature Page. Under the terms of the LPA and its lock-up provisions, the Second Investment was locked up until September 29, 2004; and, again, a withdrawal could only be made on that date upon 120 days' advance written notice. If a withdrawal was not effected under the terms of the LPA on September 29, 2004, then the Second Investment would "lock up" again for another two years (and so on). The Third Investment and Subscription Agreement On November 29, 2002, Jeepers executed a third subscription agreement for an additional $30 million limited partnership interest in the Fund (the "Third Investment"). The Third Investment was accepted by the Fund on December 1, 2002. On December 1, 2002, Jeepers executed yet another Limited Partner Signature Page to the LPA. Under the terms of the LPA and its lock-up provisions, the Third Investment was locked up until December 31, 2004; again, a withdrawal of funds on that date could only be made upon 120 days' advance written notice. If a withdrawal was not effected under the terms of the LPA on December 31, 2004, then the Third Investment would "lock up" again for another two years (and so on). The Fourth Investment and Subscription Agreement On May 30, 2003, Jeepers executed a fourth subscription agreement for an additional $10 million limited partnership interest in Fund (the "Fourth Investment"). The Fourth Investment was accepted by the Fund on June I, 2003. On May 30, 2003, Jeepers again executed a Limited Partner Signature Page to the LPA. Under the terms of the LPA and its lock-up provisions, the Fourth Investment was locked up until June 30, 2005; again, any withdrawal of funds on that date could only be made upon 120 days' advance written 10 EFTA01114949 notice. If a withdrawal was not effected under the terms of the LPA on June 30, 2005, then the Fourth Investment would "lock up" again for another two years (and so on). The Change to Three-Year Lock-Ups Thereafter, the Fund changed to a practice whereby each investment made on or after January 1, 2005 would now be subject to a three-year, not a two-year, lock-up. Thus, on November 17, 2004, limited partners were advised pursuant to a Supplement to the 2003 Confidential Memorandum that "[Ow investment purchased by a limited partner on or after January 1, 2005 will be subject to a `rolling' three-year lock-up." (Exhibit Eat VRF 00000081.) The supplement further noted that "any interest prior to January 1, 2005 will indefinitely remain subject to its current lock-up." Id.2 The Fifth Investment and Subscription Agreement In late 2004, Mr. Epstein apparently wished to make yet another investment in the Fund (which was performing well at the time). But he did not want the new investment to be subject to the new, longer lock-up period. He therefore asked that the new investment still be subject to a two-year rolling lock-up. The Fund agreed. Thus, on January 1, 2005, Jeepers executed a fifth subscription agreement for an additional $20 million limited partnership interest in Fund (the "Fifth Investment"). On January 11, 2005, in connection with Jeepers's Fifth Investment, the General Partner agreed in a side letter (the "Side Letter"), which refers specifically to Jeepers's "January 1 2 In 2004, the Fund introduced a "one-year liquidity option." Under that withdrawal option, investors could request withdrawal, upon 120 days' notice, of all or a portion of an investment as of the end of any fiscal year following the one-year anniversary of that investment. Investors, however, would not receive immediate payment of their withdrawn investment; they would receive payments over time as the assets relating to the investment matured or were liquidated. 11 EFTA01114950 Investment" in the Fund, that, notwithstanding the general change to three-year lock-ups, Jeepers would be permitted to withdraw its Fifth Investment as of the last business day of the calendar quarter ending two years after Jeepers "initially purchases this interest" (La, its Fifth Investment). (Exhibit F at HCMARB_00000156). Summary: Revers's Withdrawal Schedule The dates of Jeepers's subscriptions and its eligible dates of withdrawal are set forth in Table I : Table 1 — Jeepers's Investment/Subscription Dates and Eligible Withdrawal Periods ELIGIBLE WITHDRAWAL SUBSCRIPTION AMOUNT WITHDRAWAL NOTICE DATE INVESTED DATES REQUIRED BY 6/30/2004 3/2/2004 First Investment SIO million 6/30/2006 3/2/2006 May 1, 2002 6/30/2008 3/2/2008 9/29/2004 6/1/2004 Second Investment $10 million 9/29/2006 6/1/2006 September 1, 2002 9/29/2008 6/1/2008 12/31/2004 9/2/2004 Third Investment $30 million 12/29/2006 8/31/2006 December I. 2002 12/31/2008 9/2/2008 6/30/2005 3/2/2005 Fourth Investment $10 million 6/29/2007 3/1/2007 June I, 2003 6/30/2009 3/2/2009 Fifth Investment 3/30/2007 11/30/2006 January 1, 2005 $20 million 3/31/2009 12/1/2008 3/31/2011 12/1/2010 The Parties' Conflicting Positions About When Investments May Be Withdrawn There is no dispute that each time an investor signed a subscription agreement for a new investment, the investor was acquiring an "Interest" in the Fund and was invited to become a limited partner in it. There is also no dispute that, in practice, the 12 EFTA01114951 Fund treated each subscription—not only by Mr. Epstein but by all other investors—as creating a separate "Capital Account" subject to its own lock-up schedule. Thus, the Fund maintained a record of each investor's separate investments (also called "tranches") for the purpose of tracking the redemption rights of the individual investments. And, the evidence is further clear that the Fund dealt with all withdrawal requests from its investors on this basis. Where investors made multiple investments, the Fund permitted withdrawals only in accordance with each investment's two-year lock-up schedule. Accordingly, when an investor submitted a request to withdraw any of its funds, the Fund's Investor Relations department determined which subscription (or tranche) was available for redemption at that time and only permitted investors to redeem whatever tranches were available for redemption at that time (along with gains and losses associated with that investment or tranche).3 Jeepers, however, takes the position that all of its multiple investments in the Fund were part of a single "Capital Account," subject to a single rolling two-year lock- up. Specifically, Jeepers appears to contend that, at least initially, all of its subscriptions could be withdrawn under the withdrawal cycle set by its initial May 1, 2002 investment in the Fund (the "Initial Investment Theory" listed in Table 2 below). Jeepers also appears to suggest that, by virtue of its January 2005 Side Letter agreement, this arrangement was changed such that the withdrawal cycle for its last (or fifth) investment would now govern each of its investments and subscriptions (the "Side Letter Theory" in Table 2 below). 3 We are aware of only a few exceptions to this practice, which involved permitting smaller investors to redeem their money from the Fund. 13 EFTA01114952  Table 2 — Jeepers's Theories of Withdrawal Periods JEEPERS'S ELIGIBLE "INITIAL JEEPERS'S SUBSCRIPTION AMOUNT WITHDRAWAL INVESTMENT" "SIDE LETTER" DATE INVESTED DATES THEORY THEORY 6/30/2004 6/30/2004 -- First Investment $10 million 6/30/2006 6/30/2006 3/30/2007 May 1, 2002 6/30/2008 6/30/2008 3/31/2009 Second Investment 9/29/2004 6/30/2004 -- September I, SIC) million 9/29/2006 6/30/2006 3/30/2007 2002 9/29/2008 6/30/2008 3/31/2009 12/31/2004 6/30/2004 -- Third Investment S30 million 12/29/2006 6/30/2006 3/30/2007 December 1, 2002 12/31/2008 6/30/2008 3/31/2009 6/30/2005 6/30/2004 -- Fourth Investment Sl()million 6/29/2007 6/30/2006 3/30/2007 June I, 2003 6/30/2009 6/30/2008 3/31/2009 3/30/2007 6/30/2004 3/30/2007 Fifth Investment S20 million 3/31/2009 6/30/2006 3/31/2009 January I, 2005 3/31/2011 6/30/2008 3/31/2011 Both of Jeepers's theories thus rely on a "single date lock-up" theory (as opposed to separate lock-up schedules for each investment). Yet that theory is contrary not only to the Fund's governing documents, records and practices, but also, as described below, to well-settled industry practice as to how lock-ups operate and to the entire purpose of lock-ups. In addition, it is contrary to the Fund's treatment of every other investor. Importantly, not a single other investor in the Fund has ever taken Jeepers's position that multiple investments were subject to a single lock-up schedule. Further, Jeepers's "single date lock-up" theory makes no sense. It would mean an investor could completely undermine the two-year lock-up by making a minimum 14 EFTA01114953 initial investment (say $2 million on January I, 2002) and then a second, far larger investment 18 months later (say $30 million on July 1, 2003), and be entitled to withdraw all $32 million six months later, thereby completely circumventing the two-year lock-up. (For example, looking at Table 2, it would mean Jeepers had successfully reduced the two- year lock-up on its Fourth Investment to a one-year lock-up.) Jeepers's Side Letter Theory suffers from all of these problems — and at least one more. That theory would mean that, by the January 2005 Side Letter, Jeepers intended to extend the lock-ups for several of its prior investments. (For example, as illustrated in Table 2, Jeepers's Side Letter Theory would extend the lock-up for Jeepers's First Investment from June 30, 2006 to March 30, 2007 — a nine-month extension.) Yet, there was no reason for Jeepers to extend any of its lock-ups, and no evidence it wanted or sought to do so. The 2005 Confidential Memorandum In May 2005, the Fund issued a new Confidential Memorandum in connection with an offering to investors. The 2005 Confidential Memorandum added a sentence that explicitly stated what the Fund's practice had been all along: the Fund treated each subscription as creating its own "Capital Account" with its own three-year lock-up schedule. Thus, the Confidential Memorandum stated: "For purposes of determining the withdrawal date (the 'Withdrawal Date') with respect to Interests, a separate Capital Account will be established for each Interest purchased (i.e. each capital contribution made)." (Exhibit Gat DEZCO_FTC0001835.) This addition of this sentence did not change at all the Fund's practices as to withdrawal rights, and no investor 15 EFTA01114954 interpreted it as making any change. It simply clarified the understanding and practice under the LPA.' The Fund's Discovery and Disclosure of Accountint Irretularilies The evidence in this matter indicates that, in the spring of 2006, various potential accounting improprieties were discovered at the Fund. According to the deposition testimony, Lawrence Cutler, the Fund's Chief Compliance Officer, and David Proshan, the Fund's General Counsel, informed Mr. Zwirn of two potential accounting irregularities by June 2006: the early payment of management fees by the Fund (after they had been earned but before they were payable), and the temporary use of Fund moneys to cover a portion of the down payment for the purchase of an airplane to be used by Mr. Zwirn for business travel. Mr. Zwirn then caused the law firm Schulte Roth & Zabel LLP ("Schulte") to undertake an investigation into what had occurred. The investigation was apparently completed in mid-September 2006. Thereafter, in early October 2006, the Fund parted ways with its Chief Financial Officer, Perry Gruss. Mr. Zwim, using a script Schulte had approved, immediately called investors (including Mr. Epstein) to inform them of Mr. Gruss's departure (though he did not tell them the specific nature of the two accounting improprieties). Very shortly thereafter, a third accounting impropriety came to light: the borrowing of money by the Fund from a related Offshore Fund. As a result, in late October 2006, Mr. Zwirn again called investors (including Mr. Epstein), this time to explain to them the specific nature of all of the accounting improprieties, again using a 4 Indeed a revised LPA went into effect shortly thereafter and contained withdrawal provisions similar to the initial LPA (except as to the change to three-year lock- ups). (Exhibit H.) 16 EFTA01114955 script Schulte had approved. The law firm of Gibson Dunn & Crutcher was retained to investigate all of these matters further. At times, Mr. Epstein has claimed that, in one or both of these calls, he demanded the immediate withdrawal of all of his money in the Fund. There is no record, however, of any kind supporting that assertion. Even assuming this were true, an oral request for withdrawal would not have been proper under the LPA (LPA §§ 9.1, 9.2), nor would all of Jeepers's money have been available for withdrawal under the Fund's lock-up scheme. As to the accounting irregularities, the SEC ultimately conducted a full investigation after the Fund self-reported the issues in 2006. At the conclusion of its investigation, the SEC elected not to charge Mr. Zwirn or any of the other Zwirn Parties with any wrongdoing, but charged Mr. Gruss with aiding and abetting violations of the Investment Advisers Act for knowingly misusing his authority to direct the improper transfer of funds. Jeepers's Defective Withdrawal Demands November 13, 2006 Withdrawal Demand On November 13, 2006, Jeepers delivered to the Fund by fax a withdrawal demand directing the Fund to "immediately liquidate an interest in the amount of EIGHTY MILLION DOLLARS of [Jeepers's] interest" in the Fund (the "November 2006 Withdrawal Demand") (Exhibit I at JE002000). But Jeepers was not entitled to withdraw $80 million from the Fund in November 2006. As shown in Table 1, the withdrawal window had already closed for Jeepers's First, Second and Third Investments, including whatever amounts had been earned on those investments. Only two of Jeepers's subscriptions were eligible for 17 EFTA01114956 redemption at that time—the Fourth and Fifth Investments, then worth approximately $45 million. Emails make clear that earlier in the very day that Jeepers made this withdrawal request, the Fund advised Mr. Epstein how the lock-ups on each of his investments worked and the manner in which each could be redeemed. (See Exhibit J; Exhibit K.) Yet, Mr. Epstein nonetheless elected to submit an invalid request for the "immediate" withdrawal of $80 million, failing to acknowledge that such funds were not eligible for redemption at that time and failing to comply with the 120-day advance notice provisions contained in the LPA. Jeepers appears to claim that what happened was that, at some point that day, Mr. Epstein orally demanded the withdrawal of all amounts from the Fund; Mr. Zwim, fearing a "run on the bank," then orally implored Mr. Epstein not to withdraw all of his investments in the Fund and suggested Mr. Epstein withdraw "half" of these amounts; and that Mr. Epstein and Mr. Zwirn then orally agreed that Jeepers could withdraw $80 million immediately. As further discussed below, there is, however, no writing documenting this supposed "agreement.s5 Nor is there any explanation for why Mr. Zwirn would agree to it when, in his view, Jeepers did not have any right to withdraw its entire investment, let alone $80 million, and, at the time, under any circumstance, Jeepers would have been required to provide at least 120 days' notice to withdraw any amounts at all. It is thus hard 5 Mr. Epstein points to the words "[a]s per our conversation" on his November 13, 2006 written withdrawal demand. The reference is ambiguous, at best. It is entirely unclear what conversation is being referred to, and there is certainly no reference to any "agreement." 18 EFTA01114957 to fathom why Mr. Zwirn would have agreed to such a substantial withdrawal on behalf of the Fund and exercised any discretion granted the General Partner to do so. In fact, Mr. Zwirn has denied any such "agreement," and no one then at the Fund has testified to being told by Mr. Zwirn of any such "agreement." Also contrary to the "oral agreement" theory is the fact that Mr. Epstein seems to have dropped the entire matter immediately thereafter. Instead, after Jeepers submitted its November 2006 Withdrawal Demand, Mr. Epstein requested the General Partner's consent to transfer all of his limited partnership interests in the Fund from FTC to Jeepers, Inc. The purpose of the transfer was apparently to provide tax benefits for Mr. Epstein's entities. The Fund worked diligently—both internally and with its outside counsel and accountants—to accommodate Mr. Epstein's request. On December 29, 2006, FTC