EFTA00731279.pdf

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK X PERRY A. GRUSS, 09 cv 6441 (DC) Plaintiff, ECF CASE v. ANSWER AND COUNTERCLAIMS OF DANIEL B. ZWIRN, D.B. ZWIRN & CO., DEFENDANTS D.B. ZWIRN & CO., L.P. L.P. and D.B. ZWIRN PARTNERS, LLC, AND D.B. ZWIRN PARTNERS, LLC Defendants. JURY TRIAL DEMANDED X Defendants D.B. Zwim & Co., L.P. (the "Company") and D.B. Zwim Partners, LLC ("DBZLLC"), by their attorneys Cooley Godward ICronish LLP, answer the Complaint and Jury Demand herein as follows: I. Aver that in 2006, defendant Daniel B. Zwim ("Zwim") was the managing member of Zwim Holdings, LLC, which was the managing member of DBZ GP, LLC, which was the general partner of the Company; aver that Zwim Holdings, LLC was also the managing member of DBZLLC; aver that the Company was the investment manager of investment funds ("Funds") and separate individual investment accounts ("Managed Accounts") (the Funds and the Managed Accounts, collectively the "Managed Funds"); aver that the Company directly or indirectly managed billions of dollars in assets, and that the Company and its affiliates at their peak employed more than two hundred employees in numerous offices throughout North America, Europe and Asia; deny knowledge or information sufficient to form a belief as to the truth or accuracy of the allegations concerning Zwim, except admit that there was a time when Zwim owned a Gulfstream IV jet used for business purposes and that there were times in the summers when Zwim rented a home in Quogue, New York; aver that other allegations in EFTA00731279 Paragraph I contain argument to which no response is required; and otherwise deny the allegations of Paragraph 1. 2. Aver that in or about the Spring of 2006, the Company learned for the first time that certain Managed Fund assets may have been used to pay non-Managed Fund expenses, which assets were repaid approximately a month and a half later, and that on certain occasions management fees may have been paid to the Company after they had accrued but before they were due; that the Company immediately brought these issues to the attention of its outside counsel Schulte Roth & Zabel LLP ("Schulte") for review; that subsequently the Company retained Gibson Dunn & Crutcher LLP ("Gibson Dunn") to conduct an independent review of these issues and self-reported these issues to the United States Securities and Exchange Commission, investors and others; and otherwise deny the allegations of Paragraph 2. 3. Deny the allegations of Paragraph 3, except admit that for a period of time, Plaintiff Perry A. Gruss ("Gruss") was a partner in the Company and a member of DBZLLC and was the Chief Financial Officer and Chief Administrative Officer of the Company. 4. Aver that Gruss was effectively terminated from the Company and DBZLLC, resigning on the verge of being fired, on or about October 4, 2006, and otherwise deny the allegations of Paragraph 4. 5. Deny the allegations of Paragraph 5. 6. Deny that defendants defamed Gruss, engaged in any wrongful conduct, breached any contract, owe any amount of money to Plaintiff, or are liable to pay damages. The remainder of Paragraph 6 consists of argument to which no response is required. 7. Admit the allegations of Paragraph 7. 2 EFTA00731280  8. Deny the allegations of Paragraph 8, except admit that Zwirn lives in New York, New York, and at times was referred to as the "Managing Partner" of the Company; and aver that Zwirn was the managing member of Zwim Holdings, LLC, which was the managing member of DBZ GP, LLC, which was the general partner of the Company. 9. Admit the allegations of Paragraph 9. 10. Admit the allegations of Paragraph 10. 11. Paragraph 11 states a legal conclusion to which no response is required. 12. Paragraph 12 states a legal conclusion to which no response is required. 13. Deny the allegations of Paragraph 13, except admit that Gruss was hired by Highbridge Capital Management, LLC to be the Chief Financial Officer of Highbridge/Zwirn Capital Management, LLC, a management company; and in 2004 Gruss continued as Chief Financial Officer when Highbridge/Zwim Capital Management, LLC changed its name to D.B. Zwim & Co., L.P. 14. Admit the allegations of Paragraph 14, and aver that throughout the time period covered by the Complaint, Gruss was primarily responsible for internal controls, financing relationships, human resources and treasury operations (including the funding process for the Managed Funds' investments and potential investments as well as the management of the Company's liquidity). 15. Admit the allegations in Paragraph 15. 16. Deny knowledge or information sufficient to form a belief as to the truth or accuracy of the allegations contained in the first sentence of Paragraph 16, except aver that Silvia Wu ("Wu") and Li Anne Law ("Law") each held the title of Fund Controller at various times and reported to and were supervised by Gruss; deny the allegations contained in the second sentence, 3 EFTA00731281 except admit that Law was a Certified Public Accountant and that Wu was a Certified Financial Analyst; and upon information and belief admit the allegations of the third sentence of Paragraph 16. 17. Deny the allegations of Paragraph 17, except admit that the Fund Controllers and the Operations department reported to Gruss and worked under his supervision; that they had responsibilities concerning accounting and record-keeping; that they worked with the Funds' Administrators, Custodians and Banks; that the Fund Controllers had contact with the Funds' external auditors, PricewaterhouseCoopers ("PWC"), and were involved in the preparation of the Funds' annual financial statements; that the Fund Controllers and their direct reports also worked with business units and the banks when preparing wire transfers for investments and expenses; and that their group was involved in reconciling cash accounts for certain Funds and Managed Accounts. 18. Deny the allegations contained in Paragraph 18, except admit that Michelle O'Hara ("O'Hara"), who reported to Gruss and worked under his supervision, worked in accounts payable and was involved in tracking expenses and paying the Company's bills; and that other employees who reported to Gruss and worked under his supervision had responsibilities concerning administrative and financial matters. 19. Deny knowledge or understanding as to the meaning of the phrase "financing the Company's assets" and otherwise deny the allegations of Paragraph 19, except admit that Zwim had conversations with Gruss about Gruss's responsibility to ensure that the investments made by the Managed Funds were properly financed, and that Gruss held himself out to be qualified to perform these functions. 4 EFTA00731282  20. Admit that Harold Kahn ("Kahn") was hired in April 2005 to serve as the Company's Chief Operating Officer; and otherwise deny the allegations of Paragraph 20, except aver that Gruss was tasked with the responsibility to properly and competently discharge his duties, including managing internal controls, financial reporting, human resources, and treasury operations (such as the funding process for both the Managed Funds' investments and potential investments and the management of the Company's liquidity), and that Kahn was to focus mainly on human resources and infrastructure activities. 21. Deny the allegations of Paragraph 21, except aver that Zwim performed extensive services on behalf of the Company and DBZLLC. 22. Deny the allegations of Paragraph 22, except admit that Zwim held weekly meetings during which various matters concerning the Managed Funds were discussed, and that members of the Company's Legal, Tax, Finance, Operations, and/or Compliance departments and others attended some or all of these meetings. 23. Deny the allegations of Paragraph 23, except admit that Zwim held meetings to discuss the Company's finances and that these meetings were at times attended by Kahn, Tim Wong, Christopher Suan, and Gruss; and admit that Zwim retained BCRS LLC for his personal finances, and that from time to time BCRS LLC received information from the Company, and deny knowledge or information sufficient to form a belief as to Zwirn's state of mind concerning personal financial planning. 24. Deny the allegations of Paragraph 24. 25. Deny the allegations of Paragraph 25, except admit that on certain occasions, payments of management and performance fees were deferred. 26. Deny the allegations of Paragraph 26. 5 EFTA00731283  27. Deny the allegations of Paragraph 27, except admit that Kahn was involved in the purchasing and financing of a Gulfstream airplane to be used for business purposes, negotiating a letter of credit intended for airplane-related expenses, and the purchase of Zwim's apartment on Central Park South; and aver that Gruss had approved improper payments related to the airplane. 28. Deny the allegations of Paragraph 28, and refer to Paragraphs 159 through 181 of DBZLLC's and the Company's Affirmative Defenses and Counterclaims for an accurate account of what occurred. 29. Aver that in or about the Spring of 2006, the Company learned for the first time that certain Managed Funds' assets may have been used to pay non-Managed Fund expenses, which assets had been repaid approximately a month and a half later, and that on certain occasions management fees may have been paid to the Company after they had accrued but before they were due; that the Company immediately brought these issues to the attention of its outside counsel Schulte for review; that the Company subsequently retained Gibson Dunn to conduct an independent review of these issues and voluntarily self-reported these issues to the United States Securities and Exchange Commission, investors and others; and otherwise deny the allegations of Paragraph 29. 30. Deny the allegations of the first sentence of Paragraph 30; deny knowledge or information sufficient to form a belief as to the truth or accuracy of the allegations contained in the second and third sentences, and aver that Gruss had approved payments related to the airplane and, as Chief Financial Officer and Chief Administrative Officer, was responsible for the early collection of management fees and for any decision not to document a loan therefore; and admit the allegations of the last sentence of Paragraph 30. 6 EFTA00731284  31. Deny knowledge or information sufficient to form a belief as to the truth or accuracy of the allegations of Paragraph 31, except aver that Gruss was responsible for the early collection of management fees and for improperly causing Managed Fund assets to be used to purchase the airplane, without the Company's knowledge or consent, and for any decision not to document a loan therefore. 32. Deny the allegations of the first sentence of Paragraph 32, except aver that Gruss was effectively terminated from the Company, resigning on the verge of being fired, on or about October 4, 2006; and otherwise deny the allegations of Paragraph 32. 33. Deny the allegations of Paragraph 33, except admit that Gruss was effectively terminated from the Company, resigning on the verge of being fired, on or about October 4, 2006, and that no others were effectively terminated at that time. 34. Deny the allegations of Paragraph 34, except aver that in October 2006, Zwim made phone calls to investors upon the Company's learning for the first time that Gruss engaged in further misconduct concerning unauthorized transfers between Funds and informed investors of the improper interfund transfers, the early collection of management fees, and the use of Managed Fund assets to pay for non-Managed Fund expenses; deny that Zwim made any false statements during those calls; and refer to the article referenced in Paragraph 34 for its content. 35. Deny the allegations of Paragraph 35, except admit that Zwim had conversations with the Company's lenders, prime brokers and counterparties, and deny that Zwim made any false statements during those conversations; and refer to the article referenced in Paragraph 35 for its content. 36. Deny the allegations of Paragraph 36, except deny knowledge or information sufficient to form a belief as to the truth or accuracy of the allegations contained in the third 7 EFTA00731285 sentence of Paragraph 36 and aver that Gruss, as Chief Financial Officer and Chief Administrative Officer, was responsible for the early collection of management fees and for any decision not to document a loan therefore. 37. Deny the allegations of Paragraph 37. 38. Deny knowledge and information sufficient to form a belief as to the truth or accuracy of the allegations of Paragraph 38, except aver that Zwim made no false statements. 39. Admit the allegations of the first and second sentences of Paragraph 39; deny that truss's signature had been forged; and otherwise deny knowledge or information sufficient to form a belief as to the truth or accuracy of the allegations regarding Gruss in the third and fourth sentences of Paragraph 39. 40. Deny the allegations of Paragraph 40 except admit that Zwim talked to investors, prime brokers, counterparties, and other people in the financial community in late 2006 and early 2007, and aver that Zwim made no false statements in those conversations. 41. Admit the allegations of Paragraph 41. 42. Refer to the March 2007 Memo and to the article referenced in Paragraph 42 for their contents; deny knowledge or information sufficient to form a belief as to the truth or accuracy of the allegation that the March 2007 Memo was circulated within the financial community; and otherwise admit the allegations of Paragraph 42. 43. Deny the allegations of Paragraph 43, and refer to the March 2007 Memo for its content. 44. Refer to the March 2007 Memo for its content; deny that the statements in the March 2007 Memo were false; deny knowledge or information sufficient to form a belief as to 8 EFTA00731286 the truth or accuracy of the allegations in the fifth and sixth sentences of Paragraph 44; admit the last sentence of Paragraph 44; and otherwise deny the allegations of Paragraph 44. 45. Refer to the March 2007 Memo for its content, and otherwise deny the allegations of Paragraph 45. 46. Deny the allegations of Paragraph 46, except admit that Shahid Ramzan raised a question regarding valuation. 47. Deny the allegations of Paragraph 47, and refer to the March 2007 Memo for its content. 48. Deny the allegations of Paragraph 48, except admit that Zwim made calls to investors, counterparties, prime brokers, and others in the financial community around the time that the March 2007 Memo was distributed to investors, and aver that Zwim made no false statements during these calls. 49. Deny knowledge or information sufficient to form a belief as to the truth or accuracy of the allegations of Paragraph 49, except aver that Offit Hall Capital was the representative of at least one investor in the Funds, and aver that Zwim made no false statements to Offit Hall Capital. 50. Deny the allegations of Paragraph 50. 51. Deny the allegations of Paragraph 51. 52. Deny the allegations of Paragraph 52. 53. Deny the allegations of Paragraph 53. 54. Deny that there were inaccuracies in the March 2007 Memo; admit that the Company did not issue any statement purporting to revise the March 2007 Memo; and otherwise deny the allegations of Paragraph 54. 9 EFTA00731287  55. Deny the allegations of Paragraph 55. 56. Deny that the Company or Zwim engaged in any wrongful conduct, and otherwise deny knowledge or information sufficient to form a belief as to the truth or accuracy of the allegations of Paragraph 56. 57. Admit the allegations of Paragraph 57, and aver that Gruss had obligations to the Company and DBZLLC in addition to those set forth in the unexecuted Supplementary Agreement among D.B. Zwim & Co., L.P., D.B. Zwim Partners, LLC and Perry Gruss (the "Supplementary Agreement"). 58. Deny the allegations of Paragraph 58, except admit that Gruss was a partner in the Company from January 1, 2006 to October 4, 2006, that the terms of the Supplementary Agreement governed the relationship between Gruss and the Company, that the Supplementary Agreement was not executed and that an unexecuted copy of the Supplementary Agreement, which is incomplete, is attached to the Complaint. 59. Deny the allegations of Paragraph 59, except admit that Gruss was a partner in the Company from January 1, 2006 to October 4, 2006, that the terms of the Supplementary Agreement governed the relationship between Gruss and the Company, and that Gruss received certain payments as a partner in the Company. 60. Admit the allegations of Paragraph 60. 61. Deny knowledge or information sufficient to form a belief as to the truth or accuracy of the allegations of Paragraph 61. 62. Deny the allegations of Paragraph 62, except that to the extent the allegations purport to describe the Supplementary Agreement, refer to the Supplementary Agreement for its content. 10 EFTA00731288  63. Aver that Gruss was effectively terminated from the Company, resigning on the verge of being fired, on or about October 4, 2006, and otherwise deny the allegations of Paragraph 63. 64. Admit that Gruss has made demands that the Company make certain payments; deny that any payments are due to him; aver that others who were paid distributions did not engage in misconduct that would preclude such distributions; and otherwise admit the allegations of Paragraph 64. FIRST CAUSE OF ACTION DEFAMATION (AGAINST ZWIRN AND THE COMPANY1 65. Repeat and reallege the responses contained in Paragraphs 1 through 64 of this Answer, as if fully set forth herein. 66. Deny the allegations of Paragraph 66. 67. Deny the allegations of Paragraph 67. 68. Deny the allegations of Paragraph 68. 69. Deny the allegations of Paragraph 69. 70. Deny the allegations of Paragraph 70. 71. Deny the allegations of Paragraph 71. 72. Deny the allegations of Paragraph 72. 73. Deny knowledge or information sufficient to form a belief as to the truth or accuracy of the allegations of Paragraph 73. 74. Deny the allegations of Paragraph 74. 11 EFTA00731289  SECOND CAUSE OF ACTION DEFAMATION (AGAINST ZWIRN AND THE COMPANY) 75. Repeat and reallege the responses contained in Paragraphs 1 through 74 of this Answer as if fully set forth herein. 76. Deny the allegations of Paragraph 76. 77. Deny the allegations of Paragraph 77. 78. Deny the allegations of Paragraph 78. 79. Deny the allegations of Paragraph 79. 80. Deny the allegations of Paragraph80. 81. Deny the allegations of Paragraph 81. 82. Deny the allegations of Paragraph 82. 83. Deny knowledge or information sufficient to form a belief as to the truth or accuracy of the allegations of Paragraph 83. 84. Deny the allegations of Paragraph 84. THIRD CAUSE OF ACTION BREACH OF CONTRACT (AGAINST THE COMPANY AND D.B. ZWIRN PARTNERS, LLC) 85. Repeat and re-allege the responses contained in Paragraphs 1 through 84 of this Answer as if fully set forth herein. 86. Admit the allegations of Paragraph 86. 87. Deny the allegations of Paragraph 87. 88. Deny the allegations of Paragraph 88, except admit that Gruss was effectively terminated, resigning on the verge of being fired. 89. Admit that no payment was made to Gruss after he separated from the Company, and otherwise deny the allegations of Paragraph 89. 12 EFTA00731290  90. Deny the allegations of Paragraph 90. FOURTH CAUSE OF ACTION PROMISSORY ESTOPPEL (AGAINST THE COMPANY AND D.B. ZWIRN PARTNERS, LLCI 91. Repeat and reallege the response contained in Paragraphs 1 through 90 of this Answer as if fully set forth herein. 92. Deny the allegations of Paragraph 92. 93. Refer to the Supplementary Agreement for its contents, and otherwise deny the allegations of Paragraph 93, and aver that any right to compensation was subject, among other things, to all the terms and conditions of the Supplementary Agreement. 94. Deny knowledge or information sufficient to form a belief as to the truth of the allegations of Paragraph 94. 95. Deny the allegations of Paragraph 95. 96. Deny the allegations of Paragraph 96. 97. Deny the allegations of Paragraph 97. 98. Deny the allegations of Paragraph 98. AFFIRMATIVE DEFENSES AND COUNTERCLAIMS INTRODUCTION 99. In 2002, Highbridge Capital Management, LLC and Zwirn formed Highbridge/Zwim Capital Management, LLC to be a hedge fund management company with an innovative strategy: it would seek out a large number of small, idiosyncratic investments that traditional financial institutions had ignored and maximize risk-adjusted returns for the investors in its funds by, among other things, using a variety of funding mechanisms to finance those 13 EFTA00731291 investments efficiently. In 2004, Highbridge/Zwim Capital Management, LLC was renamed D.B. Zwim & Co., L.P. (the "Company"). 100. The investment side of the Company, managed by Zwim, flourished, as the Company generated strong returns for the funds' investors. As a result, the Company enjoyed significant growth, and the Company's assets under management increased from $900 million in 2004 to over $5 billion in September 2006 through investment returns as well as additional capital contributions from investors. 101. Throughout the relevant period, Gruss was the Chief Financial Officer of the Company, who managed the Company's finances and back office. Gruss purported to be and held himself out as competent to do the tasks required of him, which included, among other things, making arrangements for the proper financing of the funds' investments and the management of the Company's liquidity. Gruss did not disclose that in fact he had difficulties performing his duties, or that he engaged in improper conduct. 102. As the Company grew, Zwim took appropriate steps to strengthen its infrastructure. Among other things, Zwim caused the Company to hire a Company Controller in December 2005 notwithstanding resistance on the part of Gruss who claimed that it was unnecessary. Within months of being hired, the Company Controller discovered several instances of Gruss's improper conduct: money from funds and managed accounts had been improperly used to finance the purchase of a private airplane and on a number of occasions management fees had been paid to the Company early. The Company brought these issues to the attention of its outside counsel, Schulte Roth & Zabel LLP ("Schulte"), for review. Schulte investigated these issues and concluded that Gruss had been responsible. Shortly thereafter, Gruss was effectively terminated from the Company, resigning on the verge of being fired. 14 EFTA00731292  103. After Gruss left the firm, the Company learned of additional practices approved by Gruss involving improper transfers of money between the funds. The Company retained Gibson Dunn & Crutcher LLP ("Gibson Dunn") to conduct a thorough internal investigation of all potential accounting issues. Gibson Dunn retained Deloitte & Touche as a special accountant for its investigation. The Company made appropriate disclosures and self-reported these issues to the United States Securities and Exchange Commission ("SEC"), which began its own investigation into the conduct. 104. During the next five months, Gibson Dunn and the Company uncovered additional instances of Gruss's misconduct. Gibson Dunn reviewed over a million pages of Company documents and conducted more than forty interview sessions with twenty-three people. Gibson Dunn concluded that Gruss had directed, approved, or been aware of a number of accounting improprieties relating to transfers of money between funds, use of investor money to finance the airplane purchase, alteration of financial reports, backdating of investment assignments between the funds, early payment of management fees, and use of investor money to fund capital calls for personal investments held by Zwirn and two other individuals affiliated with the Company. Gibson Dunn found no credible evidence that Zwim was aware of or participated in any of the financial or accounting improprieties. 105. The Company kept the SEC apprised of the progress of Gibson Dunn's work, and the results of the Gibson Dunn investigation were provided to the SEC as part of the Company's cooperation with the SEC's investigation. 106. The Company took various steps to remediate Gruss's misconduct and make investors whole. 15 EFTA00731293  107. Through his misconduct, Gruss violated his duties as Chief Financial Officer, Chief Administrative Officer, and partner in the Company and as a member of DBZLLC, and caused the Company to spend over $43 million on investigations and remediation. 108. Gruss's misconduct and the resulting internal and SEC investigations cast a shadow over the Company, reduced investor confidence, and materially delayed completion of the funds' 2006 audits. In turn, investors submitted redemptions in excess of $2 billion, and the Company was forced to put the funds into an orderly dissolution. PARTIES 109. Defendant and Counterclaim-Plaintiff the Company is a Delaware limited partnership with its principal place of business in New York, New York. At all relevant times hereto, the general partner of the Company was DBZ GP, LLC, an entity controlled by Zwim. The Company was an investment management firm that managed the investments of certain investment funds and managed account 110. Defendant and Counterclaim-Plaintiff DBZLLC is a Delaware limited liability company with its principal place of business in New York, New York. At all times relevant hereto, the managing member of DBZLLC was Zwirn Holdings, LLC, an entity controlled by Zwirn. DBZLLC was the general partner of several of the investment funds managed by the Company. 111. Plaintiff and Counterclaim-Defendant Gruss is a former Chief Financial Officer; Chief Administrative Officer and partner in the Company, and a former member of DBZLLC. Upon information and belief, Gruss is a resident of New Jersey. 16 EFTA00731294  BACKGROUND 112. Highbridge Capital Management, LLC and Zwim formed Highbridge/Zwim Capital Management, LLC, the predecessor to the Company, in 2002. In 2004, Highbridge/Zwim Capital Management, LLC was renamed D.B. Zwim & Co., L.P. 113. The Company primarily made investments through various funds that it managed: D.B. Zwim Special Opportunities Fund LP (the "Onshore Fund"), D.B. Zwim Special Opportunities Fund Ltd. (the "Offshore Fund"), D.B. Zwim Special Opportunities Fund II Ltd. (the "LTD II Fund"), D.B. Zwim Special Opportunities Fund (TE) LP (the "TE Fund"), and D.B. Zwim Asia/Pacific Special Opportunities Fund L.P. (collectively, the "Funds"). The Company also made investments for separate individual investment accounts (the "Managed Accounts"), including HCM/Z Special Opportunities LLC ("HCM/Z"), an account managed for the benefit of Highbridge Capital Corporation. The Funds and the Managed Accounts are referred to collectively as the "Managed Funds." 114. The Company's investment strategy was unlike most hedge fund strategies in two key respects: (a) it employed a variety of investment strategies across a broad range of investment products, geographical areas, and industries; and (b) it used numerous types of funding mechanisms to finance those investments efficiently. 115. To identify investment opportunities, the Company employed about twenty-five managing directors with specializations among different products, geographic areas, and industries. The Company also partnered with over one hundred joint ventures throughout the world that helped to identify assets for investment. At its peak, the Company had 16 offices in 12 countries, with over 260 employees. The Company made investments for the Managed Funds in over twenty-five countries. 17 EFTA00731295  116. Unlike most hedge fund managers, which fund investments primarily through investor cash and on occasion leverage from prime brokerage firms, the Company arranged financing for the Managed Funds' investments through a large variety of sources. These funding mechanisms included: cash on the Managed Funds' balance sheets; interest received from existing corporate and real estate loans; remittances (collections from investments); repayments recapitalizations, or sales of assets (from when the Managed Funds exited from an investment); asset-specific non-recourse financing; multi-asset non-recourse financing (such as through collateralized loan obligation structures); recourse financing at the Fund level; prime broker leverage; repo financing; inflows of money from new or existing investors; and stand-alone asset platforms with their own funding lines. 117. The Company's business strategy maximized returns for investors in part by making efficient use of numerous funding mechanisms to finance attractive risk-adjusted investments that it had identified. 118. The Company sought to provide the Onshore Fund and the Offshore Fund with equal access to the Company's investments for which they were eligible, and attempted to generate a similar return per unit of risk for the two funds. 119. For mostly tax reasons, however, the Onshore Fund was able to participate in more investments than the Offshore Fund. In addition, the Onshore Fund generally used more leverage than the Offshore Fund. For these reasons, the Onshore Fund tended to have a higher rate of return than the Offshore Fund. 120. The Offshore Fund, however, tended to have more cash than the Onshore Fund es because more money came in from offshore investors relative to the investment opportuniti available to the Offshore Fund. 18 EFTA00731296  121. At times, the Onshore Fund and the Offshore Fund were constrained from making investments due to a lack of cash, though the Offshore Fund tended to have fewer cash constraints. 122. The Company had several ways to address any funding constraints, including (a) obtaining additional funding through the various possible funding mechanisms (for example, by gaining more leverage from a prime broker, finding additional non-recourse financing for an individual asset or a group of assets, or refinancing an individual act or a group of assets); (b) obtaining funds for new investments by selling existing assets; (c) postponing investments; (d) funding investments at a lower amount than originally planned; (e) syndicating investments (sharing them with other investors); or (f) deciding not to make certain investments. THE ROLES OF ZWIRN AND GRUSS IN THE COMPANY A. Zwim's Role 123. Zwim's primary responsibility was to determine what investments, based upon risk-adjusted return, the Managed Funds should make, subject to the approval of others who considered factors not related to the risk-adjusted return. 124. Zwim had weekly "pipeline" meetings with the officers, staff, and asset managers from various investment teams, during which he reviewed the teams' portfolios and discussed potential future investments. Zwim participated in these meetings from wherever he was in the world, and with people located all over the world. In connection with these meetings, Zwim reviewed weekly treasury reports that listed illiquid investments that the Managed Funds had funded during the month, and illiquid investments that the Managed Funds might fund in the future. 125. Zwim also reviewed a number of monthly reports relating to the Managed Funds' investments and the Company's finances. 19 EFTA00731297  126. Zwim's work for the Company required him to spend about one week per month traveling all over the world, in addition to substantial domestic travel. 127. In addition to the foregoing, Zwim chaired the management committee of the Company and found investors for the Funds. Zwim left the day-to-day management of the Company to others who were responsible for various aspects of the Company's operations. B. Gruss's Role 128. In July 2002, Gruss was hired by Highbridge Capital Management, LLC as Chief Financial Officer of Highbridge/Zwim Capital Management, LLC, the predecessor of the Company. 129. Gruss was the Company's Chief Financial Officer until on or about October 4, 2006. He was also the Company's Chief Administrative Officer from April 2005 to on or about October 4, 2006, and was a partner in the Company and a member of DBZLLC from January 2006 until on or about October 4, 2006. 130. Gruss was responsible for managing the Company's finance, accounting, and treasury operations. He supervised the Company's "back office." 131. One of Gruss's primary responsibilities was to manage the funding process, described in Paragraph 116, to ensure that the Managed Funds' investments were properly financed. This responsibility included: (a) determining the logistics of how specific investments would be funded; (b) determining how investments would be allocated among the Managed Funds; and (c) identifying new sources from which to finance investments (for example, by arranging non-recourse funding lines). It was also Grass's responsibility to inform Zwim of funding limitations on all of the investments that the Company had identified as otherwise satisfying the Company's risk-adjusted return criteria, in which case it was necessary to explore the options identified in Paragraph 122. 20 EFTA00731298  132. The Company relied on Gruss to manage properly and in good faith the funding process for investments. 133. As Chief Financial Officer of the Company, Gruss supervised a number of employees. Silvia Wu and Li Anne Law, who were financial controllers for the Funds, reported to Gruss and worked directly under his supervision. THE COMPANY'S GROWTH 134. The Company enjoyed significant growth between 2004 and September 2006. During that period, the Company's assets under management increased from $900 million to over $5 billion. 135. Throughout this period, Gruss continued to hold himself out as competent to discharge his duties and to manage properly and in good faith the funding process for investments and the Company's liquidity. 136. In truth and in fact, unbeknownst to the Company, Gruss took shortcuts to arrange funding for investments and for the Company's expenses. 137. During this period, Gruss engaged in numerous instances of serious misconduct that covered a number of different areas, as described below. SPECIFIC INSTANCES OF GRUSS'S MISCONDUCT A. Gruss directed improper transfers of money between the Managed Funds. 138. Gruss directed and approved numerous improper transfers of money between the Managed Funds (the "Interfund Transfers"). 139. The Interfund Transfers were not properly accounted for or documented as loans between the Managed Funds, and prior to their discovery no interest was paid in connection with the Interfund Transfers. 21 EFTA00731299  140. The Interfund Transfers had the effect of diminishing the returns of the investors in one Fund, while at the same time increasing the returns of investors in another Fund. 141. Gruss began approving the Interfund Transfers no later than the first quarter of 2005. 142. Gruss has admitted that the Interfund Transfers were improper, and has admitted that he approved Interfund Transfers. 143. Grass knew at the time that the Interfund Transfers were indeed improper, and Gruss concealed the practice from Zwim. 144. Gruss has admitted that he had no recollection of speaking with Zwim or other senior managers about the Interfund Transfers. Gruss has further admitted that he had been hesitant to give Zwim bad news on this issue and that he did not want senior management at the Company to know about the Interfund Transfers. 145. The Interfund Transfers were not a secret among accounting personnel who reported to Gruss. 146. Gruss's concealment of the issue from senior management was not a secret to accounting personnel. In an April 18, 2005 email—after Gruss had approved yet another improper transfer—Li Anne Law suggested that Gruss "get all the partners/top mgmt in the loop (i.e. REALITY) and then have them make a joint decision." 147. Law's predecessor, Silvia Wu, indicated to Law that she resigned from the Company in June 2005 because she was uncomfortable with the Interfund Transfer practice. 148. When Law left the Company for the same reason in June 2006, she advised her successor, Alisa Butchkowski (who also reported to Gruss), not to allow herself to get drawn into the practice of making Interfund Transfers. 22 EFTA00731300  149. At least four of the Interfund Transfers were made such that the assets of one Fund were used to repay loan obligations of another Fund under a 75-day revolving credit facility (the "Swingline Facility"). 150. On January 9, 2006, truss approved such a transfer. 151. On that date, Gruss typed "Ok pag" in response to wire transfer instructions requesting this Interfund Transfer. The subject line of the email referred to repayment of the Swingline Facility, and when Jason Pecora, a Company employee who reported to Gruss, asked in an email what the transfer was for, Gruss specifically stated that it was for "[rjepayment of 75day swingline revolver." 152. On March 3, 2006, Gruss again approved another such Interfund Transfer by which the assets of one Fund were used to fulfill a repayment obligation of another Fund under the Swingline Facility. 153. The wire instructions Gruss approved specifically requested a transfer from "the Ltd # 721600 to # 721599;" that is, a transfer from the account of one Fund to the account of another Fund. The subject of the email containing truss's approval referred to repayment of the Swingline Facility. 154. On May 26, 2006, Gruss again approved, via email, an Interfund Transfer by which the assets of one Fund were used to fulfill the repayment obligation of another Fund under the Swingline Facility. 155. Numerous additional Interfund Transfers were made so that the assets of one Fund were used for the purpose of funding investments of another Fund. 23 EFTA00731301  156. For example, on April 18, 2005, Gruss approved such a transfer. In an email exchange that day, Li Anne Law specifically asked Gruss whether the Company should fund an investment of one Fund with the assets of another Fund. Gruss responded, "Yes, pls." 157. On May 5, 2005, Gruss again approved a transfer through which the assets of one Fund were used for the purpose of funding investments of another Fund. An email from that date shows that Gruss wrote "Ok pag" in response to Law's instructions to "transfer [funds] from the Ltd acct # 721600 to the LP acct # 721599." 158. Zwim did not know of, did not participate in, and did not authorize any improper Interfund Transfers. B. Gruss was aware of and approved the use of investor money to fund the purchase of an airplane. 159. In 2005, it was determined that, given Zwim's extensive business travel, it made sense to purchase a private airplane. 160. Harold Kahn, the Company's Chief Operating Officer, was put in charge of the airplane purchase. 161. Kahn and Gruss discussed getting a revolving credit line in the Company to fund the purchase of the airplane and pay for related expenses. 162. Merrill Lynch offered non-recourse financing for 90 percent of the transaction but required a $1.9 million letter of credit. 163. Citibank agreed to provide the letter of credit as part of a $10 million revolving line of credit for the Company's operations. Gruss and Kahn expected the Citibank revolver, including the letter of credit to help finance the purchase of the plane, to be in place by September 30, 2005. 24 EFTA00731302  164. Up until September 27, 2005, all payments related to the airplane had been advanced by the Company. 165. Beginning on September 27, 2005, there was a series of four wire transfers related to airplane expenses that were made from either the Onshore Fund or the HCM/Z managed account. 166. On September 27, 2005, Kahn emailed Li Anne Law, copying Gruss: "LL -- can you pls arrange to have the $1.9MM wired to Citi asap for the issuance of the LC. This will only be a short-term deposit in that once the Citi revolver is in place (should be w/in a week) we will credit the amount against the line." 167. On September 28, 2005, Gruss authorized the $1.9 million payment from the HCM/Z account to Citibank. 168. Gruss knew that this transfer was to pay for expenses related to the airplane purchase. 169. On September 27, 2005, Kahn emailed Law, copying Gruss, requesting a wire transfer to Merrill Lynch of an $80,250 facility fee. 170. The next day, Gruss signed a wire transfer form authorizing $80,250 to be wired from the HCM/Z account at Bear Steams. 171. Gruss knew that this transfer was to pay for expenses related to the airplane purchase. 172. In an email exchange on September 29, 2005, Kahn wrote to Law, copying Gruss, asking her to wire $1,681,350 to Insured Aircraft Title Insurance: "we are trying to do the close late-moming/mid-day." 25 EFTA00731303  173. That same day, $1,681,350 was transferred from the Onshore Fund with truss's knowledge and approval. 174. Gruss knew that this transfer was to pay for expenses related to the airplane purchase. 175. On September 30, 2005, Kahn emailed Law and Michelle O'Hara (who worked with Law), copying Gruss, asking Law to wire $112,575 in broker fees relating to the airplane purchase. 176. That same day, $112,575 was transferred from the Onshore Fund with Gruss's knowledge and approval. 177. Gruss knew that this transfer was to pay for expenses related to the airplane purchase. 178. In an October 25, 2005 email, O'Hara wrote to Gruss seeking approval for payment in connection with the airplane purchase: "Please approve - $163,267.50 for DZ airplane expense. Fyi, I am now out completely of cash. ... I have about 2MM of invoices holding on my desk waiting to be paid." Gruss replied, "ok pag. Pls move $ from Ltd." 179. The Citibank revolver was finally in place on November 4, 2005, and $8.1 million was credited to the Company's account. 180. When Gruss subsequently directed the return of the funds to the Onshore Fund and the HCM/Z managed account, he did not ensure that those repayments included interest, and the initial transfers were never documented as loans from the Managed Funds to the Company. 181. Zwim did not know of, did not participate in, and did not authorize the use of money from the Onshore Fund and the HCM/Z managed account for the plane purchase. C. Gruss directed his subordinates to alter financial reports. 26 EFTA00731304  182. In March 2006, Gruss became concerned about the difference in the rate of return between the Onshore Fund and the Offs