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Securities and Exchange Commission v. Gruss

United States District Court, S.D. New York

March 28, 2017

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
PERRY A. GRUSS, Defendant.

          Attorneys for Plaintiff SECURITIES AND EXCHANGE COMMISSION By: Todd D. Brody, Esq. Peter Altenbach III, Esq.

          Attorneys for Defendant DORSEY & WHITNEY LLP By: Nathaniel H. Ackerman, Esq. Thomas 0. Gorman, Esq.

          OPINION

          ROBERT W. SWEET, U.S.D.J.

         Table of Contents

         Prior Proceedings .............................................. 2

         The Facts......................................................3

         The Defendant and the Funds Involved..........................3

         The Operating Documents......................................11

         The U.S. Tax Exemption for the Offshore Fund.................23

         The Offshore Fund Loans to the Onshore Fund..................33

         The Offshore Fund Loans to Pay Revolver Obligations..........91

         The Payment by the Offshore Fund of Onshore Fund Management Fees........................................................105

         The Payment by the Offshore Fund for the Purchase of an Airplane....................................................111

         Materiality.................................................134

         CONCLUSIONS OF LAW...........................................157

         The Applicable Standards....................................157

         The SEC's Motion for Summary Judgment that Section 206(2) Was Violated is Granted.........................................160

         Section 206(2) Is Applicable Because DBZCO Was an Investment Advisor under Section 206(2) of the Advisers Act Owing Fiduciary Duties to Its Investors and Used Instrumentalities of Interstate Commerce.........................................160

         DBZCO Violated Its Fiduciary Duty by Transferring Funds from the Offshore Funds to Meet the Onshore Fund's Obligations... 161

         The Offshore Fund Was Prohibited from Making Investments in or Loaning Money to U.S. Companies (Including the Onshore Fund) .. 162

         The Offshore Fund Was Prohibited from Making Payments to the Onshore Fund (or Directly to Its Creditors) for Its Revolving Credit Facility.............................................167

         The Breaches of the Fiduciary Duty by Making Loans from the Offshore Fund to the Onshore Fund for Investments and the Revolver Were Material......................................170

         Gruss acted with a Negligent Intent When He Authorized the Offshore Fund Transfers to Fund Onshore Investments and the Revolver....................................................181

         Gruss Aided and Abetted DBZCO's Violation of Section 206(2) of the Advisers Act............................................184

         The Advance Payment of Management Fees Were Appropriate Inter-Company Transfers...........................................186

         The Motion for an Injunction Based Upon the Payment by The Offshore Fund to Purchase an Airplane is Denied as Presenting a Contested Issue of Fact.....................................186

         The Motion for the Imposition of a Civil Penalty is Granted. 191

         Conclusion...................................................195

         The plaintiff the Securities and Exchange Commission ("SEC" or the "Plaintiff") has moved pursuant to Rule 56(a) F. R. Civ. P. for summary judgment enjoining the defendant Perry A. Gruss ("Gruss" or the "Defendant") from violating Sections 206(1) and (2) of the Investment Advisers Act of 1940 (the "Advisers Act") and for disgorgement and civil penalties. Gruss has also moved for summary judgment pursuant to Rule 56(a) to dismiss the SEC complaint against him. Upon the facts and conclusions set forth below, both motions are granted in part and denied in part.

         The principal dispute between the parties arises from the interpretation of the documents controlling the operations of the funds involved relative to the actions taken by Gruss. Central to this controversy is the bar against engaging in a U.S. trade or business under which the Offshore Fund was exempted from U.S. taxes and whether or not that bar was breached.

         The SEC has advanced four grounds on which it urges the issuance of an injunction based on violations of Sections 206(1) and (2) of the Advisers Act by D.B. Zwirn & Co. ("DBZCO"), aided and abetted by Gruss. The first is based upon the sixty-six interfund transfers from the Offshore Fund to the Onshore Fund to fund Onshore investment between May 2004 and July 2006, fourteen of which were real estate investments. The second ground relates to the four payments of the Onshore revolver credit between June 2005 and May 2006, and the third and fourth grounds arise out of the payment by the Offshore Fund of DBZCO management fees and to purchase an airplane for DBZCO's managing partner. Because the payments for funding the Onshore Fund investment and repaying the Onshore revolving credit facility violate the Advisers Act, the SEC motion for injunctive relief and penalties will be granted, and the Gruss motion for summary judgment denied. Because the intercompany payment of management fees does not violate the Advisers Act, that portion of the SEC motion is denied and that portion of Gruss' summary judgment is granted. Because there is a factual issue as to Gruss' knowledge with respect to the payments to purchase the airplane, the SEC summary judgment motion on that basis is denied.

         Prior Proceedings

         The SEC filed this action on April 8, 2011 alleging that Gruss, the Chief Financial Officer of DBZCO, a hedge fund aided and abetted violations of the Advisers Act by using funds of the Offshore Fund to fund investments by the Onshore Fund and to pay Onshore Fund loan commitments as well as a revolving 75-day credit facility and management fees and payments to purchase an airplane.

         Discovery proceeded, the motion of Gruss to dismiss the complaint was denied on May 9, 2012 (859 F.Supp.2d 653 (S.D.N.Y. 2012), and the instant motions were heard and marked fully submitted on October 6, 2016.

         The Facts

         The facts in these fact-rich motions are set forth in the parties' respective Rule 56.1 Statements of Material Fact and are not in dispute except as noted below.

         The Defendant and the Funds Involved

         1. DBZCO was an investment adviser to and manager of certain hedge funds and managed accounts.

         2. DBZCO no longer performs any business functions.

         3. At different times, DBZCO had offices in numerous locations, including New York, London, Hong Kong, Houston, Milan, Frankfurt, Tokyo, Seoul, Beijing, Singapore, Melbourne, and Luxembourg. DBZCO also had offices in Connecticut, Mexico, New Delhi, Warsaw, Tel Aviv, and Taipei.

         4. Daniel B. Zwirn ("Zwirn") was the founder and managing partner of DBZCO.

         5. The Chief Financial Officer ("CFO") and Chief Administrative Officer for DBZCO was Gruss. In January 2006, Gruss became a partner of DBZCO and at various times held the title of Senior Vice President Managing Director. Prior to becoming the CFO of DBZCO, Gruss had never served as a CFO, although he did work in the finance departments at Nomura Holdings America, where he prepared profit and loss statements, and at American International Group.

         6. In 2004, Gruss' compensation at DBZCO was either $800, 000 or $1.2 million. In 2005, his compensation at DBZCO was $1.8 million. In 2006, his compensation at DBZCO was $1, 657, 718.00.

         7. Gruss' bonus comprised the vast majority of his compensation. In 2005, his base salary from DBZCO was $160, 000. In 2006, in connection with his promotion to partner, Gruss' base salary was increased to $225, 000.

         8. In 2007, Gruss was hired as a "marketer" for Babcock & Brown, LP, a global merchant/investment bank. As of the date of his deposition in this case, Gruss was still employed by Babcock & Brown.

         Gruss admitted the statement in part and denied it in part, noting Babcock & Brown ("B&B") did hire Gruss in 2007 as a marketer, but he has never worked in that role at B&B, that B&B has been in liquidation after being delisted on the Australian Stock Exchange in June 2009, that since that time his responsibility at B&B has been to assist in the company's liquidation, and that he has not worked for an investment advisor since he left DBZCO in September-October 2006 and at the present time has no plans to work for an investment advisor.

         9. During the time period of 2002 through 2009, DBZCO managed several "hedge funds, " including the D.B. Zwirn Special Opportunities Fund, L.P. ("the Onshore Fund") and the D.B. Zwirn Special Opportunities Fund, Ltd. (the "Offshore Fund"), and added a third fund in March 2003 and a fourth fund in May 2005, in addition to several separately managed private accounts.

         Price Waterhouse Coopers ("PWC") audited each of these funds annually.

         10. The Onshore Fund was a Delaware limited partnership founded in April 2002 to operate as a private investment fund. The Onshore Fund commenced investment operations in May 2002.

         The Offshore Fund was a Cayman Island exempted company incorporated on April 12, 2002 to operate as a private investment fund. The Offshore Fund commenced investment operations in May 2002.

         11. While there was some overlap in the investors in the Onshore and Offshore Funds, the majority of investors in the two funds were different. Gruss knew that the investors in the Onshore Fund were separate and distinct from the investors in the Offshore Fund. The Offshore Fund was open to both non-U.S. investors and permitted U.S. investors, and both groups of investors were required to be accredited investors and qualified purchasers. A significant proportion of the investors in both funds were themselves registered investment advisors. The SEC has noted that Gruss' only citation for this statement is the report of Dr. Richard Bergin ("Dr. Bergin"), his expert, and that Dr. Bergin cannot testify about purely factual information where the expert has no first-hand knowledge and because Gruss has not provided an admissible source for this assertion, the SEC has not responded.

         The SEC has cited listings of investors for the Onshore Fund and the Offshore Fund for the period of January 1, 2006 to March 4, 2008. The relevant period of the inter-fund transfers alleged in the complaint and claimed on the SEC s summary judgment motion is March 2004 through July 2006. The evidence as to the relative proportion of the same investors in both funds has not been established.

         12. The Offshore Fund was an exempted company under Cayman Islands law; as such, it had received an undertaking as to tax concessions that provided that, for a period of 20 years from the date of issue of the undertaking, no law thereafter enacted in the Cayman Islands imposing any taxes or duty to be levied on income or capital assets, gains or appreciation would apply to any income or property of the Offshore Fund. Gruss asserts that the next paragraph of the exhibit cited states:

"There can be no assurance that the ... Cayman Islands tax laws will not be changed adversely with respect to the Fund ... or .that the Funds income tax status will not be successfully challenged."

         13. The 2002, 2003 and 2005 Offshore Fund Offering Memoranda disclosed that "these securities [shares in the Offshore Fund] are suitable for sophisticated investors" who "fully understand and are willing to assume the risks involved in the portfolio's investment program." Ex. L at DBZ 0009680; Ex. M at DBZ 0009823; Ex. 0 at DBZ 0009747.

         The Offering Memoranda further disclosed that "Shares will only be offered to non-U.S. or permitted U.S. investors" who had to be "'accredited investors, ' as defined in Rule 501(a) under Regulation D of the United States Security Act of 1933, " as well as "'qualified purchasers', as defined by Section 2(a) (51) of the United States Investment Company Act of 1940." Ex. L at p. 12 (DBZ 009688); Ex. M at p. 15 (DBZ 0009841); Ex. 0 at p. 6 (DBZ 0009755).

         The investors of the fund 1) were a bank, insurance company or investment company or had investments of at least $5 million, or had a net worth of at least $1 million (as an accredited investor) and 2) owned at least $5 million in investments (as a qualified purchaser).

         14. The Offshore Fund had Assets under Management ("AUM") of (1) $877, 000, 000; (2) $1, 500, 000, 000; and (3) $2, 400, 000, 000 respectively as of December 31, 2004, December 31, 2005, and December 31, 2006. At the end of February 2006, the Offshore Fund's AUM were $1, 500, 000, 000. The Onshore Fund and Offshore Fund experienced substantial and rapid growth in AUM from inception in May of 2002 to the end of 2006: the Onshore Fund's AUM was approximately $525 million on December 31, 2004.

         15. The DBZCO investment approach yielded for the investors of the Offshore Fund and the Onshore Fund "superior annual returns relative to S&P 500 or other multi-strategy hedge funds" from 2004 to 2006. The SEC denies this statement as based upon the expert report of Dr. Bergin about purely factual information where the expert has no first-hand knowledge. The SEC further notes that the Bergin report provides, in 2006, the Offshore Fund was significantly outperformed by both the CS/Tremont Multi-Strategy sub-index and by the S&P 500. The SEC also has disputed use of the term "superior", which is not defined, noting that when over the three year period identified, the annual difference between the performance of the Offshore Fund and the CS/Tremont Multi-Strategy sub-index was 34 basis points and the charts provided by Dr. Bergin demonstrate that in sixteen of the twenty-four months presented for the period 2004 to 2005, the S&P 500 and/or the CS/Tremont Multi-Strategy sub-index outperformed the Offshore Fund. In fact the SEC asserts that over the twenty-nine month period (January 2004 - May 2006) analyzed in Dr. Bergin's report, a $100 January 2004 investment in the Offshore Fund would have grown to $125.11 by May 2006, and the same $100 investment in the C/S Tremont Multi-Strategy sub-index growing to $124.03 and in the S&P 500 to $122.81. Finally, the SEC has noted the Bergin report does not provide any explanation why it would be appropriate to compare the performance of the Onshore and Offshore Funds to the S&P 500 or to the CS/Tremont Multi-Strategy sub-index (as opposed to other funds whose investment strategy was actually similar to that of the Onshore and Offshore Funds).

         16. Zwirn made all investment decisions for the funds managed by DBZCO. Gruss was not authorized to make any investment decisions. Zwirn has acknowledged that Gruss and later the DBZCO Chief Operating Officer, Harold Kahn ("Kahn"), managed the non-investment portion of the firm.

         The Operating Documents

         17. The Offshore Fund and Onshore Fund were governed by their operating documents. Those include the Offshore Fund Shareholder Agreement and Onshore Fund Limited Partnership Agreement (collectively "formation documents"), the Offering Memoranda for each fund furnished to each investor (Exhs. K, L, M, 0, T, U), and the Management Agreement executed by each fund with DBZCO. (Exhs. V, W, MM, NN, SS) (the "Operating Documents"). Collectively the Operating Documents created essentially the same governance structure, although there were certain differences.

         The SEC has noted that "the Offering Memoranda explained that the Offshore Fund was subject to regulation and supervision by the Cayman Island authorities and that it was obligated to adhere to Cayman Islands law" (SEC v. Gruss, 859 F.Supp.2d at 657) and that DBZCO, the investment advisor for both Offshore and Onshore Funds, was subject to the federal securities laws even though it was unregistered. See, e.g., SEC v. Rabinovich & Assocs., Onshore Fund, 07 Civ. 104547, 2008 U.S. Dist. LEXIS 93595 (S.D.N.Y. Nov. 18, 2008).

         18. The Onshore Fund Limited Partnership Agreement vested broad powers in the General Partner, DBZCO:

management, operation and control . . .[vests] exclusively in the General Partner, which shall have the Power by itself on behalf and in the name of the Partnership to carry out any and all of the purposes of the Partnership and to perform all acts and enter into and perform all contracts and other undertakings that it may deem necessary or advisable or incidental. Ex. TT at p. 5, §3.1.

         The SEC has noted that the agreement does not use the term "broad powers."

         19. Similarly, the Offshore Fund Memorandum of Association specifies the reasons for the formation of the term - "investments":

The objects for which the company is established are unrestricted and shall include, but without limitation . . . (e) to undertake and carry on and execute all kinds of investment, financial, commercial, mercantile trading and other operations . . . (iii) To purchase or otherwise acquire, to sell, exchange, surrender, lease, mortgage, charge, convert, turn to account dispose of and deal with real and personal property and rights of all kinds . . . (v) To stand surety for or to guarantee, support or secure the performance of all and any of the obligations of any person, firm or company whether or not related or affiliated to the Company in any manner.

         Ex. S at pp. 1-3 (MAXAM00000929-931). To implement these goals the Offshore Fund could "advance, deposit, or lend money, securities and/or property to or with such [other] persons, and on such terms as may seem expedient." Ex. S at p. 2 (MAXAM00000930), ¶(d).

         The SEC has noted the memorandum does not define the term "investments" and, as Gruss concedes in ¶39 of his 56.1 Statement, the Offshore Fund "was prohibited" from participating in certain investments because of tax considerations.

         20. The Offering Memoranda or Private Placement Memoranda for each fund was utilized to solicit investors to purchase the securities of either the Onshore Fund or the Offshore Fund under "Section 4(2) of the Securities Act of 1933", Regulation D, which provided an exemption from the registration provisions of Section 5 of the Securities Act of 1933. See e.g. Ex. K at DBZ 0009448. There were multiple Offering Memoranda, but each was essentially similar including those for the Onshore Fund and Offshore Fund. Each defined the type of investments the fund would make on behalf of its shareholders in broad, general terms which gave the investment adviser or Manager the broadest possible discretion.

         The SEC did not deny the first sentence in this statement but noted the lack of citation for the remainder of the statement, and further noted that the Offshore Fund "was prohibited" from participating in certain investments because of tax considerations, that the Offshore Fund was restricted and that consequently the investment adviser or Manager did not have the "broadest possible discretion."

         21. The Offshore Fund Memoranda represented that it "focuses on multiple strategies, including but not limited to" corporate debt investments, assets, public equity, and that Onshore Fund and other funds "are managed using strategies generally similar to those the Manager used for the [Offshore Fund] Fund." Ex. M at pp. 18-20 (DBZ 0009844-9846). Compare e.g. Ex. T at pp.14-16 (DBZ 0009601-9603). The SEC has noted that the financial statements for the Offshore Fund demonstrates that the fund overwhelmingly invested in Corporate Bonds (44.13% [Brody Decl. Ex. 96 at p. 4]) and Loans (30.17% [Id. at p. 6]).

         22. Investments selected by the Manager for both the Onshore Fund and Offshore Fund could be highly speculative. As the Offering Memoranda for the Offshore Fund specified, "The Fund (and including for the avoidance of doubt, any managed accounts or investment vehicles advised or managed by the Manager or any of its affiliates in which a portion of the Fund's assets may be invested) will utilize highly speculative investment techniques." Ex. M at p. 34 (DBZ 0009860). Compare e.g. Ex. T at p. 30 (DBZ 0009617).

         23. Co-investments with third parties were specifically authorized by the Offshore Fund Offering Memoranda. Ex. M at p. 42 (DBZ 0009868) ("co-investment with third parties through joint ventures"). Assignments of investments from the Onshore Fund were also specifically authorized for the Offshore Fund. Ex. M at p. 20 (DBZ 0009846). ("[A]n assignment of, or participating in, a loan from the U.S. Fund at a price approved by an independent third party."). The Offshore Fund could also invest directly in other funds managed by DBZCO: Alternatively the investments for the Offshore Fund and others managed by DBZCO could also include investments in affiliated funds.

         The SEC has noted that the Offering Memoranda also provided that "the [Offshore] Fund ... will generally not invest in ... other assets such as real estate or make direct loans to or otherwise engage in the active management of a U.S. company." (Brody Decl. Ex. 3 at 19-20.) The SEC also noted that DBZCO and Gruss repeatedly represented this limitation on the Offshore Fund's ability to invest to the auditors, investors and potential investors. Likewise the SEC noted that Gruss has conceded that the Onshore Fund was a U.S. company, and that he told lawyers from the law firm Gibson, Dunn & Crutcher, and Albert Lilienfeld from Deloitte Financial Advisory Services, which conducted the internal investigation for DBZCO in 2006 and 2007, that money from the Offshore Fund needed to be kept separate from the money from the Onshore Fund to avoid ECI issues. The SEC also notes that Gruss conceded it was well-known that a transfer from the Offshore Fund to the Onshore Fund would raise Effectively Connected Income ("ECI") and "trade or business concerns" (Brody Decl. Ex. 182; Ex. 57 at 111:10-24, 113:16-23) and that an arrangement where the Offshore Fund would loan money to the Onshore Fund to pay its debts, fund its investments or operate its business would raise ECI issues and would not be permitted under the funds' offering documents. ECI is the acronym for "effectively connected income, " which is the income when a foreign person engages in a trade or business in the United States, connected with the conduct of that trade or business.

         Gruss has denied this and objects to this statement noting that as the interview memoranda state in the beginning paragraph, "Gruss has not read, reviewed, or adopted the contents of this memorandum." Brody Decl, Ex. 182 at 1, and that whoever wrote up Gruss' alleged interview statement did not understand how the Onshore Fund and Offshore Fund funds worked and why they were established or that "money from the Offshore Fund needed to be kept separate from the Onshore Fund to avoid ECI issues" was the entire purpose of establishing a U.S. fund and a non-U.S. fund and that the advances were recorded as such on the books and records of the Onshore Fund and Offshore Fund and not as interest bearing loans, Ex. BBB at p. 174, so there would be no ECI issues. Gruss has further noted that in connection with Gruss' alleged statement, Lilienfeld testified that Deloitte "never found loan documentation, so when we referred to the CDC or other transfers of monies being loans, that is not the proper terminology because a loan implies that there is a documentation surrounding it. It is more of a transfer, an advance or something along those lines, but not raising it to the level of a loan, " Ex. UUU at p. 113, and that this did not mean that the Offshore Fund could not advance funds to the Onshore Fund that the Onshore Fund could use to buy investments. Gruss further has noted that he had told Jason Pecora, DZBCO's Treasurer, that the monies advanced from the Offshore Fund to the Onshore Fund were not booked as a "loan in the portfolio accounting system" and "papered as a loan" precisely to avoid "tax issues, " Ex. EEE at pp. 67-69, and that this practice of the Offshore Fund advancing money to the Onshore Fund was permitted by the funds' and Operating Documents.

         Gruss has further noted that Dr. Bergin stated that: "[a]n aspect of DBZCO's strategy, as detailed in the pertinent fund materials, was for the Offshore Fund and the Onshore Fund to operate symbiotically in order to enhance investment opportunities, facilitate largely parallel strategies and bolster returns for both funds and that the Onshore Fund was frequently utilized as a sourcing agent to acquire select investments for the fund complex, and often these investments were not immediately available to the Offshore Fund and that this process required a treasury approach which facilitated the movement of funds among fund complex members." Ex. D at p. 8. Gruss further has contended that the Onshore Fund located investments for the Offshore Fund and often restructured them in a manner that fit within the tax limitations of the Offshore Fund and that this arrangement benefited both funds - the Onshore Fund because, although uncompensated for its task, was able to effectively leverage its assets, which enhanced the Onshore Fund's rate of return; the Offshore Fund because it was able to expand its investments beyond the limitations imposed by the tax code as a result of the sourcing and restructuring efforts of the Onshore Fund.

         24. The Offering Memoranda acknowledged that at times working for a group of funds and making investments for each and for the group not only required the Manager to allocate its time but created potential conflicts that investors had to consider in investing in the Onshore Fund or the Offshore Fund: "inherent or potential conflicts of interest in the structure and operation of the Fund's business should be considered by prospective investors before subscribing for Shares." Ex. M at p. 50 (DBZ 0009876); Ex. 0 at p. 28 (DBZ 0009777); Ex. L at p. 28 (DBZ 0009704); Ex. T at p. 46 (DBZ 0009633); Ex. U at p. 29 (DBZ 0009561); Ex. K at p. 23 (DBZ 0009473). See also Ex. B at pp. 8-10 (SEC_Gruss 001015-17) (DBZCO also provided a similar conflicts of interest disclosure in due diligence materials for potential investors.) A conflict can arise from the practice of “cross trading, ' i.e., the Manager effects a trade or a loan between the Fund and another investment fund or account that it or its affiliates manage." Ex. M at p. 52 (DBZ 0009878); Ex. L at p. 29 (DBZ 0009705); Ex. T at p. 47 (DBZ 0009634); Ex. U at p. 30 (DBZ 0009562); Ex. K at p. 24 (DBZ 0009474). Thus, the Offering Memoranda granted DBZCO the right to engage in transactions between the funds, while simultaneously disclosing that such a transaction could create a conflict of interest. The Offering Memoranda also disclosed that "notwithstanding the potential conflicts of interest resulting from these multiple relationships, the Manager is expressly permitted to enter into contracts and transactions with its affiliates on behalf of the Fund." Id.; Ex. K at p. 25 (DBZ 0009475). Similar disclosures appeared in the due diligence materials provided to investors.

         The SEC has admitted the quoted language appears in the Offering Memorandum, but has noted that this statement is incomplete as the Offering Memorandum also provided that "the [Offshore] Fund ... will generally not invest in ... other assets such as real estate or make direct loans to or otherwise engage in the active management of a U.S. company" (Brody Decl. Ex. 3 at 19-20) and repeatedly represented this limitation on the Offshore Fund's ability to invest to the auditors, investors and potential investors. The SEC did not contest that the Offering Memoranda specifically stated that the Offshore Fund might "accept an assignment of, or participation in, a loan from the [Onshore Fund] at a price approved by an independent third party" [Brody Decl. Ex. 3 at 201), and has noted that Gruss made statements as noted in the Findings of Fact ("FOF") above.

         25. In such instances "the Manager and Zwirn may have a conflict of interest between acting in the best interests of the Fund and such other accounts and funds." Ex. M at p. 51 (DBZ 0009877); Ex. 0 at p. 28 (DBZ 0009777); Ex. L at p. 28 (DBZ 0009704); Ex. T at p. 46 (DBZ 0009633); Ex. U at p. 29 (DBZ 0009561); Ex. K at p. 23 (DBZ 0009473). Those conflicts were to be resolved by the Manager in its sole discretion: "When the Fund and one or more other clients of the manager have available funds for investments, investments . . . will be allocated substantially pro rata on an overall basis ... to the extent possible, unless the Manager believes, in good faith, that another method would be more fair and equitable." Ex. M at pp. 51-52 (DBZ 0009877-78); Ex. 0 at p. 29 (DBZ 0009778); Ex. L at p. 29 (DBZ 0009705); Ex. T at pp. 46-47 (DBZ 0009633-34); Ex. U at pp. 29-30 (DBZ 0009561-62); Ex. K at p. 24 (DBZ 0009474). The Offering Memoranda stated that the Manager can "engage in investment techniques and strategies not described" in the Offshore Fund's Offering Memoranda "that the Manager considers appropriate under the circumstances" Ex. M at p. 27 (DBZ 0009853) and "to perform all acts and enter into and perform all contracts and other undertakings that it may deem necessary or advisable or incidental" for the Onshore Fund. Ex. K at p. 5 (DBZ 0009502).

         The SEC has admitted the quoted language appears in the Offering Memoranda, but noted that these statements are incomplete because the Offering Memorandum explicitly provided that "the [Offshore] Fund ... will generally not invest in ... other assets such as real estate or make direct loans to or otherwise engage in the active management of a U.S. company, " (Brody Decl. Ex. 3 at 19-20), that DBZCO and Gruss represented this limitation on the Offshore Fund's ability to invest to the auditors, investors and potential investors and that Gruss made statements as notes in the FOF.

         26. The Management Agreements with the Funds, under which DBZCO was retained as investment adviser by each fund, stated authority of the Manager in the Offering Memoranda. The 2005 version of the Offshore Fund Management Agreement stated that:

The Fund desires to employ its capital by investing and reinvesting in securities and other instruments and investments as specified in the Memorandum [Offering Documents] . . . The.Manager is authorized as attorney-in-fact of the Fund to take all such actions ... on behalf of the Fund that it deems, in its sole discretion, necessary or appropriate to perform its obligations under this Agreement.
Ex. V at ¶ 1 (BS00000220).

         The SEC has noted that the Management Agreement specifically states that the Offshore Fund "desires to employ its capital by investing and reinvesting in securities and other instruments as specified in the [Offering Memorandum] ...." (Brody Decl. Ex. 139 at 1), and the Offering Memorandum included the limitation that "the [Offshore] Fund ... will generally not invest in ... other assets such as real estate or make direct loans to or otherwise engage in the active management of a U.S. company." (Brody Decl. Ex. 3 at 19-20).

         27. The agreement for the Onshore Fund is virtually identical. Ex. W at ¶ 1 (DBZ0040972) see also Exhs. MM, NN, SS at ¶ 1.

         The U.S. Tax Exemption for the Offshore Fund

         28. The purpose of the Offshore Fund, a Cayman Island company, was to create an investment vehicle that would not be subject to U.S. taxes.

         29. A representation letter to the auditors for all of the Offshore Funds managed by DBZCO, signed by Gruss and Zwirn stated: "[t]he Funds have structured their operation in order that it will not be deemed to be engaged in a trade or business within the U.S. for purposes of U.S. federal tax laws." (Brody Decl. Ex. 21).

         30. DBZCO made similar representations to the investors in the Offshore Fund. The Offering Memorandum explained that "[a] non-U.S. corporation engaged in a U.S. trade or business is generally subject to U.S. corporate income tax on income and gain earned in the U.S. which is connected to such trade or business, in the same manner as a U.S. corporation. In addition, a non-U.S. corporation engaged in a U.S. trade or business is subject to a 'branch profits' tax equal to 30% of the amount of its U.S. earning which are not reinvested in U.S. assets." In order to avoid these taxes, "the [Offshore] Fund intends to operate and structure its investments in a manner such that it should not be deemed to be engaged in a U.S. trade or business." (Brody Decl. Ex. 3 at 66; 15 "[t]he manager intends to conduct the business of the [Offshore] Fund (including investments in loans originated by the U.S. Fund or its affiliates) in a manner such that the fund should not be engaged in a U.S. trade or business").

         The same section of the July 2006 Offering Memoranda stated:

The Manager intends to conduct the business of the Fund in a manner so as to meet the requirements of the Safe Harbor, and believes that the transactions under its investment program, including investments in loans originated by the U.S. Fund or its affiliates, should qualify for the Safe Harbor. There can be no assurance, however, that the Service will agree that each of such transactions qualifies for the Safe Harbor. If certain of the Fund's activities were determined not to be of the type described in the Safe Harbor, the Fund's activities may constitute a U.S. trade or business, in which case the Fund would be subject to U.S. income and branch profits tax on its share of the income and gain from those activities and related activities, if any, and the Fund may have to file a U.S. tax return. In addition, if any credit default swap is characterized as a contract of insurance or a guarantee, payments to the Fund under such credit default swap may be subject to an excise tax or a withholding tax.
The Safe Harbor, however, may not apply to the trade or business of actively originating loans within the U.S. The Manager believes that the transactions under its investment program, including investments in loans, should qualify for the Safe Harbor, although there can be no assurance that the Service will agree. Moreover, as indicated above, the Fund may acquire interests in loans (including leases treated as financings for U.S. Federal income tax purposes), revolvers and letters of credit originated by the U.S. Fund or its affiliates and may make such investments through subsidiary vehicles. The Fund believes that these activities should qualify for the Safe Harbor terms are agreed upon and will not in any event be obligated to make any purchases until after the loans are made. Furthermore, the Fund will not be permitted to purchase interests in loans originated by the U.S. Fund or its affiliates unless an independent party approves the purchase. Nevertheless, there can be no assurance that the Service will not assert that the Fund is engaged in a trade or business within the U.S. by virtue of such purchase of interests in loans from the U.S. Fund or its affiliates. If the Service is successful in such an assertion, the Fund's or its subsidiary's income from these activities and related activities, if any, may be subject to U.S. income and branch profits tax and the Fund or its subsidiary may have to file a U.S. tax return.

Ex. M at p. 67.

         31. The Offering Memorandum stated that "actively originating loans within the U.S." might create adverse tax consequences and that "certain investments by the [Offshore] Fund could result in the [Offshore] Fund being deemed engaged in a U.S. trade or business, including direct investments by the [Offshore]Fund in U.S. real estate." Id. at pp. 67, 69. As such, the offering memorandum noted that "the [Offshore] Fund ... will generally not invest in leased equipment and other assets such as real estate or make direct loans to or otherwise engage in the active management of a U.S. company." Id. at pp. 19-20.

         The July 2005 Offering Memoranda stated:

The U.S. Fund, the Parallel Cayman Fund and the TE Fund are managed using strategies generally similar to those the Manager uses for the Fund. Even though their strategies are generally similar, performance of the U.S. Fund, the Parallel Cayman Fund and the TE Fund will not be the same as the Fund's performance as a result of, among other things, different legal, regulatory, tax, liquidity, structuring and investment constraints on the U.S. Fund, the Parallel Cayman Fund and the TE Fund. These constraints include adverse tax consequences to the Fund and the Parallel Cayman Fund of certain investments made by the U.S. Fund as well as differences in the timing of investments, limitations on size of investments, nature of investments, and governmental regulation of investments. For example, the Fund and the Parallel Cayman Fund will generally not invest in leased equipment and other assets such as real estate or make direct loans to or otherwise engage in the active management of U.S. company. The Fund or a subsidiary of the Fund may, however, accept an assignment of, or participation in, a loan from the U.S. Fund at a price approved by an independent third party (see "Conflicts of Interest"). The TE Fund is managed using strategies generally similar to those the Manager uses for the U.S. Fund, except that the TE Fund generally does not engage in investment activities that would generate UBTI for U.S. tax purposes. As a consequence of these and other differences, the Fund's performance will differ from the performance of the U.S. Fund, the Parallel Cayman Fund and the TE Fund. In the future, the Fund may carry out its investment objectives by investing all or a portion of its capital through a master-feeder structure along with other funds and accounts managed by the Manager. The offering memorandum explained that instead of making a direct investment, "[t]he [Offshore] Fund or a subsidiary of the [Offshore] Fund may, however, accept an assignment or, or participation in, a loan from the U.S. Fund at a price approved by an independent third party ...." Id. at pp. 19-20. "The [Offshore] Fund believes that these activities should qualify for the Safe Harbor since it will only be committing to buy the interests in the loans after the loan terms are agreed upon and will not in any event be obligated to make any purchases until after the loans are made. Furthermore, the Fund will not be permitted to purchase interests in loans originated by the U.S. Fund or its affiliates unless an independent party approves the purchase."

Id. at p. 67.

         32. The Offering Memorandum stated that instead of making a direct investment, "[t]he [Offshore] Fund or a subsidiary of the [Offshore] Fund may, however, accept an assignment or, or participation in, a loan from the U.S. Fund at a price approved by an independent third party." Id. at p. 20. "The [Offshore] Fund believes that these activities should qualify for the Safe Harbor since it will only be committing to buy the interests in the loans after the loan terms are agreed upon and will not in any event be obligated to make any purchases until after the loans are made. Furthermore, the Fund will not be permitted to purchase interests in loans originated by the U.S. Fund or its affiliates unless an independent party approves the purchase." Id. at p. 67.

         33. The Offering Memorandum stated that the inability for the Offshore Fund to participate in certain transactions for tax reasons could result in a disparity of performance between the Offshore Fund and other investment vehicles managed by Zwirn. In a 2005 internal email, Gruss noted that a recently disparity in performance was because "there have been several pops on a few assets that cannot go offshore be of ECI", including "Oil/Gas Overides. Resi Platforms." (Brody Decl. Ex. 22) .

         Gruss has noted that Brody Decl. Ex. 22 is an email exchange between Gruss/Kahn and a member of the DBZCO staff in the London office, that there are many different causes for a potential disparity in returns between the Onshore Fund and the Offshore Fund, including most significantly, the leverage attributed to the Onshore Fund's Collateralized Loan Obligations ("CLOs").

         34. As a result of tax laws, the Offshore Fund could not "buy certain investments for itself, " and the Onshore Fund would have to buy and "season" the investments for anywhere between 30 to 90 days before it could sell those investments to the Offshore Fund. Ex. Z at pp. 31-33; Ex. R at pp. 97-100, 142-43; Ex. CC at pp. 72-74. The SEC has noted that this was not only because of the tax laws but also because the Offshore Fund Offering Memorandum specifically stated that it would not engage in such investments, and that none of the evidence cited by Gruss states that the investments were "seasoned" for a period of 30 to 90 days and that Gruss told one investor that "[a]11 loans will be seasoned a minimum of 90 days sometimes 110 days." (Brody Decl. Ex. 32); see also (Brody Op. Decl., Ex. J at 24:14-23) (90 days), (Brody Op. Decl., Ex. K at 98:21-24) (90 days).

         35. Quarterly investor letters sent from DBZCO to offshore investors also noted that the offshore entities, including the Offshore Fund "do not expect to originate loans." (Brody Decl. Ex. 23 at p. 5). In response to a question from a prospective investor about this language in the quarterly letter and "does the offshore [fund] eventually participate via a seasoning vehicle or does it never participate at all, " DBZCO responded "[w]e are extremely sensitive to trade or business issues related to our lending and assets business. Yes, while the onshore fund originates the loans, for the majority of the loans we can season them and then the Offshore Fund can participate as well." (Brody Decl. Ex. 24). Likewise, DBZCO said that "[t]he fund is mindful of [sic] Offshore Fund can't be in the business of originating to U.S. companies otherwise it would be subject to 54.5% U.S. tax rate." (Brody Decl. Ex. 25).

         This tax issue was regularly discussed with investors and potential investors. In 2004, one investor emailed DBZCO as part of its due diligence and asked "does the manager generate any Effectively Connected Income." (Brody Decl. Ex. 26).

         36. In 2005, Gruss told one investor doing due diligence that "DB Zwirn seasons their loans in the onshore [fund] for 90 days before they contemplate participating in the loans by the offshore [fund]. ... [W]hen a loan is ready to be sold to the offshore [fund], the loan is priced at fair market value. ... Prior to every sale to the offshore, DB Zwirn utilizes an independent trading manager that determines if a loan is 'offshorable' and the trading manager also opines on the transaction price. The independent trading manager they use is called the Taylor Group and they are based in Chicago." (Brody Decl. Ex. 27) .

         In another 2005 due diligence meeting with an investor, Gruss said that the tax/ECI issue "is a focus of Perry [Gruss]. They [DBZCO] have structured every deal in order to avoid it. If needed, the offshore does not participate and deals are held for 90 days. The lawyers told him deals should be held 30-60 [days] to avoid it [ECI] but practice may hit 90 days eventually and they use 90 days for all deals going forward." (Brody Decl. Ex. 28). Approximately a month after this meeting, the same investor emailed Gruss and stated "ECI is become a priority issue for us in many of our products and I was telling [our CFO] of your dealings in this area and she would like to speak to you at your convenience." (Brody Decl. Ex. 29).

         In a 2006 due diligence meeting between Gruss and a potential investor, Gruss informed the investor that "[b]ecause of tax issues associated with loan origination the Offshore Fund does not participate in all trades" and that "[t]he Offshore Fund historically underperforms the on shore due to tax issues associated with loan origination." (Brody Decl. Ex. 30).

         37. In response to an email from one investor about whether offshore investors were involved in loan origination, Gruss responded that they were not involved in loan origination because of ECI issues.

         38. One investor had a specific call with Gruss about whether the Offshore Fund was in the domestic lending business. In this call, Gruss stated that "[a]11 loans will be seasoned a minimum of 90 days sometimes 110 days. In addition to the seasoning term all loans purchased by the Offshore Fund from the onshore fund will have an independent 3rd party valuation group price the loan." Gruss also told the investor that he was "confident enough portfolio statistics will be generated to support a strong case that the Offshore Fund is not solely a domestic lender." The investor noted that "[i]f an Offshore Fund was found to be a domestic lender by the IRS the implications would be very serious and could cause a very material impact." (Brody Decl. Ex. 32) .

         39. Gruss understood that the Offshore Fund could not make certain investments because of "limitations" including that it could not be deemed to be involved in a U.S. trade or business because that would have "adverse tax implications" for the Offshore Fund. (Brody Decl. Ex. 4 at 77:14 - 78:3). Gruss reviewed transactions to try and find ways to allow the Offshore Fund to participate in investments "without incurring ECI." (Brody Decl. Ex. 33)

         40. Gruss candidly stated that ECI "scares the [expletive] out of me." (Brody Decl. Ex. 34). Gruss may have been scared about ECI because of its complexity and because it would cause issues for the investors in the Offshore Fund if the Offshore Fund was found to have engaged in a U.S. trade or business. Gruss told Sylvia Wu ("Wu"), the controller for the funds, that because of tax reasons, the Onshore Fund could originate loans while the Offshore Fund could not.

         41. Other members of the accounting department also understood that if loan originations would come out of the Offshore Fund, it would open the Offshore Fund to tax liability.

         The Offshore Fund Loans to the Onshore Fund

         42. The individuals in the accounting and finance departments who reported to Gruss included Wu, Li Anne Law ("Law"), Robert Racusin ("Racusin"), Michelle O'Hara ("O'Hara"), and Jason Pecora ("Pecora"). Josh Karotkin ("Karotkin") was also in a line that reported to Gruss.

         43. The funds had various bank accounts. The main bank account for the Offshore Fund was account ***600 at ABN Amro. The main account for the Onshore Fund was account ***559 at ABN Amro. The SEC asserts that everyone in the accounting department knew which account was which. When Law spoke with Gruss about the accounts, they would refer to them by their account numbers. Gruss knew that Ltd. Account #***600 was for the Offshore Fund because it was one of the accounts most frequently used at the custodian bank and was the shorthand way the accountants referred to the account.

         Gruss, however, asserts that he was not aware of the identity of the account numbers for each account. Law testified that when she spoke to Gruss about the Onshore Fund and Offshore accounts, she used both the account number and the name of the fund. Ex. BBB at p. 142.

         44. Each of the funds also had a brokerage account at Bear Stearns. (Brody Decl. Ex. 17 at 52:9-12) The Offshore Fund was referred to in shorthand as "Ltd" and the Onshore Fund was referred to in shorthand as "LP." Id. at 53:3-6.

         45. During all relevant time periods, Zwirn and Gruss were the two individuals at DBZCO who were authorized to transfer cash from the funds. (Brody Decl. Ex. 2 at 262:17-21). Only one of their signatures was required to transfer money. (Brody Decl. Ex. 17 at 55:19 - 56:6).

         46. DBZCO had no written manual of accounting policies or procedures during the relevant period of time. Nor were there any written policies at DBZCO concerning the movement of cash, however, the accounting department knew that Gruss was the signatory on all fund accounts.

         47. The procedure for requesting that wires be made from the funds accounts at ABN Amro was that "the accounting team would send out the instructions [to the bank] and say 'Please do this wire' and then [Gruss] would have to send an e- mail reply back to all that says okay to go. And then that wire would go out." (Brody Decl. Ex. 16 at 55:13-18).

         48. There was a photocopy of Gruss' signature that was used to fax wire requests to Bear Stearns when Gruss was not available. Id. at 47:1-3, 48:25 - 49:2. Most of the accounting and operations team had a copy of the signature.

         49. Because money needed to be sent quickly and Gruss was sometimes not available, the accountants would "take the signature and take it to a photocopy and take it on the sheet that we created, instruction that we created, and photocopy it and to make it look like it was signed by Perry, and then fax it to Bear Stearns." (Brody Decl. Ex. 16 at 48:20-24).

         50. Using Gruss' signature under these circumstances was standard operating procedure at DBZCO. People talked about using the photocopied signature since this was a standard practice.

         Gruss' signature was used "when he was out of the office", Ex. ZZ at p. 50, or he "could not be located to sign a wire." Ex. BBB at p. 47.

         51. Gruss was aware of this practice, approved the practice, and joked about the practice saying "[h]ey, look, here is my fake signature." (Brody Decl. Ex. 16 at 49:3-13, 50:824; Ex. 17 at 48:1-7 "joking atmosphere"). Gruss never complained that his signature had been used in an unauthorized fashion. Gruss even praised accountants after they used his copied signature to get a wire out. (Brody Decl. Ex. 16 at 49:13-18).

         52. The Onshore Fund consistently suffered from a lack of available cash. (Brody Decl. Ex. 1 at ¶ 14; Ex. 36 "we are extremely tight right now"; Ex. 37 "pis don't tell me we're out of cash"; Ex. 199; Ex. 38; Ex. 39 "we have negative really big $$$$ - Wu is freakin. How do we avoid this in the future?"; Ex. 4 0 "Wu is losing it over the whole money thing"; Ex. 41 "US =BROKE"; Ex. 42 "we owe at least $11M in cash we don't have right now and that is a very conservative number"; Ex. 43; Ex. 44; Ex. 4 5; Ex. 4 6 "Onshore Fund is tight on cash"; Ex. 47 "tight"; Ex. 48; Ex. 49 "we should discuss our current funding availability situation sometime today"; Ex. 50 "we need to start exploring the idea of maintaining a min cash available amount for each fund"; Ex. 51 "Onshore Fund is just about tapped"; Ex. 52 "not good. Onshore Fund is getting extremely tight"; Ex. 53 "we have no cash in Onshore Fund"; Ex. 54 "Do we need the money today ..." "Not today, last Wednesday.") According to Gruss, the use of the adverb "consistently" is an overstatement and that whether the Onshore Fund at times had a lack of cash is irrelevant.

         53. The Offshore Fund often did not have sufficient cash on hand to fund new investments to which it had committed capital. (Brody Decl. Ex. 1 at ¶ 14; Ex. 55 at 85:4-8; Ex. 17 at 124:1-4 "Not enough subscriptions, investor subscriptions to match the investments that were going out the door"). According to Gruss, "often" is an overstatement.

         54. The Offshore Fund, however, "had more cash than investment opportunities due to its inability to make investments or loans directly in a U.S. trade or business without being subject to a U.S. tax liability." (Brody Decl. Ex. 1 at ¶ 15). Gruss has denied this statement.

         55. At times the funds had at their disposal many sources of capital available to draw on for investments. These sources included prime brokers, banks, affiliated funds, managed accounts, structured vehicles such as the Offshore Fund and Onshore Fund CLOs and other financing sources. These sources of capital were continually evolving and expanding over time. Depending on the type of investment and cash availability at each of the sources, certain borrowing sources were preferred over others. However, several factors influenced the Manager's decision to use one funding source over another, including investment type, financing vehicle constraints, cash availability and differing tax consequences. Above all, the Manager's goal, when determining its funding source, was to maximize investor returns whenever possible.

         The SEC has noted that the Offering Memorandum for the Offshore Fund further provided that "the [Offshore] Fund . . . will generally not invest in ... other assets such as real estate or make direct loans to or otherwise engage in the active management of a U.S. company" (Brody Decl. Ex. 3 at 19-20) and DBZCO and Gruss represented this limitation on the Offshore Fund's ability to invest to the auditors, investors and potential investors, and that Gruss made the statements referred to in the FOF above.

         56. In 2004, a practice started where Gruss and the accountants would take cash that was sitting in the Offshore Fund and use that money to pay for Onshore Fund investments. As described by Wu, the controller for the funds:

[W]e didn't have the money [in the U.S. Fund]. We received an email from the analyst, but we didn't have the money to send the money out from the onshore fund. And at that time, Bob [Racusin] and I were sitting to next together and we want to figure out what to do and we don't know what to do, and we go into Perry's office and the three of us will have a - the three of us had a powwow and trying to figure out how to deal with the situation. Perry asked me how much there is in the onshore fund, how much there is in the Offshore Fund, and how much the fund -- the analyst want to send out, and we will come up with suggestions. I said to him before that, like, he could - can we lend the money that we have excess sitting at the Offshore Fund and lend it to the onshore fund, and we create like an intercompany loan and charge interest, and once the onshore fund has money, it can pay back. And he said no, you cannot do that because of some tax reason, that the Offshore Fund cannot lend to the onshore fund. I didn't remember the exact details of it, but it's just a "No" answer. And then I also said can we lend money directly from the Offshore Fund to the borrower so we have enough money, since we have enough money in the Offshore Fund. And he said no, the loan cannot be originated from the Offshore Fund. And then he said that since we will have money coming in, you know, next week or so for the new subscriptions of the onshore fund, we can send the money out from the Offshore Fund now and then we can repay - when the subscription money comes in, we can repay the Offshore Fund. And since that was the only alternative that we had, and so that's what we did.
Brody Decl. Ex. 16 at 63:4-64:13.

         According to Gruss, on cross-examination in her deposition, Wu stated that she was confused as to what she was told by Gruss, did not understand that the tax reason as to why the Onshore Fund could not lend money to the Offshore Fund with interest was because the act of lending money with interest could arguably place the Offshore Fund in engaging in the trade or business of loaning money. Wu also confused "loan origination" by the Onshore Fund with the Offshore Fund advancing funds to the Onshore Fund so it could originate the loans that were the investments that the Onshore Fund would season and later provide to the Offshore Fund.

         57. It was Gruss' idea to use the money from the Offshore Fund to fund the U.S. Fund's investments. Id. at p. 64:14-18. Wu recalled that the initial conversation was essentially "[b]asically we are screwed; what are we going to do. We have no money. That dude back there wants the money out. What are we going to do." Brody Decl. Ex. 16 at p. 65:10-14.

         Gruss has denied this statement asserting that the answer was to a leading question by the SEC that should be suppressed as a violation of Fed. R. Evd. 611(c) because Wu was a witness for the SEC, had entered into a cooperation agreement with the SEC (Ex. AAA), the question was asked on direct examination and the witness was not hostile to the SEC or identified with Gruss and the remaining statements are inadmissible hearsay in which Wu relates a conversation she had with Racusin.

         58. Wu was uncomfortable with the practice of moving "money from the Offshore Fund in order to fund the onshore fund obligations, " Brody Decl. Ex. 16 at 33:20 - 34:12, because she was "told that we were not supposed to lend money from the Offshore Fund to the onshore fund. So since I was told that, so I thought we had - as a hedge fund manager, you are supposed to have fiduciary duty to your investors, so we're doing something that wasn't beneficial to the investors." Id. at 72:25 - 73:5.

         Gruss has denied this statement as inadmissible as the operation of Wu's mind, and has noted she did not explain her "reasoning to him [Gruss], " did not know what the funds could or could not legally do under their Offering Memoranda and formation documents, that she had never read any of the fund Offering Memoranda to determine whether the Offshore Fund could advance funds to the Onshore Fund and had the title of "Controller, " but stated she was "essentially a bookkeeper at D.B. Zwirn." Id. at pp. 21, 232.

         59. Wu told Gruss that she was uncomfortable with the practice "and we really need to find some solutions to this ... I asked him if Dan Zwirn knows about what we are doing, and basically tell him that this is causing me a lot of stress." Id. at 72:5-13.

         Gruss has noted that Law testified that "[n]o one acted like it [the LTD advancing funds to the Onshore Fund] was wrong" and "nobody told . . . [her] that this was illegal" and that it was "stressful" because it was "an accounting headache that we needed to clear as soon as we could" and that "it was creating a lot of accounting work and responsibilities." Ex. BBB at pp. 174, 198-99. "[T]he monies that went from the Offshore to the Onshore, this all had to be done the last minute, and the money had to be moved in and it was extremely stressful." Id. at p. 263. Gruss testified that Wu attempted to resign 5 times before she actually left because of stress.

         60. Wu told Gruss numerous times that she was uncomfortable with the practice because "we're not supposed to do this, so we need to do something." Brody Decl. Ex. 16 at 73:8-13. Wu even joked with Gruss that they were going to go to jail because of the interfund transfers. Id. at 97:10-17. When Wu had these conversations with Gruss, at no point did Gruss say that this practice was allowed under the offering documents. Id. at 75:25 - 76:4.

         According to Gruss, Wu's statement about "going to go to jail because of the interfund transfers "in fairness ought to be considered" along with Wu's admission that "she did not know if it [the LTD advancing funds to the ...


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