United States District Court, S.D. New York
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.
W. SWEET, U.S.D.J.
Proceedings .............................................. 2
Defendant and the Funds Involved..........................3
U.S. Tax Exemption for the Offshore Fund.................23
Offshore Fund Loans to the Onshore Fund..................33
Offshore Fund Loans to Pay Revolver Obligations..........91
Payment by the Offshore Fund of Onshore Fund Management
Payment by the Offshore Fund for the Purchase of an
SEC's Motion for Summary Judgment that Section 206(2) Was
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
Violated Its Fiduciary Duty by Transferring Funds from the
Offshore Funds to Meet the Onshore Fund's Obligations...
Offshore Fund Was Prohibited from Making Investments in or
Loaning Money to U.S. Companies (Including the Onshore Fund)
Offshore Fund Was Prohibited from Making Payments to the
Onshore Fund (or Directly to Its Creditors) for Its Revolving
Breaches of the Fiduciary Duty by Making Loans from the
Offshore Fund to the Onshore Fund for Investments and the
acted with a Negligent Intent When He Authorized the Offshore
Fund Transfers to Fund Onshore Investments and the
Aided and Abetted DBZCO's Violation of Section 206(2) of
Advance Payment of Management Fees Were Appropriate
Motion for an Injunction Based Upon the Payment by The
Offshore Fund to Purchase an Airplane is Denied as Presenting
a Contested Issue of
Motion for the Imposition of a Civil Penalty is Granted. 191
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.
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
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.
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.
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.
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.
Defendant and the Funds Involved
DBZCO was an investment adviser to and manager of certain
hedge funds and managed accounts.
DBZCO no longer performs any business functions.
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.
Daniel B. Zwirn ("Zwirn") was the founder and
managing partner of DBZCO.
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.
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,
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.
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.
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.
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.
Waterhouse Coopers ("PWC") audited each of these
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.
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.
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
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.
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
"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
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.
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).
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).
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.
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).
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
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.
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.
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.
has noted that the agreement does not use the term
Similarly, the Offshore Fund Memorandum of Association
specifies the reasons for the formation of the term -
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.
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
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.
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
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
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.
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).
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.
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.
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
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
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
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
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
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.
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
Ex. V at ¶ 1 (BS00000220).
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).
agreement for the Onshore Fund is virtually identical. Ex. W
at ¶ 1 (DBZ0040972) see also Exhs. MM, NN, SS at ¶
U.S. Tax Exemption for the Offshore Fund
purpose of the Offshore Fund, a Cayman Island company, was to
create an investment vehicle that would not be subject to
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).
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").
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.
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
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
Id. at p. 67.
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.
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) .
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
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).
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).
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.
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) .
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).
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).
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
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) .
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.
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
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.
Offshore Fund Loans to the Onshore Fund
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.
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.
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.
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.
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).
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.
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).
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.
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
Using Gruss' signature under these circumstances was
standard operating procedure at DBZCO. People talked about
using the photocopied signature since this was a standard
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.
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).
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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