EFTA01124983.pdf

JAMS ARBITRATION IN THE MATTER OF FORTRESS VRF I LLC and FORTRESS VALUE RECOVERY FUND I LLC, Claimants v. JEEPERS, INC., Respondent § Case No. and FINANCIAL TRUST COMPANY, INC. and JEEPERS, Counter-Claimants and Third-Party Claimants v. § Arbitrator: D.B. ZWIRN SPECIAL OPPORTUNITIES FUND, L.P. len/a FORTRESS VALUE RECOVERY FUND I LLC, Counter-Respondent and D.B. ZWIRN PARTNERS, LLC, D.B. ZWIRN & CO., L.P., DBZ GP, LLC, ZWIRN HOLDINGS, LLC, DANIEL ZWIRN, and Third-Party Respondents JEEPERS, INC.'S RESPONSE AND FINANCIAL TRUST COMPANY, INC.'S AND JEEPER INC.'S STATEMENT OF COUNTERCLAIM AND THIRD-PARTY CLAIM RESPONSE 1. Respondent, Jeepers, Inc. generally denies all of the allegations in the Claim submitted by Fortress VRF I LLC and Fortress Value Recovery Fund I LLC. 1045767v1/011585 EFTA01124983  COUNTER- AND THIRD-PARTY CLAIM 2. Counter- and Third-Party Claimants Jeepers, Inc. and Financial Trust Company, Inc. submit the following statement of claims against D.B. Zwim Special Opportunities Fund, L.P. k/n/a Fortress Value Recovery Fund I LLC, D.B. Zwirn Partners, LLC, D.B. Zwim & Co., L.P., DBZ GP, LLC, Zwim Holdings, LLC, and Daniel Zwirn. Introduction 3. Over a three-year period beginning in 2002, Jeffrey Epstein ("Epstein"), through a firm he owned and managed named Financial Trust Company, Inc. ("FTC"), made an $80 million investment in D.B. Zwirn Special Opportunities Fund (k/n/a Fortress Value Recovery Fund I LLC, and referred to in this Statement as the "Fund"). FTC subsequently transferred the investment to its wholly-owned subsidiary, Jeepers, Inc. ("Jeepers"). Counter-Claimants will refer to this investment throughout as belonging to FTC even though ownership was transferred to Jeepers during the events in question. 4. In October 2006, Daniel Zwim, on behalf of the Fund, contacted Epstein to report on certain irregularities at the Fund. Initially, Zwim reported that the Fund's Chief Financial Officer had been fired over "non-material" accounting issues. Subsequently, Zwim reported that the Fund was launching an internal investigation. Zwim insisted (it is believed falsely) that he had no involvement in any improprieties. 5. In response to these initial revelations, Epstein repeatedly demanded the complete withdrawal of FTC's capital account in the Fund. FTC's investment was worth approximately $140 Million at the relevant time. FTC had signed an agreement with the Fund that permitted FTC to withdraw its capital account on March 31, 2007 by giving 120-days notice—i.e., by 1045767v1/0I1585 2 EFTA01124984 December 1, 2006. Epstein made these initial demands orally to Zwim, who controlled the Fund. 6. FTC was a very large investor in the Fund and one of the Fund's first investors. Zwim apparently believed that Epstein's withdrawal would prompt other investors to follow suit. Zwim could ill-afford to have other investors follow FTC's lead, particularly at a time when Zwim was determining how to deal with the eventual public disclosure of the Fund's financial and accounting irregularities. Over the next few months, Zwirn, the Fund and its management employed a combination of misrepresentations and contrived legal arguments to thwart FTC's withdrawal. 7. To help convince Epstein to change his mind, Zwim sought the help of his partner and former employer, Glenn Dubin, whose firm launched the Fund with Zwirn and owned substantial interests in the Fund's general partner and in D.B. Zwim & Co., L.P., the investment manager of the Fund, and the other funds and managed accounts that comprised Zwim's hedge fund business. Dubin had a long-standing personal and business relationship with Epstein. Dubin and his firm, originally known as Highbridge Capital Management, LLC, served as investment advisors to FTC, which invested in the Fund as well as other Highbridge-sponsored investment funds on the advice and recommendation of Dubin. 8. On November 13, 2006, Zwim and Dubin held a telephone conference with Epstein. During that call, Epstein again demanded the complete withdrawal of FTC's capital account. Zwim urged Epstein not to completely withdraw from the Fund, as that would cause other investors to follow suit and precipitate a "run on the bank." Zwim told Epstein that if FTC would withdraw a lesser amount, the Fund would honor it. Epstein, then, agreed that he would reduce his demand to withdraw FTC's entire capital account to a demand to withdraw the lesser 1045767W/011585 3 EFTA01124985 amount of $80 million, which was the amount FTC originally invested. Zwim agreed to honor this demand. Based on Zwirn's clear and unambiguous agreement that the Fund would honor the $80 Million withdrawal demand, FTC submitted a written demand to withdraw $80 million on November 13, 2006. 9. However, Zwim and the Fund reneged on the agreement. In fact, it appears that Zwim and the Fund never had any intention of honoring the agreement and were lying to FTC in order to induce FTC to give a notice that the Fund could later reject on technical grounds. Moreover, Zwim and the Fund delayed a formal response to FTC's withdrawal demands for months, so that FTC would be unable to correct any later asserted technical deficiencies until after the expiration of the 120-day notice period for a March 31, 2007 withdrawal expired. Over the next few months, Epstein sought Dubin's assistance in effectuating the $80 Million withdrawal without success. In February 2007, Epstein once again demanded FTC's complete withdrawal from the Fund; this time by submitting a written notice for a complete withdrawal. 10. Zwim delayed a formal response to Epstein's withdrawal demands for another month and a half. On March 26, 2007, the Fund released a carefully worded investor report regarding the results of an internal "investigation" at the Fund. The report described numerous management overcharges and financial, accounting and documentation improprieties with respect to the Fund and other funds and accounts managed by Zwirn's firm. 11. Zwim then turned his sights on Epstein. On March 27, 2007, the Fund finally responded in writing to FTC's withdrawal demands. The Fund argued that FTC's $80 Million demand on November 13, 2006 was deficient because, although given timely (that is, within 120 days prior to March 31, 2007), it was for a partial withdrawal. The Fund claimed that the agreement that permitted FTC's withdrawal on March 31, 2007 only applied to complete 1045767v1/011585 4 EFTA01124986 withdrawals, as opposed to partial withdrawals. Because FTC's November 13, 2006 demand for $80 million was a demand for a partial withdrawal, the Fund claimed that it was ineffective. In making this claim, the Fund completely ignored Zwim's express agreement to honor FTC's $80 million withdrawal demand. With regard to FTC's complete withdrawal demand made in February 2007, the Fund claimed it was also deficient because it was given too late, as it was not given within 120 days prior to March 31, 2007. Here too, the Fund completely disregarded the fact that Epstein had timely made repeated demands for FTC's complete withdrawal, but, at Zwirn's request, FTC was induced to reduce its timely written demand to one for $80 million based, on among other things, Zwim's agreement to honor the reduced demand. In addition, the Fund took the position that at that point, FTC could not withdraw any portion of its capital account until 2008 at the earliest. In response and without prejudice to its earlier demands, FTC subsequently made yet another demand to withdraw on the dates specified in the Fund's March 27, 2007 response, even though the dates fell in 2008 and 2009. 12. By late 2007, the Fund was unable to produce audited financial statements for the year ending December 31, 2006. Apparently, in response to this failure, numerous investors made withdrawal requests. As a result, in early 2008, the Fund suspended all withdrawals and announced a wind-down. FTC was never permitted to withdraw its capital account. The Fund is currently valued at a mere fraction of its 2007 valuation. 13. In addition to misleading FTC regarding FTC's withdrawal from the Fund, Zwim misled FTC about the nature and scope of the problems at the Fund and Zwirn's involvement in the later-revealed improprieties. Had Zwim and the Fund provided timely and truthful disclosures to Epstein in 2006 about the problems with the Fund and Zwim's involvement in those problems, Epstein never would have reduced his withdrawal demand in the first place, and I045767v1/0I1585 5 EFTA01124987 FTC would have received its entire capital account of approximately $140 Million back in 2007. Arbitration Provision 14. The parties have agreed repeatedly to arbitrate any dispute among them. The arbitration agreement has remained substantially identical in every agreement. During the events in question, the Second Amended and Restated Agreement of Limited Partnership for the Fund was in effect and provided, "[t]he Partners agree that in the event of any dispute arising between the parties, such dispute shall be settled by arbitration to be conducted in the county and state of the principal office of the General Partner at the time of such dispute in accordance with the rules of the Judicial Arbitration and Mediation Service ("JAMS") applying the laws of the State of Delaware." The principal office of the General Partner is located in New York, New York. The Parties Counter- and Third-Party Claimants 15. Counter- and Third-Party Claimant FTC is a financial consulting firm and, through the work of Jeffrey Epstein, also invests its own funds. 16. Counter- and Third-Party Claimant Jeepers, Inc. is a wholly-owned subsidiary of FTC. On January 1, 2007, FTC assigned its entire interest in the Fund to Jeepers, Inc. with the consent of the Fund. The assignment was made retroactively effective January 1, 2006. Counterclaim and Third-Party Respondents 17. Counterclaim Respondent D.B. Zwim Special Opportunities Fund, L.P. k/n/a Fortress Value Recovery Fund I LLC was a limited partnership formed under the laws of the State of Delaware. In July 2009, management of the Fund was turned over to Fortress Investment Group, a publicly-traded investment management firm, and the Fund was converted from a limited partnership to a limited liability company and renamed "Fortress Value Recovery 1045767vI/011585 6 EFTA01124988 Fund I LLC." 18. Third-Party Respondent D.B. Zwim Partners, LLC, was the general partner of the Fund. 19. Third-Party Respondent D.B. Zwim & Co., L.P. was the investment manager for the Fund. 20. Third-Party Respondent DBZ GP, LLC was the general partner of D.B. Zwim & Co., L.P. — the Fund's investment manager. 21. Third-Party Respondent Zwim Holdings was the managing member of the Fund's general partner (D.B. Zwim Partners, LLC) and of DBZ GP, LLC, which in turn acted as the general partner of the Fund's investment manager (D.B. Zwim & Co., L.P.). 22. Third-Party Respondent Daniel Zwim controlled the Fund by virtue of his ownership of Zwim Holdings, LLC, which gave him control over the Fund's general partner and over the general partner of the Fund's investment manager, D.B. Zwim & Co., L.P. Zwim had the power to bind the Fund and his statements are attributable to the Fund. For simplicity, Claimants will hereafter use the name "Zwim" to refer to Daniel Zwim and the various entities owned and controlled by Zwim. Relevant Non-Party 23. As outlined below, non-party Glenn Dubin, through his own firm (originally called Highbridge Capital Management, LLC and later renamed Dubin & Swieca Asset Management, LLC), owned substantial direct and indirect interests in the Fund's general partner, the Fund's investment manager, and the general partner of the Fund's investment manager. As well, Highbridge Capital entrusted approximately $500 million to Zwim to invest side-by-side 1045767v1/011585 7 EFTA01124989 with the Fund in a managed account. Statement of the Claim 24. In 2002, Epstein was introduced to Daniel Zwim by Glenn Dubin. Dubin and his partner Henry Swieca started Highbridge Capital, a very successful investment management firm. Epstein had a long-standing personal and business relationship with Dubin and Higbridge, who served as investment advisors to Epstein. Epstein and FTC invested substantially in, among other things, Highbridge-sponsored investment funds, including the Fund, on the advice and recommendation of Dubin. 25. After working for Highbridge, in 2002, Zwim started a hedge fund with Highbridge's sponsorship and assistance. Initially, the Fund was called the Highbridge/Zwim Special Opportunities Fund, L.P. Highbridge not only invested with the Fund but also took substantial direct and indirect ownership interests in the Fund's general partner and its investment manager, and Dubin and Highbridge actively participated in the operations of the Fund. The Fund was formed in April 2002 and commenced operations in May 2002. 26. Zwim relied on Dubin, as a principal of the Fund, to introduce him to Epstein (and other substantial investors) when Zwim and Highbridge first launched the Fund. After making these introductions, Dubin prevailed upon Epstein to invest substantially in the Fund, touting Zwim's reliability, and business and investment acumen. Epstein invested on the basis of his trusted advisor's recommendations. Epstein believed that Zwim and the Fund would be closely monitored by Highbridge and Dubin, and that, as sponsors and principals of the Fund, Epstein could look to them to resolve any issues that may arise in connection with FTC's investment. 1045767vI/011585 8 EFTA01124990  27. During 2002 and 2003, FTC invested $60 million in the Fund. On April 4, 2002, FTC invested $10 million in the Fund. On September 1, 2002, FTC invested another $10 million. On December 1, 2002, FTC invested an additional $30 million. FTC made another investment of $10 million on June 1, 2003. 28. From 2002 to 2004, the Fund reported strong performance. In late 2004, the Fund announced that investments made on January 1, 2005 forward would be subject to a three-year lock-up. 29. In late December 2004, FTC sought to invest an additional $20 million in the Fund. Since the Fund accepted investments on the first day of the month, the investment would be made effective January 1, 2005. FTC, however, wanted a single, unified withdrawal date to apply to its entire investment. 30. FTC and the Fund therefore agreed to a letter agreement on January 5, 2005 ("2005 Letter Agreement"). The 2005 Letter Agreement provided: In accordance with Section 9.1 of the Amended and Restated Limited Partnership Agreement, dated as of May 1, 2003 (as amended to the date hereof, the "Agreement") of the Fund, the General Partner hereby agrees that Financial Trust Company, Inc. (the "Company") shall be permitted to withdraw its Capital Account as of the last Business Day of the calendar quarter ending at least two years after the Company initially purchases this Interest . . . upon not less than 120 days' prior written Notice to the General Partner. Capitalized terms used herein but not defined shall have the meanings ascribed to them in the Agreement. 31. The Limited Partnership Agreement provided that each limited partner had a single "Capital Account." Specifically, the Agreement defined a "Capital Account" by providing that "[a] `Capital Account' shall be maintained for each Partner," and that such account shall constitute the Partner's "Initial Capital Contribution" plus adjustments for performance of the Fund and increased by any "Additional Capital Contribution." Thus, the 2005 Letter Agreement 1045767v1/0II585 9 EFTA01124991 clearly applied to all of FTC's investments in the Fund, which were held in FTC's single "Capital Account," as opposed to merely the January 1, 2005 investment. 32. Under the 2005 Letter Agreement, FTC could withdraw its Capital Account on March 31, 2007 (the quarter ending after the two-year anniversary of the January 1, 2005 investment). FTC would have to give 120-days notice—i.e., notice by December 1, 2006. 33. In October 2006, Zwim contacted Epstein. The two had not spoken about anything of substance since 2002. Zwim informed Epstein that the Fund's Chief Financial Officer, Perry Gruss, had been terminated over an accounting transaction that was "nonmaterial." Zwim specifically mentioned that more than $3 million in investor money had been used to pay for a private Gulfstream 400 jet for Zwim. Zwim explained that the money was repaid to investors quickly and that the CFO had approved the transaction without Zwim's knowledge. Nevertheless, Zwim acknowledged this transaction should not have occurred and that the CFO had been terminated as a result. Sensing that something was not right, Epstein responded by demanding the complete withdrawal of FTC's capital account from the Fund. Zwim urged Epstein to refrain from withdrawing. 34. Epstein telephoned Dubin to advise Dubin of Epstein's concerns and of Epstein's demand to Zwim to withdraw all of FTC's capital account. Epstein asked Dubin to get to the bottom of the matter. 35. In late October 2006, Zwim called Epstein again. This time Zwim informed Epstein that the Fund was going to conduct an internal investigation in the wake of the CFO's firing. Zwim again maintained that he had no prior knowledge of the CFO's accounting irregularities. Zwim also pointed to the continued positive performance reported by the Fund as evidence of the Fund's solid financial condition. Epstein demanded to know why Zwim 1045767vI/011585 10 EFTA01124992 previously had characterized the issues as "nonmaterial" when now an independent review was required. Zwirn insisted that he had used the "nonmaterial" language on the advice of counsel, Shulte Roth & Zabel (the Fund's outside counsel). Epstein demanded that Zwim get the lawyers from Shulte on the phone so that Epstein could confirm Zwim's story. At the end of the call, Epstein remained concerned about the issues with the Fund. 36. Epstein, then, contacted Dubin and recounted to Dubin what had occurred. Epstein also repeated his demand to withdraw FTC's entire capital account. 37. On or about November 13, 2006, Dubin, Epstein, and Zwim participated in a three-way call. During the call, Epstein once again demanded to withdraw FTC's entire capital account in the Fund, which at that point Epstein believed to be valued between $135 Million to $140 Million. At no time during that conversation did Zwim ever dispute the fact that Epstein was entitled to FTC's complete withdrawal. To the contrary, Zwim begged Epstein to refrain from a complete withdrawal because such a withdrawal could cause other investors to do the same and precipiate a "run-on-the-bank." When Epstein indicated that he still wanted his money back, Zwim proposed as a compromise that Epstein make only a partial withdrawal demand on FTC's behalf. Zwim agreed that if Epstein made such a demand, the Fund would honor it quickly. Based on Zwim's agreement that the Fund would promptly comply with such a reduced withdrawal demand and Zwim's previous description of the issues with the Fund, which allegedly did not implicate Zwim, as well assurances Epstein received regarding the continued financial well-being of the Fund and security of the balance of FTC's capital account, Epstein responded that he would reduce his demand to slightly more than half FTC's total capital account or $80 Million. (This amount represented the amount of original capital that FTC invested.) Zwim agreed to honor the $80 Million withdrawal demand. Zwim's agreement was 10457670/0'1585 11 EFTA01124993 clear and unambiguous. Dubin participated in the conversation and has confirmed the terms of Zwim's agreement in an affidavit, a copy of which is attached as Exhibit 1. 38. The Fund received valuable consideration in return for FTC's agreement to refrain from pursuing a complete withdrawal. The Fall of 2006 was a precarious time for the Fund, as it was conducting an internal investigation and the Securities & Exchange Commission was investigating the Fund too. The Fund could ill-afford a fight with one of its largest investors at that time. 39. Consequently, on the evening of November 13, 2006, FTC sent by fax a written notice to Zwirn demanding withdrawal of "$80 million of Financial Trust Company's interest in D.B. Zwirn Special Opportunities Fund, L.P." The notice also was mailed by certified mail to Zwim at 745 Fifth Avenue, 18th Floor, New York, New York 10151, to comply with the notice provision of the Limited Partnership Agreement. 40. Upon information and belief, in October and November 2006, Zwim and the Fund did not intend to honor their agreement to allow FTC to withdraw from the Fund either in part or in whole. As a consequence, Zwim and the Fund made false representations to FTC about the Fund's willingness to honor FTC's withdrawal requests and about the Fund's position regarding FTC's withdrawal rights. In October and November 2006, had the Fund or Zwirn explained the position it subsequently took regarding FTC's withdrawal rights, FTC would never have agreed to reduce its withdrawal request. To the contrary, FTC would have demanded that the Fund honor FTC's rights to withdraw in full, just as FTC did orally in October and November 2006 and in writing in February 2007. 41. Between November 13, 2006 and December 1, 2006 (the last day when FTC could have given notice under the 2005 Letter Agreement for a March 31, 2007 withdrawal), 1045767vi/011585 12 EFTA01124994 neither Zwim nor the Fund purported to reject the November 13, 2006 notice, nor did they assert that this notice somehow failed to comply with the 2005 Letter Agreement or was otherwise deficient. 42. In February 2007, the Fund indicated that it was not going to honor FTC's November 13, 2006 request. The Fund ignored the application of the provisions of the 2005 Letter Agreement. Moreover, the Fund claimed that each of FTC's investment tranches was subject to a different two-year lock-up and that the January 1, 2005 investment tranche was subject to a three-year lock-up. 43. As a result of the Fund's apparent unwillingness to abide by its and Zwim's agreements, on February 14, 2007, Epstein wrote the Fund a letter again demanding the complete withdrawal of FTC's entire capital account. Without limiting the right to the complete withdrawal of FTC's capital account, Epstein's letter noted that, at a minimum, the Fund was required to honor the $80 million demand made on November 13, 2006. 44. On March 26, 2007, the Fund reported the results of the internal investigation that was launched in October 2006. As outlined in more detail below, the results showed that the Fund's internal controls were in disarray. 45. The day after this report was issued to investors, on March 27, 2007, the Fund finally responded in writing to FTC's withdrawal demands. After taking months to put forth any legitimate basis for the Fund's refusal to honor FTC's withdrawal demands, the Fund's outside counsel provided a tortured explanation for the Fund's position. With regard to the November 13, 2006 demand to withdraw $80 million, the Fund acknowledged the demand was made within the 120-day notice period. However, the Fund deemed this notice invalid because it was for a "partial" withdrawal. According to the Fund, the 2005 Letter Agreement did not provide Mr. 1045767v1/011585 13 EFTA01124995 Epstein with any such right as of March 31, 2007, because partial withdrawals are governed by Section 9.2 of the Limited Partnership Agreement, which was not covered by the 2005 Letter Agreement. To explain, Section 9.1 of the Limited Partnership Agreement generally addresses "complete withdrawals" and Section 9.2 addresses "partial withdrawals." (There is no substantive difference between the provisions.) The 2005 Letter Agreement begins with the introductory clause, "In accordance with Section 9.1 of the Amended and Restated Limited Partnership Agreement . . . ." The Fund claimed that as a result of this reference to Section 9.1, the 2005 Letter Agreement only authorized "complete withdrawals." 46. The Fund's position was inexplicable. The only reason that FTC demanded a partial withdrawal—as opposed to a complete withdrawal—in November 2006 was because the Fund requested it. To induce FTC to reduce its complete withdrawal demand, Zwim had agreed expressly and unambiguously to honor a partial withdrawal demand. 47. Worse, the Fund waited to express its view that the 2005 Letter Agreement authorized only complete withdrawals until after the deadline expired for FTC to change the November 13, 2006 demand back from a partial withdrawal demand to the complete withdrawal demand that Epstein had previously made repeatedly to Zwim. 48. The Fund's reading of the 2005 Letter Agreement also was baseless. To begin with, the introductory phrase "In accordance with Section 9.1" simply acknowledged that the 2005 Letter Agreement was authorized pursuant to the penultimate sentence of Section 9.1, which gave the General Partner the discretion to alter withdrawal rights in general. See Limited Partnership Agreement § 9.1 ("Withdrawals may also be made at such other times with the consent of, and upon such terms of payment as may be approved by, the General Partner in its sole discretion."). Moreover, the Limited Partnership Agreement is careful to distinguish 1045767v1/011585 14 EFTA01124996 between a "complete" and "partial" withdrawal when intending to distinguish between the two. Had the Fund intended to limit FTC's rights, it knew how to do so. The 2005 Letter Agreement, however, gives FTC the right to "withdraw" without any limiting language (that is, FTC may withdraw either partially or completely). Indeed, it makes no sense that the Fund would have agreed to give FTC special rights to withdraw only its entire capital account but not a lesser amount. Obviously, a partial withdrawal is much preferable from the Fund's perspective to a complete withdrawal. 49. With regard to FTC's February 14, 2007 demand for a complete withdrawal, the Fund declared that it was not timely because 120-days notice was not given. According to the Fund, [T]he 2005 Letter Agreement permitted Financial Trust to withdrawal under Section 9.1 as of March 31, 2007 (and as of the second anniversary of that date thereafter) on 120 days prior written notice. Because the February 14, 2007 Letter seeking complete withdrawal was not provided 120 days prior to March 31, 2007, it did not constitute valid notice. Of course, this ignores the fact that Epstein had repeatedly given Zwirn notice of his demand for a complete withdrawal well within that 120-day period. The only reason that FTC had not provided written notice for the complete withdrawal within that period was that in November 2006, Zwim had induced FTC to change the request. The Fund clearly knew of Epstein's true desire to withdraw FTC's entire capital account well before the 120-day period. 50. The Fund further claimed that each of FTC's investments was subject to a distinct lock-up period. The Fund claimed that the investments were subjected to two-year rolling lock- up periods (i.e., they could be withdrawn on every two-year anniversary of the investment being made). Specifically, the Fund claimed that as of March 2007, FTC could withdrawal on the following schedule: 10457671,1/011585 15 EFTA01124997  Investment Date Withdrawal Date April 1, 2002 June 30, 2008 September 1, 2002 September 30, 2008 December 1, 2002 December 31, 2008 June 1, 2003 June 30, 2007 January 1, 2005 March 31, 2009 51. In case there was any doubt about FTC's desire to exit the Fund in 2007, FTC responded to the above letter by informing the Fund that without prejudice to its position regarding the effect of the January 1, 2005 Agreement, FTC requested withdrawals on the above specified schedule too. 52. FTC had the right to withdrawal at least $45 million as of March 1, 2007. Based on even the Fund's position that each investment was subject to a distinct two-year lock-up, FTC had the undisputed right to withdraw two of its investment tranches in 2007: (1) FTC's January 1, 2005 investment tranche could have been withdrawn on March 31, 2007 by giving notice before December 1, 2006; and (2) FTC's June 1, 2003 investment tranche could have been withdrawn on June 30, 2007 by giving notice before March 3, 2007. As confirmed by the Fund, the combined values of those two investment tranches on their respective withdrawal dates was approximately $45 Million. On November 13, 2006, FTC gave notice of its demand to withdraw $80 million. Given that the Limited Partnership Agreement provides no rule on the form notice must take (even if such a requirement existed, compliance with such a formality would be 1045767vI/011585 16 EFTA01124998 excused under Delaware law), this demand for $80 million was sufficient to put the Fund on notice of FTC's desire to withdraw at least the $45 million that the Fund concedes FTC had the right to withdraw. Yet, the Fund refused to pay even this money out to FTC. 53. Between the end of March 2007 and the end of 2007, the Fund continued to report good performance. However, due to the Fund's problematic accounting issues reported in March 2007, the Fund was unable to produce audited financial statements for 2006. According to the Fund, at the end of 2007, it received massive requests for withdrawals by investors who were frustrated by the inability of the Fund to produce audited financials. As a result, in February 2008, the Fund announced that it would suspend all withdrawals and withdrawal payments. In March 2008, the Fund announced that it would wind down the Fund. FTC now was stuck in the Fund along with all other investors. 54. During 2008 and 2009, the Fund's investments suffered greatly and the value of the Fund dropped precipitously from the 2006 and 2007 valuations. 55. In July 2009, management of the Fund was taken over by Fortress Investment Group, and Zwim was removed from direct involvement in the Fund. 56. It now appears that Zwim and the Fund were not honest with Epstein in the October 2006 about the scope of the Fund's problems and Zwim's involvement in those problems. To begin with, Zwirn had learned of the initial problems—the temporary use of investor money to buy a plane for Zwim and early payment of management fees—back in the Spring of 2006. Zwirn, however, waited until October 2006 to inform investors. 57. This inexplicable delay by Zwirn injured FTC. Even accepting the Fund's view that each of FTC's investments could be withdrawn on its two-year anniversary, FTC had a right to withdraw a $30 million investment made on December 1, 2002 on December 31, 2006. But I045767v1/011585 17 EFTA01124999 FTC had to give notice 120-days before December 31, 2006. Had Zwirn and the Fund timely revealed the initial irregularities, FTC would have been able to request a timely withdrawal of the December 1, 2002 investment, the value of which was greatly in excess of $30 million as of December 31, 2006. Moreover, when Zwim did reveal the problems to FTC in October 2006, he falsely portrayed the problems as newly-discovered. This withdrawal would be in addition to the $45 million that could have been withdrawn—again based on the Fund's own position—in early 2007. See supra at ¶ 52. It is believed that the total value of these investments would have been $100 million on the withdrawal dates. 58. Zwim also was well aware that the problems were more significant than he revealed to Epstein and FTC. As noted above, in March 2007, the Fund issued a report that revealed that the Fund had been borrowing money from D.B. Zwim Special Opportunities Fund, LTD, an offshore sister fund of the Fund, and other managed accounts without any documentation. According to the report, the advances totaled over $100 million. Upon information and belief, FTC alleges that the reason, in part, for the $100 million of intra-fund transfers was that Zwim required the use of the offshore fund's substantial cash resources, which were lacking in the Fund, in order to fund investments that the offshore fund could not properly make. So, upon information and belief, Zwim transferred cash from the offshore fund to the Fund to make those investments and, in order to "smooth out" reported earnings between the two funds, Zwirn subsequently documented the cash transfers as loans with excessive interest rates as high as 20% per annum. As a result, the Fund ended up with a disproportionate amount of illiquid investments while the offshore fund received a right to be repaid in cash at exorbitant interest rates. The Fund also explained that Zwim's management company had overcharged the Fund for operating expenses by $12 million. The Fund also reported that there were additional 1045767v1/011585 18 EFTA01125000 examples of Fund money being used to pay personal expenses of management. 59. While the Report claimed that Zwim was not aware of these issues, the Fund's former CFO recently sued Zwim, claiming this statement was untrue. The claim is also inconsistent with reported accounts of Zwim's management style. According to the article published in the November 2008 issue of Institutional Investor's Alpha, Zwim was a micro- manager. His former employees report that Zwim "insisted on signing off on every deal and every detail down to the exact furnishings of DBZ's Mayfair offices in London." Upon information and belief, FTC alleges that Zwim was well-aware in October 2006 of the improprieties detailed in the March 2007 report. 60. Had the Fund or Zwim been honest with Epstein in October and November 2006 about the nature and scope of the problems and Zwim's role, Epstein certainly never would have reduced, and would have given timely formal written notice of, FTC's original demand for a complete withdrawal of FTC's capital account, which according to the Fund's March 27, 2007 letter, the Fund would have been obligated to honor. Causes of Action First Cause of Action: Breach of Contract 61. Counter-Claimants and Third-Party Claimants repeat and incorporate by reference all of their allegations set forth above. 62. FTC had three contracts with the Fund: the 2005 Letter Agreement, the Limited Partnership Agreement, and an oral agreement formed on November 13, 2006. The Fund breached these agreements by refusing to honor FTC's withdrawal requests. 63. All conditions precedent have been performed. In the alternative, to the extent FTC did not comply with the notice requirements, compliance is excused by—among others- 1045761v1/011585 19 EFTA01125001 the inequitable conduct of the Fund and Zwirn and the fact that otherwise an inequitable forfeiture would result. 64. As the general partner of the Fund, Zwim is liable for the breach. 65. As a result of this conduct, FTC suffered damage. Second Cause of Action: Promissory Estoppel 66. Counter-Claimants and Third-Party Claimants repeat and incorporate by reference all of their allegations set forth above. 67. To the extent the November 13, 2006 withdrawal request was not authorized under the contracts mentioned above, the request is enforceable under the doctrine of promissory estoppel. Zwirn and the Fund promised to honor FTC's November 13, 2006 request to withdraw S80 million. The promise was clear and unequivocal. FTC relied on the promise by not seeking a full redemption. 68. As the general partner of the Fund, Zwim is liable for the obligations of the Fund. 69. As a result of this conduct, FTC suffered damage. Third Cause of Action: Fraud 70. Counter-Claimants and Third-Party Claimants repeat and incorporate by reference all of their allegations set forth above. 71. Zwirn and the Fund made false statements and omitted material information when convincing FTC to reduce its withdrawal request in the Fall of 2006, including, without limitation, misrepresentations about Zwim's knowledge and participation in the Fund's financial and accounting irregularities, the nature and scope of the problems, and the Fund's true intent not to honor FTC's withdrawal. Zwim and the Fund had a duty to speak. Zwirn acted in a fiduciary 1045767v1/0I1585 20 EFTA01125002 capacity to FTC. As well, Zwim and the Fund had a duty to reveal information to make statements they made not misleading. 72. FTC reasonably relied on these misrepresentations and omissions. 73. As a result of this conduct, FTC suffered damage. Fourth Cause of Action: Breach of Fiduciary Duty 74. Counter-Claimants and Third-Party Claimants repeat and incorporate by reference all of their allegations set forth above. 75. Zwim owed a fiduciary duty to FTC arising from Zwim's status as and control over the Fund's general partner. 76. Zwim breached this fiduciary duty to FTC by, among other things, failing to make timely, full and accurate disclosure about the Fund's internal issues and FTC's withdrawal rights and by failing to inform FTC about the Fund's internal issues when Zwim first learned of them. 77. As a result of this conduct, FTC suffered damage. Fifth Cause of Action: Negligent Misrepresentation 78. Counter-Claimants and Third-Party Claimants repeat and incorporate by reference all of their allegations set forth above. 79. Zwim made false statements when convincing FTC to reduce its withdrawal request in the Fall of 2006. Zwim had a duty to FTC. At a minimum, Zwim was negligent in not discovering the true facts underlying its statements and in not revealing, timely or at all, the truth to FTC. 80. FTC reasonably relied on these misrepresentations. 81. As a result of this conduct, FTC suffered damage. 1045767v1/0I1585 21_ EFTA01125003  Conclusion 82. As a result of Zwim's and the Fund's fraudulent and otherwise unlawful conduct, FTC has been damaged in an amount equal to approximately $140 Million plus prejudgment interest, punitive damages, and is also entitled to rescissionary damages, plus interest, together with the attorneys' fees and costs of this proceeding. Dated: New York, New York May Zi, 2010 Respectfully submitted, SUSMAN GODFREY L.L.P. Steph . Susman Seth Ard 654 Madison Avenue, 5th Floor New York, New York 10065-8440 Telephone: (212) 336-8330 Fax: (212) 336-8340 E-mail: E-mail: Harry P. Susman SUSMAN GODFREY L.L.P. 1000 Louisiana Street, Suite 5100 Houston, Texas 77002-5096 Telephone: (713) 651-9366 Fax: (713 654-6666 E-mail: Attorneys for Respondent Counter-Claimants and Third-Party Claimants Financial Trust Company, Inc. and Jeepers, Inc. I 045767v1/0I 1585 22 EFTA01125004  PROOF OF SERVICE This is to certify that a true and correct copy of the foregoing instrument has been served by email and first class mail, this 21 day of May, on: Brad S. Karp Alan Levine Allan Arffa Cooley LLP Paul, Weiss, Rifkind, Wharton & Garrison LLP The Grace Building 1285 Avenue of the Americas 1114 Avenue of the Americas New York, NY 10019 New York, NY 10036 John S. Siffert Lankier Siffert & Wohl LLP 500 Fifth Avenue, 33rd Floor New York, NY 10110 HarryR usman I045767vI/011585 23 EFTA01125005 EXHIBIT 1 EFTA01125006  AFFIDAVIT OF GT AZNN O(1RIN STATE OF NEW YORK ) ss.: COUNTY OF NEW YORK Glenn Dubin, being duly sworn, deposes and says: I am over twenty-one years of age and am competent to testify to the matters stated in this affidavit. I have personal kno wledge of the facts and statements herein. Each of the facts and statements here in is true and correct. 2. Starting in 2002, an entity that I both own ed and controlled, currently known as Dubin & Swieca Asset Management, LLC ("DSAM"), owned interests in the gene ral partner and in the investment manager of D.B. Zwirn Special Opportunities Fund, L.P. (the "Zwim Fund"). The Zwirn Fund was named after Daniel Zwim ("Zwim"). While Zwim was responsible for the day-to-day management and operations of the Zwim Fund, after Zwim spun off his business from DSAM (then known as Highbridge Cap ital Management, LLC), 1 helped introduc e investors to Zwim, invested my personal and family foundation itsf.ts with Zwirn, and my firm allocated assets of Highbridge Cap ital Corporation ("BCC") to an account man aged by Zwim's company which was also the investment manager of the Zwim Fund. 3. One of the early investors that I introduced to Zwim was Jeffrey Epstein ("Epstein"). Epstein was both a persona l friend of min e and a long-time investor in FICC. My understandipg is that beginning in 2002 Epstein invested assets in the Zwi rn Fund through an entity called Financial Trost Company, Inc. EFTA01125007  4. In the fall of 2006, Zwim called me and told me that he was firing the Zwirn Fund's Chief Financial Officer. Zwim told me that there had be