tetragon financial lawsuit by silverstein
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JS 44C/SDNY
REV. 1/2008CIVIL COV
The JS-44 civil cover sheet and the informationcontained hergjfceither replace nor supplement the filing and service ofpleadings or other papers as required bylaw, except as provided by local rules of court. This form, approved by the JudicialConference of the United States in September 1974, is required for use of the Clerk of Court for the purpose of initiatingthe civil docket sheet.
1 • ZQU
PLAINTIFFS
DANIEL K. SILVERSTEIN, Derivatively on Behalfof TETRAGON FINANCIAL GROUP LTD.
DEFENDANTSBYRON KNIEF, RUPERT DOREY, DAVID JEFFREYS, LEE OLESKY,GREVILLE V.B. WARD, PATRICK DEAR, READE GRIFFITH,ALEXANDER JACKSON,JEFF HERLYN, MICHAEL ROSENBERG,DAVID WISHNOW, TETRAGON FINANCIAL MANAGEMENT LP
and POLYGON INVESTMENT PARTNERS LLP
and TetragonFinancial Group LTD.,a Guernsey Corporation
Nominal Defendant
ATTORNEYS (FIRM NAME, ADDRESS, ANDTELEPHONE NUMBER)Robbins Geller Rudman & Dowd, LLP58 So. Service Road, Suite 200, Melville, NY 11747 (631) 367-7100
ATTORNEYS (IF KNOWN)
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CONTRACTPERSONAL INJURYPERSONAL INJURY
[ ]310 AIRPLANE[ )315 AIRPLANE PRODUCT
LIABILITY
[ ] 320 ASSAULT, LIBEL &SLANDER
[ ] 330 FEDERALEMPLOYERS'
LIABILITY
[ ]340 MARINE[ ] 345 MARINE PRODUCT
LIABILITY
[ ] 350 MOTOR VEHICLE[ ] 355 MOTOR VEHICLE
PRODUCT LIABILITY[ ] 360 OTHER PERSONAL
INJURY
FORFEITURE/PENALTY
[ )110[ 1120[ 1130[ ]140
[]150
[ ) 151[1152
[J 153
I )160
[ J 190
[ 1195
[ ]196
INSURANCE
MARINE
MILLER ACT
NEGOTIABLE
INSTRUMENT
RECOVERY OF
OVERPAYMENT &
ENFORCEMENT
OF JUDGMENT
MEDICARE ACT
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OVERPAYMENT
OF VETERAN'S
BENEFITS
STOCKHOLDERS
SUITS
OTHER
CONTRACT
CONTRACT
PRODUCT
LIABILITY
FRANCHISE
REAL PROPERTY
[ J210
I )220( ]230
[ ]240[J245
[ J290
LAND
CONDEMNATION
FORECLOSURE
RENT LEASE &
EJECTMENT
TORTS TO LAND
TORT PRODUCT
LIABILITY
ALL OTHER
REAL PROPERTY
ACTIONS UNDER STATUTES
[ ) 362 PERSONAL INJURY- [ ] 610MED MALPRACTICE [ ] 620
[ ] 365 PERSONAL INJURYPRODUCT LIABILITY [ ] 625
[ ] 368 ASBESTOS PERSONALINJURY PRODUCT
LIABILITY
PERSONAL PROPERTY
[ J 370[ 1371[ I 380
[ ]385
OTHER FRAUD
TRUTH IN LENDING
OTHER PERSONAL
PROPERTY DAMAGE
PROPERTY DAMAGE
PRODUCT LIABILITY
[ J 630[ ] 640[ ]650[ ]660
[ J 690
AGRICULTURE
OTHER FOOD &
DRUG
DRUG RELATED
SEIZURE OF
PROPERTY
21 USC 681
LIQUOR LAWS
RR& TRUCK
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LITIGATION[ ]441 VOTING [ ]510 MOTIONS TO [ ]791 EMPL RET INC
I 1142 EMPLOYMENT VACATE SENTENCE SECURITY ACT[ 1443 HOUSING/ 20 USC 2255
ACCOMMODATIONS [ ] 530 HABEAS CORPUS IMMIGRATION[ J444 WELFARE [ ]535 DEATH PENALTY
1 ]445 AMERICANS WITH [ ]540 MANDAMUS & OTHER [ ]462 NATURALIZATIONDISABILITIES - [ I 550 CIVIL RIGHTS APPLICATIONEMPLOYMENT [ I 555 PRISON CONDITION I ]463 HABEAS CORPUS-
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ENCED & CORRUPT
[ J 820 COPYRIGHTS ORGANIZATION ACT
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PLAINTIFF(S) ADDRESS(ES) AND COUNTY(IES)
610 Wyoming Avenue
Kingston, PA 18704
(Luzerne County)
DEFENDANT(S) ADDRESS(ES) AND COUNTY(IES)
See attached Schedule A.
DEFENDANT(S) ADDRESS UNKNOWNREPRESENTATION IS HEREBY MADE THAT, AT THIS TIME, I HAVE BEEN UNABLE, WITH REASONABLE DILIGENCE, TO ASCERTAIN THE
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I 1 N0 n* iocsfC] YES (DATE ADMITTED Mo. uo Yr. lt,ao )
Magistrate Judge is to be designated by the Clerk of the Court.
MAG. JUDGE G0INSTE1NMagistrate Judge is so Designated.
J. Michael McMahon, Clerk of Court by Deputy Clerk, DATED .
UNITED STATES DISTRICT COURT (NEW YORK SOUTHERN)
Byron Knief18 East 95th Street, Apt. 5New York, NY 10128(New York County)
Rupert DoreyLe CamptrehardRue des RocquettesSt. Andrews, Guernsey Gy6 8SHChannel Islands
David JeffreysCanon Hall
La TurquieBordeaux, Guernsey, GY3 5EBChannel Islands
Lee Olesky317 West 92nd Street
New York, NY 10025(New York County)
Greville V.B. Ward
148 Baldwin Road
Mount Kisco, NY 10549(Westchester County)
Patrick Dear
399 Park Avenue
New York, NY 10022(New York County)
Reade Grifith
10 Duke Street
London W1U3EP
Alexander Jackson
33 Gilliam Lane
Riverside, CT 06878(Fairfield County)
Schedule A
Jeff Herlyn12 Longmeadows RoadWilton, CT 06897(Fairfield County)
Michael Rosenberg1 Karlin Drive
Chatham, NJ 07928(Morris County)
David Wishnow
52 Dorison Drive
Short Hills, NJ 07078(Essex County)
Tetragon Financial Management LP399 Park Avenue
New York, NY 10022(New County County)
Polygon Investment Partners LLP399 Park Avenue, 22nd FloorNew York, NY 10022
Tetragon Financial Group, Ltd.c/o Tetragon Financial Management LP399 Park Avenue
New York, NY 10022(New York County)
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m
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
DANIEL K. SILVERSTEIN, Derivatively onBehalf of TETRAGON FINANCIAL GROUP
LTD.,
Plaintiff,
vs.
BYRON KNIEF, RUPERT DOREY, DAVIDJEFFREYS, LEE OLESKY, GREVILLE V.B.WARD, PATRICK DEAR, READEGRIFFITH, ALEXANDER JACKSON, JEFFHERLYN, MICHAEL ROSENBERG, DAVIDWISHNOW, TETRAGON FINANCIALMANAGEMENT LP and POLYGON
INVESTMENT PARTNERS LLP,
Defendants,
and
TETRAGON FINANCIAL GROUP LTD., a
Guernsey corporation,
Nominal Defendant.
11F¥
Civil Action No.
DERIVATIVE ACTION
VERIFIED DERIVATIVE COMPLAINT
FOR BREACHES OF FIDUCIARY DUTIES
AND VIOLATIONS OF THE INVESTMENT
ADVISERS ACT OF 1940
CO
x DEMAND FOR JURY TRIAL
FACTUAL ALLEGATIONS
INTRODUCTION
1. This is a derivativeactionbroughtby plaintiff on behalf of TetragonFinancial Group
Ltd. ("TFG" or the"Company") against certain of Tetragon's officers anddirectors, its investment
manager, Tetragon Financial Management LP ("Investment Manager" or "investment advisers"),
and a private investment firm, Polygon Investment Partners LLP ("Polygon Investment").
2. Polygon Investment was founded by and is owned and/or controlled by TFG
directors, defendants Patrick Dear and Reade Griffith. Polygon Investment owns and controls
Polygon Credit Management GP LLC, which in turn owns and controls the defendant Investment
Manager.
3. By this action, plaintiff seeks to remedy an ongoing abusive scheme by TFG's
directors and entitiescontrolled by the directors, who areunlawfullyprofiteeringvia self-dealing at
the expense of TFG. Defendants, in breachof their fiduciary duties, have awarded the Investment
Manager (and themselves) $205 million inperformance fees even though TFG's investments have
failed tomakeup theirprior losses sincethe thirdquarterof 2008. Defendants' violations became so
pervasive that, with respect toa recent transaction inwhich oneparticular director was excluded by
his co-defendants from sharing in the ill-gotten gains, that director, Alexander Jackson, is now
independently suing his fellow directors for their breaches of fiduciary duties and looting of the
Company.2
l The Investment Manager was formerly known as Polygon Credit Management LP.
2 Acopy ofAlexander Jackson's pleading in that case, filed intheRoyal Court ofGuernsey, isattached hereto as Exhibit 1.
1 -
4. Plaintiff seeksto recoverdamages, andequitableand injunctivereliefforTFGagainst
defendants, to remedy defendants' breaches of fiduciary duties of good faith, loyalty and
independence, and for unjust enrichment and constructive fraud. Plaintiffalso brings this action for
TFG against certain defendants forviolation of the Investment Advisers Actof 1940. As theTFG
Board of Directors (the "Board")has alreadydemonstrated, absentthisaction, theCompany'srights
against its wayward fiduciaries will not be exercised, to the further detriment of TFG.
5. TFG is a closed-end investment company. It is a structured credit fund created in
2002 by several New York and London-based individuals via a closelycontrolled New York and
London-based privateinvestment firm, Polygon Investment. InApril 2007, TFGraised $300 million
in a public offering. At all relevant times, TFG primarily invested in the "equity" or "first-loss"
tranchesofcollateralized loan obligations ("CLOs") - a structured credit vehicle that uses pools of
leveraged loansas collateral to issuedebt securities with varying degrees of risk. TFG's principal
place ofbusiness is inNewYork. Seven outof thenineBoard members who haveserved onTFG's
seven-member Board since 2007 have been or are citizens of the United States.
6. TFG's Articles ofIncorporation("Articles") mandate that the Boardbe comprised of
seven members, a majority of whom must be "independent." TFG's Articles also provide that all
members of the Audit Committee of the TFG Board must be "independent." However, contrary to
defendants' representations, neither the majority of the Board, nor the Audit Committee, has ever
been "independent."
7. Instead offaithfully serving the Company's investors, defendants have engaged and
continue to engage in the looting ofTFG. The Investment Manager, with the active complicityof
the TFG Board, has expropriated almost $205 million in unjust fees in what has been described as
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'"the most flawed compensation system'" ever seen. As reported in an article in The Wall Street
Journal on February 16, 2010:
It might be one of the greatest financial performances of 2010 - a fortunecreated even after losing staggering sums for investors.
Meet the managers ofTetragon Financial Group. They are five Wall Streetveterans who, by luck and design, enjoy what Tetragon investor Charles W. GriegeJr. critiqued as "the most flawed compensation system" he had ever seen.
Tetragon is awarding its managers tens, and potentially hundreds, ofmillionsof dollars. This comes despite massive losses in the fund, an offshoot of London-based hedge fund Polygon Investment Partners LLP, which decorated its ParkAvenue offices with embossed wallpaper featuring its name.
And Tetragon is pocketing one-quarter ofthe "gains" it registers each quarter,though it is really just earning back the $767 million in losses recognized over thepast year, according to securities filings.
8. Although defendants persist in keeping secret the investment management agreement
("IMA") entered into between TFG and the Investment Manager on April 26, 2007, it appears that
the Investment Manager is paid a percentage (1.5% per annum) of the aggregate Net Asset Value
("NAV") ofthe fund on a share-by-share basis. Defendants also claim and have approved, pursuant
to the IMA, a 25% "incentive (performance) fee" to the Investment Manager for increases in the
NAV of the fund. Defendants steadfastly refuse to disclose the IMA to TFG shareholders.
9. Purportedly relying upon the terms of the IMA, defendants have expropriated (and
continue to expropriate) tens of millions of dollars from the Company, irrespective of TFG's
portfolio performance. Defendants paid a 25% performance fee to the Investment Manager each
time the Board marked up the net asset value of the fund that was previously marked down (at the
Investment Manager's direction) by hundreds ofmillions ofdollars below the value established by
the Investment Manager's own chosen valuation model (itself commissioned from State Street
Advisors, Inc.). Defendants have acted and continue to act in bad faith and in contravention oftheir
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fiduciary duties. Infact, defendants' sole justification for arguing that the diversion ofthe fees tothe
Investment Manager is permissible, is thattheir manipulation of TFG's NAV downward and then
back up is not expressly forbidden by the IMA. As one reporter from The Wall Street Journal
reported, the25% performance fee was atypical intheindustry and defendants' practice is nothing
short of "astounding":
TFG continues to be a massive money-spinnerfor Polygon, generating$88 million infees for it in the first nine months of 2010, the most recent available data.
The revenue is notable because it underlines TFG's astoundingfee structure,which resets each quarter without recognizingprevious losses. Ifhalfof TFG'sportfolio is wiped out in a year, Polygon still collects 25% on any subsequentquarterly gain above a nominal Libor hurdle.
That's pretty much what happened betweenmid-2008 and mid-2009, whenTFG's net asset value sank to $693 million from $1.3 billion. But by the fourthquarter of 2009, the leveraged loanmarket wason themend, so Polygon wrotebackupthevalueof theTFGportfolio andtooka cool$29.8 millionin performance fees.Furtherwriteups in the first ninemonthsof 2010 resulted in another$78 million inperformance fees, though net assetvalue remained well below that 2008 figure.
Loss-making funds typically must return to their high water mark beforetaking performance fees.
Depending on yourpointof view, it is eithera very cleverwayforPolygon tomaximize TFG's feepotential, or a terribleway to treatshareholders whohave hada very rough ride and are now seeing the vast bulk of recent improvements go intoPolygon's pocket.
To put it in perspective, shareholders got $41.9 million in dividends in theseven quarters to Sept. 30, 2010, while Polygon's affiliate that manages the fund,Tetragon Financial Management, took $130 million in fees.
Nice work if you can get it.
Margot Patrick, "Polygon'sTetragon StillMumonJackson Ousting," WSJ/The Source, January 27,
2011.
10. To accomplishthe expropriationofalmost $205 million to defendantsdressed up as
"performance fees," defendants stacked the TFG Board and its Audit Committee with non-
independent directors who had (and still have) direct affiliations with the Investment Manager.
Insulated and conflicted, defendants have looted, and continue to loot, TFG through a series of
manipulative actions entered inbadfaith and inderogation of thefiduciary duties owed bythem to
TFG. TheIMAitself,if portrayed andinterpreted accurately by defendants, wasagreed toinbreach
of fiduciary duties owed to the Company by the defendant Board members who were not
independent asclaimed bydefendants. Rather, theindividual defendants and entities controlled by
them were, and remain, conflicted by their web of incestuous cross-affiliations.
JURISDICTION AND VENUE
11. The claims asserted herein arise under the Investment Advisers Act of 1940,
15 U.S.C. §80b-l, etseq., andthe common law for breaches of fiduciary duties, unjustenrichment
andconstructivefraud. This Courthas subjectmatter jurisdiction pursuant to 28 U.S.C. §1331,and
as well as 15 U.S.C. §80b-14. This Court also has supplemental jurisdiction over the non-federal
claims asserted herein pursuant to 28 U.S.C. §1367.
12. Defendants purposely availed themselves of the privilege of conducting activities
within New York and therefore invoked the benefits and protection of its laws and its courts. TFG
conducts business from its New York office. Each individual defendant has minimum contacts with
the State of New York, certain of the defendants are citizens of New York, reside here or have
frequently traveled here on TFG's business and otherwise.
13. This action is not a collusive one to confer jurisdiction on a court ofthe United States
which it would not otherwise have.
14. Venue is proper pursuant to 28 U.S.C. §§1391 and 1401. Many of the acts and
practices complained ofhereinoccurred in substantial partin thisDistrict. TFGconducts business in
this District. TFG solicited investors in New York and other parts of the country from its office in
this District.
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THE PARTIES
15. Plaintiff Daniel K. Silverstein is, and at all times since March 2010 has been, a TFG
shareholder. He is a citizen of Pennsylvania.
16. Nominal party TFG is a Guernsey closed-end investment company whose executives
and directors are located in New York City. TFG's shares are traded on the Euronext Amsterdam
Exchange ("Euronext"). TFG invests primarily through long-term funding vehicles, such as CLOs,
in selected securities assets classes. Its main investments are in equity tranches of CLOs. TFG
invests through a "master-feeder" structure whereby TFG's only direct investment is in shares of
Tetragon Financial Group Master Fund Limited ("TFG Master Fund"), also incorporated in
Guernsey.3 TFG and TFG Master Fund consist of the same board ofdirectors.
17. Defendant Byron Knief ("Knief) has served as an Independent Non-Executive
Director of TFG and TFG Master Fund since July 2005. Knief is a citizen of New York. As a
director, he regularly participates in the review and performance ofTFG's investments and generally
supervises the conduct ofTFG's affairs. He was responsible for reviewing and authorizing the IMA.
He is a Managing Director ofCourt Square Capital Advisor, LLC. Prior to 1989, he ran a variety of
businesses for Citigroup in the United States, Europe, Canada and Latin America. While purporting
to serve as an "Independent Director" ofTFG, he also serves as a board member ofPolygon Global
Opportunities Fund and Polygon Global Opportunities Master Fund, which are directly affiliated
with TFG's Investment Manager by having a common owner, Polygon Investment. Defendant Knief
has breached his fiduciary duties to TFG by simultaneously serving on the boards of companies
TFG has an authorized share capital of $1,000,000 divided into 10 voting shares and999,999,990 non-voting shares, at par value of $0,001 each. The 10 voting shares are owned byPolygon Credit Holdings II Limited (based in the Cayman Islands), another Polygon Investmententity that is associated with the Investment Manager.
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affiliated with the Investment Manager, thereby compromising his so-called "independence." As a
member ofthe TFG Board, he violated his fiduciary duties by failing to safeguard TFG's assets and
wrongfully diverting tens of millions of dollars from TFG's coffers to those of the Investment
Manager with which he is affiliated.
18. Defendant Rupert Dorey ("Dorey") has served as an Independent Non-Executive
Director ofTFG and TFG Master Fund since July 2005. Dorey is a U.K. citizen. As a director, he
regularly participates in the review and performance ofTFG's investments and generally supervises
the conduct of TFG's affairs. He was responsible for reviewing and authorizing the IMA. He is
based in Guernsey and has over 23 years ofexperience in debt capital markets specializing in credit-
related products, including derivative instruments. Defendant Dorey's expertise is principally in the
areas ofdebt distribution, origination and trading, covering all types ofdebt from investment grade
to high yield and distressed debt. Defendant Dorey currently acts as a director on a number ofhedge
funds, fund of hedge funds and private equity funds. He was at Credit Suisse for 17 years, from
1988 until 2006. As a member of the TFG Board, he breached his fiduciary duties by failing to
safeguard TFG's assets and wrongfully diverting tens of millions of dollars from TFG's coffers to
those of the Investment Manager.
19. Defendant David Jeffreys ("Jeffreys") has served as an Independent Non-Executive
Director ofTFG and TFG Master Fund since July 2005. Jeffreys is a U.K. citizen. As a director, he
regularly participates in the review and performance ofTFG's investments and generally supervises
the conduct of TFG's affairs. He was responsible for reviewing and authorizing the IMA. He is
based in Guernsey and provides directorship services to a small number offund groups. From 1993
until June 2004, defendant Jeffreys was Managing Director of Abacus Fund Managers (Guernsey)
Limited. Previously, defendant Jeffreys worked as an auditor and accountant for 12 years with
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Coopers & Lybrand (and its predecessor firms). As a member of the TFG Board, he breached his
fiduciary duties by failing to safeguard TFG's assets and wrongfully diverting tens of millions of
dollars from TFG's coffers to those of the Investment Manager.
20. Defendant Lee Olesky ("Olesky") served as an Independent Non-Executive Director
ofTFG and TFG Master Fund from July 2005 to April 2010. Olesky is a citizen ofNew York. As a
director, he regularly participated in the review and performance ofTFG's investments and generally
supervised the conduct ofTFG's affairs. He was responsible for reviewing and authorizing the IMA.
He is the President of Thomson TradeWeb and co-founder of the TradeWeb business, a fixed-
income electronic trading brokering platform. He has over 17 years of experience in the global
fixed-income markets and 7 years leading TradeWeb and another fixed-income electronic trading
brokering platform, BrokerTec, from start-up through to successful global businesses. Before that,
he was the Director of Fixed Income Legal and Compliance at Credit Suisse and in private law
practice. He has served on the boards ofdirectors ofa number ofprivate companies. While serving
as a purported "Independent Director" ofTFG, he also served as a board member ofPolygon Credit
Income Fund, which is affiliated with the Investment Manager. Defendant Olesky has breached his
fiduciary duties to TFG by simultaneously serving on the boards ofthe companies affiliated with the
Investment Manager, thereby compromising his so-called "independence." As a member ofthe TFG
Board, defendant Olesky breached his fiduciary duties to TFG by failing to safeguard TFG's assets
and wrongfully diverting tens ofmillions ofdollars from TFG's coffers to those of the Investment
Manager with which he is affiliated.
21. Defendant Greville V.B. Ward ("Ward") replaced defendant Olesky in April 2010 as
the new Independent Non-Executive Director ofTFG. Ward is a U.K. citizen. Defendant Ward was
a former Managing Director and one of the founders of Collins Stewart Inc., a financial advisory
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company. Previously, defendant Ward worked in London for Savory Milln, a brokerage firm.
While serving as an "Independent Director" of TFG, he currently serves on the board of Polygon
Global Opportunities Master Fund and certain of its affiliates, which are affiliated with TFG's
Investment Manager. Defendant Ward has breached his fiduciary duties to TFG by simultaneously
serving on the boards ofcompanies affiliated with the Investment Manager, thereby compromising
his so-called "independence." As a member of the TFG Board, defendant Ward breached his
fiduciary duties to TFG by failing to safeguard TFG's assets and wrongfully diverting tens of
millions of dollars from TFG's coffers to those of the Investment Manager with which he is
affiliated.
22. Defendant Patrick "Paddy" Dear ("Dear") is a director ofTFG and TFG Master Fund.
He co-founded TFG's Investment Manager in 2005 and serves as its Principal. Dear is a U.K.
citizen. In 2002, he also co-founded Polygon Investment, which is affiliated with the Investment
Manager. He is on the investment committees ofthe Investment Manager and TFG's Master Fund,
which is responsible for making all the investment decisions for TFG. He was previously Managing
Director and the Global Head ofHedge Fund Coverage for UBS Warburg Equities. Prior to this, he
was Co-Head ofEuropean sales trading, execution, arbitrage sales and flow derivatives. He was in
equity sales at Prudential Bache before joining UBS. As a member of the TFG Board, defendant
Dear breached his fiduciary duties by failing to safeguard TFG's assets and wrongfully diverting
tens ofmillions ofdollars from TFG's coffers to those of the Investment Manager with which he is
affiliated. As a Principal of TFG's Investment Manager, he aided and abetted the TFG Board
members in breaching their fiduciary obligations to TFG.
23. Defendant Reade Griffith ("Griffith") is a director of TFG and TFG Master Fund.
Griffith is a citizen of New York. He also co-founded TFG's Investment Manager and serves as a
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Principal. He was also involved in co-founding Polygon Investment. He is on the investment
committeeofthe InvestmentManagerresponsible for making all the investment decisions forTFG.
Hewaspreviouslythe founderandformerChiefExecutive Officerof the European officeof Citadel
Investment Group, a multi-strategy hedge fund that he joined in 1998. He was previously with
Baker, Nye, an investment company, where he was an analyst working on an arbitrage and special
situations portfolio. As a member of the TFG Board, defendant Griffith breached his fiduciary
dutiesby failing to safeguard TFG's assetsandwrongfully divertingtens of millionsof dollars from
TFG's coffers to those of the Investment Manager with which he is affiliated. As a Principal of
TFG's Investment Manager, he aided and abetted the TFG Board in breaching its fiduciary
obligations to TFG.
24. Defendant Alexander Jackson ("Jackson") is a Principal of TFG's Investment
Manager. Jackson is a citizenof Connecticut. Until January2011,he also served as a member of
the TFG Board. He co-founded Polygon Investment in 2002 and co-founded TFG's Investment
Manager in 2005. He is on the investment committee of the Investment Manager, which is
responsible formakingall the investment decisions forTFG. Hewaspreviously the ChiefExecutive
Officerof the European officeof Highbridge CapitalManagement. Prior to joining Highbridge, he
workedfor Taylor & Companyin Texas, wherehe was responsible for equityderivative investments
inJapan. Hestarted his careerat PaineWebber. As a member of theTFGBoard, defendant Jackson
breached his fiduciary duty by failing to safeguard TFG's assets and wrongfully diverting tens of
millions ofdollars from TFG's coffers to the Investment Manager with which he is affiliated. As a
Principal of TFG's Investment Manager, he aided and abetted the TFG Board in breaching its
fiduciary obligations to TFG.
10-
25. Defendant Jackson is well aware of the violations of law that he and his fellow
defendants have perpetrated. In a derivative action that Jackson himself filed in the Royal Court of
Guernsey on February 25, 2011 (a copy of which is attached hereto as Exhibit 1), Jackson
acknowledges that his fellow TFG Board members and executives - with the exception of Olesky,
the same individual defendants as in this case - have engaged in self-dealing and made false
statements in connection with transactions with Polygon entities in which some of his fellow
directors are heavily invested but from which Jackson has largely divested. Since Jackson cannot
profit from those transactions, he has alleged that they were entered into in a gross breach of
fiduciary duties owed to him and other TFG shareholders.
26. By his complaint, Jackson has admitted that each ofthe directors owe fiduciary duties
to TFG:
(i) to act in good faith in the best interests ofthe Company and to promote
the success of the Company;
(ii) to ensure that his own personal interests or duties to another Principal
do not come into conflict with the interests of the Company and not to use for his personal benefit
any asset or business opportunity belonging to the Company;
(iii) to exercise his powers within the authority conferred on him under the
constitution and to ensure that the Company is operated lawfully, in accordance with its constitution
(including its articles ofassociation) and in accordance with all statutory and regulatory provisions
concerning the Company;
(iv) to exercise his powers as a director of the Company for the purposes
upon which they were conferred; and
(v) to act with reasonable care, skill and diligence.
-11 -
27. In his lawsuit, defendant Jackson also acknowledged that his fellow TFG directors
and executives breached their fiduciary duties and unfairly enriched themselves in connection with a
transaction not authorized by TFG's Memorandum and Articles of Incorporation and at the expense
ofTFG by (a) breaching the conflict provisions ofGuernsey's Authorized Closed Ended Investment
Scheme Rules 2008 by engaging in transactions other than at arms' length; (b) acting against the
Company's interests by exposing it to double management fees and exposure to shareholders for
misrepresentations that Jackson alleges were made by TFG; (c) breaching Sections 298 and 299 of
the Companies (Guernsey) Law 2008; (d) breaching their duties offull and frank disclosure; and (e)
breaching their duties of skill, care and diligence. Ex. 1 at 19-46, ^62-93. Defendant Jackson has
now been ousted from the TFG Board and has even been denied access to the New York offices of
the Investment Manager (of which he remains a Principal). Ex. 1 at 19, TJ61.2.
28. Defendant JeffHerlyn ("Herlyn") joined the Investment Manager as a Principal upon
its formation in May 2005. Herlyn is a citizen ofConnecticut. He is on the investment committee of
the Investment Manager, which is responsible for making all of the investment decisions for TFG.
Prior to that, he was a Managing Director and Co-Head (with defendant Michael Rosenberg) of the
Global CDO Group at UBS AG and was responsible for a group focused on structuring, originating
and distributing CDOs, inaddition to managing the secondary CDO trading desk.4 Prior to joining
UBS, he was a Managing Director at JPMorgan and a Co-Head (also with defendant Rosenberg) of
the firm's North American CDO Group. Previously, he was a Managing Director at CIBC World
Markets, where he held various positions within the North American Capital Markets Group,
CDOs, or collateralized debt obligations, are a type ofstructured asset-backed security whosevalue and payments are derived from a portfolio of fixed-income underlying assets. CDOs aredivided into different risk classes or tranches. Senior tranches are considered to be the safest
securities. Interest and principal payments are made in order of seniority.
12
including National Sales Manager and Head ofthe U.S. Government Primary Dealer Trading Desk.
As a Principal ofTFG's Investment Manager, defendant Herlyn aided and abetted the TFG Board in
breaching its fiduciary obligations to TFG.
29. Defendant Michael Rosenberg ("Rosenberg") joined the Investment Manager as a
Principal upon its formation in May 2005. Rosenberg is a citizen of New York. He is on the
investment committee of the Investment Manager, which is responsible for making all of the
investment decisions for TFG. Prior to that, he was a Managing Director and Co-Head (with
defendant Herlyn) ofthe Global CDO Group at UBS AG. Prior to joining UBS, he was a Managing
Director at JPMorgan and a Co-Head (also with defendant Herlyn) of the firm's North American
CDO Group. Prior to working in investment banking, he worked in the mortgage banking industry,
both in the United States and internationally in Poland and in the former Soviet Union. As a
Principal ofTFG's Investment Manager, defendant Rosenberg aided and abetted the TFG Board in
breaching its fiduciary obligations to TFG.
30. Defendant David Wishnow ("Wishnow") served as a director ofTFG until December
2008 and joined TFG's Investment Manager as a Principal upon its formation in May 2005.
Wishnow is a citizen ofNew Jersey. He is on the investment committee ofthe Investment Manager,
which is responsible for making all of the investment decisions for TFG. Prior to that, he was a
Managing Director and Head of European and Asian Hedge Company Client Management for the
Fixed Income, Rates and Currency division at UBS AG in London. Prior to these positions, he was
European Co-Head ofUBS's Banks/Insurance Credit Fixed Income Sales and Global Head ofShort
Duration Sales, responsible for the distribution of financing, money market and short-term fixed-
income products. As a member ofthe TFG Board, defendant Wishnow breached his fiduciary duties
to TFG by failing to safeguard TFG's assets and wrongfully diverting tens of millions of dollars
-13-
from TFG's coffers to those ofthe Investment Manager with which he is affiliated. As a Principalof
TFG's Investment Manager, defendant Wishnow aided and abetted the TFG Board in breaching its
fiduciary obligations to TFG.
31. The Investment Manager, defendant Tetragon Financial Management LP, was
appointed the investment manager ofTFG and the TFG Master Fund by defendants Knief, Dorey,
Jeffreys and Olesky pursuant to the IMA. The Investment Manager is a citizen ofNew York. The
investment committee of the Investment Manager (the "Investment Committee") consists of
defendants Herlyn, Rosenberg, Wishnow, Griffith, Dear and Jackson (the "Principals") and is
responsible for the investment management of the portfolio and the business. The Investment
Committee currently sets forth the investment strategy and approves each significant investment by
the TFG Master Fund. The risk committee of the Investment Manager (the "Risk Committee")
currently consists of the Principals. The Risk Committee is currently responsible for the risk
management of the portfolio and the business and performs active and regular oversight and risk
monitoring. The Investment Manager aided and abetted TFG's Board in breaching its fiduciary
obligation to TFG.
32. Defendant Polygon Investmentis a globalprivate investment firm foundedin 2002by
defendants Dear and Griffith. Polygon Investment is a citizen of New York. Polygon Investment
owns and/or controls the Investment Manager, Polygon Credit Management GP LLC, Polygon
Global Opportunities Fund, Polygon Opportunities Master Fund and Polygon Credit Income Fund.
Polygon Investment aided and abetted TFG's Board in breaching its fiduciary obligations to TFG.
DEFENDANTS' MISCONDUCT
The TFG Board Was Not Independent
33. The members of the TFG Board owed duties to TFG that included:
14
• A duty to exercise a level of skill and care that may be reasonably expected from aperson of the director's knowledge and experience;
• A duty to act in good faith, exercise their powers for proper purpose and to keep theircompany's confidence;
• A duty to ensure that their own personal interests or duties to another principal do notconflict with the interests ofthe company and not to use for personalbenefit propertyor opportunities belonging to the company;
• A duty to exercise their powers within the authority conferred by the company'sconstitution and to ensure it is operated lawfully; and
• A duty to act honestly and in good faith in the best interests of the company as awhole.
34. TFG's Articles assure TFG shareholders and regulators that there will be seven
members on the TFG Board and that a majority ofthose directors will be "independent." Articles at
43. The TFG Board has the authority and responsibility to declare dividend payments and has the
responsibility for preparing the Directors' Report and the Company's financial statements in
accordance with applicable law and regulations. Articles at 57. According to the Company's 2009
Annual Report, the directors are also responsible for keeping proper accounting records which
disclose with "reasonable accuracy" at any time the financial position of the Company and enable
them to ensure that the financial statements were legally compliant. Moreover, the Board has the
"general responsibility for taking such steps as are reasonablyopen to them to safeguardthe assetsof
the Company and to prevent and detect fraud and other irregularities."
35. The Articles provide that TFG shall maintain an Audit Committee of the Board,
composed solely of independent directors, to assist and advise the Board regarding:
(i) the Company's accounting and financial reporting process;
(ii) the integrity and audit of the Company's financial statements;
(iii) the qualifications, performance and independence of the Company'sindependent accountants;
-15-
(iv) the qualifications, performance and independence of any third partythat provided validations for the Company's investments; and
(v) recommending to shareholders the firm ofindependent accountants tobe engaged to conduct audits.
Articles at 49-50.
36. The Articles define "Independent Director" as meaning a "Director who is determined
by the Directors to satisfy in all material respects the standards for an 'independent' director set forth
in United Kingdom's Financial Reporting Council's Combined Code ofCorporate Governance, as
from time to time in effect." Articles at 3.
37. Section 1(A)(A.3.1) of the UK Combined Code of Corporate Governance indicates
that a director will not be "independent" if the director in question:
• has, or has had within the last three years, a material business relationshipwith the company either directly, or as a partner, shareholder, director orsenior employee of a body that has such a relationship with the company;
• has cross-directorships or has significant links with other directors throughinvolvement in other companies or bodies; [or]
• represents a significant shareholder ....
38. From 2008 through 2010, the TFG Board consisted, variously, of defendants Dear,
Dorey, Griffith, Jackson, Jeffreys, Knief, Olesky and Ward. TFG identified Dorey, Jeffreys, Knief,
Olesky and Ward as "Independent Directors."5
5 In April 2010, Olesky stepped down from the Board and was replaced bydefendant Ward,also identified by TFG as an Independent Director. On January 24, 2011, it was announced thatdefendant Jackson had been ousted from the TFG Board (although he remains a Principal of theInvestment Manager), and the TFG Board has now been reduced from seven members to just six.
16
39. TFG falsely represented that Knief was "independent." In truth, he was a board
member ofPolygon Credit Income Fund, Polygon Global Opportunities Fund and Polygon Global
Opportunities Master Fund.
40. TFG falsely represented that Olesky was "independent." In truth, he was also a board
member of Polygon Credit Income Fund.
41. TFG falsely represented that Ward was "independent." In truth, he was a board
member of and had a material business relationship and significant links with Polygon Global
Opportunities Master Fund.
42. These Polygon funds, on which Knief, Olesky and Ward sit as board members, are
directly affiliated with significant links and/or have material business relationships with the
Investment Manager. Moreover, all ten voting shares in TFG are owned by Polygon Credit Holdings
II Limited, an affiliate of the Investment Manager, as well as of Polygon Investment and Polygon
Investment Partners LP.
43. The TFG Board has never been "independent" as defendants have represented.
Under a Non-independent Board, DefendantsImplemented a Scheme to Award Their CloselyRelated Investment Manager Unjust Compensation
44. Under the leadership, guidance and approval ofthe conflicted, non-independent TFG
Board, TFG entered into a non-arms'-length agreement with the Investment Manager. Defendants
insist that the IMA has allowed and allows the Investment Manager to charge an "incentive
(performance) fee" equal to 25% ofthe increase in the NAV ofthe Company during the Calculation
17-
Period6 above (i) the Reference Net Asset Value ("Reference NAV")7 plus (ii) the Hurdle8 for the
Calculation Period, without limitation and without regard to the interests ofTFG.
45. To award themselves performance fees equal to 25% ofthe increase in the NAV of
the Company, defendants took steps to manipulate TFG's NAV below its fair value. In TFG's 2008
Annual Report, defendants announced that the "dramatic global economic decline and increasingly
negative outlook as well as extensive upheaval in the global financial markets" had such a negative
effect on TFG's investments that the third-party model supplied by State Street Advisors, Inc. that
TFG had been using to value TFG's assets had been revised, stating:
The Investment Manager believes its buy-and-hold strategy has allowed theCompany to take a long-term view on the expected cash flows from a CLO or otherSecuritization Vehicle. Market developments, however, have and may continue to,impact the fair value of a Securitization Vehicle and/or its underlying assets. Forexample, the fourth quarter of 2008 evidenced dramatic developments, including amarked deterioration in economic outlook and an increasingly negative defaultoutlook by various market participants, including rating agencies, with an associatedsignificant increase in rating agency downgrades and credits related Caal/CCC+ orbelow. The potential impact ofthose and further similar developmentshas prompted
A "Calculation Period" is a period ofthree months endingon March 31, June 30, September30 and December 31 of each year, or as otherwise determined by the directors.
7 The Reference NAV is the greater of (i) NAV at the end of the Calculation Periodimmediately preceding the current Calculation Period and (ii) NAV as ofthe end of the CalculationPeriod immediately preceding the Calculation Period referredto in subsection(i). For the purposeofdeterminingthe Reference NAV at the end of a Calculation Period, NAV shall be adjusted by theamount of accrued dividends and the amounts of any redemptions or repurchase of the shares (orother relevant capital adjustments) and incentive fees to be paid with respect to that CalculationPeriod.
o
The Hurdle for any Calculation Period will equal (i) the Reference NAV multiplied by (ii)the Hurdle Rate. For Calculation Periods ending prior to April 25,2008, the Hurdle Rate was equalto 8% per year multiplied by the actual number of days in the Calculation Period divided by 365.Subsequently, the Hurdle Rate for any Calculation Period equals the three-month USD LIBOR(London Interbank Offered Rate) determined as of 11:00 a.m. London time on the first Londonbusiness day of the then-current Calculation Period, plus the Hurdle Spread of2.647858% in eachcase multiplied by the actual number of days in the Calculation Period divided by 365.
- 18-
adjustments to TFG's IRR modeling assumptions and a corresponding reduction inthe fair value of TFG's investments.
46. Accordingly, in the fourth quarter of 2008, TFG wrote down the NAV of its CLO
investments by hundreds of millions of dollars purportedly to "fair value" by manipulating
downward the underlying assumptions in TFG's mark-to-model method (used for valuing equity
tranches of a CLO) to presumably reflect the market deterioration in TFG's CLO investment
portfolio. TFG adjusted certain of its internal weighted-average rate of return ("IRR") modeling
assumptions, which included adjustments to the default rate, recovery rate, prepayment rate, and
reinvestment price and spread.9 For example, for the next two years, the annual assumed default rate
on the underlying loans was increased by 300% as compared to TFG's original annual assumed
default rate (implied by the average Moody's Weighted Average Rating Factor); the assumed
recovery rate on the underlying loans was reduced to approximately 55%, or approximately 0.8% of
TFG's original assumed recovery rate; the assumed loan prepayments rate was reduced to 7.5% p.a.
("per annum," or each year); and the assumed reinvestment rate was reduced to 87%. As a result,
the IRR fell 18.3% or 310 basis point from 16.9% in third quarter 2008 to 13.8% in fourth quarter
2008. These changes to the modeling assumptions were designed to enable defendants to carry out
their wrongful conduct (as complained herein) because TFG's actual assumed default rates were, in
fact, at least 25% below the U.S. institutional rate and did not support these conservative changes to
the model:10
IRR measures the profitability ofthe underlying investments, and is also sometimes referredto as the discounted-cash-flow rate of return. A lower IRR results in a lower NAV, other thingsbeing equal.
10 United States Generally Accepted Accounting Principles ("U.S. GAAP") require thataccounting methods reflect the characteristic of neutrality to avoid a biased result. "Relevance andreliability are the two primary qualities that make accounting information useful for decision
-19-
Default Rates - Trailing 12 Months12%-
U.S. Institutional
Loans
Tetragon FinancialJ\2008 2009 2010
faunw: TfG. S&MCD
47. Not content with the advantage gained by the unsupported revisions to the model as
detailed above, also in the fourth quarter of 2008, the Investment Manager established an
Accelerated Loss Reserve ("ALR" or "reserve") to further mark down the NAVs of TFG's
investments in CLOs. Failing to provide investors with any specifics about how the amount of the
ALR was to be determined, defendants simply asserted that "[t]he ALR was determined by applying
a more pessimistic set of short-term assumptions to the CLO." Indeed, defendants attempted to
justify taking the additional ALR - on top of the alterations to the mark-to-model method - by
simply claiming that "TFG deemed it appropriate to apply an even more pessimistic view in order to
reflect further market deterioration in its fair value through an increased ALR."
making.... To be relevant, information must be timely and it must have predictive value orfeedback value or both. To be reliable, information must have representational faithfulness and itmust be verifiable and neutral. ... A neutral choice between accounting alternatives is free frombias towards a predetermined result." Statement of Financial Accounting Concepts No. 2,Qualitative Characteristics ofAccounting Information.
20
48. Accordingly, in the fourth quarter of2008, TFG booked $141 million in ALR, and, in
the first quarter of 2009, the Investment Manager forced TFG to book another $290 million in
reserve ALR to further mark down the NAV ofTFG's CLO portfolio. In fact, TFG admitted that it
reduced the NAV by booking ALR, that had "the effect ofapplying a higher discount [interest] rate
than the deals' IRRs to their respective cash flows."1' By the end offiscal 2009, defendants had by
fiat recorded an astounding $431 million markdown ofTFG's investment portfolio, notwithstanding
that this was not consistent with the valuation generated by the revised model defendants themselves
had just insisted be created. The ALR amount was so dramatic that it exceeded the entire
$300 million ofproceedsfrom TFG's initial offering and reduced TFG's NA Vby approximately
30%. By the end ofthe second quarter of2010, TFG stated that "after taking into account the ALR,
[the discount rate] was close to 30%, on a portfolio wide basis, representing a significant spread over
BB-rated CLO debt tranches."
49. At all relevant times, defendants have reassured investors that, in calculating its NAV
and preparing its financial statements, TFG complies with the dictates ofU.S. GAAP, representing
that "TFG currently calculates its NAV and prepares its financial statements in accordance with
applicable law and U.S. Generally Accepted Accounting Principles."12 These representations were
false and misleading.
1' Ahigher discount (interest) rate reflects higher risk, and, other things being equal, results inalower NAV.
12 "The financial statements are prepared in conformity with the United States generallyaccepted accounting principles ('U.S. GAAP')." TFG 2008 Annual Report. "The financialstatements give a true and fair view, are prepared in conformity with accounting principles generallyaccepted in the United States of America ('U.S. GAAP') and comply with the Companies(Guernsey) Law, 2008." TFG 2009 Annual Report.
-21
50. U.S. GAAP constitute those standards recognized by the accounting profession in the
United States as the conventions, rules and procedures necessary to define accepted accounting
practices at aparticular time.13
51. TFG's use of ALR violated U.S. GAAP. Financial Accounting Standard No 5,
Accountingfor Contingencies ("FAS 5"), provides guidance on the appropriate recognition of loss
contingencies, includingreserves. FAS 5 states that an estimatedloss contingencyshallbe accrued
by a charge to net income only if both of the following conditions are met:
a. Information available prior to issuance ofthe financial statements indicatesthat it is probable that an asset had been impaired or a liability had been incurred atthe date of the financial statements. It is implicit in this condition that it must beprobable that one or morefuture events will occur confirming thefact ofthe loss.
b. The amount ofloss can be reasonably estimated.
FAS 5, f 8 (footnote omitted).
52. TFG's use of ALR violated FAS 5 because the ALR was set up to account for
"potential" rather than "probable and estimable" losses.14 TFG wrote that "[t]he Accelerated Loss
Reserve seeks to address a near-term rating agency driven phenomenon of an increase in negative
loan ratings migration that may persist for a period materially less than the expected life of an
13 On June 30, 2009, the Financial Accounting Standards Board ("FASB") issued FinancialAccounting Standard ("FAS") No. 168, The FASB Accounting Standards Codification and theHierarchy ofGenerally Accepted Accounting Principles - a replacement of FASB Statement No.162. FASB Accounting Standards Codification ("ASC") became the source of authoritative U.S.accountingand reporting standardsfor non-governmental entities, in addition to guidanceissuedbythe U.S. Securities and Exchange Commission ("SEC"), effective for financial statements issued forreporting periods that ended after September 15, 2009. The ASC did not change existing U.S.GAAP. These allegations use the historical references to U.S. GAAP as such references existedduring the relevant period.
14 According totheFASB, "probable" means "[t]he future event orevents are likely tooccur."FAS 5,1f3a.
22
investment as well as other potential unrealized losses, which in each case may not be appropriate
for inclusion in TFG's long-term IRR modeling assumptions, but which mayhave an impact on the
fair value of TFG's investments." TFG's ALR does not purport to result in an actual or probable
negative adjustment to the fair value of TFG's investment. Instead, TFG asserts that its negative
adjustment merely "may have an impact on the fair value of TFG's investments." Clearly, TFG's
ALR is not based upon actual or "probable and estimable" losses, but rather, upon additional
"potential" unrealized losses arising from, among other things, rating agency downgrades to TFG's
investments' "underlying collateral." U.S. GAAP does not state or suggest that "potential,"
"conceivable," "possible," or other such speculative impairments or losses should be recognized in
the financial statements and, in fact, specifically prohibits the accrual ofan asset impairment when it
is not probable that an asset of an enterprise has been impaired.
53. By taking additional reserves to further mark down the fair value ofinvestments, TFG
reported its investments at below fair value - a further violation ofU.S. GAAP. TFG represented in
its 2008 Annual Report that TFG adopted the provisions ofFAS No. 157, Fair Value Measurements
("FAS 157"), effective its 2008 fiscal year. FAS 157 defines fair value as the price that TFG would
receive to sell an asset or pay to transfer a liability in an orderly transaction between market
participants at the measurement date. TFG also stated that it considered the guidance provided by
FASB Staff Position ("FSP") FAS No. 157-3, Determining the Fair Value ofa Financial Asset
When theMarketfor That AssetIs NotActive ("FSP FAS 157-3"), in its determination ofestimated
fair values during 2008. FSP FAS 157-3 states that "[a] fair value measurement represents the price
at which a transaction would occur between market participants at the measurement date."
54. TFG's statements that it adopted FAS 157 and FSP FAS 157-3 were false. TFG
buried a telling description in certain endnotes of its financial reports that, in effect, exposes the fact
-23
that its investment assets were not stated at fair value in accordance with U.S. GAAP due to booking
ALR:
The Accelerated Loss Reserve is transaction specific. The Accelerated Loss Reserveis a direct adjustment to the fair value of an investment to account for the potentialimpact ofcertain potential losses and the cumulative value of such adjustments isevidenced in TFG's financial statements.15
In the above endnotes, TFG admits that its investment assets which have already been calculated at
fair value using TFG's own mark-to-model valuation assumptions and methodology are further
artificially reduced by "the potential impact ofcertain potential losses." Thus, these investments are
not reported at fair value, a clear violation of FAS 157 and FSP FAS 157-2.
55. The ALR is simply an accounting manipulation created for the purpose ofgenerating
additional performance fees. TFG can boost - and has boosted - its performance fees merely by
booking reversals ofthe ALR. In effect, TFG's ALR was not part ofthe process ofreporting TFG's
investments at fair value; but instead, was an artifice designed specifically to mark down the NAV
below fair value during the market downturn, and then to "earn" additional performance fees on
reversals of the ALR that further increase the NAV during market upswings. TFG's application of
the ALR is aptly characterized as "cookie jar" accounting. U.S. GAAP prohibits the accrual of
reserves for general orunspecified purposes.16 The SEC also prohibits the management ofearnings,
including the employment of unsubstantiated accruals to manage earnings. See In re Microsoft
15 See, e.g., TFG 2010 Consolidated Annual Report at 27 n.38.
16 "Some enterprises have in the past accrued so-called 'reserves for general contingencies.'General or unspecified business risks do not meet the conditions for accrual in paragraph 8[of FAS 5], and no accrual for loss shall be made." FAS 5, ^14. "The first condition in paragraph 8[of FAS 5] - that a loss contingency not be accrued until it is probable that an asset has beenimpaired or a liability has been incurred - ... is intended to prohibit the recognition of a liabilitywhen it is not probable that one has been incurred and to prohibit the accrual of an asset impairmentwhen it is not probable that an asset of an enterprise has been impaired." FAS 5, ]|68.
24
Corp., Exchange Act Release No. 46017, Accounting and Auditing Enforcement Release No. 1563,
2002 SEC LEXIS 1427 (June 3, 2002).
56. Defendants' true motivations in adjusting the model and creating the ALR were
finally revealed when the Investment Manager started claiming significant performance fees by
simply marking up the NAV of the investments thatpreviously hadbeenwritten down. With the
stroke of a pen,defendants cashin on theirreversals of theALRbecausethe ALRintroduced a bias
- in effect, an overstated discount rate - that favored the Investment Manager's own wallet at the
expense of investors.
57. Between fourthquarter2009 andfirstquarter2011,duringthe worsteconomic crisis
sincethe GreatDepression, defendants expropriated anddiverted toTFG's investment advisers (and,
thereby, themselves) almost $205 million inpurported performance fees which were, in fact, nothing
of the sort. In fact, they extracted $41 millionfrom TFG at the endof 2010,when the NAVof the
underlying investment portfolio as of fourth quarter2010was still $211 millionbelowthe NAV in
thirdquarter 2008. Defendants continue to loot the Company and, at the end of first quarter 2011,
extracted another $55 million in performance fees even though the NAV ofthe investmentsremains
approximately$50 million below the NAV in third quarter 2008:
-25
Tetragon Financial Group LimitedQuarterly Incentive Fees
Quarter
Amount of
Incentive Fee Net Asset Value
NAV Per
Share
Fee as
Percent of
NAV
1Q07 $ 4,712,136 lL 782,792,719 N/A 0.60%
2Q07 $ 5,031,334 $ 1,055,097,006 $ 10.08 0.48%
3Q07 $ 6,397,544 $ 1,216,246,279 N/A 0.49%
4Q07 $ - $ 1,188,220,992 $ 10.03 0.00%
1Q08 $ 2,235,377 $ 1,212,596,178 $ 10.25 0.18%
2Q08 $ 9,365,245 $ 1,319,050,418 $ 10.44 0.71%
3Q08 $ 10,329,924 $ 1,348,485,272 $ 10.69 0.77%
4Q08 $ - $ 1,141,950,194 $ 9.06 0.00%
1Q09 $ - $ 723,368,706 $ 5.75 N/A
2Q09 $ - $ 693,081,080 $ 5.50 N/A
3Q09 $ - $ 720,846,408 $ 5.71 N/A
4Q09 $ 29,781,872 $ 806,846,805 $ 6.47 3.69%
1Q10 $ 22,266,024 $ 867,436,352 $ 7.02 2.57%
2Q10 $ 16,458,239 $ 909,356,085 $ 7.44 1.81%
3Q10 $ 39,280,873 $ 1,018,625,872 $ 8.43 3.86%
4Q10 $ 41,532,519 $ 1,137,546,494 $ 9.47 3.65%
1Q11 $ 55,504,288 $ 1,297,999,285 $ 10.85 4.28%
58. In spite of witnessing improvement in the economy in mid-to-late 2009, the
Investment ManagerforcedTFG to further increasereserves. In third quarter 2009, TFG reported
that "[t]he thirdquarterof 2009 saw a return to profitability, driven in part by improvements in the
O/C [over-collateralization] cushions of certainU.S.portfoliodeals." Nonetheless, the Investment
Manager forced TFG to increase the ALR by $79.7 million in that quarter. TFG explained the
increase as follows: "The quarter witnessed positive earnings as well as an increase in the
Accelerated Loss Reserves due to the restoration ofcertain previously released amounts." However,
the truth was that TFG did not merely perform a "restoration" of the ALR but added an additional
$79.7 million to the ALR because the Investment Manager recognized that the investment market
was improving, andby the thirdquarterof 2009it mightwellbe one of the last opportunities to take
advantage of the ALR "cookie jar."
26
59. Further, in its 2009 Annual Report, TFG stated that "[t]he second halfof2009 saw a
generalrecovery in many ofTFG's CLO investments,which resulted in an increase in fair values."
Nonetheless, in the fourthquarterof2009, TFG once again increasedthe ALR by $15.2million. As
revealed later, the sole purpose of the total $94.9 million increase in the ALR for the second halfof
2009 was to increase the "cookie jar" for future drawdowns of the ALR to create further unearned
performancefees when a substantial amount of those reserves was reversed, as they were in 2010.
60. In the first quarter of 2010, defendants started reducing the ALR and, as a result,
increased the NAV ofthe CLO portfolio. Throughout 2010, defendants repeated this practice, and,
as shown in the chart below, in 2010 defendants reversed $91 million from TFG's ALR account,
reducing it from $349 million in the fourth quarter of2009 to $258 million in the fourth quarter of
2010, and paid $22.8 million in performance fees to the Investment Manager simply for reversing
the ALR. Defendants continue this practice by reducing ALR reserves by $102 million in the first
quarter of 2011 and taking a stunning $25 million in performance fees for the reversal. As of first
quarter 2011, defendants have extracted a total of $48.3 million in unjust performance fees by
reversing the ALR and still have another $155.7 million in TFG's ALR account to potentially
expropriate another $38.9 million in fees. The chart below also shows TFG's NAV and NAV per
share corrected to exclude the non-U.S. GAAP ALR, along with the ALR misstatement as a
percentage of the corrected NAV for each respective quarter:
-27-
Tetragon Financial Group LimitedMaterial GAAP Misstatement Impact of TFG's Accelerated Loss Reserw
Quarter
Reported Net
Asset Value
Reported
NAV Per
Share
Non-GAAP ALR
Adjustment
Performance
Fees Accrued
on ALR
Reversals
NAV Corrected
for ALR GAAP
Violation
NAV Per
Share
Corrected
for ALR
GAAP
Violation
ALR
Misstatement as
a Percentage of
Corrected NAV
3Q08 $ 1,348,485,272 $ 10.69 0 $ 1,348,485,272 $10.69 0%
4Q08 $ 1,141,950,194 $ 9.06 $ (141,000,000) $ 1,282,950,194 $10.18 -11%
1Q09 $ 723,368,706 $ 5.75 $ (315,000,000) $ 1,038,368,706 $8.25 -30%
2Q09 $ 693,081,080 $ 5.50 $ (254,100,000) $ 947,181,080 $7.52 -27%
3Q09 $ 720,846,408 $ 5.71 $ (333,800,000) $ 1,054,646,408 $8.35 -32%
4Q09 $ 806,846,805 $ 6.47 $ (349,000,000) $ 1,155,846,805 $9.27 -30%
1Q10 $ 867,436,352 $ 7.02 $ (339,500,000) $ (2,375,000) $ 1,209,311,352 $9.79 -28%
2Q10 $ 909,356,085 $ 7.44 $ (330,700,000) $ (2,200,000) $ 1,242,256,085 $10.16 -27%
3Q10 $ 1,018,625,872 $ 8.43 $ (274,700,000) $ (14,000,000) $ 1,307,325,872 $10.82 -22%
4Q10 $ 1,137,546,494 $ 9.47 $ (258,000,000) $ (4,175,000) $ 1,399,721,494 $11.65 -19%
1Q11 $ 1,297,999,285 $ 10.85 $ (155,700,000) $ (25,575,000) $ 1,479,274,285 $12.37 -12%
61. In fact, the total performance fee of $22.8 million paid to the defendant Investment
Managerin 2010- for reversing the ALR- exceededthe total $21.9 million feeawardedin 2008for
investment performance. Notably, defendants' manipulations have already resulted in the
Investment Manager reaping far more in fees than TFG has generated in income for its shareholders:
Management and Performance Fees as a Percentage of Investment Income
(In millions of dollarsexcept percentages)
4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Total
Management &Performance Fees $32.7 $25.4 $19.8 $42.7 $45.6 $60.0 $226.2
Investment Income $41.4 $46.8 $46.6 $49.3 $51.3 $53.7 $289.1
Fees as Percent of
Investment Income 79% 54% 42% 87% 89% 112% 78%
62. Defendants' interpretation of the performance fee structure and improper ALR
manipulations have had a deleterious impact on the market value ofTFG shares, as well as TFG's
reported NAV per share. On March 31, 2011, for example, TFG's share price was only $7.60
(Ticker Symbol: TFG.AS), indicating that TFG traded at a substantial 30% discount to TFG's
reported NAV of $10.85 per share as of the end of the first quarter of 2011.
-28
63. Defendants have also drastically cut back dividend payouts to TFG shareholders
while lining their own pockets. The total dividend paid toshareholders in2007 was $48.9 million,
which equaled to 41% ofthe cash flow from operations ("CFO") - inline with what was originally
contemplated when the Company went public in2007. And the total management and performance
fees ("M&P Fees") paidto the Investment Manager in 2007 was $29million, i.e., 24% of CFO. In
2007, this resulted in M&P Fees being59% of the dividends paid to shareholders. But, as shown
below, since 2007, the total dividend payout as a percentage of CFO has substantially decreased,
while theM&P Fees to CFO ratio has exploded, thereby depriving shareholders while defendants
further enrich themselves. For2010, thetotal dividend paid toshareholders was $34.2 million, 13%
ofCFO, whereas M&P Fees was $133.5 million, 51 %ofCFO. This translated into M&P Fees being
390% of dividends paid to shareholders in 2010.
Management and Performance Fees as a Percentage of Dividends Paid to Shareholders
(In millions of dollars except percentages) 2007 2008 2009 2010
Cash Flow from Operations ("CFO") $120.4 $345.3 $138.9 $261.7
Dividend $48.9 $97.9 $15.1 $34.2Dividend as a Percent of CFO 41% 28% 11% 13%
Management & Performance ("M&P") Fees $29.0 $41.9 $42.2 $133.5M&P as a Percent of CFO 24% 12% 30% 51%
M&P Fees/Dividends 59% 43% 279% 390%
Defendants Breached Their Fiduciary Duties ofGood Faith and Loyalty and the Investment ManagerViolated the Investment Advisers Act of 1940
64. Beyond their obligation to exercise a level of skill and care that may be reasonably
expected from aperson ofadirector's knowledge and experience, defendants owed TFG afiduciary
duty to acthonestly in good faith and exercise their powers forproper purpose.
-29
65. Moreover, the Board has the "general responsibility for taking such steps as are
reasonably open to them to safeguard the assets of the Fund and to prevent and detect fraud and
other irregularities."
66. Defendants' acts were undertaken in bad faith and in flagrant disregard of their
fiduciary duties. Defendants knew or should have known thatbyawarding exorbitant performance
fees/unjust compensation tothemselves and their affiliates, they emptied the corporate treasury and
damaged TFG.
67. Defendants knew orshould have known, based ontheir numerous years ofexperience
with theinvestment industry, thatthe language contained in the IMA awarding investment advisers
"an incentive fee equal to 25% ofthe increase in the Net Asset" meant that the investment advisers
needed to surpass a certain previous peak NAV before they could be awarded performance fees.
Nevertheless, defendants expropriatedfrom TFG anddiverted to theInvestment Manager almost
$205 million for revising down TFG's modeling assumptions and then making bookkeeping
changes. In doing so, defendants breached their fiduciary duties and have failed to safeguard
corporate assets.
68. The Investment Manager is a registered investment adviser under the Investment
Advisers Act of 1940 (the "Advisers Act"). Pursuant to §215 of theAdvisers Act, any investment
adviser contract is considered voidif eitherthe formation orperformance of thecontract violates the
provisions of the Advisers Act. The IMA violates §206 of the Advisers Act. Under §206 of the
Advisers Act, investment advisers have an affirmative obligation of theutmost good faith and fair
disclosure of all material facts to their clients, as well as a duty to avoid misleading them and to
avoid being manipulative. Byfailing todisclose itsintention toseek performance fees based only on
marking down assets and bookkeeping entries, defendants' Investment Manager manipulated and
-30-
misled TFG and its shareholders. Accordingly, the IMA is void as regards to the rights of the
defendants who, in agreeing to the IMA and/or to its enforcement, haveviolated the Advisers Act.
Shareholder Remonstrations Have Been Ignored
69. None of theindividual defendants can contend that theongoing diversion of tens of
millions of dollars from TFG to the Investment Manager was done without their knowing
participation. In fact, major shareholders ofTFG, including TFG's largest outside shareholder, have
directed letters to the TFG Board demanding that TFG stop its Investment Manager from continuing
to divert millions ofdollars in fees by merely making bookkeeping entries and/or reversing reserves.
As soonas the defendants' manipulations cameto light, theseinvestors demanded thatthewholesale
breaches offiduciary duty bydefendants beremedied. For example, one aggrieved investor wrote in
his letter to the TFG Board:
As you well know, the Net Asset Value of Tetragon has plunged fromapproximately $10/share at its IPO to approximately $5.4 today. Under the currentstructure, you, theinvestment managers, stand tocollect incentive fees on any rise inNAV, even from these depressed levels. This will come at the expense of yourdevoted shareholders that chose to hold their Tetragon shares, and ride out thedifficult times. If, for example, the gross NAV were to recover back to where itstood at the IPO, $10/share, you would collect over $1.0 pershare inincentive fees,and your shareholders would effectively remain underwater bythat amount. Worseyet, even if theNAV were toremain atcurrent levels butfluctuate intheinterim, theInvestment Manager would collect incentive fees on these fluctuations. This currentincentive fee structure defeats the purpose of aligning the Investment Manager'sinterests with those ofshareholders: the larger the volatility in the NAV, the largertheincentive fees to theInvestment Manager, all to thedismay of shareholders.
We propose that the incentive fee berestructured such that no incentivefeewill bepaid to the Investment Manager until the NA Vof Tetragon rises back to$10/share.
We believe strongly that an adjustment to the incentive fee structure is notonly appropriate, but necessary. Moreover, such restructuring will send a strongmessage to existing and potential shareholders that you have shareholder value inmind. We are confident that such a message will contribute significantly to arecovery ofTetragon's share price, and will bewell-received bythe greater Tetragonshareholderbase as well as by potential investors.
-31-
June30,2009 letterfromDorchester Management LLCto theTFGBoard, attached hereto asExhibit2.
70. Similarly, another major investor wrote to the Board:
Basedon numerous conversations with existingandpotential shareholders,thereis a consensus around the fact that the incentive compensation on the reversalof the ALR is blatantly excessive. Most investors view the compensation asinequitable and refuse to invest in a vehicle that permits theInvestment Manager towrite down asset values during a downturn in thecredit cycle and then simply writeup the values in subsequent quarters and take 25% of the"appreciation" for doingnothing. This compensation arrangement is not in the spirit of the IMA, and it iscontributing toTFG'sstock price underperformance. I request thattheIndependentDirectors force Polygon to waive its contractual right to an incentive fee on thereversalofthe ALR. As a result, investorswould gain considerablecomfort that theInvestment Manager and shareholders are receiving equitable compensation in theevent of value creation. This action will contribute to reducing TFG's significantdiscount to NAV.
November4,2010 letter from OmegaAdvisors, Inc. to the TFG Board, attachedheretoas Exhibit3.
71. Unfortunately, nothing hasbeen done to cease thewrongful practices complained of
herein orpayTFG back theunjust compensation diverted totheInvestment Manager. Defendants'
practices continue to the present day.
72. Pursuant to the IMA, TFG's directors can terminate the agreement based on the
Investment Manager's "fraud or wilful misconduct in the performance of [its] duties under the
Investment Management Agreement." Defendants have not done so. Instead, in continuing
breaches of their fiduciary duty, the directors refuse to takeany steps whatsoever to terminate the
IMA and have permitted the Investment Manager to loot TFG of almost $205 million in unjust
compensation. Defendants continue to refuse to protect or safeguard the assets of theCompany.
DERIVATIVE AND DEMAND FUTILITY ALLEGATIONS
73. Plaintiff incorporates If1-72.
74. Pursuant to Fed. R. Civ. P. 23.1, plaintiffbringsthis action derivatively on behalfof
TFG to redress injuries suffered, and yet to be suffered, by theCompany as a direct and proximate
-32-
result ofdefendants' misconduct. Plaintiff is a holder ofTFG shares and was a holder ofTFG shares
duringtimes relevant to defendants' illegal and wrongful conduct allegedhereinandwill adequately
represent the interests of the Company in this litigation. This action is not a collusive one to confer
jurisdiction on a court of the United States which it would not otherwise have.
75. As shown in ^[33-43, the TFG Board has never been independent. At all relevant
times the TFG Board consisted of defendants Knief, Dorey, Jeffreys, Dear, Griffith, Jackson,
Wishnow,Oleskyand/orWard. Eachofthese defendants,by virtue of(i) being directlyresponsible
for agreeingto and/or interpretingthe IMAin the manner chosen; (ii) profiting from themisconduct
allegedherein; and (iii) having irreparableconflictsofinterest with and among each other andTFG,
is incapable of adequately evaluating a demand that the Board take action against themselves and
other former and current directors and officers of TFG for the misconduct alleged herein.
76. It was TFG's non-independent Board that instituted the IMA, and even though it has
the power to terminate the agreement, it has left the agreement intact so it can pay the Investment
Manager, and thus themselves, tens of millions of dollars in unjust compensation. A pre-suit
demand upon the Board, although already made by TFG shareholders - and ignoredby defendants-
is a useless and futile action and is therefore excused.
77. TFG's directors would not on their own commence this action on behalf of the
Company. As describedearlier, the InvestmentManager effectivelycontrols the Companybecause
its affiliate, Polygon Credit Holding II Limited, holds all ofTFG's voting shares. Under Article 88
ofthe Articles, a director may be removed from office for any reason by resolution ofthe holders of
the voting shares. Thus, TFG's directorswould be reluctant to commence this proceedingon behalf
of the Company for the fear of being removed from office by the voting shareholders. In addition,
33
pursuant toArticle 63, the voting shareholders may call an"extraordinary general meeting" tovote
against thedecision to commence proceedings against the Investment Manager.
78. Plaintiff has not made any demand on shareholders of TFG to institute this action
since such demand would be a futile anduseless act for the following reasons:
(a) TFG is a publicly traded company with approximately 120 million shares
outstanding, and hundreds, if not thousands of shareholders;
(b) Making demand onsuch a number of shareholders would be impossible for
plaintiffwho has no way offinding out thenames, addresses orphone numbers ofshareholders; and
(c) Making demand on all shareholders would force plaintiff to incur huge
expenses, assuming all shareholders could be individually identified.
COUNT I
Against Defendants Dear, Dorey, Griffith, Jackson, Jeffreys, Knief,Olesky, Ward and Wishnow for Breaches of Fiduciary Duties
79. Plaintiff incorporates fl1-78.
80. Each of thedefendants named in thisCount wasa director ofTFGand, assuch, owed
to TFG the highest duty as a director ofa Guernsey company. Each ofthese defendants agreed to
and did participate in and/or aided and abetted one another inadeliberate course ofaction designed
to divert corporate assets in breachof the fiduciary duties these defendants owedto TFG.
81. As demonstrated by the allegations above, defendants named herein breached their
fiduciary duties of loyalty, good faith, and independence owed to TFG and its shareholders and
failed to disclose material information and/or made material misrepresentations to shareholders
regardingTFG's Investment Manager compensation scheme.
82. Defendants have violated their fiduciary duties of loyalty, good faith, and
independence owed toTFG and its shareholders, have engaged inunlawful self-dealing, and have
-34-
acted to put theirpersonal interests and/ortheir colleagues' interests ahead of the interests of TFG
and its shareholders. As directors and/or officers ofTFG, defendants participated in the wrongful
acts alleged herein. They thereby breached their fiduciary duties to TFG shareholders.
83. In committing the wrongful acts particularized herein, defendants have pursued or
joined in the pursuit of a common course of conduct and have acted in concert with one another in
furtherance of their common plan or design. At all relevant times, defendants collectively and
individually initiated a courseof conduct which was designed to and did causeTFG's assets to be
diverted to TFG's Investment Manager via a compensation scheme.
84. Defendants' misconduct was notduetoanhonest error ofjudgment butrather totheir
badfaith and was done knowingly, willfully, intentionally or recklessly.
85. By reason of the foregoing acts, practices and course of conduct, defendants have
failed to exercise good faith and instead have acted knowingly or in reckless disregard of their
fiduciary obligations toward TFG and itspublic shareholders, thereby harming TFG.
COUNT II
Against All Defendantsfor Unjust Enrichment
86. Plaintiff incorporates fflfl -78.
87. As aresult ofthe conduct described above, defendants will beand have been unjustly
enriched at the expense ofTFG, in the form of, among other things, unjustified performance fees.
88. All the payments and benefits provided to defendants based upon or related to the
Investment Manager's clandestine executive compensation scheme were unjustly awarded and atthe
expense of TFG, resulting in substantially unearned benefits.
89. Defendants knew that they were unjustifiably receiving the benefits of the
performance fees and it would be unjust to allow defendants to retain these benefits.
-35-
90. The Company received nobenefit from these payments and was in fact damaged by
such payments.
91. Defendants should be ordered to disgorge the gains which they have and/or will
unjustly obtain and/or a constructive trust should be imposed for thebenefit of the Company.
COUNT III
Against All Defendantsfor Constructive Fraud
92. Plaintiff incorporates Iffll -78.
93. As corporate fiduciaries, the defendant directors and officers owed to TFG and its
shareholders a duty to fully disclose the true nature and/or intent of the IMA.
94. TFG justifiably relied upon its Board to act in the best interest of the Company and
carry out its fiduciary obligation.
95. As a result of the conduct complained of, the defendants made, or aided and abetted
the making of, numerous misrepresentations to and/or concealed material facts from TFG
shareholders despite their duties to act honestly. Thus, they have committed constructive fraud
and/or violated their duty to act honestly.
96. As a result, TFG was damaged.
COUNT IV
Against Defendants Dear, Griffith, Herlyn, Jackson,Rosenberg, Wishnow and the Investment Managerfor Violating the Investment Advisers Act of 1940
97. Plaintiff incorporates fflfl -78.
98. The Investment Manager is registered as an investment adviser under the Advisers
Act.
-36-
99. The Investment Manager violated §206 of the Advisers Act by its looting of TFG.
§206 provides in relevant part:
It shall be unlawful for any investment adviser, by use of the mails or anymeans or instrumentality of interstate commerce, directlyor indirectly -
(1) to employ any device, scheme, or artifice to defraud any client orprospective client;
(2) to engage in any transaction, practice, or course of business whichoperates as a fraud or deceit upon any client or prospectiveclient; [or]
(4) to engagein any act, practice, or courseof businesswhich is fraudulent,deceptive, or manipulative.
100. The IMA entered between the Investment Manager and the Company should be
considered voidpursuant to §215 of the Advisers Act, whichprovides:
(b) . . . Every contract made in violation of any provision of this title andevery contract heretofore or hereafter made, the performance ofwhich involves theviolation of, or the continuance of any relationship or practice in violation of anyprovision ofthistitle, or anyrule, regulation, ororderthereunder, shall bevoid (1) asregards the rights of any person who, in violation of any such provision, rule,regulation, or order, shall have made or engaged in the performance of any suchcontract, and (2) as regards the rights of anyperson who, not beinga party to suchcontract, shall haveacquired anyright thereunder withactual knowledge of thefactsby reason ofwhich the making or performance of such contract was in violation ofany such provision.
101. Accordingly, plaintiff seeks rescission ofthe IMA and restitution ofthe consideration
given pursuant to its purported terms.
PRAYER FOR RELIEF
WHEREFORE, plaintiff demands judgment as follows:
A. Against defendants and infavor ofTFG fortheamount ofdamages sustained bythe
Company as a result of defendants' violation of law;
-37-
B. Extraordinary equitable and/or injunctive relief as necessary or permitted by law,
equity and the statutory provisions sued hereunder, including disgorgement, attachment,
impoundment, imposition of a constructive trust on or otherwise restricting the disposition of the
excessive performance fees at issue herein;
C. Directing the TFG Board to take all necessary actions to reform its corporate
governance and take steps to amend, alter, rectify and/or enjoin the terms of the IMA or its
enforcement, so as to terminate the wrongful diversion ofassets to defendants and their affiliatesvia
the manipulation ofTFG's NAV;
D. The IMA deemed void and in violation of the Advisers Act;
E. Awardingto plaintiff the costs and disbursementsofthe action,includingreasonable
attorneys' fees, accountants' and experts' fees, costs and expenses; and
F. Granting such other and further relief as the Court deems just and proper.
JURY DEMAND
Plaintiff demands a trial by jury.
DATED: July 11, 2011 ROBBINS GELLER RUDMAN& DOWD LLP
SAMUEL H. RUDMAN
ROBERT M. ROTHMAN
58 South Service Road, Suite 200Melville, NY 11747Telephone: 631/367-7100631/367-1173 (fax)
38-
ROBBINS GELLER RUDMAN
& DOWD LLP
DARREN J. ROBBINS
MARK SOLOMON
655 West Broadway, Suite 1900San Diego, CA 92101Telephone: 619/231-1058619/231-7423 (fax)
ROBBINS GELLER RUDMAN
& DOWD LLP
S. ASHAR AHMED
Post Montgomery CenterOne Montgomery Street, Suite 1800San Francisco, CA 94104Telephone: 415/288-4545415/288-4534 (fax)
LAW OFFICES OF MARC S. HENZEL
MARC S. HENZEL
431 Montgomery Avenue, Suite BMerion Station, PA 19066Telephone: 610/660-8000610/660-8080 (fax)
Attorneys for Plaintiff
-39
VERIFICATION
I, DANIEL K. SILVERSTEIN, herebydeclare as follows:
I am a holder of Tetragon shares. I have read the foregoing complaint and am aware of
the contents thereof. I am informed and believe the matters therein are true and on that ground
allege that the matters stated therein are true.
Executed this Jo_ day of <3» h ,2011 at^2^Ll_^ Pcnnsyhivania.
•^t4*^^X1 K. SILVERSTEhN
ApplebyJ T Le Tissier
25 February 2011 *^fe» lN THE R°VAL COURTOF GUERNSEY
MW PLACED ON THE PLEADING LISTtfe/w. g dependants
l UefejidaniYaclrttiMs lor service: - S^X. BiXCt^Jthis £g &dy off^yitey20// /??prfSs£&6J?\
Her M^Wyj Deputy Grefller
^6£t7),OJ&tD&mCJkE:
7 ** 0ER3WH& c^et House. SrJou^s*taw> 5T4me/U
IN THE ROYAL COT TOT OF GUF.RNSKVORDINARY DrVTSTON
ALEXANDER JACKSON of 33 Gilliam Lane, Riverside, Connecticut, UnitedStates of America, 06878, whose address for service is First Floor, Lefebvrc Place,Lefebvre Street in the parish of Saint Peter Port (the "Plaintiff') suing on behalf ofhimself and all other shareholders in the Seventh and Eighth Defendants other than theFirst to Sixth Defendants
ACTIONS
(1)
(2)
(3)
(4)
(5)
(6)
(7)
PATRICK DEAR whose service address is situate at Second Floor TudorHouse, Le Bordage in the parish ofSaint Peter Port;'
READE GRIFFITH whose service address is situate at Second Floor TudorHouse, Le Bordage in the parish ofSaint Peter Port;
RUPERT DOREY whose service address is situate at Second Floor TudorHouse, Le Bordage in the parish ofSaint Peter Port;
DAVID JEFFREYS whose service address is situate at Second Floor TudorHouse, Le Bordage in the parish ofSaint Peter Port;
BYRON KNIEF whose service address ,s situate at Second Floor TudorHouse, Le Bordage in the parish ofSaint Peter Port;
GREVILLE WARD whose service address is situate at Second Floor Tudor-House, Le Bordage in the parish ofSaint Peter Port;
TETRAGON FINANCIAL GROUP LIMITED whose registered office ,s
G4893(i. 1
situate at Second Floor, Tudor House, Le Bordage in the parish of Saint PeterPort;
(8) TETRAGON FINANCIAL GROUP MASTER FUND LIMITEDwhose registered office is situate at Second Floor, Tudor House, Le Bordage inthe parish of Saint Peter Port;
who are together the "Defendants" TO SEE the Court order the relief claimed or
such other order as the Court deems necessary in the following circumstances:
1. These are the particulars of claims against the first to sixth Defendants to be
brought by Mr Jackson on behalf of the Seventh and Eighth Defendantspursuant to sections 349 and 350 of the Companies Law (Guernsey) Limited.2008 further or alternatively the following claims atcustomary law:
1.1 a derivative claim brought by the Plaintiff, Mr Alexander Jackson("Mr Jackson"), seeking relief on behalf of the Seventh Defendant,Tetragon Financial Group Limited ("TFG");
1.2 a double derivative claim brought by Mr Jackson seeking relief onbehalf of the eighth Defendant, Tetragon Financial Group MasterFund Limited ("TFGMF"), through TFG, being a shareholder inTFGMF;
1.3 a double derivative Claim brought by Mr Jackson seeking relief onbehalf ofTFG through Polygon Credit Holdings II Limited ("PCF1II"), being a shareholder in TFG; and
1.4 a double derivative Claim brought by Mr Jackson seeking relief onbehalf ofTFGMF through PCH II, being a shareholder in TFGMF.
2. The Seventh and Eight Defendants are included as parties to this cause only inso far as may be necessary for them to derive the benefit arising from it in thenfavour and for the purposes of disclosure.
G1S9J6. i
The Polygon Funds and the Subsequent Establishment oi- the
Tetragon Fund in 2005
3. Mr Jackson is a structured debt investment specialist. Mr Griffith is an arbitrageinvestment specialist.
4. In 2002 the Shareholders (as defined at paragraph 21 below) established a hedge
fund together, then operating under the name Polygon Global Opportunities
Fund ("the Polygon Funds"). Approximately one half of the assets of the
Polygon Funds were invested in debt, which assets were principally managed
by MrJackson, and the other halfof the Polygon Funds' assets were invested in
equities, which assets were principally managed by Mr Griffith. Mr Dear was
principally responsible for operational aspects of the Polygon Funds.
5. In 2005 the Shareholders established a second hedge, fund together operating
under the name Tetragon ("the Tetragon Funds") in order to exploit
investment opportunities arising in the equity or residual portion of
collateralised loan obligations ("CLOs") and collateraliscd debt obligations
("CDOs"). The Tetragon Funds have 3t all material times been operated by
TFGMF, TFG and Tetragon Financial Group LP ("TFGUS"), a limited
liability partnership formerly established under the laws of Delaware and which
was dissolved on or about 9 December 2009. In particular at all material times:
5.1 TFGMF operated and continues to operate the master fund of the
Tetragon Funds;
5.2 TFG operated and continues to operate the non-US feeder of the
Tetragon Funds; and
5.3 until its dissolution on about 9 December 2009, TFGUS operatedthe US feeder of the Tetragon Funds.
CM 8936.1
Tetragon Financial Group Ltd: company information
6. TFG was incorporated on 23 June 2005 as a company limited by shares underthe Companies (Guernsey) Law 1994 with registered number 43321 and is an
authorised closed ended investment company under the Protection of Investor(Bailiwick of Guernsey) Law, 1987.
I'S
7. TFG is listed on the NYSE Euronext Amsterdam stock exchange in theNetherlands.
8. The registered office of TFG is situate at Second Floor, Tudor House, LeBordage in the parish of Saint Peter Port.
9. According to its annual validation dated 21 January 2011 TFG had issued
131,158,852 non-voting shares with a par value of US$0,001 and 10 votingshares with a par value of USS0.001 each. At all material times the issuedshares in TFG were and are held:
9.1 as to all the voting shares, by Polygon Credit Holdings II Limited;
9.2 as to 417,458 non-voting shares, by Mr Jackson though his brokerMorgan Stanley; and
9.3 as to the balance ofthe non-voting shares, by other investors.
10. In the prospectus for the initial global offering of shares in TFG dated 26March 2007 (the "Prospectus") it was described inter alia as:
"The Company
..[TFG] is an investment company thai currently invests in selected scunilizcd assetsclasses and aims to provide stable returns to investors across various interest rale and creditcycles .
Current Investments
[TFGJ currently invests in the subordinated, residual tianclies ("Residual Tranches") ofcollateralized debt obligation ("CDO") products, which are securilixed interests in
underlying assets assembled by asset managers and divided into tranches based on their
degree of credit risk.
A Distinctive Investment Strategy
• Strength in CDO structuring through Investment Manager's proactive role from
the beginning ofa potential CDO transaction.
• Substantial positions in residual tranches of CDO's which enable the
Investment Manager to make the structure belter able to address changes in thecredit, environment.
• Hedging and leverage across the portfolio to address the risk profile ofthe entire
portfolio and apply appropriate hedging and leveraging strategies to enhancereturns."
11. The Prospectus has not been amended or updated.
Tetragon Financial Group Master Fund Ltd: company information
12. TFGMF was incorporated on 23 June 2005 as a company limited by shares
under the Companies (Guernsey) Law 1994 with registered number 43322 and
is an authorised closed ended investment company under the Protection of
Investors (Bailiwick of Guernsey) Law 1987.
13. The registered office of TFGMF is situated at Second Floor, Tudor House, Le
Bordage in the parish of Saint Peter Port.
14. According to its annual validation dated 21 January 2011 TFGMF had issued
131,158,852 non-voting shares with a par value of US$0,001 and 10 votingshares with a par value of US$0,001 each At all material times all the issued
voting shares in TFGMF were and are held by PCH II and all the issued non
votingshares in TFGMF were and arc held by TFG.
G 489.16.1
15. The Prospectus describes TFGMF and its relationship with TFG as follows:
"Summary
In this prospectus, references to the "Company" are to the hsuer together with Tetragon
Financial Group Master Fund Limited (tlte. "Master Fund"). The Company invests
through a "master-feeder" structure whereby the Issuer's only direct investment is shares
in the Master Fund. Therefore, all investments of the Company arc made through the
Master Fund."
Polygon Credit Holdings II: company information
16. Polygon Credit Holdings II Limited ("PCH II") was incorporated on 15June
2007 as an exempt company limited by shares under the Companies Law of the
Cayman Islands with registered number 182334.
17. The registered office of PCH II is situate at 89 Nexus Way, Camana Bay,
Grand Cayman, Cayman Islands.
18. The authorised capital of PCH II is US$50,000 divided into 5 million shares of
US$0.01 each, which shares may be issued in one or more classes. The issued
share capital of PCH II is US$1,000 divided into 40,000 class A shaies, 40,000
class B shares and 20,000 class C shares.
19. At all material times the issued shaies in PCH II were and are held as follows:
19.1 as to 40,000 class A shares, by the second Defendant, Mr Rcade
Griffith ("Mr Griffith");
19.2 as to 40,000 class B shares, by Mr Jackson; and
19.3 as to 20,000 class C shaies, by the. First Defendant, Mr Patrick Dear
("Mr Dear").
ciswf.i
20. The objects for which PCH 11 was established arc unicstricted. As set out
3bove, PCH II holds all of the voting shares in both TFG and TFGMF.
21. At all material times, the directors of PCH II were, and are, Mr Jackson, Mr
Griffith, and Mr Dear (together "the Shareholders")
22 A representative diagram of the organisational structure of TFG, TFGMF and
associated entities is provided at appendix A.
The Directors of TFG and TFGMF
23. Until 23 January 2011 Mr Jackson was at aLi material times a director of both
TFG and TFGMG (together "the Companies" and individually "Company" as
the context permits). The other directors of each of TFG and TFGMF were at
all material times and are: Mr Griffith, Mr Dear, Mr Rupert Dorey, Mr David
Jeffreys, Mr Byron Knief, and Mr Greville Ward (together "the Directors").
24. On 23 January 2011 Mr Jackson was removed as a director of the Companies
following notice being given by the Directors to vacate his position.
25. As a director of the Companies, each of the Directors owe fiduciary duties to
each of the Companies:
25.1 to act in good faith in the best interests of the Company and to
promote the success of the Company;
25.2 to ensure that his own personal interests or duties to another
principal did not come into conflict with the interests of the
Company and not to use for their personal benefit any asset or
business opportunity belonging to the Company;
25.3 to exercise their powers within the authority conferred on them
under the constitution and to ensure that the Company is operated
lawfully, in accordance with its constitution (including its articles of
association) and in accordance with all statutory and regulatory
provisions concerning the. Company;
25.4 to exercise his powers as a director of the Company for the
purposes upon which they were conferred;
25.5 (both under customary law and pursuant to section 162 of the
Companies (Guernsey) Law 2008), immediately after becoming
aware of the fact that he is interested in a transaction or proposed
transaction with the company to make disclosure to the board of
directors (i) where the monetary value of the director's interest is
quantifiable, of the nature and monetary value of that interest, or
(ii) where the monetary value of the director's interest is not
quantifiable, of the nature and extent of that interest; and
25.6 to act with reasonable care, skill and diligence.
26. Furthermore:
26.1 pursuant to the Articles of Incoiporation of TFG each Director is
entitled to be a party to, or otherwise interested in, any transaction
or arrangement with TFG or in which TFG is otherwise interested
and entitled to vote as a director at any board meeting in respect of
any such transaction or arrangement only it he has disclosed to the
directors of TFG the nature and extent of his interest in accordance
with the Companies (Guernsey) Law 2008 (articles 91(a) and 99);
and
26.2 pursuant to the Articles of Incorporation of TFGMF each Director
as a director is entided to be a party to, or otherwise interested in,
any transaction or arrangement with TFGMF or in which TFGMF
is otherwise interested and entitled to vote as a director at any board
meeting in respect of any such transaction or arrangement only if heII has disclosed to the directors of TFGMF the nature and extent ofjI
his interest in accordance with the Companies (Guernsey) Law
2008 (articles 84(21 and 92).
26.3 The matters set out in paragraphs 25 and 26 above are referred
together as the "Duties"
The Investment Management Agreement and the management of
the Tetragon Funds
27. The investment manager for the Tetragon Funds was at all material times and is
Tetragon Financial Management LP (formerly Polygon Credit Management
LP)("TFM"), a limited partnership formed under the laws of Delaware.
28. TFM was most recently appointed as the investment manager of the Tetragon
Funds pursuant to a written agreement dated 26 April 2007 ("the. Investment
Management Agreement"). Under the terms of the Investment Management
Agreement, TFG, TFGMF and TFGUS appointed TFM as manager of the
Tetragon Funds on the terms and conditions set out in that agreement (clause
2(a)). The following terms were (amongst others) express terms of the
Investment Management Agreement, namely that:
28.1 TFM, as investment manager, would have full power and
discretionary authority on behalf of and for the account of the
Tetragon Funds to manage and invest cash and other assets of the
Tetragon Funds pursuant to and in accordance with the investment
objective of the Tetragon Funds (clause 2(b)); and
28.2 TFM, as investment manager, would have the authority for and in
the name of the Tetragon Funds to determine the investment
strategy to be pursued in furtherance of the investment objective of
their Tetragon Funds (clause 4(a)): but
28.3 in carrying out its duties under the Investment Management
Agreement, TFM would be required to have due regard to comply
with (amongst other matters) the investment objective of the
Tetragon Funds and the constitutional documents of each of TFG,
TFGMF and TFGUS (clause 4(c)Y
28.4 TFM would be authorised to enter into transactions on behalf of
the Tetragon Funds with persons who are affiliates of TFM (as that
term is defined in the US Securities Act 1933) provided that in
connection with any such transaction that exceeds $5 million of
aggregate investment TFM informs the boards of directors of TFG
and TFGMF and obtains either (i) the approval of a majority of the
members of the directors of TFG and TFGMF that do not have a
material interest in such transaction (whether as part of a board
resolution or otherwise) or (ii) an opinion from a recognised
investment bank, auditing firm or other appropriate professional
firm substantively to the effect that the. financial terms of the
transaction are fair to the Tetragon Funds from a financial point of
view (clause 4(d)); and
28.5 as remuneration for its services under the Investment Management
Agreement, the Tetragon Funds would pay to TFM (amongst other
maiters) a fee in such manner and at such rate or rates as are set out
in Schedule 1 to the Investment Management Agreement (clause
mm-
29. The business and affairs of the Tetragon Funds are managed on a day to day
basis by Messrs Jeffrey Herlyn, Michael Rosenberg and David Wishnow.
Tetragon has an investment committee and a risk committee, each committee
presently being comprised of each of the Shareholders and Messrs Herlyn,
Rosenberg 3nd Wishnow. Meetings of the investment and risk committees are
held approximately once each week by telephone to discuss inter alia
investments and opportunities. The Shareholders and Messrs Herlyn,
Rosenburg and Wishnow also meet formally once a month.
G4B9J6.1
The Closure of the Polygon Funds
30. During or about May or June of2008 Mr Jackson took steps to remove himselffrom the operation and management of the Polygon Funds.
31. During September, October, November and December 2008, the PolygonFunds experienced significant financial losses. In about late 2008 a substantial
number of investors in the Polygon Funds subnutted redemption requests inorder to redeem their investments in the Funds.
32. By reason of inter alia the losses and substantial redemption requests, in aboutOctober 2008, Mr Griffith and Mr Dear publicly announced that the PolygonFunds would be wound up, though no formal petition to wind up the PolygonFunds was submitted to the Court of the Cayman Islands at the time. To date
the Polygon Funds have not been wound up and since October 2008 their
directors have sought to liquidate fund assets and distribute value to theinvestors.
33. On 11 August 2010 a group of investors holding approximately 11% of theinterests in the Polygon Funds presented to the Grand Court of the CaymanIslands a winding up petition seeking the compulsory liquidation of PolygonGlobal Opportunities Master Fund on the grounds that (i) there has been a
failure and/or loss of the substratum of the Polygon Funds and/or (ii) theinvestors have suffered a justifiable loss of faith in the management of thePolygon Funds.
34. The said winding up petition was withdrawn following an arrangement beingreached with creditors of the Polygon Funds. Mr Griffiths and Mr Dear have
now stated that they anticipate they will be in a position to close the PolygonFunds by the end of March 2011.
35. Once the Polygon Funds have been closed the remuneration Mr Griffiths and
Mr Dear receive directly and indirectly from the operation of the PolygonFunds will cease.
C:4S93h.l
36. In addition, the. entities which provide, management and infrastructure services
to the Polygon Funds (in which Mr Griffiths and Mr Dear are understood to
have substantial interests) will no longer receive fees for their services from the
Polygon Funds. Without such fees and in the absence of new business it is
anticipated those entities will either have to downsize dramatically or close
altogether.
The GORE Term Sheet and the proposed GORE Transaction
37. On or about 18 May 2010 a term sheet ("the Term Sheet") in respect of a
proposed real estate venture was purportedly entered by between the following
parties:
(a) TFG;
(b) TFGMF;
(c) Polygon Management LP ("Polygon HoldCo");
(d) Polygon Investment Partners LLP;
(e) Polygon Investment Partners LP;
(t) Fred Schmidt;
(g) John Carrafjell; and
(h) Sonny Kalsi.
38. The Term Sheet was executed by Mr Griffith on behalf of each of Polygon
HoldCo, Polygon Investment Partners LLP and Polygon Investment Partners
LP (together "the InfrastructureCo Entities") and also purportedly on behalfof
TFG and TFGMF. The Term Sheet was neither approved nor authorised by
the. directors of the Companies prior to being signed by Mr Griffith on 18 May
2010
39. Mr Griffith and Mr Dear arc understood to both have a substantial interest in
each of the InfrastructureCo Entities. Mr Jackson believes Mr Griffith and Mi-
Dear to be the ultimate owners of the InfrastructureCo Entities and therefore,
entitled to all of their profits.
40. Mr Jackson has no direct or indirect interest in any of the InfrastructureCo
Entities, save that he has a declining interest in Polygon Investment Partners
LP. Mr Jackson does not expect or anticipate he will receive any current or
future remuneration as a result of his interest in Polygon Investment Partners
LP and his interest is due to be extinguished on 31 December 2012.
41. The InfrastructureCo Entities also provide management and/or infrastructure
services to the Polygon Funds. In the event that the InfrastructreCo Entities
were to provide infrastructure services as proposed in the Term Sheet and
receive a fee for doing so it is anticipated that the effect of the closure of the
Polygon Funds upon the InfrastructureCo Entities as set out at paragraph 36
will be mininuscd.
42. The Term Sheet provided, under the side-heading "Overview", that it
outlined "certain binding economic and other understandings among the parlies" and
was intended "to serve as the basis for definitive documents...to replace the. Term
Sheet".
43 The stated purpose df the venture proposed in the Tenn Sheet (as described
under the side-heading "Purpose") is "to launch a global real estate business with
operations initially in New York, London and Tokyo, which may include, over lime,
investing in direct and indirect real estate investments, publicly and non-publicly traded
real estate, equity, debt, hybrid and derivative securities including commercial mortgage
backed securities, and real estate advisory businesses" (collectively, the "RE
Business").
44. It was further stated in the Tenn. Sheet (also under the side-heading "Purpose")
that the RE Business would "seek lo raise several discreel investment pools or funds,
separate/managed accounts, club deals or individually capitalized investments. ..and
[would] thereafter appoint (directly or through affiliates) [GrecnOak Real Estate
("GORE")] as a manager or advisor to such Investment Programs". GORE was an
entity to be formed by Messrs Schmidt, Carraficll and Kalsi (together "the.
GORE Founders"), and was at the time of execution of the Tenn Sheet
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expected to be a Delaware limited partnership with a Delaware limited liability
company acting as its general partner.
45. The Term Sheet provided (under the side-heading "Documentation/Binding
Effect") that the Term Sheet would be binding upon the Parties and would
oovern the parties' respective obligations to the extent that the parties had not
entered into definitive documentation superseding the Term Sheet upon (i) the
fulfilment of the "Condition Precedent" and (ii) the approval in writing by the
GORE Founders, TFG and Polygon HoldCo of an initial Business Plan.
46. The "Condition Precedent" for these purposes was defined in the Tenn Sheet
(under the side-heading "Condition Precedent") as the requisite approval from
the boards of directors of TFG and TFGMF.
47. The Tenn Sheet also provided for the Companies to participate in the GORE
real estate venture on terms (amongst others) that:
47.1 (under the side-heading "TFG Interest in GORE") TFG would
receive 10 per cent of both the ownership interests in GORE and
any carried interests;
47.2 (under the side-heading "Options in TFG") the GORE Founders
would receive, in consideration of the transactions described in the
Term Sheet and without payment of any additional purchase price
or option payment, options with respect to 3 per cent of the issued
shares of TFG (being 3,908,241 shares). The terms of the options
would be such that each GORE Founder's options would vest and
become exercisable after five years (to the extent be remained active
in the RE Business as a GORE Founder after that date) and expire
after 10 years, with a strike pnee of US$5.50/share;
47.3 (under the side-heading "Co-Investment of TFG Master Fund)
TFGMF.would make available to GORE US$100 million that
could be drawn by GORE for "co-investment" purposes for any
investment programme sponsored by GORE; and
47.4 (under the side-heading "Working Capital") TFGMF with would
provide GORE with working capital of US$10 million in the form
of non-recourse working capital loans pursuant to the terms of a
loan agreement on terms that each draw-down of working capital
should be funded pro rata by Tetragon and Polygon HoldCo.
48. Ihe Term Sheet provided for the InfrastructureCo Entities to participate in the
GORE real estate venture on terms (amongst others) that:
48.1 (under the side-heading "Polygon HoldCo Interest in GORE")
Polygon HoldCo would receive 13 per cent of both the. ownership
interests in GORE and any carried interests;
48.2 (under the side-heading "Interest in Polygon HoldCo") the GORE
Founders would receive, in consideration of the transactions
described in the Term Sheet and without payment of any additional
purchase price or option payment, as a limited partner in Polygon
HoldCo, economic interests representing 3.6 per cent, of the equity
and profits of Polygon HoldCo and would be pari passu with the
other limited partners of Polygon HoldCo;
48.3 (under the side-heading "Infrastructure Services Agreement and
Infrastructure Committee") the InfrastructureCo Entities would
provide at cost, including employee wages and bonuses, (amongst
other matters) infrastructure to the GORE real estate venture,
including operational control, financial control, trade settlement,
marketing and IR support, marketing systems, legal, compliance,
administrative, payroll and employee benefits, office space, (in
London and New York) and other infrastructure services to the RE
Business; and
48.4 (under the side-heading "Working Capital") the InfrastructureCo
Entites (through Polygon HoldCo) would provide GORE with
working capital of US$10 million in the form of non-recourse
working capital loans pursuant to the terms of a loan agreement on
terms that each draw-down of working capital should be funded
pro rata by Polygon HoldCo and TFGMF.
49. In addition to the matters set out above, the Term Sheet provided (under the
side-heading "Founders Interest in GORE") for the GORE Founders:
49.1 each to receive an ownership in GORE representing 25% per cent,
of the total equity and global profits (to include all fees, whether in
the form of management fees, advisory fees or otherwise, but
excluding carried interests and performance fees) of GORE (which
would include all business lines and holdings of the RE Business);
and
49.2 collectively to receive 77 per cent, of all carried interests and
pcifomiancc fees received by GORE and 77 per cent, of the profits
from each "Carry Vehicle" or similar entity (directly or indirectly
through GORE), in each case after payment of expenses or other
obligations of GORE.
The mjeetings of the uoards of dirjf.ctors of the Companies on 29 July
2010
50. On or about 26 July 2010 a pack of documentation was circulated to the board
of directors of the Companies. The documentation:
50.1 gave, notice that parallel meetings of the Companies were to be held
at the registered office of the. Companies in Guernsey on 29 July
2010 at 6:00 pm (Guernsey time);
50.2 set out an agenda for the meetings; and
C«93li.l
50.3 included the supporting documentation for all items to be discussed
at the meetings.
51. The only documentation relating to the Proposed Gore Transaction was an
entry at point C of the agenda of the meetings which stated: "C. Update on
Green Oak Real Estate business proposal". No proposal to vote upon or approve,
the proposed GORE Transaction was set out in the agenda for the parallel
meetings. Further, at no time before the paraUel meetings did the board
circulate or was provided with a list of items which needed to be considered in
order to approve the GORE Transaction.
52. The parallel meetings of the boards of directors of the Companies took place
on 29 July 2010 as intended. Entry into the GORE Transaction was not on
the agendas for the meetings. Notwithstanding this, at the parallel meetings it
was proposed that entry into the GORE Transaction be approved.
53. The board of directors of the Companies resolved to enter into the GORE
transaction at the said meeting (the "GORE Resolutions"). Other than Mr
Jackson, each of the Directors voted in favour of the GORE Resolutions. Mr
Jackson voted against the GORE Resolutions.
54. Further, Mr Jackson denies that the minutes of the parallel meetings as
approved by the .boards ofthe Companies are accurate and representative ofthe
matters raised and resolutions made at the parallel meetings. Mr Jackson has
stated his opposition to the content of the minutes.
Breaches of duty and/or the Companies' Articles by the Directors
55. It is averred that:
55.1 in passing the GORE Resolutions and approving the GORE
Transaction the Directors have acted in breach of their Duties to
the Companies and/or in breach of the Companies' Articles, and
55.2 m the event that the Companies were to approve an initial Business
Plan and thus bind themselves to the GORE Transaction on the
terms of the Term Sheet, this would constitute further breaches by
the Directors of (i) their Duties to the Companies, (ii) the
Companies' Articles, (iii) the Authorised Closed Ended Investment
Scheme Rules 2008 and (iv) the Companies (Guernsey) Law, 2008.
56. The facts and matters on which Mr Jackson relies in this respect are set out
within this cause and more particularly in paragraphs 62 to 93. Mr Jackson
reserves the right to amend or add to these particulars following disclosure in
these proceedings
57. In addition, the facts and matters set out herein demonstrate a course, of
conduct by Mr Griffith and Mr Dear designed effectively to apply the assets of
the Companies for the benefit of the InfrastructureCo Entities, and thus
significantly to the benefit of their own interests.
58. At all material times Mr Dear and Mr Griffith were the Directors who
proposed, negotiated, advanced and were instrumental in ensuring that TFG
and TFGMF participate in the GORE Transaction. MrJackson avers that the
facts and matters set out hereinafter demonstrate a course of conduct by Mr
Griffith and Mr Dear designed effectively to apply the assets of TFG and
TFGMF for the benefit of the InfrastructureCo Entities, and thus significantly
to the benefit of their own interests
59 The facts and matters set out within this cause and more particularly 3t
paragraphs 62 to 93 below, both individuaUy and taken together, constitute the
conduct of the Companies' affairs in a manner which is unfairly prejudicial to
the Companies' members generally or some part of their members (including
Mr Jackson). Mr Jackson reserves the right to amend or add to these particulars
following disclosure in these proceedings.
60. Further or alternatively, it is averred that unless the claims pleaded within this
cause are prosecuted on behalf of and in the. name of the Companies by MrJackson those claims would not be prosecuted as the First to Sixth Defendants
to the claims:
60.1 control the Companies; and
60.2 control the majority of those shares in the Companies which hold
voting rights
and therefore would not othenvise permit the claims to be brought by the
Companies.
61. Upon being given notice that Mr Jackson was considering commencing this
action:
61.1 the directors removed Mr Jackson as a director of each of the
Companies, and
61.2 Mr Jackson's access to the New York offices of the investmentmanager to TFM (the. investment manager) was, and remains,
suspended.
(A) BREACH OF THE AUTHORISED CLOSED ENDED INVESTMENT SCHEME
Rules 2008
62. The Companies arc both authorised by the Guernsey Financial ServicesCommission ("the GFSC") under the Protection of Investors (Bailiwick of
Guernsey) Law 1987 and each operates as an authorised closed endedinvestment fund. Accordingly both are subject to the Authorised Closed
Ended Investment Scheme Rules 2008 ("the Rules").
63. Pursuant to Rule 3.01 (Conflicts of Interest) of the Rules:
63.1 each of the Directors arc obliged to take all reasonable steps to
ensure that there is no breach of any of the requirements of Rule
3.01 (Conflicts of Interest) involving a "relevant person" (Rule
a.oimv.
63.2 the InfrasttuctreCo Entities constitute a relevant person;
63.3 a relevant person may not sell or deal in the sale of property to TFG
or TFGMF unless the ami's length requirement in Rules 3.01(9)
and (10) are satisfied (Rule 3.01(4));
63.4 the 'sale of property' includes any transaction under which scheme
property of TFG and/or TFGMF is made available by either of
them (Rule 3.01(4)). Accordingly, the GORE Transaction
constitutes a sale, of property; and
63.5 a relevant person may not provide services for TFG and/or
TFGMF unless the services are provided on terms which satisfy the
arm's length requirement in Rule 3.01(9) (Rule 3.01(8)).
64. The ami's length requirement for the purposes of Rules 3.01(4) and (8) is that
the relevant arrangements must be at least as favourable to TFG and/or
TFGMF as would be any comparable arrangement effected on normal
commercial terms negotiated at arm's length with an independent party (Rule
3.01(9)).
65. The GORE Transaction involves the Companies entering into an agreement
including the InfrastructureCo Entities (which are companies in which Mr
Dear and Mr Griffith arc interested as set out above) where;
65.1 the Companies make available certain of their property under such
agreement; and
65.2 provide services under such agreement.
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:s65. In the premises, pursuant to Rule 3.01 of the Rules each of the Companic
may only enter into the GORE Transaction if the. transaction is at least
favourable to the Companies as would be any comparable arrangement effected
on normal commercial tenns negotiated at ami's length with an independent
patty ("the Ann's Length Requirement"). The GORE Transaction, ifenteredinto and pursued by the Companies, would not satisfy the Arm's LengthRequirement and would contravene Rule 3.01 ofthe Rules. Mr Jackson relies
on the following facts and matters:
as
(i) The proposed terms of the GORE Transaction significantly favour the
InfrastructureCo Entities over the Companies and therefore—it_js^ jiot
representative of an ami's length transaction
65.1 Under the proposed terms of the GORE Transaction:
65.1.1 the InfrastructureCo Entities will acquire a 13 per cent, of both
the ownership interests and carried interests in GORE in return
for:
(l) the GORE Founders receiving a 3.6 per cent, interest in
Polygon HoldCo (which is understood to be a recently
formed entity for the purposes of the GORJ-.
Transaction with little or no value);
(ii) ' making available a sum of US$10 million by way of
working capital loan to GORE, and
(iii) providing infrastructure services to GORE, for the
entire cost of which will, in any event, be paid for by
GORE.
65.1.2 Whereas the Companies, on the other hand, will acquire a
lesser 10 per cent, of both the ownership interests and earned
interests in GORE in return for:
(i) the GORE Founders receiving options in respect of
3,908,241 of TFG's shares representing 3 per cent, of its
issued share capital exercisable at $5.50 per share. Such
C-I89.50.V
options are estimated to have a present value of at least
US$17 million, which may increase considerably;
(ii) TFGMF making available a sum of US$10 million by
way of working capital loan; and
(iii) TFGMF making available a sum of US$100 million to
be co-invested in any investment programme
undertaken by GORE.
65.2 Accordingly, under the proposed terms of the GORE Transaction the
total value of the consideration to be provided by the InfrastructureCo
Entities is substantially less than the total value of the consideration to be
provided by the Companies, however, the InfrastructureCo Entities'
interest in GORE is 30 per cent, greater than that which is to be
received by TFG and TFGMF together.
65.3 Accordingly, the terms of the GORE Transaction cannot be
representative of an arms' length transaction as the InfrastructureCo
Entities are receiving significantly more remuneration than the
Companies in return for providing significantly less valuable
consideration.
(ii) The proposed GORE Transaction presents an uncommercial level of risk
to reward for the Companies and is therefore not representative of an arms'
length transaction
65.4 The proposed GORE Transaction is unlikely to produce any or any
acceptable return for TFG and TFGMF commensurate with the level of
risk being accepted as would normally be expected in such a transaction
and therefore it is terms are not representative of an arms' length
transaction. Mr Jackson relies on the following facts and matters:
65.4.1 The GORE Founders do not have a good track record of
producing substantial returns from real estate investments in
difficult economic markets
GJS93(i.l
65.4.2 The terms of the GORE Transaction as proposed in the Tenn
Sheet do not require the GORE Founders to invest any of
their own money into the GORE Transaction. Thud party
investors typically require that fund managers, such as the
GORE Founders, invest a substantial amount of their own
money into any fund before investing themselves. In the
absence of substantial investment by the GORE Founders in
the GORE real estate venture, substantial external investment
would be unlikely.
65.4.3 The GORE real estate venture would be a start up venture
with no current revenues or operating history. Under the
business plan for the GORE real estate venture prepared by the
GORE Founders, it is predicted that GORE would have
minimal cash reserves by the fourth quarter of 2012.
Accordingly, any delay in revenue production would be likely
to have significant implications for the solvency of GORE
65.5 Furthermore, in the light of the proposed financing commitments to be
made by TFG and TFGMF under the GORE Transaction (as
summarised in paragraph 47 above) and the level of nsk to TFG and
TFGMF which would be inherent in the GORE Transaction (as
summarised in paragraph 65.2 above), the level of potential return if
TFG and TFGMF were to enter into the GORE Transaction would be
unacceptably low, substantially less than a commercial return and
inconsistent with the amis' length requirement.
(hi) The terms of the proposed GORE Transaction would provide no. or no
adequate, protection to the Companies and therefore it is not representative of
an arms' length transaction
65.6 If the Companies were to enter into the GORE Transaction on the.
proposed terms as set out in the Term Sheet:
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G-IB93A.I
65.6.1 neither TFG nor TFGMF would have any control over the
sum of US$100 million required to be made available to be co-
invested in GORE investment programmes, whether as to the
nature or the timing of any investment;
65.6.2 indeed, as the co-investments to be made with the sum ofUS$100 million required to be made available by TFGMF are
to be determined by GORE, TFG and TFGMF would be
likely to be required to co-invest a larger than proportionateinterest in GORE investment programmes which are
unpopular with and/or undeifunded by external investors;
65.6.3 contrary to standard commercial practice, the GORE Founderswould not themselves be obliged to invest any sums in any
GORE investment programme. The sums advanced by
TFGMF by way of co-investment and working capital loan
could be used to finance the entirety of GORE's obligation to
co-invest m any particular GORE investment programme;
65.6.4 there are no adequate pre-emption nghts in relation to the
underlying investments made by GORE and accordingly those
investments are liable to dilution;
65.6.5 the Companies are entitled, between them, to only one vote at
any meeting of the board or other managing organ ofGORE,whereas the GORE Founders are entitled, between them, to
nine votes;
65.6.6 neither TFG nor TFGMF are entitled to nominate a
representative to the GORE investment committee, whereas
the InfrastructureCo Entities are entitled to nominate a person
to attend meetings of the GORE investment committee as an
observer; and
65.6.7 neither TFG nor TFGMF are entitled to nominate a
representative to the GORE mfrastnicture committee, whereasthe InfrastructureCo Entities are entitled to appoint all the
members of the GORE infrastructure committee.
65.7 By reason of the facts and matters set out above, the terms of theproposed GORE Transaction provide no, or alternatively no adequate,commercial protection to the Companies in respect of their interests
under the GORE Transaction and do not represent an arrangement
effected on nonnal commercial temis negotiated at arm's length.
(iv) The terms of the p^p.^H GOR P Transaction relating to default
significantly favour the. InfrastnictureCo Entities over the Companies_and
therefore is not representative ofan ami's length transaction
65.8 Each of the InfrastructureCo Entities and the Companies have agreed to
provide a US$10,000,000 working capital commitment as well as:65.8.1 the InfrastructureCo Entities have agreed to provide
infrastructure services; and
65.8.2 the Companies have agreed to provide a US$100,000,000 co-
investment commitment.
65.9 The obligations of each of the InfrastnictureCo Entities and theCompanies set out in paragraph 65.8 above shall be referred to as their
"Obligations".
65.10 In return for inter alia their performance oftheir Obligations the terms of
the GORE Transaction provide:
65.10.1 the InfrastnictureCo Entities will receive a 13 per cent, interest
of both the ownership interests and carried interests in GORE;
and
65.10.2 the Companies will receive a 10 per cent, interest of both the
ownership interests and carried interests in GORE.
C4S9J6.25
65.11 Under the heading "Failure to Fund Working Capital or TFG Co-Investment" the Term Sheet provides for the forfeiture of ownership
interests and carried interests in GORE by the InfrastructureCo Entities
and/or the Companies upon a failure to perform all or part of their
Obligations.
65.12 In the event that there is a failure by:
65.12.1 the InfrastructureCo Entities to provide their US$10,000,000working capital commitment part of its Obligations they willforfeit 4 percentage points of their total ownership interests and
earned interests in GORE; and
65.12.2 the Companies to provide their US$10,000,000 workingcapital commitment part of their Obligations they will forfeit 4percentage points of their total ownership interests and earnedinterests m GORE.
65.13 In the event that there is a failure by the InfrastructureCo Entities toprovide the infrastructure services part of their Obligations they do notforfeit any oftheir ownership and carried interests in GORE.
65.14 Conversely, if the Companies fail to provide their co-investmentcommitment part, of their Obligations to GORE they forfeit 6percentage points of their total ownership and earned interests in ^GORE.
65.15 Accordingly, if there is acomplete failure to perfonn their Obligations:65.15.1 the InfrastnictureCo Entities will still have a 9 per cent,
ownership and carried interests in GORE; but
65.15.2 the Companies will not have any ownership or earned
interests in GORE.
65.16 Accordingly, the terms of the GORE Transaction cannot berepresentative of an arm's length transaction as the tenns relating to
GIR9.V..I
default in the provision of the Obligations significantly favour the
InfrastnictureCo Entities over the Companies.
66. In the premises, the. GORE Transaction is a transaction which causes theCompanies to breach the Rules and in passing the GORE Resolutions,approving the GORE Transaction and m allowing the Companies to enterinto the GORE Transaction the Directors have acted in breach of their duties
set out in paragraph 25 above.
ffii-The GORE Transaction is NOii_LNjnjE_^sjLJNI£EESls. of the
Companies,
67. 'The GORE Transaction ls not m the. best interests of the Companies. Noreasonable director of the Companies, or either of them, would cause the.Companies to enter into and pursue the GORE Transaction on the proposedterms. Mr Jackson relies upon (a) the facts and matters set out in his letter of 6July 2010 to the boards of both Companies, the letter sent by the Nelson LawFinn LLC on behalf of Mr Jackson dated 6July 2010 to Mr Griffith. Mr Dear
and PCH II, the letter sent by Appleby on 21 July 2010 to Simpson ThacherBaitlett LLP (the lawyers appointed to advise the independent directors), Mr
Jackson's email of 27 July 2010 to Mr Dorey, Mr Jeffreys, Mr Knief, Mr Wardand Gary Horowitz and his email of 28 July 2010 to the Directors, (b) the factsand matters set out in paragraph 65.2 above and (c) the following facts and
matters.
(i) The GORE Transaction would result in the Companies paying duplicate
fees
67.1 TFM, as the investment manager of the Companies, is presentlyobliged pursuant to aservices agreement dated 26 April 2007 to makepayments to Polygon Investment Partners LP and Polygon InvestmentPartners LLP for the provision of infrastructure services on the.
Companies' assets, which would include those assets to be invested inthe GORE investment programme In the event that the Companies
67.2
were to enter mto the GORE Transaction, Polygon InvestmentPartners LP and Polygon Investment Partners LLP would also beentitled to receive payment, pursuant to the terms of the GORETransaction, on the infrastructure services provided mrespect of thosesame assets invested in the GORE investment programme
Pursuant to clause 10 of the Investment Management Agreement withTFM, the Companies are presently obliged to pay to TFM an annualmanagement fee of 1.5 per cent, of net asset value together with aquarterly peifonnance fee equal to 25 per cent, of the increase in netasset value of the Tetragon Funds over the previous 3 months mexcess of athreshold increase in net asset value (the "Hurdle"). TheHurdle is broadly calculated as net asset value multiplied by threemonth US Dollar LIBOR plus 2.65% per annum, over the preceding3month period. In the event that the. Companies were to enter mtothe GORE Transaction, they would be obliged to pay managementand performance fees both to GORE and to TFM in respect of assetswhich were invested in the GORE investment programmes.
67.3 It is against the interests of the Coiiipan.es to incur, directly andindirectly through TFM, two sets of management and performancefees in respect of the same assets.
(yIJrjie_wmO»^^n^n^t^hnveholders for misxejarejsentation
67.4
0.48936.1
If the Companies were to enter into the GORE Transaction, doing socould expose them to potential claims for misrepresentation by theholders of non-voting shares in the companies (i.e. the investors in theTetragon Funds). Mr Jackson rel.es on the following facts and matters:
67.4.1 The Prospectus set out that the Tetragon Funds would investin CEO's and CDO's with the matters set out in the Prospectus
being tailored specifically to those specific types investments.I„ particular the Prospectus stated (amongst other matters) that:
•'Senior secured bank loans represent the majority of assetsunderlying the. portfolio. [TFG] believes these are attractive dueto their bu> historical volatility and low correlation to otherfixed income and equity markets. [TFG] currently gainsexposure to these assets primarily through investments in theudwrdinatcd, residual tranches ("Residual Tranches") ofcollateralized debt obligation ("CDO") products, winch areiaurilizcd interests in underlying assets assembled by assetmanagers and divided into tranches based on their degree ofcredit risk. By taking substantial positions in the ResidualFranclm of these CDOs, the Company is able to negotiatecertain enhanced features of the CDOs during the originationprocess and obtain structural flexibility, as well as the ability toinfluence amendment, to the terms, mil option exercise and otherdecisions with respect to the CDOs. [TFG] currently invests ina broad range of CDO products, utilizing over 35 assetmanagers, and its underlying assets are diversified on aocoaraphic and industry-sector basis. In addition, the"investment Manager typically hedges to manage default risk,concentration lisk and currency risk. Interest rale and fundingri<k are primarily hedged through the long-term matchedfunding embedded in (he CDO structure (i.e., the assetsacquired bear interest by reference to afoaling rate similar to thefunding source for those assets). The Investment Manageractively and regularly evaluates available asset classes and looksfor additional investment vehicles through which [TFG] can?aiu exposure, to its target asset classes and through which ifbelieves ii can generate attractive returns. Accordingly, [TFG]expects thai the asset classes and investment vehicles in itsportfolio will likely expand over time"
67.5 The Prospectus did not, in contrast, refer at all to the possibility of theTetragon Funds investing in real estate, real estate managementservices, real estate financing structures or real estate-related financialvehicles, as is proposed by way of investments under the GORETransaction. Mr Jackson will rely at trial upon the Prospectus for its
full terms
67.6 The aforesaid statements constituted representations by TFG to thepersons who subscribed for and were issued with non-voting shares in
TFG that those companies would make investments substantially in
CDOs and related instruments.
67.7 It was further represented in the Prospectus that TFG would change
its investment objective only by decision of the board with the
approval of the voting shareholders in TFG, i.e. PCH II. No suchapproval has been sought or obtained from PCH II and, if sought,would not be given by reason of the fact that the approval of Mr
Jackson, as holder of all the issued class Bshares in PCH II, would berequired and would not be given on the present tenns and in thepresent circumstances.
67.8 In the circumstances entry into the GORE Transaction exposes TFGto potential claims for misrepresentation by the. non -voting
shareholders in TFG.
(mt.The proposed GO£JOianactigri_wouJd_provide excessive remuneration
to the GORE Founders
67.9 Under the proposed terms of the GORE Transaction the threeGORE Founders would between them receive:
67.9.1 an ownership in CORE representing 77 per cent, of the total
equity and global profits;
67.9.2 77 per cent, of all earned interests and peifomiancc feesreceived by GORE and 77 per cent, of the profits from
each "Carry Vehicle" or similar entity;
67.9.3 options in respect of shaies representing 3 per cent, of theissued shares of TFG exercisable at US$5.50 per share; and
67.9.4 a 3.6 per cent, interest in Polygon HoldCo
(together "the GORE Founders' Benefits").
67.10 The GOR-E Founders' Benefits are excessive and substantially exceeda commercial market rate for the services to be provided by the
GORE Founders under the GORE Transaction.
67 11 Had the GORE Founders' Benefits been at a commercial market ratethe Companies would have been able to obtain more commerciallyadvantageous terms within the GORE Transaction.
67.12 Further or alternatively, had the GORE Founders' Benefits been at acommercial market rate the Companies would not have granted
options on so many TFG shares on such favourable terms.
67.13 Accordingly, by entering into the GORE Transaction on the above,tenns the Directors have caused the Companies to suffer loss as set out
at paragraphs 67.Hand 67.12 above.
(iv) The Pro^oscd_GOP^ Transaction ^j^sejqh^
Regulatory Action by the GFSC
67.14 For the reasons set out at paragraphs 62 to 65 the Proposed GORETransaction represents a breach of the Rules.
67.15 Any breach of the Rules by either of the Companies could potentiallyexpose that Company to:
67.15-1 sanction or other forms ofenforcement action by the GFSC;
67.15.2 revocation of its authorisation to operate the Tetragon
Funds by the GFSC; and/or
67.153 claims by investor shareholders for breach ofstatutory dutyunder section 34 of the Protection of Investors (Bailiwick of
Guernsey) Law, 1987.
Siimmai^T2Ieach_^^
68. By reason ofthe facts and matters aforesaid:
68.1 in causing the Companies purportedly to enter mto the Tenn Sheet,Mr Griffiths and/or Mr Dear have acted in breach of their duty to act
in the best interests of the Companies as set out in paragraph 25.1
above;
68.2 in passing the GORE Resolutions and approving the GORETransaction the Directors acted in breach of their duty to act in thebest interests of the Companies as set out in paragraph 25.1 above, and
68.3 in the event that the. Companies were to approve an initial BusinessPlan and thus bind themselves to the GORE Transaction on the tennsof the -Tenn Sheet, the Directors would in procuring or allowingthem so to do be acting in breach oftheir duties set out in paragraph
25.1 above.
(Q_£MA£!LQfSectk^^
2008
69. Pursuant to sections 298 and 299 of the Companies (Guernsey) Law, 2008("Sections 298-299") before acompany grants nghts to subscribe for shares in acompany otherwise, than for cash the board of directors must (inter alia):
69.1 resolve that, in its opinion, the consideration for and tenns of the issueof the nghts or securities and, in either case, the shares are fair andreasonable to the company and to all existing members (s^298(l)(b));
69.2 approve a certificate:
69.2.1 stating the consideration for, and tenns of, the issue of therights or securities and, in cither case, the shaies (s. 29S(2)(a));
<71893h.i
69.2.2 describing the consideration in sufficient detail to identify it (s,
298(l)(b));
69.2.3 stating that, mtheir opinion, the consideration for and terms of
issue of the rights or securities and, in either case, the shares are
fair and reasonable to the company and to all existing members
(s. 298(1 Uc));
69.2.4 stating the reasonable present cash value of the consideration
for issue and the basis for assessing it (s. 299(4)(a)); and
69.2.5 stating that, in the opinion of the board, the present cash value
of the consideration to be provided is not less than the amount
to be credited for the issue of the shares (s. 299(4)(b)),
69.3 determine the reasonable present cash value of the consideration for
the issue (s. 299(3)(a)); and
69.4 resolve that, in its opinion, the present cash value of the consideration
to be. provided is not less than the amount to be credited for the issue
of the shares (s^99jSKb));
70. 'The proposed terms of the GORE Transaction include a term for the grant ofoptions to the GORE Founders to subscribe for 3,908,241 shares in the capitalof TFG exercisable at $5.50 per share.
71. In breach of the requirements of Sections 298-299, the Directors of each of
TFG and TFGMF failed at their meetings held on 29 July 2010 or thereafter
to:
71.1 resolve, that, in their opinion, the consideration for and tenns of the
issue, of the rights or sccunties and, in either case, the shares was fair
and reasonable to the company and to all existing members;
G4R93'vl33
71.2 approve acertificate stating all of the matters required to be stated asre fully particularised in paragraphs 69.2 above;
71.3
more
determine the reasonable present cash value, of the consideration forthe proposed issue of shares pursuant to the proposed option, and/or
71.4 resolve that, in its opinion, the present cash value of the considerationto be provided is not less than the amount to be credited for the issue
of the shares.
72. Mr Jackson avers that the minutes of the parallel meetings of directors of theCompanies on 29 July 2010 are unrepresentative of the meeting and, mparticular, the Directors faded adequately or at all to observe the requirementsof Sections 29S-299.
73. By reason of the matters aforesaid, following the entry of TFG mto the GORETransaction on the tenns set out in the Term Sheet, and mparticular die grantof options to the GORE Founders to subscribe for 3,908,241 shares in thecapital ofTFG exercisable without any option payment:
73.1the Directors and TFG have not complied with the requirements of
Sections 298-299;
73.2 accordingly, any grant of options by TFG would be. unlawful andinvalid; and
73.3
G-fKWlvl
in the circumstances the Directors, and each of them, has acted inbreach oftheir duties in paragraphs 25.1, 25.3, 25.4 and 25.6 above inallowing TFG to enter into the GORE Transaction on the terms ofthe Tei-m Sheet and purportedly to grant the options to the GORE
Founders.
3-1
74. Further or alternatively, had the Directors complied with their Duties and with
Sections 298-299 they would not have agreed that the Companies should enter
into the GORE Transaction on the present terms. The Companies have
suffered loss as had the Directors caused the Companies to enter into the
GORE Transaction having complied with Sections 298-299 the terms of the
GORE Transaction would be more favourable to the Companies.
(D) MR Griffith and Mr Dear have breached their duties of full and
FRANK DISCLOSURE TO THE COMPANIES
75. At no material time, whether before or after the execution of the Term Sheet
on 18 May 2010, have Mr Griffith and Mr Dear disclosed fully and frankly toeach ofthe Companies and all the other directors ofeach of the Companies the
nature and extent of their respective interests in relation to the Term Sheet
and/or the GORE Transaction.
76. In the premises, Mr Griffith and Mr Dear have acted, and continue to act, inbreach of their duties set out at paragraph 25.5 above and in breach of articles
91(a) and 99 of TFG's Articles of Incoiporation and articles 84(2) and 92 ofTFGMF's Articles of Incoiporation as setout at paragraph 26 above.
77 Notwithstanding their failure to disclose their interests in the GORE
Transaction fully and frankly, at meetings ofthe boards ofdirectors ofTFG andTFGMF held on 29 July 2010 both Mr Griffith and Mr Dear purported to vote
m favour of approving the proposed terms of the GORE Transaction and in
favour of the GORE Resolutions.
78. In the premises:
78.1 the Tenn Sheet is liable to be set aside at the instance of TFG and/or
TFGMF;
78.2 neither Mr Griffith nor Mr Dear was entitled to vote in respect of the
Proposed Resolution and their votes in respect of the Proposed
Resolution are not to be counted;
78.3 in any event, should the Companies approve an initial Business Plan
and thus bind themselves to the GORE Transaction on the terms of
the Term Sheet at a time when either Mr Griffith or Mr Dear has not
yet fully and frankly disclosed the nature and extent of their interest in
the GORE Transaction, the GORE Transaction would be liable to
be set aside at the instance of each of the Companies; and
78.4 by virtue oftheir failure to comply with the provisions ofarticle 91(c)of TFG's Articles of Incoiporation and article 84(c) of TFGMF's
Articles of Incorporation and their fiduciary duties to the Companies
by virtue of their positions as directors both Mr Griffith and Mr Dear-are accountable to the Companies for any benefit they derive from
entry by the Companies into the GORE Transaction and in particular
their interests in the InfrastnictureCo Entities. An inquiry into and
account of the benefits denved by Messrs Dear and Griffith from the
GORE Transaction is claimed.
(Hi Mr Griffith and Mr Dear havf placed themselves in a position of
conflict in breach of their duties to the Companies
79. In entering into negotiations regarding the GORE Transaction and inproposing and recommending the GORE Transaction to the boards of theCompanies, each of Mr Griffith and Mr Dear has placed himself in a positionwhere his own respective personal interests and his fiduciary duty to the
InfrastructureCo Entities conflicted with the interests of the Companies and his
duties to those companies.
80. Mr Jackson relies upon the following facts and matters:
80.1 It was and is in the interests of the Companies (i) that the GORE
Transaction be pursued only if it is in the. best interests of the.
Companies and (ii) that the Term Sheet and the GORE 'Transaction
represent the most advantageous terms available.
80.2 Furthermore, Mr Griffith and Mr Dear were and are under a duty to
act in the best interests of the Companies (as set out in paragraph 25.1
above). The said duty required them to negotiate such terms in
respect of the Tenn Sheet and the GORE Transaction as were most
advantageous to the Companies. The aforesaid duty further required
Mr Griffith and Mr Dear to propose or recommend the Term Sheet
and/or the GORE Transaction to the boards of the Companies only
if the terms proposed in respect thereof represented the most
advantageous tenns available to the Companies.
80.3 However, Mr Griffith and Mr Dear, as managers and/or directors
and/or agents of the InfrastructureCo Entities, were also under a duty
(to those entities) to act in the best interests of those entities. 'The said
duty required them to negotiate such terms in respect of the Tenn
Sheet and the GORE Transaction as were most advantageous to the
InfrastructureCo Entities.
80.4 Furthennore, it is understood that, Mr Gnffith and Mr Dear have
substantial interests in the InfrastructureCo Entities and therefore
stood and stand (through the InfrastructureCo Entities) to benefit
personally from their entry into the Term Sheet and the GORE
Transaction on tenns which are most advantageous to the
InfrastructureCo Entities (rather than to the Companies).
81. In the premises, there was and is a conflict between the duties of Mr Griffith
and Mr Dear to the Companies, on the one hand, and their personal interests
and duties to the InfrastnictureCo Entities, on the other. Accordingly, Mr
Gnffith and Mr Dear have both acted, and m causing or allowing the
Companies to bind themselves to the GORE Transaction on the tenns of the
.37
Term Sheet would be continuing to act, in breach of their duty as directors to
each of the Companies as setout at paragraph 25.2 above.
82. The said breaches of duty have not been authorised or otherwise approved by
the Companies.
S3. By virtue of their failure to comply with the provisions of article 91(c) ofTFG's Articles of Incoiporation and article 84(c) of TFGMF's Articles of
Incorporation and by virtue of their breaches ofduty set out in paragraphs 79to 82 above Mr Gnffith and Mr Dear are accountable to the Companies for
any benefit they derive from entry by the Companies into the GORETransaction and in particular their interests in the InfrastnictureCo Entities
An inquiry into and account of the benefits derived by Messrs Dear andGriffith from the GORE Transaction is claimed.
(F) Breach of duties of skill, care and diligence
84. By reason ofall the facts and matters set out in paragraphs 62 to 83 above:
84.1 in purporting to enter into the Term Sheet on behalf of TFG andTFGMF each of Mr Griffith and Mr Dear failed to act with
reasonable skill, care and diligence in breach of his duty to the
Companies as setout in paragraph 25.6 above,
84.2 in passing the GORJE Resolutions and approving the Tenn Sheet andthe GORE Transaction, each of the Directors failed to act with
reasonable skill, care and diligence in breach of his duty to the
Companies as set out in paragraph 25.6 above; and
84.3 m the event that TFG and/or TFGMF were to agree an initial
Business Plan and thus bind itself to the GORE Transaction on the
tenns of the Term Sheet, in causing or allowing them to do so each of
the Directors would fail to act with reasonable skill, care and diligence
CJ893KI38
in breach of his duty to those companies set out in paragraph 25.6
above.
85. Further, in breach of their duty to act with reasonable skill, care and diligence
the Directors failed adequately or at all to fully and properly consider the tenns
of the GORE Transaction on behalf of the Companies by reason of the
following facts and matters:
85.1 In advance of the GORE Resolutions an opinion was obtained from
Houlihan Lokey Howard Si Zulcin Financial Advisors Inc ("Houlihan
Lokey" and the "Fairness Opinion" as appropriate).
85.1.1 It is understood that the instructions to Houlihan Lokey
were provided by or on behalfof Messrs Griffiths and Dear.
Accordingly the mstmctions to Houlihan Lokey were
instructions from persons with a conflict of interest in the
GORE Transaction. The Directors ought to have either
reviewed the instructions to Houlihan Lokey to ensure they
were appropriate and covered all necessary aspects of the
GORE Transaction alternatively they ought to have
retained an alternate advisor to provide such opinion;
85.1.2 Whilst the Fairness Opinion stated that Houlihan Lokey
considered the GORE Transaction "is fair to TFG from a
financial point of view" it specifically and expressly excluded
any consideration or companson with inter alia the benefit
that the InfrastructureCo entities would obtain from the
GORE Transaction;
85.1.3 Accordingly, the Directors failed adequately or at all to
instinct Houlihan Lokey and/or such other advisor as would
be appropriate including as to whether the. tenns of the
GORE Transaction were fair as they applied to the
Companies when compared to the terms which applied to
the InfrastnictureCo Entities;
85.1.4 Further or alternatively the Directors failed adequately or at
all to instruct Houlihan Lokey and/or such other advisor as
would be appropriate to opine as to the fairness of the
GORE Transaction (taking into account all aspects of,
interests in and parties to the GORE Transaction), the
commerciahty of the tenns of the GORE Transaction and
whether the terms of the GORE Transaction were the best
that could reasonably be obtained;
85.15 Further or alternatively the Directors failed adequately to
discuss with Houlihan Lokey and/or such other advisor as
would be appropriate the Fairness Opinion, the terms of the
GORE Transaction and to obtain further advice from
Houlihan Lokey and/or such other advisor as would be
appropriate on the whether the terms of the GORE
Transaction were fair as they applied to the Companies
when compared to the terms which applied to the
InfrastructureCo Entities,
85.1.6 Further or alternatively the Directors failed adequately to
discuss with Houlihan Lokey and/or such other advisor as
would be appropriate the Fairness Opinion, the terms of the
GORE Transaction and to obtain further advice from
Houlihan Lokey and/or such other advisor as would be
appropriate on the commercial merits of the. GORE
Transaction and whether the tenns of the GORE
Transaction were the best that could reasonably be obtained;
8517 Further or alternatively the Directors failed adequately or at
all to discuss with Houlihan Lokey and/or such other
advisor as would be appropnare whether the GORE
'Transaction constitutes an ami's length transaction for the
purposes of the Authorised Closed Investment Scheme.
Rules, 2008, and
85.1.8 Further or alternatively the Directors failed adequately or at
all to instruct Houlihan Lokey and/or such other advisor as
would be appropriate to include within the Fairness
Opinion or to othenvise provide an opinion stating whether
the GORE Transaction constitutes an arm's length
transaction for the purposes of the Authorised Closed
Investment Scheme Rules, 2008.
85.2 The Directors failed adequately or at all to consider and compare, the
benefit obtained by the InfrastnictureCo Entities under the GORE
Transaction to the benefit obtained by the Companies and properly
establish that the tenns of the GORE Transaction as they applied to
the Companies were:
85.2.1 fair;
85.2.2 representative of an ami's length transaction; and
85.2.3 the best terms the Companies could reasonably obtain.
85.3 The Directors failed adequately or at all in relation to the GORE
Transaction:
85.3.1 to consider and make allowance for the value of the Co-
Investment Commitment being made by TFGMF;
85.3.2 to consider and make allowance for the diluting effect of the
grant of options in TFG to the GORE Founders. The net
asset value of TFG shares substantially exceeds the traded
value of TFG shaies. To grant substantial options in TFG
G4S936.1
to the GORE Founders without any or any proper
valuation and allowance being made for such discount will
cause a loss of value, in the shares held by existing
shareholders which the Directors have failed adequately or
at all to consider;
85.3.3 to critically analyse the methodology adopted by Houlihan
Lokey and the assumptions and qualifications made by
Houlihan Lokey in their analysis of the GORE Transaction
and whether that methodology and those assumptions and
qualifications were appropriate in all ofthe circumstances;
85.3.4 to critically analyse the calculations adopted by HouUhan
Lokey in their analysis of the GORE Transaction and
whether they were accurate and justified m all of the
circumstances;
85.3.5 to t3ke into account the information and internal projections
of future investment performance and cash generation by
the Companies when considering the terms of the GORE
Transaction;
85.3.6 to consider whether the terms of the GORE Transaction
provide the Companies with adequate protection to prevent
the dilution of the GORE investments;
85.3.7 to ensure that the terms of the GORE Transaction provide
the Companies with adequate protection to prevent the
dilution of the GORE investments,
85.3.8 to consider whether the. voting rights of the Companies m
relation to GORE activities arc appropriate and provide the
Companies with adequate protection;
C«936 I
85.3.9 to ensure that the voting nghts ofthe Companies in relationto GORE activities are appropriate and provide the
Companies with adequate protection;
85.3.10 to consider whether the absence of any requirement for arepresentative of the Companies to be amember of, or evenan observer of, those committee(s) to which all investment
and management of GORE investment programs are
obliged to be delegated provides the Companies with
adequate protection;
85.3.11 to ensure that a representative of the Companies is a
member of, or even an observer of, those conumttee(s) to
which all investment and management of GORE
investment programs is to be delegated;
85.3.12 to consider whether the tenns of the GORE transaction
provide the Companies with adequate protection fromtaxation and regulatory nsk through limitation of the types
of investments which can be made by GORE;
85.3.13 to ensure that the terms of the GORE transaction, provide
the Companies with adequate protection from taxation andregulatory nsk through limitation of the types ofinvestments which can be made by GORE;
85.3.14 to consider whether the terms of the GORE Transaction
provide any or any adequate protection to the Companies toensure that their co-investment commitment is invested in a
manner which is in the best interests of and which will
produce the best possible return for the Companies;
85.3.15 to ensure that the terms of the GORE. Transaction provide
adequate protection to the Companies to ensure that then
co-investment commitment is invested m a manner which is
in the best interests of and which will produce the best
possible return for the Companies;
85.3.16 to consider whether the terms of the GORE Transaction
provide any or any adequate protection to the Companies toensure that their co-investment commitment is not subject
to adverse selection for investment in unfavourable and/or
the leastpopular GORE investment programs;
85.3.17 to ensure that the terms of the GORE Transaction provide
adequate protection to the Companies to ensure that theirco-investment commitment is not subject to adverse
selection for investment in unfavourable and/or the least
popular GORE investment programs;
85.3.18 to consider whether there is any or any adequate protection
for the Companies to ensure that duplicate infrastructure
fees and duplicate investment management fees are not paidon those assets committed under the co-investment
commitment; and
85.3.19 to ensure that there is adequate protection for the
Companies to ensure that duplicate infrastructure fees andduplicate investment management fees are not paid on thoseassets committed under the co-investment commitment.
86. By reason of the breaches of duty of skill, care and diligence set out atparagraphs 84 to 85.3.19 above the Directors have caused the Companies tosuffer loss and damage by entenng into the GORE Transaction on tenns whichare not as advantageous to the Companies as if they had performed such duty
to the level required of:
86.1 directors professing the level ofskill and experience ofthe Directors;
and
G4S93IU
86.2 directors holding such office as the Directors hold at the Companies.
Conclusion
87. By reason of the matters aforesaid, in passing the GORE Resolutions and
approving the Tenn Sheet and the GORE Transaction, the Directors have
acted in breach of then Duties to the Companies and/or in breach of the
Companies' Articles.
88. Further or alternatively, by causing or permitting the Companies to bind
themselves to the GORE Transaction on the terms of the Term Sheet, the
Directors have acted in breach of and contrary to (l) their Dutias to the
Companies, (ii) the Companies' Articles, (in) the Authorised Closed Ended
Investment Scheme Rules 2008 and/or (iv) the Companies (Guernsey) Law,
200S. Together all breaches of the Duties by the Directors set out in the cause
are refened to as the "Breaches'.
89. As a result of the Breaches the. Companies have suffered loss and damage.
90. Had the Breaches not taken place the Directors would not have resolved to
enter into the GORE transaction further or alternatively the Directors would
not have resolved to enter into the GORE transaction on the current terms.
91. If they had complied with their Duties the Directors would have ensured that
the Companies did not enter into the GORE transaction other than on terms
which are in the best interest of the Companies and which are the best terms
which could be reasonably obtained.
92. Accordingly, in respect of the matters detailed under headings.
92.1 (A) Breach of the. Authorised Closed Ended Investment Scheme
Rules 2008;
92.2 (B) The. GORE Transaction Is Not In The Best Interests of the
Companies,
GIC936.1
92.3 (C) Breach of Sections 298 and 299 of the Companies (Guernsey)
Law, 2008; and
92.4 (F) Breaches ofDuties ofSkill, Care and Diligence;
the Companies have suffered loss and damage which includes the difference invalue between the current tenns of the GORE Transaction and the tenns ofthe GORE Transaction which would have been obtained if the Directors hadacted in accordance with their Duties and with paragraph 91 above. An
inquiry as to the amount of such loss and damage is claimed, together with anorder that the Directors pay such sums to the Companies as may be found
upon the taking of the inquiry.
93. In respect ofthe matters detailed under headings.93.1 (D) Mr Griffith and Mr Dear Have Breached Their Duties Of Full
And Frank Disclosure 'To The Companies; and
93.2 (E) Mr Griffith and Mr Dear Have Placed Themselves In APosition OfConflict In Breach OfTheir Duties To The Companies;
an inquiry into and account of the benefit derived from the GORE transactionby Mr Griffith and Mr Dear is claimed, together with an order that any suchbenefit be paid to the Companies.
AND THE PLAINTIFF CLAIMS ON HIS OWN BEHALF AND/OR ONBEHALF OF THE SEVENTH AND EIGHTH DEFENDANTS:
(1) An order pursuant to section 349 of the Companies (Guernsey) Law, 2008 (the"Law") that the affairs of the Seventh and Eight Defendants are being and havebeen conducted in a manner that is unfairly prejudicial to the interests of then-members generally or some part of their members (including the Plaintiff);
(2) An order pursuant to section 350 of the Law authorising those, claims containedherein brought pursuant to section 349 and 350 of the Law lie brought in thename of the Seventh and Eighth Defendants by the Plaintiff;
(3) An order that the Plaintiff be indemnified out of the assets of the Seventh andEighth Defendants in respect ofthe legal costs ofthe claims contained herein;
(4) Agamst the First to Sixth Defendants, an inquiry as to the loss and damagesuffered by the Seventh and Eighth Defendants detailed at paragraphs 87 to 92
above;
(5) An order for payment to the Seventh and Eighth Defendants by the First to SixthDefendants (in such proportions as the Court may order) ofsuch sums as shall be
found upon the taking of the said inquiry at (4) above;
(6) An inquiry into and account of the benefit derived by the First and SecondDefendants as detailed at paragraph 93 above;
(7) An order for payment to the Seventh and Eight Defendants by the First andSecond Defendant of such sums as shall be found upon the taking of the said
inquiiy and account at (6) above;
(S) Such further consequential or other accounts or inquiries as may be necessaiy or
requisite;
(9) An order for payment to the Seventh and Eighth Defendants of interest on thesaid sums at such rate and for such period as the Court shall think fit,
(10) All other necessaiy and incidental orders and directions;
(11) Such further orother relief as the Court thinks fit; and
(12) Costs.
G4RM6.I
J T LE TISSIER
Advocate for Alexander Jackson
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i 48
Jan 072011 5:55PM Omega Advisors, Inc. 561-883-DG07
June 30, 2009
Dorchester Management LLC2460 teraalne Ave
Suite SOS
Port Lee, W 07024Phone:202-944-4333
Mr, David WishnowMr. Jeffrey HerlynMr. Michael RosenbergPolygon Credit Management GP ULC399 ParkAvenue, 22nd FloorNew York, NY10022
Gentlemen:
We are writing to express our dissatisfaction with Tetragon Ffnanclal Group ltd.'s {'Tetragon")current structure of the Incentive fee payable to the Investment Manager.
We recogntee that on whole, the economic downturn of '0S-'09 was unexpected and, as such,that the sharp plunge in Tetragon's NAV has been an unforeseen consequence of thatdownturn. We recogntee also that when you drafted Tetragon's prospectus before gofngpublic, you did not envision that such a problem would arise. Finally, we assume that each ofyou Is doing your best to maxlmfea value for Tetragon shareholders.
Asyou well know, the Net Asset Value of Tetragon has plunged from approximately$10/shareat Its IPOto approximately$5.4 today. Underthe current structure, you, the Investmentmanagers, stand to collect Incentive fees on tmyrtse In NAV, even from these depressed levels,This will come at the expense of yourdevoted shareholders that chose to hold their Tetragonshares, and ride out the difficult times. If, for example, the gross WAV were to recover back towhere ft stood atthe IPO, SlO/share, you would collect over$1.0 per share In Incentive fees,and your shareholders would effectively remain underwater by that amount. Worse yet, even Ifthe NAV wereto remain at currant levels but fluctuate inthe Interim, the Investment Managerwould collect Incentive fees on these fluctuations. Thiscurrent Incentive fee structure defeatsthe purpose of aligning the Investment Manager's Interests with those ofshareholders: thelarger the volatility Inthe NAV, the largerthe Incentive fees to the InvestmentManager, all tothe dismay of shareholders.
Wo propose that that tfia incentive foe bo rastructured *ueh that no incentive fee will be paidto theinvastmeot Manaire untitthe NAVofTetragon rises bacfeto 5^0/sh?re.
Pagel
Jan 07 2011 5:55PM Omega Advisors, Inc. 561-883-0607 p.t
Dorchester Management LLC
Webelieve strongly that an adjustment to the Incentivefee structure Isnot only appropriate,butnecessary. Moreover, suchrestructuring will send a strongmessage to existing andpotential shareholders that you have shareholdervalue In mind. We are confident that such amessage will contribute significantly to a recovery ofTetragon's shareprice, andwlH bewell-received bythe greaterTetragon shareholder baseas well as bypotenfMInvestors.
We lookforward to hearing back from you regarding this.
The undersigned own collectively over625,000 shares, representingapproximately O.S %ofTetragon's outstanding shares.
Sincerely,
'.<]( Avse/l*L-C*DorchesterHoldings Ltd.By Gil Afaoodl, Investment Manager.
BRM GroupByAvi Basher, CFO & VP Finance
Git Shwed ™~"" "~"" "~
By R$n Shwed, investment Manager
Page 2
Omega Advisors, Inc. 1Wall Street Plaza • 88 Pine Street »31st Floor | New York, New York 10005Tel: 212-495-5210 I Fax: 212-495-5236
Leon Q. Cooperman, C.F.A.Chairman & Chief Executive Officer
November 4,2010
Mr. Rupert Dorey, DirectorMr. David Jeffreys, DirectorMr. Byron L. Knief, Director
Mr. Greville V.B. Ward, Director
Tetragon Financial Group LtdDorey Court, Admiral Park, St. Peter PortGuernsey, Channel Islands GY1 8BG
Dear Gentlemen:
According to publicly available documents, Omega, and related entities, is thelargest shareholder in TetragonFinancial Group, LTD ('TFG"), owning close to 10% of theequity. We remain veryconcerned aboutthe manner in which the Independent Directors ofTFG, as well as TFG's Investment Manager, Polygon Credit Management LP ("Polygon"),continue to operate with an apparent disregard for shareholder rights and an apparent lackofconcern forenhancing shareholder value. As longas theIndependent Directors andPolygoncontinue to ignore the responsibilities associated with managing a public company, TFGshareswillcontinueto underperform its peersand tradeat a significantdiscountto NAV.
AsIndependent Directors with a fiduciary responsibility to protect the rights of nonvoting shareholders, I implore you to take the following actions in order to enhanceshareholder value:
1) Amend the Investment Management Agreement to exclude incentivecompensationon the reversalof the AcceleratedLoss Reserve ("ALR");
2) Increase corporate communication by conducting openquarterly conferencecalls followed by a question and answerperiod for all shareholders;
3) Utilizeexcess cashto tender for up to 10%of common shares as long as thestock sells at a 20% or greater discount to NAV and we are confident in thebusiness outlook;
4) Increasedividend payoutas a percentage of cash flowsfrom operations backto 2007 level; and
5) Provide additional portfolio disclosure on TFG holdings with performancemetrics.
Incentive Compensation
Based on numerous conversations with existing and potential shareholders, there is aconsensus around the fact that the incentive compensation on the reversal of the ALR isblatantly excessive. Most investors view the compensation as inequitable and refuse toinvest in a vehicle that permits theInvestment Manager to write down asset values during a
0
downturn in the credit cycle and then simply write up the values in subsequent quarters andtake 25% of the "appreciation" for doing nothing. This compensation arrangement is not inthe spirit of the IMA, and it is contributing to TFG's stock price underperformance. Irequest that the Independent Directors force Polygon to waive its contractual right to anincentive fee on the reversal of the ALR. As a result, investors would gain considerablecomfort that the Investment Manager and shareholders are receiving equitable compensationin the event of value creation. This action will contribute to reducing TFG's significantdiscount to NAV.
Corporate Communication
I have been investing in stocks for decades and cannot recall a management teamrefusing to conduct interactive conference calls with shareholders. This is a highly unusualcorporate communication policy for a public company with a market capitalization of about$700 million. In fact, both KFN and Man Group PLC, which are public investmentcompanies, conduct interactive conference calls. Existing shareholders and, moreimportantly, potential shareholders find this policy unacceptable, making them wary aboutthe Investment Managers' actions and motives. Shareholders are tired of Polygon's charadeof asking for questions in advance and then simply ignoring them. Shareholders are entitledto an open dialogue with the Investment Manager in an open forum to confirm investmentmerits as well as discuss potential issues with the portfolioor strategy. By denying investorsthe opportunity to ask direct questions, the Investment Manager can operate in a vacuum andignore investor concerns and demands. This closed minded communication style leads toinvestor skepticism and discourages potential investors from purchasing TFG shares.Furthermore, Polygon has a storied past with regards to upholding investor rights. The WallStreet Journal reported on September 4, 2010 that investors petitioned the Cayman Islandcourt to appoint independent liquidators to wind up the Polygon Global Opportunities Fundbecause the fund manager, Reade Griffith, has returned just half of the money sinceannouncing in late 2008 that he would windup the fund. In addition, he continues to chargefees on more than $1.2 billion of capital that remains locked up despite investor outrage.The Board must recognize that Polygon's reputation of self-dealing is no longer acceptableand is causing TFG stock to underperform. I request that the Independent Directors forcePolygon to hold quarterly conference calls with an open question and answer period so thatinvestors can have a direct and honest dialogue with Polygon. This is standard protocol forlarge, public entities and will help ease investor concerns regarding Polygon's managementof the portfolio. This action will also contribute to reducing TFG's significant discount toNAV.
Excess Cash
The Board has elected, at the urging of Polygon, to retain an excessive amount ofcash in TFG instead of paying out a one-time dividend or tendering for a meaningfulpercentage of the common stock. Since 3Q 2009, TFG has maintained a cash balance inexcess of $149 million and elected not to deploy it during the greatest credit bull market inmodern history. After CLO prices rallied and coiporate spreads largely normalized, Polygon
2
elected to potentially raise a new CLO and invest $110 million in GreenOak Real Estate, anasset class outside of TFG's core competency. Shareholders would be better served if theBoard elected to use $100 million in cash to tender for up to 20% of the common stock.This would send a signal to the market that the Board and Polygon have tremendousconfidence in their CLO investments and future prospects. In November 2009, Irecommended that the Board consider a tender offer for 10% of the outstanding shares at aprice of approximately $3.00. The Board electednot to pursue a tender offer, and instead,they elected to purchase 6.5 million shares in the secondary market over the past fourquarters at an average price of $4.00, or 16% above TFG's stock price on November 23,2009. Although the stock price is higher today, the merits associated with a tender offer stillstand given the significant share price discount to NAV. A meaningful tender offer wouldadd to pro forma EPS, increase book value and significantlycontribute to reducing TFG'sdiscountto NAV. I wouldrecommend that the Boardestablisha policy of significant equityrepurchase when the shares sell at a 20% or greater discount to NAV and we are comfortablewith our outlook.
Dividend Payout
The current dividend policy is unacceptable given current cash balance and cashflows fromoperations ("CFO"). I request that the Board increase the dividend payoutratioto 40% of CFO, which is in line with what was originally contemplated when the companywentpublic in 2007. As highlighted in table 1 below, the total dividendpaid to shareholdersin 2007 was $48.9 million, 41% of CFO, and total management and incentive fees ("M&IFees") paid to Polygon was $29.0 million, 24% of CFO. This resulted in M&I Fees being59% of the dividends paid to shareholders. Although shareholders may not approve of thatratio, it wasat least more reasonable than what is occurring today.
This year, through October 29, 2010, the total dividends paid or declared toshareholders was $26.8 million, 14% of CFO, and M&I Fees paid to Polygon was $88.0million. In other words, Polygon has received $61.2 million more in distributions than theshareholders, whohavecapital at risk. Overthe pastseven quarters, the Board paidPolygon$130.1 million in M&I Fees but just $41.9 million in dividends to shareholders.Furthermore, since 2007, the Board paid $188.7 million in dividends to shareholders and$200.6 million in M&I Fees to Polygon. This translates into M&I Fees being 106% of thedividends paid to shareholders. This is not equitable.
Existing shareholders and, more importantly, potential shareholders find this payoutpolicy unacceptable. The Board must recognize that the dividend payout ratio needs to beincreased to approximately 40% of CFO. This would translate into YTD 2010 dividends of$46.3 million or $0.38 per share, versus the actual YTD amount of $0.14 per share.Increasing the dividend payout ratio would raise TFG's dividend yield and would contributeto reducing TFG's significant discount to NAV.
Table 1: Tetragon Financial Group Payout Ratio
Year Ended December 31, YTD
2010«($mm) 2607 2008 2009 Total
CFO $120.4 $345.3 $139.0 $186.1 $790.8
Dividends $48.9 $97.9 $15.1 $26.8 $188.7
Percent ofcash flow 41% 28% 11% 14% 24%
M&I Fees $29.0 $41.5 $411 $88.0 $200.6
Percent of cash flow 24% 12% 30% 47% 25%
:;$i!!ir)if$^Through October 29,2010Source:TFGannualand Interim reports
Portfolio Disclosure
TFG portfolio disclosure is unacceptable and does not provide investors adequateinformation with which to accurately analyze the CLO holdings. Therefore, investors haveno choice but to employ draconian assumptions when valuing TFG's CLO positions. TheBoard's decision to limit CLO disclosure is causing the stock to trade at a significantdiscount to NAV. For example, KFN provides quarterly updates that highlight capitalstructure, portfolio composition, deal dates, key portfolio metrics and over collateralizationtests for each CLO (see table 2 below). This level of disclosure is necessary in order forinvestors to determine the risk profile of each CLO and, thus, the underlying value of TFGholdings and stock. I argue that this is one of the reasons KFN trades at a premium to bookvalue. I have previously requested that the Board disclose CLO metrics but to no avail. Infact, Polygon has indicated that the information is "strategic" and that "investors would notunderstand it." If this is accurate, then why has KFN decided otherwise? I request that theIndependent Directors force the Board to provide CLO level detail similar to KFN. Thisaction will contribute to reducing TFG's significant discount to NAV.
Table 2: KKR Financial CLO 2005-1, Ltd.
KFNDiracI KmOwiwrihlp Total Dtr«t;indlr«l
Tranche Ownttiblp through OlhrrClOa KFNOwnmhlp OulatdiOrrrirKhlp Tolal CouponClew A t - ♦ » $ 715.000 * 715.000 La 27bpsClwB - - - •»O00 58,000 !.♦ 45bpjClaaaC - • 6(400 61400 La (Sbpacta*sr>
- S2,0C» 51XM0 52.000 La205bp*CtaiB 15,000 ISjOOO 15,000 l»530bpjClasaF • 9.000 3,000 3,000 I.a850bpaSubordinated Note! 6K00 . »5vJ00 85,500 RcaHual
Total
AuH
i »!,«K> » njm $ 1»7,5o0
WtdAvg Coupon*
* (37.M0 • ♦9M0O
Par /Notional Amount
Principal Caah » 33,134
Honda
FtatdRatc 31413 6.47% Senior Srcutrd loan*FloatingRata 36.942 t>4.26% ton ' «cod»/7ndl.trni
toana M*
PbcdRate
floating Kato 920J39 LH97%Total * ifiis/m L.VlMt
,T.i,iwNM.t4jMai»ljaORa,wMfe^aNp«.nMif<v«*kA»* ^BMJttHtHnAMllftitt/WK
Number of luuors 92
dosing Date March 30,2009 Urgoit Obligor at % of Total Collateral 2.6X
KclnvcaimoiM end Par* April26,201) vVklAvg Ratingof Asada 02FinalMaturity April26.2017 Net ArielSpreadh> SeniorDcbl 281 boa
Nonfat End Data April 46,2008 WtdAvfiUfeotAjMts 4.43
OC<9mlor Minimum
AoofDat*
Join 30,4009 Septan*** 30,2009
119.40%
DtnMbtrSl.tOIrt
119.40%
March 31.2010 1IIM30.2010
119,40% 119.40% 119.40%OC-Smhr Ratio 12431% IJ7.II* 128.10% 130.71% 131.68%Senior Test Paaa/PaD Pa* Paaa Paaa Pas* Paaa
OC'Mcnonlne M tnlmu m IOS.00% 106A0% 106.00% 106X0% 104.00%
OCMer/anlnc Ratio 106.65% 11032% 111.30% 113.66% 11450%MenanbtaTest Paaa / Fan Pasa Pasa Paaa Paaa Fan
OC-Stibordtnate M bumum 106.20% 10620% 106.20% 106.20% 106.20%OC-Subordlnato Ratio 104.91% tW.69% 109.53% 111.77% 112.60%Subordinate Pasa/Fall Fall l*J Pan Pan Pa»
Source: KKH FinancialCorporation disclosure
I hope this commentary hasbeen insightful, andI would liketo meet with a Boardrepresentative; tq discuss thecontents of this letter and onlypublicly available information.
Leon G. Cooperman