JS 44C/SDNY

CIVIL COV

REV. 1/2008

The JS-44 civil cover sheet and the informationcontained hergjfceither replace nor supplement the filing and service of
pleadings or other papers as required bylaw, except as provided by local rules of court. This form, approved by the Judicial

1 ZQU

Conference of the United States in September 1974, is required for use of the Clerk of Court for the purpose of initiating
the civil docket sheet.

PLAINTIFFS

DEFENDANTS

and Tetragon

DANIEL K. SILVERSTEIN,

Derivatively on Behalf

BYRON 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

Financial Group LTD.,

a Guernsey Corporation
Nominal Defendant

of TETRAGON FINANCIAL GROUP LTD.

and POLYGON INVESTMENT PARTNERS LLP

ATTORNEYS (FIRM NAME, ADDRESS, AND TELEPHONE NUMBER)

Robbins Geller Rudman & Dowd, LLP

ATTORNEYS (IF KNOWN)

58 So. Service Road, Suite 200, Melville, NY 11747 (631) 367-7100

CAUSE OF ACTION (cite the u.s. civil statute under which you are filing and write a brief statement of cause)
(DO NOT CITE JURISDICTIONAL STATUTES UNLESS DIVERSITY)

Pursuant to Sections 10(b) and 20(a) of the Exchange Act [15 U.S.C. Sections 78j(b) and 78t (a)]
promulgated thereunder by the United States Securities and Exchange Commission [17 c.F.R Section

and Rule

10b-

240. 10b-5].

Hasthisor a similar case been previously filed inSDNY at any time? No? [7] Yes?

Judge Previously Assigned

If yes, was this case Vol.D Invol.

(PLACE AN [x] IN ONE BOX ONLY)
TORTS

Dismissed. NoD Yes

If yes, give date

&Case No.

NATURE OF SUIT
ACTIONS UNDER STATUTES

CONTRACT

PERSONAL INJURY INSURANCE MARINE

MILLER ACT

PERSONAL INJURY

FORFEITURE/PENALTY

BANKRUPTCY

OTHER STATUTES

[ [ [ [

)110 1120 1130 ]140

[ ]310 AIRPLANE [ )315 AIRPLANE PRODUCT

LIABILITY

[ ) 362 PERSONAL INJURY[ ] 365 [ ] 368

[ ] 610
[ ] 620

AGRICULTURE

[ J 422 APPEAL
28 USC 158

[ ]400
[ [ [ [ [ 1110 ]430 I 450 I 460 ] 470

STATE

NEGOTIABLE INSTRUMENT RECOVERY OF OVERPAYMENT &

ENFORCEMENT

MED MALPRACTICE PERSONAL INJURY

OTHER FOOD &

DRUG DRUG RELATED SEIZURE OF PROPERTY 21 USC 681

[ ]423 WITHDRAWAL
28 USC 157

REAPPORTIONMENT ANTITRUST

[ ] 320 ASSAULT, LIBEL &

SLANDER

PRODUCT LIABILITY
ASBESTOS PERSONAL
INJURY PRODUCT
LIABILITY

[ ] 625

BANKS & BANKING

COMMERCE DEPORTATION

[]150

[ ] 330 FEDERAL
EMPLOYERS'
LIABILITY

PROPERTY RIGHTS

RACKETEER INFLU
ENCED & CORRUPT

OF JUDGMENT

[ ) 151 [1152

MEDICARE ACT RECOVERY OF DEFAULTED

[ ]340 MARINE [ ] 345 MARINE PRODUCT

LIABILITY

PERSONAL PROPERTY

STUDENT LOANS

(EXCL VETERANS)

[ ] 350 MOTOR VEHICLE [ ] 355 MOTOR VEHICLE

PRODUCT LIABILITY

[ J 370 OTHER FRAUD [ 1371 TRUTH IN LENDING [ I 380 OTHER PERSONAL [ ]385
PROPERTY DAMAGE PROPERTY DAMAGE PRODUCT LIABILITY

[ [ [ [

J 630 ] 640 ]650 ]660

LIQUOR LAWS RR& TRUCK AIRLINE REGS OCCUPATIONAL

[ J 820 COPYRIGHTS [ ] 830 PATENT [ I 840 TRADEMARK

ORGANIZATION ACT

SAFETY/HEALTH

[ J 690

OTHER SOCIAL SECURITY

(RICO) [ ] 480 CONSUMER CREDIT [ J 490 CABLE/SATELLITE TV [ )810 SELECTIVE SERVICE

[J 153

RECOVERY OF

ft] 850

[ ] 360 OTHER PERSONAL

INJURY

OVERPAYMENT OF VETERAN'S

LABOR

I )160 [ J 190

BENEFITS STOCKHOLDERS SUITS

OTHER CONTRACT

[ ]861 HIA(1395ff) [ ] 862 BLACK LUNG (923) FAIR LABOR

STANDARDS ACT

SECURITIES/ COMMODITIES/ EXCHANGE CHALLENGE 12 USC 3410

[ ]875 CUSTOMER

[]710 [ ] 720 [ ] 730

ACTIONS UNDER STATUTES

[ J 863 DIWC/DIWW (405(g))

[ ] 864 SSID TITLE XVI [ ) 865 RSI (405(g))

LABOR/MGMT
RELATIONS

[ )890 OTHER STATUTORY

ACTIONS

[ 1195

CONTRACT
PRODUCT LIABILITY

LABOR/MGMT
REPORTING &
DISCLOSURE ACT

FEDERAL TAX SUITS

[J891 AGRICULTURAL ACTS [ J 892 ECONOMIC

STABILIZATION ACT

[ ]196 FRANCHISE

CIVIL RIGHTS

PRISONER PETITIONS

[ ) 740 [ ] 790 [ ]791

RAILWAY LABOR ACT [ J 870 TAXES (U.S. Plaintiff or OTHER LABOR Defendant) LITIGATION [ ] 871 IRS-THIRD PARTY
EMPL RET INC SECURITY ACT

[ I 893 ENVIRONMENTAL
MATTERS

[ ]894 ENERGY [ ]895

ALLOCATION ACT FREEDOM OF

REAL PROPERTY

[ ]441 VOTING I 1142 EMPLOYMENT [ 1443 HOUSING/

ACCOMMODATIONS

[ ]510

MOTIONS TO VACATE SENTENCE 20 USC 2255

26 USC 7609

INFORMATION ACT

[ J210
I )220 ( ]230

LAND CONDEMNATION

FORECLOSURE RENT LEASE & EJECTMENT TORTS TO LAND TORT PRODUCT

LIABILITY ALL OTHER REAL PROPERTY

[ J444 WELFARE 1 ]445 AMERICANS WITH

DISABILITIES EMPLOYMENT AMERICANS WITH

[ [ [ [ [

] 530 HABEAS CORPUS IMMIGRATION ]535 DEATH PENALTY ]540 MANDAMUS & OTHER [ ]462 NATURALIZATION I 550 CIVIL RIGHTS APPLICATION I 555 PRISON CONDITION I ]463 HABEAS CORPUSALIEN DETAINEE

[ J900 APPEAL OF FEE

DETERMINATION

UNDER EQUAL ACCESS TO JUSTICE

[ ]950 CONSTITUTIONALITY
OF STATE STATUTES

[ ]240 [J245
[ J290

[ J446

DISABILITIES -OTHER

[ ]465

OTHER IMMIGRATION
ACTIONS

[ )440 OTHER CIVIL RIGHTS

v a ^^
Check if demanded in complaint: iiji CHECK IF THIS IS A CLASS ACTION

DO YOU CLAIM THIS CASE IS RELATED TO A CIVIL CASE NOW PENDING IN S.D.N.Y.?
IF SO, STATE:

LJ UNDERF.R.C.P. 23
DEMAND $_
OTHER

JUDGE

DOCKET NUMBER

Check YES only if demanded in complaint

JURY DEMAND: 0 YES

NO

NOTE: Please submit at the time of filing an explanation of why cases are deemed related.

(PLACE AN x IN ONEBOX ONLY)

ORIGIN

LlJ 1 Original
Proceeding

I I 2a. Removed from I I3 Remanded from I I 4 Reinstated or

State Court Appellate Court Reopened

LJ 5 Transferred from Lj 6 Multidistrict

(Specify District) Litigation

LJ 7 Appeal to District
Judge from

2b.Removed from
State Court AND
at least one

Magistrate Judge
Judgment

party is pro se.

(PLACE AN x IN ONE BOX ONLY)

1 U.S. PLAINTIFF 2 U.S. DEFENDANT

BASIS OF JURISDICTION
L7J 3 FEDERAL QUESTION
(U.S. NOT A PARTY)

IF DIVERSITY, INDICATE
CITIZENSHIP BELOW.
(28 USC 1322, 1441)

Q4 DIVERSITY

CITIZENSHIP OF PRINCIPAL PARTIES (FOR DIVERSITY CASES ONLY)

(Place an [X] in one box for Plaintiff and one box for Defendant)
PTF DEF PTF DEF PTF DEF

CITIZEN OF THIS STATE CITIZEN OF ANOTHER STATE

[)1 [)2

[J1 []2

CITIZEN OR SUBJECT OF A
FOREIGN COUNTRY

[]3[]3 []4[]4

INCORPORATED and PRINCIPAL PLACE

OF BUSINESS IN ANOTHER STATE

[]5 []6

[]5 []6

INCORPORATED or PRINCIPAL PLACE

OF BUSINESS IN THIS STATE

FOREIGN NATION

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 UNKNOWN

REPRESENTATION IS HEREBY MADE THAT, AT THIS TIME, I HAVE BEEN UNABLE, WITH REASONABLE DILIGENCE, TO ASCERTAIN THE
RESIDENCE ADDRESSES OF THE FOLLOWING DEFENDANTS:

Checkone:

THIS ACTION SHOULD BE ASSIGNED TO:

(DO NOT chck-Etthr hpxjf this a PRISONER PETITION.)

WHITE PLAINS

MANHATTAN

DATE 07/11/11 SlGp^&fyfc/ffnZIWEY OFREQj2D____

RECEIPT*
(

s^ty^c.
^/
)

ADMITTED TO PRACTICE IN THIS DISTRICT

i 1 no I ] N0

V^

Attorney Bar Code #SR7957

n* fC] YES (DATE ADMITTED Mo. uo Fl Mi

iocs Yr. lt,ao )

Magistrate Judge is to be designated by the Clerk of the Court.

Magistrate Judge
J. Michael McMahon, Clerk of Court by

MAG. JUDGE G0INSTE1N

Deputy Clerk, DATED

is so Designated.
.

UNITED STATES DISTRICT COURT (NEW YORK SOUTHERN)

Schedule A

Byron Knief 18 East 95th Street, Apt. 5

New York, NY 10128 (New York County)

Rupert Dorey Le Camptrehard Rue des Rocquettes St. Andrews, Guernsey Gy6 8SH
Channel Islands

David Jeffreys
Canon Hall

La Turquie Bordeaux, Guernsey, GY3 5EB

Channel Islands

Lee Olesky
317 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)

Jeff Herlyn 12 Longmeadows Road

Wilton, CT 06897

(Fairfield County) Michael Rosenberg

1 Karlin Drive

Chatham, NJ 07928

(Morris County)
David Wishnow
52 Dorison Drive

Short Hills, NJ 07078

(Essex County) Tetragon Financial Management LP

399 Park Avenue

New York, NY 10022

(New County County) Polygon Investment Partners LLP 399 Park Avenue, 22nd Floor New York, NY 10022

Tetragon Financial Group, Ltd. c/o Tetragon Financial Management LP

399 Park Avenue

New York, NY 10022

(New York County)

2-

m
F UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

11
Civil Action No.

DANIEL K. SILVERSTEIN, Derivatively on

Behalf of TETRAGON FINANCIAL GROUP LTD.,
DERIVATIVE ACTION

VERIFIED DERIVATIVE COMPLAINT

Plaintiff,
vs.

FOR BREACHES OF FIDUCIARY DUTIES AND VIOLATIONS OF THE INVESTMENT ADVISERS ACT OF 1940

BYRON 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,

Defendants,
and

TETRAGON FINANCIAL GROUP LTD., a

CO

Guernsey corporation,
Nominal Defendant. x DEMAND FOR JURY TRIAL

FACTUAL ALLEGATIONS
INTRODUCTION

1.

This is a derivative action brought by 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 in performance fees even though TFG's investments have
failed to make up theirprior losses sincethe third quarterof 2008. Defendants' violations became so

pervasive that, with respect to a recent transaction in which 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

The Investment Manager was formerly known as Polygon Credit Management LP.

A copy of Alexander Jackson's pleading in that case, filed in theRoyal Court ofGuernsey, is

attached hereto as Exhibit 1.

1 -

4.

Plaintiff seeksto recoverdamages, and equitableand injunctivereliefforTFG against

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 for violation of the Investment Advisers Act of 1940. As the TFG
Board of Directors (the "Board")has alreadydemonstrated, absentthis action, 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 closely controlled 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"
tranches of collateralized loan obligations ("CLOs") - a structured credit vehicle that uses pools of

leveraged loans as collateral to issue debt securities with varying degrees of risk. TFG's principal

place ofbusiness is in NewYork. 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 of TFG. The Investment Manager, with the active complicity of the TFG Board, has expropriated almost $205 million in unjust fees in what has been described as

2-

'"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 fortune created even after losing staggering sums for investors. Meet the managers of Tetragon Financial Group. They are five Wall Street veterans who, by luck and design, enjoy what Tetragon investor Charles W. Griege Jr. critiqued as "the most flawed compensation system" he had ever seen.
Tetragon is awarding its managers tens, and potentially hundreds, ofmillions of dollars. This comes despite massive losses in the fund, an offshoot of Londonbased hedge fund Polygon Investment Partners LLP, which decorated its Park Avenue 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 the past year, according to securities filings. 8. Although defendants persi st 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 of millions of dollars 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
-3-

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 in theindustry and defendants' practice is nothing
short of "astounding":

TFG continues to be a massive money-spinnerfor Polygon, generating$88 million in

fees 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. If halfof TFG's portfolio is wiped out in a year, Polygon still collects 25% on any subsequent quarterly gain above a nominal Libor hurdle.

That's pretty much what happened between mid-2008 and mid-2009, when
TFG's net asset value sank to $693 million from $1.3 billion. But by the fourth

quarter of 2009, the leveraged loanmarket wason the mend, so Polygon wroteback up the valueof the TFGportfolio andtook a cool$29.8 millionin performance fees. Furtherwrite ups in the first nine months of 2010 resulted in another $78 million in performance fees, though net asset value remained well below that 2008 figure.
Loss-making funds typically must return to their high water mark before
taking performance fees.

Depending on yourpoint of view, it is either a very cleverway forPolygon to maximize TFG's fee potential, or a terribleway to treat shareholders who have had a very rough ride and are now seeing the vast bulk of recent improvements go into
Polygon's pocket.

To put it in perspective, shareholders got $41.9 million in dividends in the seven 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's Tetragon StillMumonJackson Ousting," WSJ/The Source, January 27,
2011.

10.

To accomplishthe expropriationof almost $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 in derogation of thefiduciary duties owed bythem to
TFG. The IMAitself,if portrayed andinterpreted accurately by defendants, wasagreed to in breach

of fiduciary duties owed to the Company by the defendant Board members who were not

independent as claimed 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., and the common law for breaches of fiduciary duties, unjustenrichment
and constructivefraud. This Court has subject matterjurisdiction 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 of hereinoccurred 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.
-5-

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 of directors.
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 of Court 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 of Polygon 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 and 999,999,990 non-voting shares, at par value of $0,001 each. The 10 voting shares are owned by Polygon Credit Holdings II Limited (based in the Cayman Islands), another Polygon Investment entity that is associated with the Investment Manager.

-6-

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 of TFG 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 of experience in debt capital markets specializing in creditrelated products, including derivative instruments. Defendant Dorey's expertise is principally in the areas of debt distribution, origination and trading, covering all types of debt 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 of fund 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

-7-

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 of a number ofprivate companies. While serving
as a purported "Independent Director" ofTFG, he also served as a board member of Polygon 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 of millions of dollars 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

-8-

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 of companies 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 of European 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 of 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
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

-9-

Principal. He was also involved in co-founding Polygon Investment. He is on the investment

committeeofthe InvestmentManagerresponsible for making all the investment decisions for TFG.

He waspreviouslythe founderand formerChief Executive 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 assetsand wrongfully 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 formaking all the investment decisions forTFG. He waspreviously the ChiefExecutive Officerof the European office of Highbridge CapitalManagement. Prior to joining Highbridge, he
worked for Taylor & Company in Texas, where he was responsible for equityderivative investments

in Japan. He started his careerat PaineWebber. As a member of the TFG Board, defendant Jackson
breached his fiduciary duty by failing to safeguard TFG's assets and wrongfully diverting tens of
millions of dollars 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.
to TFG:

By his complaint, Jackson has admitted that each ofthe directors owe fiduciary duties

(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 of association) 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 of Guernsey'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 of full 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 of Connecticut. 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 whose value and payments are derived from a portfolio of fixed-income underlying assets. CDOs are
divided 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 fixedincome 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 of New 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 founded in 2002 by

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 a
person of the director's knowledge and experience;

A duty to act in good faith, exercise their powers for proper purpose and to keep their
company's confidence;

A duty to ensure that their own personal interests or duties to another principal do not conflict with the interests ofthe company and not to use for personalbenefit property or opportunities belonging to the company;

A duty to exercise their powers within the authority conferred by the company's
constitution and to ensure it is operated lawfully; and

34.

A duty to act honestly and in good faith in the best interests of the company as a
whole.

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 reasonably open 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)
(ii)

the Company's accounting and financial reporting process;

the integrity and audit of the Company's financial statements;

(iii)

the qualifications, performance and independence of the Company's independent accountants;

-15-

(iv)

the qualifications, performance and independence of any third party that provided validations for the Company's investments; and
recommending to shareholders the firm ofindependent accountants to be engaged to conduct audits.

(v)

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 of Corporate 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 relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company;

has cross-directorships or has significant links with other directors through involvement 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

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 that defendant Jackson had been ousted from the TFG Board (although he remains a Principal of the Investment 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 of Polygon 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, Defendants Implemented a Scheme to Award Their Closely Related 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 of TFG.
45. To award themselves performance fees equal to 25% of the 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 the Company to take a long-term view on the expected cash flows from a CLO or other Securitization Vehicle. Market developments, however, have and may continue to, impact the fair value of a Securitization Vehicle and/or its underlying assets. For example, the fourth quarter of 2008 evidenced dramatic developments, including a marked deterioration in economic outlook and an increasingly negative default outlook by various market participants, including rating agencies, with an associated significant increase in rating agency downgrades and credits related Caal/CCC+ or below. The potential impact ofthose and further similar developmentshas prompted

A "Calculation Period" is a period ofthree months ending on March 31, June 30, September 30 and December 31 of each year, or as otherwise determined by the directors.

The Reference NAV is the greater of (i) NAV at the end of the Calculation Period

immediately preceding the current Calculation Period and (ii) NAV as ofthe end of the Calculation Period immediately preceding the Calculation Period referredto in subsection(i). For the purpose of

determining the Reference NAV at the end of a Calculation Period, NAV shall be adjusted by the amount of accrued dividends and the amounts of any redemptions or repurchase of the shares (or other relevant capital adjustments) and incentive fees to be paid with respect to that Calculation
Period.
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 equal to 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 London business day of the then-current Calculation Period, plus the Hurdle Spread of 2.647858% in each case 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 in

the 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 referred to as the discounted-cash-flow rate of return. A lower IRR results in a lower NAV, other things being equal.

10

United States Generally Accepted Accounting Principles ("U.S. GAAP") require that

accounting methods reflect the characteristic of neutrality to avoid a biased result. "Relevance and reliability are the two primary qualities that make accounting information useful for decision
-19-

Default Rates - Trailing 12 Months

12%-

J\
2008 2009

U.S. Institutional Loans

Tetragon Financial

2010
faunw: TfG. S&MCD

47.

Not content with the advantage gained by the unsupported revisions to the model as also in the fourth quarter of 2008, the Investment Manager established an

detailed above,

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 or
feedback value or both. To be reliable, information must have representational faithfulness and it must be verifiable and neutral. ... A neutral choice between accounting alternatives is free from bias 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 of TFG's CLO portfolio. In fact, TFG admitted that it

reduced the NAV by booking ALR, that had "the effect of applying 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 of U.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'
12

Ahigher discount (interest) rate reflects higher risk, and, other things being equal, results ina
"The financial statements are prepared in conformity with the United States generally

lower NAV.

accepted accounting principles ('U.S. GAAP')." TFG 2008 Annual Report. "The financial statements give a true and fair view, are prepared in conformity with accounting principles generally accepted 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 a particular 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, including reserves. FAS 5 states that an estimated loss contingency shall be 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 indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. It is implicit in this condition that it must be probable 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 Financial

Accounting Standard ("FAS") No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162. FASB Accounting Standards Codification ("ASC") became the source of authoritative U.S. accountingand reporting standards for non-governmental entities, in addition to guidanceissuedby the U.S. Securities and Exchange Commission ("SEC"), effective for financial statements issued for reporting 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 existed
during 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 may have 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 of FAS 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 of a Financial Asset

When theMarketfor That Asset Is Not Active ("FSP FAS 157-3"), in its determination of estimated 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 Reserve is a direct adjustment to the fair value of an investment to account for the potential impact of certain potential losses and the cumulative value of such adjustments is evidenced 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 of certain 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 16

See, e.g., TFG 2010 Consolidated Annual Report at 27 n.38. "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 been impaired or a liability has been incurred - ... is intended to prohibit the recognition of a liability when it is not probable that one has been incurred and to prohibit the accrual of an asset impairment when 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 that previously had beenwritten down. With the
stroke of a pen,defendants cashin on theirreversals of the ALRbecausethe 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 and first quarter2011, duringthe worsteconomic crisis

sincethe GreatDepression, defendants expropriated anddiverted to TFG'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 million from TFG at the end of 2010, when the NAV of the underlying investment portfolio as of fourth quarter2010 was still $211 millionbelowthe NAV in third quarter 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 Limited

Quarterly Incentive Fees
Fee as

Amount of

NAV Per

Percent of
NAV

Quarter 1Q07
2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

Incentive Fee

Net Asset Value

Share N/A

1Q10
2Q10 3Q10 4Q10 1Q11

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

4,712,136 5,031,334

lL
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

6,397,544
-

2,235,377 9,365,245 10,329,924

-

782,792,719 1,055,097,006 1,216,246,279 1,188,220,992 1,212,596,178 1,319,050,418 1,348,485,272 1,141,950,194 723,368,706 693,081,080 720,846,408 806,846,805 867,436,352 909,356,085 1,018,625,872 1,137,546,494 1,297,999,285

0.60%
0.48%

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $

10.08 N/A 10.03

10.25

0.49% 0.00% 0.18% 0.71% 0.77%

0.00% N/A N/A

10.44
10.69

9.06
5.75 5.50 5.71 6.47

N/A
3.69% 2.57% 1.81%

29,781,872

22,266,024 16,458,239 39,280,873 41,532,519 55,504,288

7.02
7.44

8.43 9.47 10.85

3.86%
3.65%

4.28%

58.

In spite of witnessing improvement in the economy in mid-to-late 2009, the

Investment Managerforced TFG to further increasereserves. In third quarter 2009, TFG reported that "[t]he third quarter of 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 of certain 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 third quarterof 2009 it might well be 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 half of 2009 saw a

general recovery in many ofTFG's CLO investments, which resulted in an increase in fair values." Nonetheless, in the fourth quarter of2009, TFG once again increased the ALR by $15.2million. As
revealed later, the sole purpose of the total $94.9 million increase in the ALR for the second half of
2009 was to increase the "cookie jar" for future drawdowns of the ALR to create further unearned

performance fees 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 of the 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 of 2009 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 Limited Material GAAP Misstatement Impact of TFG's Accelerated Loss Reserw
NAV Per Share Performance Corrected
ALR

Reported Reported Net

Quarter 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09
Asset Value NAV Per Share Non-GAAP ALR

Fees Accrued
on ALR Reversals

NAV Corrected for ALR GAAP

Violation

for ALR GAAP Violation

Misstatement as

a Percentage of
Corrected NAV
0%

Adjustment
0

$ $ $ $ $ $ $ $ $ $ $

1,348,485,272 1,141,950,194 723,368,706 693,081,080 720,846,408 806,846,805 867,436,352 909,356,085 1,018,625,872 1,137,546,494 1,297,999,285

10.69

$ $
$

9.06 5.75
5.50

$
$ $ $

5.71
6.47 7.02 7.44

1Q10 2Q10 3Q10 4Q10 1Q11

$
$ $

8.43
9.47 10.85

$ $ $ $ $ $ $ $ $ $

(141,000,000) (315,000,000) (254,100,000) (333,800,000) (349,000,000) (339,500,000) (330,700,000) (274,700,000) (258,000,000) (155,700,000)

$ $

1,348,485,272 1,282,950,194

$10.69
$10.18

-11% -30% -27% -32%

-30%

$ $ $ $ $

(2,375,000) (2,200,000) (14,000,000) (4,175,000) (25,575,000)

$ $ $ $ $ $ $ $ $

1,038,368,706 947,181,080 1,054,646,408 1,155,846,805 1,209,311,352 1,242,256,085 1,307,325,872 1,399,721,494 1,479,274,285

$8.25 $7.52

$8.35
$9.27 $9.79 $10.16 $10.82 $11.65 $12.37

-28%
-27% -22%

-19% -12%

61.

In fact, the total performance fee of $22.8 million paid to the defendant Investment

Managerin 2010- for reversing the ALR - exceeded the 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 dollars except percentages)
Management &
Performance Fees Investment Income Fees as Percent of Investment Income

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

Total

$32.7 $41.4

$25.4

$19.8 $46.6

$42.7

$45.6 $51.3

$60.0

$226.2

$46.8

$49.3

$53.7

$289.1

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 of TFG 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 to shareholders in 2007 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 being 59% 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 the M&P Fees to CFO ratio has exploded, thereby depriving shareholders while defendants further enrich themselves. For2010, thetotal dividend paid to shareholders 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) Cash Flow from Operations ("CFO")
Dividend
2007 2008 2009 2010

$120.4
$48.9
41%

$345.3
$97.9
28%

$138.9

$261.7 $34.2
13%

$15.1
11%

Dividend as a Percent of CFO

Management & Performance ("M&P") Fees

M&P as a Percent of CFO
M&P Fees/Dividends

$29.0
24% 59%

$41.9
12%
43%

$42.2
30%

$133.5
51%

279%

390%

Defendants Breached Their Fiduciary Duties of Good Faith and Loyalty and the Investment Manager
Violated 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 for proper 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 thatby awarding 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% of the 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 the Advisers Act, any investment
adviser contract is considered voidif eitherthe formation or performance of the contract 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 the utmost 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 thatthe wholesale

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 from approximately $10/share at its IPO to approximately $5.4 today. Under the current structure, you, theinvestment managers, stand tocollect incentive fees on any rise in

NAV, even from these depressed levels. This will come at the expense of your devoted shareholders that chose to hold their Tetragon shares, and ride out the
difficult times. If, for example, the gross NAV were to recover back to where it

stood atthe IPO, $10/share, you would collect over $1.0 pershare inincentive fees, and your shareholders would effectively remain underwater bythat amount. Worse yet, even if theNAV were toremain at current levels butfluctuate in theinterim, the
Investment Manager would collect incentive fees on these fluctuations. This current

incentive fee structure defeats the purpose of aligning the Investment Manager's interests with those ofshareholders: the larger the volatility in the NAV, the larger theincentive fees to the Investment Manager, all to thedismay of shareholders.
We propose that the incentive fee berestructured such that no incentivefee will bepaid to the Investment Manager until the NA V of Tetragon rises back to
$10/share.

We believe strongly that an adjustment to the incentive fee structure is not

only appropriate, but necessary. Moreover, such restructuring will send a strong
message to existing and potential shareholders that you have shareholder value in

mind. We are confident that such a message will contribute significantly to a recovery ofTetragon's share price, and will bewell-received bythe greater Tetragon
shareholderbase as well as by potential investors.
-31-

June 30,2009 letterfromDorchester Management LLCto theTFGBoard, attached hereto as Exhibit

2.

70.

Similarly, another major investor wrote to the Board:

Basedon numerous conversations with existingand potential shareholders, thereis a consensus around the fact that the incentive compensation on the reversal of the ALR is blatantly excessive. Most investors view the compensation as

inequitable and refuse to invest in a vehicle that permits theInvestment Manager to write down asset values during a downturn in thecredit cycle and then simply write up the values in subsequent quarters and take 25% of the"appreciation" for doing
nothing. This compensation arrangement is not in the spirit of the IMA, and it is contributing to TFG's stock price underperformance. I request thatthe Independent Directors force Polygon to waive its contractual right to an incentive fee on the reversal ofthe ALR. As a result, investors would gain considerable comfort that the Investment Manager and shareholders are receiving equitable compensation in the event of value creation. This action will contribute to reducing TFG's significant
discount to NAV.

November4,2010 letter from Omega Advisors, Inc. to the TFG Board, attached heretoas 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 take any 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 the Company.
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 the Company 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,Olesky and/or Ward. Each ofthese defendants,by virtue of(i) being directlyresponsible for agreeingto and/or interpreting the IMA in the manner chosen; (ii) profiting from the misconduct allegedherein; and (iii) having irreparableconflicts ofinterest 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 ignored by defendantsis 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 described earlier, the InvestmentManager effectively controls 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 directors would 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 and useless 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 on such 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 fl 1-78.

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 breach of the fiduciary duties these defendants owed to 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

regarding TFG'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 their personal 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 notdueto anhonest error ofjudgment butrather totheir

bad faith 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 its public shareholders, thereby harming TFG.
COUNT II

Against All Defendants for Unjust Enrichment

86.

Plaintiff incorporates fflfl -78.

87.

As a result ofthe conduct described above, defendants will beand have been unjustly

enriched at the expense of TFG, 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 the benefit of the Company.
COUNT III

Against All Defendants

for Constructive Fraud

92.
93.

Plaintiff incorporates Iffll -78.

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 Manager
for Violating the Investment Advisers Act of 1940

97.

Plaintiff incorporates fflfl -78.

98.
Act.

The Investment Manager is registered as an investment adviser under the Advisers

-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 any means or instrumentality of interstate commerce, directlyor indirectly (1) to employ any device, scheme, or artifice to defraud any client or
prospective client;

(2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client; [or]

(4) to engagein any act, practice, or courseof business which is fraudulent,

deceptive, or manipulative.

100.

The IMA entered between the Investment Manager and the Company should be

considered void pursuant to 215 of the Advisers Act, which provides:

(b) . . . Every contract made in violation of any provision of this title and every contract heretofore or hereafter made, the performance of which involves the

violation of, or the continuance of any relationship or practice in violation of any provision of thistitle, or anyrule, regulation, or orderthereunder, shall be void (1) as regards 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 such contract, and (2) as regards the rights of any person who, not being a party to such contract, shall haveacquired anyright thereunder withactual knowledge of the facts
by reason of which the making or performance of such contract was in violation of
any 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 in favor ofTFG fortheamount of damages 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 of assets to defendants and their affiliates via
the manipulation of TFG'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 200 Melville, NY 11747 Telephone: 631/367-7100 631/367-1173 (fax)

38-

ROBBINS GELLER RUDMAN

& DOWD LLP

DARREN J. ROBBINS
MARK SOLOMON

655 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax)
ROBBINS GELLER RUDMAN
& DOWD LLP S. ASHAR AHMED

Post Montgomery Center One Montgomery Street, Suite 1800

San Francisco, CA 94104

Telephone: 415/288-4545 415/288-4534 (fax)

LAW OFFICES OF MARC S. HENZEL
MARC S. HENZEL

431 Montgomery Avenue, Suite B Merion Station, PA 19066 Telephone: 610/660-8000 610/660-8080 (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_^ Pcnnsyh

i vania.

^t4*^^X
1 K. SILVERSTEhN

Appleby
J T Le Tissier

25 February 2011

*^fe lN THE RVAL COURTOF GUERNSEY

MW PLACED ON THE PLEADING LIST
l UefejidaniYaclrttiMs lor service: - S^X. BiXCt^J

tfe/w. g dependants

this g &dyoff^yitey20//

/??prfSs&6J?\

Her M^Wyj Deputy Grefller

^6t7),OJ&tD&mCJkE:

7 ** 0ER3WH& c^et House. SrJou^s*taw> 5T4me/U

IN THE ROYAL COT TOT OF GUF.RNSKV
ORDINARY DrVTSTON

ALEXANDER JACKSON of 33 Gilliam Lane, Riverside, Connecticut, United

States 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 of
himselfand all other shareholders in the Seventh and Eighth Defendants other than the
First to Sixth Defendants

ACTIONS

(1)

House, Le Bordage in the parish ofSaint Peter Port;'

(2)

PATRICK DEAR whose service address is situate at Second Floor Tudor

READE GRIFFITH whose service address is situate at Second Floor Tudor

House, Le Bordage in the parish ofSaint Peter Port;

(3)

RUPERT DOREY whose service address is situate at Second Floor Tudor

House, Le Bordage in the parish ofSaint Peter Port; House, Le Bordage in the parish ofSaint Peter Port;

(4)

DAVID JEFFREYS whose service address is situate at Second Floor Tudor

(5)

BYRON KNIEF whose service address ,s situate at Second Floor Tudor

House, Le Bordage in the parish ofSaint Peter Port;

(6)

House, Le Bordage in the parish ofSaint Peter Port;

(7)

GREVILLE WARD whose service address is situate at Second Floor Tudor-

TETRAGON FINANCIAL GROUP LIMITED whose registered office ,s

G4893(i. 1

situate at Second Floor, Tudor House, Le Bordage in the parish of Saint Peter
Port;

(8)

TETRAGON FINANCIAL GROUP MASTER FUND LIMITED

whose registered office is situate at Second Floor, Tudor House, Le Bordage in

the 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 Defendants

pursuant 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 ofthe Seventh Defendant,
Tetragon Financial Group Limited ("TFG");

1.2

a double derivative claim brought by Mr Jackson seeking relief on behalf of the eighth Defendant, Tetragon Financial Group Master
Fund Limited ("TFGMF"), through TFG, being a shareholder in
TFGMF;

1.3

a double derivative Claim brought by Mr Jackson seeking relief on behalf ofTFG through Polygon Credit Holdings II Limited ("PCF1
II"), being a shareholder in TFG; and

1.4

a double derivative Claim brought by Mr Jackson seeking relief on

behalf ofTFGMF through PCH II, being a shareholder in TFGMF.

2.

The Seventh and Eight Defendants are included as parties to this cause only in
so far as may be necessary for them to derive the benefit arising from it in then
favour 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 arbitrage

investment 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 operated

the 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 under

the Companies (Guernsey) Law 1994 with registered number 43321 and is an authorised closed ended investment company under the Protection of Investor
I'S

(Bailiwick of Guernsey) Law, 1987.

7.

TFG is listed on the NYSE Euronext Amsterdam stock exchange in the

Netherlands.

8.

The registered office of TFG is situate at Second Floor, Tudor House, Le

Bordage 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 voting

shares with a par value of USS0.001 each. At all material times the issued
shares in TFG were and are held:

9.1 9.2

as to all the voting shares, by Polygon Credit Holdings II Limited; as to 417,458 non-voting shares, by Mr Jackson though his broker
Morgan 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 26
March 2007 (the "Prospectus") it was described inter alia as:
"The Company

..[TFG] is an investment company thai currently invests in selected scunilizcd assets

classes and aims to provide stable returns to investors across various interest rale and credit
cycles .

Current Investments

[TFGJ currently invests in the subordinated, residual tianclies ("Residual Tranches") of

collateralized 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 the
credit, environment.

Hedging and leverage across the portfolio to address the risk profile ofthe entire portfolio and apply appropriate hedging and leveraging strategies to enhance
returns."

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 voting

shares 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
voting shares 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 he

has disclosed to the directors of TFGMF the nature and extent of

I I j
I

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 himself
from the operation and management ofthe Polygon Funds.

31. During September, October, November and December 2008, the Polygon
Funds experienced significant financial losses. In about late 2008 a substantial

number of investors in the Polygon Funds subnutted redemption requests in

order to redeem their investments in the Funds.

32. By reason of inter alia the losses and substantial redemption requests, in about

October 2008, Mr Griffith and Mr Dear publicly announced that the Polygon Funds would be wound up, though no formal petition to wind up the Polygon
Funds 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 the
investors.

33. On 11 August 2010 a group of investors holding approximately 11% of the interests in the Polygon Funds presented to the Grand Court of the Cayman

Islands a winding up petition seeking the compulsory liquidation of Polygon

Global 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) the
investors have suffered a justifiable loss of faith in the management of the
Polygon Funds.

34. The said winding up petition was withdrawn following an arrangement being
reached 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 Polygon
Funds 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 Polygon
Funds 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)
(b)

TFG;
TFGMF;

(c)
(d) (e)
(t)

Polygon Management LP ("Polygon HoldCo");

Polygon Investment Partners LLP; Polygon Investment Partners LP;
Fred Schmidt;

(g)
(h)

John Carrafjell; and

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 behalf of

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 MiDear 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

CWJft.l

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

C93li.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. Mr Jackson 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 Mr

Jackson 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
action:

this

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 investment manager 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 Services Commission ("the GFSC") under the Protection of Investors (Bailiwick of Guernsey) Law 1987 and each operates as an authorised closed ended
investment 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
65.2

the Companies make available certain of their property under such

agreement; and

provide services under such agreement.

G 4893lv i

65. 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
:s

as

on normal commercial tenns negotiated at ami's length with an independent

patty ("the Ann's Length Requirement"). The GORE Transaction, ifentered

into and pursued by the Companies, would not satisfy the Arm's Length Requirement and would contravene Rule 3.01 ofthe Rules. Mr Jackson relies
on the following facts and matters:

(i) The proposed terms of the GORE Transaction significantly favour the
InfrastructureCo Entities over the Companies and thereforeit_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) '
(iii)

making available a sum of US$10 million by way of

working capital loan to GORE, and

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
consideration.

for

providing significantly less valuable

(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:

G4S93().l

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 coinvested 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 of

US$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 proportionate

interest in GORE investment programmes which are

unpopular with and/or undeifunded by external investors;

65.6.3 contrary to standard commercial practice, the GORE Founders

would 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

G-IB93A.I

65.6.7

neither TFG nor TFGMF are entitled to nominate a

representative to the GORE mfrastnicture committee, whereas

the 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 the proposed 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 coinvestment commitment.

65.9 The obligations of each of the InfrastnictureCo Entities and the Companies 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.

25 C4S9J6.

65.11 Under the heading "Failure to Fund Working Capital or TFG CoInvestment" 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$10,000,000

working capital commitment part of its Obligations they will forfeit 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 working

capital commitment part of their Obligations they will forfeit 4 percentage points of their total ownership interests and earned
interests m GORE.

65.13 In the event that there is a failure by the InfrastructureCo Entities to

provide the infrastructure services part of their Obligations they do not

forfeit any oftheir ownership and carried interests in GORE. 65.14 Conversely, if the Companies fail to provide their co-investment commitment part, of their Obligations to GORE they forfeit 6

percentage 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 be representative 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 the Companies to breach the Rules and in passing the GORE Resolutions,
approving the GORE Transaction and m allowing the Companies to enter
into the GORE Transaction the Directors have acted in breach oftheir duties
set out in paragraph 25 above.

ffii-

The GORE Transaction is NOii_LNjnjE_^sjLJNIEESls. of the

Companies,

67. 'The GORE Transaction ls not m the. best interests of the Companies. No reasonable director of the Companies, or either of them, would cause the.

Companies to enter into and pursue the GORE Transaction on the proposed
terms. Mr Jackson relies upon (a) the facts and matters set out in his letter of 6 July 2010 to the boards of both Companies, the letter sent by the Nelson Law
Finn 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 Thacher Baitlett 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 Ward

and Gary Horowitz and his email of 28 July 2010 to the Directors, (b) the facts
and 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 presently

obliged pursuant to aservices agreement dated 26 April 2007 to make payments to Polygon Investment Partners LP and Polygon Investment
Partners LLP for the provision of infrastructure services on the.

Companies' assets, which would include those assets to be invested in

the GORE investment programme In the event that the Companies

were to enter mto the GORE Transaction, Polygon Investment

Partners LP and Polygon Investment Partners LLP would also be entitled to receive payment, pursuant to the terms of the GORE Transaction, on the infrastructure services provided mrespect of those
same assets invested in the GORE investment programme

67.2

Pursuant to clause 10 of the Investment Management Agreement with TFM, the Companies are presently obliged to pay to TFM an annual

management fee of 1.5 per cent, of net asset value together with a quarterly peifonnance fee equal to 25 per cent, of the increase in net
asset value of the Tetragon Funds over the previous 3 months m excess of athreshold increase in net asset value (the "Hurdle"). The Hurdle is broadly calculated as net asset value multiplied by three month US Dollar LIBOR plus 2.65% per annum, over the preceding 3month period. In the event that the. Companies were to enter mto
the GORE Transaction, they would be obliged to pay management

and performance fees both to GORE and to TFM in respect of assets

which were invested in the GORE investment programmes.

67.3

It is against the interests of the Coiiipan.es to incur, directly and indirectly through TFM, two sets of management and performance
fees in respect of the same assets.

(yIJrjie_wmO^^ n^n^t^hnveholders for misxejarejsentation

67.4

If the Companies were to enter into the GORE Transaction, doing so

could expose them to potential claims for misrepresentation by the

holders of non-voting shares in the companies (i.e. the investors in the Tetragon Funds). Mr Jackson rel.es on the following facts and matters: 67.4.1 The Prospectus set out that the Tetragon Funds would invest
in CEO's and CDO's with the matters set out in the Prospectus

0.48936.1

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 assets

underlying the. portfolio. [TFG] believes these are attractive due

to their bu> historical volatility and low correlation to other

fixed income and equity markets. [TFG] currently gains exposure to these assets primarily through investments in the

udwrdinatcd, residual tranches ("Residual Tranches") of

collateralized debt obligation ("CDO") products, winch are iaurilizcd interests in underlying assets assembled by asset

credit risk. By taking substantial positions in the Residual Franclm of these CDOs, the Company is able to negotiate

managers and divided into tranches based on their degree of process and obtain structuralflexibility, as well as the ability to influence amendment, to the terms, mil option exercise and other
decisions with respect to the CDOs. [TFG] currently invests in a broad range of CDO products, utilizing over 35 asset
certain enhanced features of the CDOs during the origination

managers, and its underlying assets are diversified on a

"investment Manager typically hedges to manage default risk,

ocoaraphic and industry-sector basis. In addition, the

concentration lisk and currency risk. Interest rale and funding

acquired bear interest by reference to afoaling rate similar to the funding source for those assets). The Investment Manager actively and regularly evaluates available asset classes and looks for additional investment vehicles through which [TFG] can ?aiu exposure, to its target asset classes and through which if believes ii can generate attractive returns. Accordingly, [TFG] expects thai the asset classes and investment vehicles in its
portfolio will likely expand over time"

ri<k are primarily hedged through the long-term matched funding embedded in (he CDO structure (i.e., the assets

67.5

The Prospectus did not, in contrast, refer at all to the possibility of the
Tetragon Funds investing in real estate, real estate management

services, real estate financing structures or real estate-related financial vehicles, as is proposed by way of investments under the GORE Transaction. Mr Jackson will rely at trial upon the Prospectus for its
full terms

67.6

The aforesaid statements constituted representations by TFG to the

persons 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 such approval 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 be required and would not be given on the present tenns and in the
present circumstances.

67.8

In the circumstances entry into the GORE Transaction exposes TFG to potential claims for misrepresentation by the. non -voting
shareholders in TFG.

(mt.The proposed GOJOianactigri_wouJd_provide excessive remuneration

to the GORE Founders

67.9

Under the proposed terms of the GORE Transaction the three

GORE 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 fees

received 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 the

issued 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 exceed

a 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 rate

the Companies would have been able to obtain more commercially

advantageous terms within the GORE Transaction.

67.12

Further or alternatively, had the GORE Founders' Benefits been at a

commercial 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 GORE

Transaction represents a breach of the Rules.

67.15

Any breach of the Rules by either of the Companies could potentially

expose 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 duty

under 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 oftheir 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 GORE

Transaction the Directors acted in breach of their duty to act in the best 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 Business

Plan and thus bind themselves to the GORE Transaction on the tenns of the -Tenn Sheet, the Directors would in procuring or allowing them 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 a company 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 issue

of the nghts or securities and, in either case, the shares are fair and
reasonable 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 the
rights 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, m their 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 of options to the GORE Founders to subscribe for 3,908,241 shares in the capital
of 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;

33 G4R93'vl

71.2

approve acertificate stating all of the matters required to be stated as

more

re fully particularised in paragraphs 69.2 above;

71.3

determine the reasonable present cash value, of the consideration for

the proposed issue of shares pursuant to the proposed option, and/or

71.4 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.

72. Mr Jackson avers that the minutes of the parallel meetings of directors of the Companies on 29 July 2010 are unrepresentative of the meeting and, m particular, the Directors faded adequately or at all to observe the requirements
of Sections 29S-299.

73. By reason of the matters aforesaid, following the entry of TFG mto the GORE
Transaction on the tenns set out in the Term Sheet, and mparticular die grant

of options to the GORE Founders to subscribe for 3,908,241 shares in the

capital ofTFG exercisable without any option payment:
73.1

the 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 and

invalid; and

73.3

in the circumstances the Directors, and each of them, has acted in breach oftheir duties in paragraphs 25.1, 25.3, 25.4 and 25.6 above in

allowing TFG to enter into the GORE Transaction on the terms of

the Tei-m Sheet and purportedly to grant the options to the GORE
Founders.

3-1

G-fKWlvl

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 to each ofthe Companies and all the other directors ofeach ofthe 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, in
breach 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 of

TFGMF's Articles of Incoiporation as set out 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 and TFGMF 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 oftheir 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 Dearare 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 in

proposing and recommending the GORE Transaction to the boards of the Companies, each of Mr Griffith and Mr Dear has placed himself in a position
where 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 set out 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) of
TFG'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 79

to 82 above Mr Gnffith 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 derived by Messrs Dear and
Griffith 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 and
TFGMF 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 set out in paragraph 25.6 above,

84.2

in passing the GORJE Resolutions and approving the Tenn Sheet and
the 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

CJ893KI

38

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 behalf of 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

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;

G4S936.1

85.3.9

to ensure that the voting nghts ofthe Companies in relation

to GORE activities are appropriate and provide the

Companies with adequate protection;

85.3.10 to consider whether the absence of any requirement for a

representative of the Companies to be amember of, or even

an 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 from

taxation 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 and regulatory nsk through limitation of the types of
investments 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 to

ensure 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

C936 I

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 to

ensure 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 their

co-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 paid

on those assets committed
commitment; and

under the co-investment

85.3.19 to ensure that there is adequate protection for the

Companies to ensure that duplicate infrastructure fees and duplicate investment management fees are not paid on those
assets committed under the co-investment commitment.

86. By reason of the breaches of duty of skill, care and diligence set out at

paragraphs 84 to 85.3.19 above the Directors have caused the Companies to

suffer loss and damage by entenng into the GORE Transaction on tenns which are 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 92.2 (A) (B) Breach of the. Authorised Closed Ended Investment Scheme The. GORE Transaction Is Not In The Best Interests of the
Rules 2008;

Companies,

GIC936.1

92.3
92.4

(C) Breach of Sections 298 and 299 of the Companies (Guernsey)

Law, 2008; and

(F)

Breaches ofDuties ofSkill, Care and Diligence;

the Companies have suffered loss and damage which includes the difference in
value between the current tenns of the GORE Transaction and the tenns of the GORE Transaction which would have been obtained if the Directors had acted 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 an
order 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
93.2

(D) Mr Griffith and Mr Dear Have Breached Their Duties Of Full

And Frank Disclosure 'To The Companies; and

(E) Mr Griffith and Mr Dear Have Placed Themselves In A

Position Of Conflict In Breach OfTheir Duties To The Companies;

an inquiry into and account of the benefit derived from the GORE transaction

by Mr Griffith and Mr Dear is claimed, together with an order that any such
benefit be paid to the Companies.

AND THE PLAINTIFF CLAIMS ON HIS OWN BEHALF AND/OR ON

BEHALF 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 have been conducted in a manner that is unfairly prejudicial to the interests of thenmembers generally or some part of their members (including the Plaintiff);

(2) An order pursuant to section 350 of the Law authorising those, claims contained herein brought pursuant to section 349 and 350 of the Law lie brought in the
name of the Seventh and Eighth Defendants by the Plaintiff;

(3) An order that the Plaintiff be indemnified out of the assets of the Seventh and
Eighth Defendants in respect ofthe legal costs ofthe claims contained herein;

(4) Agamst the First to Sixth Defendants, an inquiry as to the loss and damage
suffered 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 Sixth
Defendants (in such proportions as the Court may order) ofsuch sums as shall be
found upon the taking ofthe said inquiry at (4) above;

(6) An inquiry into and account of the benefit derived by the First and Second
Defendants as detailed at paragraph 93 above;

(7) An order for payment to the Seventh and Eight Defendants by the First and
Second 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 the
said 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.

J T LE TISSIER
Advocate for Alexander Jackson

G4RM6.I

APPENDIX A

ORGANISATIONAL STRUCTURE OF TFG, TFGMF

AND OTHER RELATED ENTITIES

Reade

I Alexander

Patrick

Griffith
40.000

I
40,000
Class B Shares
20.000

Jackson
Cla.ss C Shares

Dear

Investors (including Alexander Jackson)

Class A Shares 100% Shares

lOOw Noii-Voiing Shares

Polygon

Capital Holdings II
Limited

(PCH II)

100% Vciinc Shares

iiiiilrMiiiii
1007c Non-Voiias
Shares

100% Voiing Shires

S @ro.uWpasteE|5S!
wssWf^a*TiSj<SaSsfaaBsS

iiiiiisiiiilii
48

tUSW.l

Jan 07

2011 5:55PM

Omega Advisors, Inc.

561-883-DG07

Dorchester Management LLC

2460 teraalne Ave
Suite SOS

Port Lee, W 07024

Phone:202-944-4333

June 30, 2009

Mr, David Wishnow

Mr. Jeffrey Herlyn

Mr. Michael Rosenberg

Polygon Credit Management GP ULC

399 ParkAvenue, 22nd Floor

New York, NY 10022

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 that downturn. We recogntee also that when you drafted Tetragon's prospectus before gofng
public, you did not envision that such a problem would arise. Finally, we assume that each of
you Is doing your best to maxlmfea value for Tetragon shareholders.

Asyou well know, the Net Asset Value of Tetragon has plunged from approximately$10/share at Its IPOto approximately$5.4 today. Underthe current structure, you, the Investment managers, stand to collect Incentive fees on tmyrtse In NAV, even from these depressed levels, This will come at the expense of your devoted shareholders that chose to hold their Tetragon
shares, and ride out the difficult times. If, for example, the gross WAV were to recover back to

where 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 If

the NAV wereto remain at currant levels but fluctuate inthe Interim, the Investment Manager
would collect Incentive fees on these fluctuations. This current Incentive fee structure defeats the purpose of aligning the Investment Manager's Interests with those ofshareholders: the

larger the volatility Inthe NAV, the largerthe Incentive fees to the InvestmentManager, all to
the dismay of shareholders.
Wo propose that that tfia incentive foe bo rastructured *ueh that no incentive fee will be paid

to 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

We believe strongly that an adjustment to the Incentivefee structure Is not only appropriate,

butnecessary. Moreover, suchrestructuring will send a strong message to existing and

potential shareholders that you have shareholdervalue In mind. We are confident that such a

message will contribute significantly to a recovery ofTetragon's shareprice, andwlH be wellreceived bythe greater Tetragon shareholder base as well as by potenfMInvestors.
We look forward to hearing back from you regarding this.

The undersigned own collectively over625,000 shares, representing approximately O.S %of
Tetragon's outstanding shares.

Sincerely,

L-C*

'.<]( Avse/l*

DorchesterHoldings Ltd. By Gil Afaoodl, Investment Manager.

BRM Group
ByAvi Basher, CFO & VP Finance

Git Shwed

~""

"~""

"~

By R$n Shwed, investment Manager

Page 2

Omega Advisors, Inc. 1 Wall Street Plaza 88 Pine Street 31st Floor | New York, New York 10005
Tel: 212-495-5210 I Fax: 212-495-5236

Leon Q. Cooperman, C.F.A.

Chairman & Chief Executive Officer

November 4,2010

Mr. Rupert Dorey, Director Mr. David Jeffreys, Director Mr. Byron L. Knief, Director
Mr. Greville V.B. Ward, Director

Tetragon Financial Group Ltd Dorey Court, Admiral Park, St. Peter Port Guernsey, Channel Islands GY1 8BG

Dear Gentlemen:

According to publicly available documents, Omega, and related entities, is the largest shareholder in Tetragon Financial Group, LTD ('TFG"), owning close to 10% of the equity. We remain very concerned aboutthe manner in which the Independent Directors of

TFG, 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 lack of concern for enhancing shareholder value. As longas theIndependent Directors andPolygon continue to ignore the responsibilities associated with managing a public company, TFG shareswill continueto underperform its peers and trade at a significantdiscountto NAV. As Independent Directors with a fiduciary responsibility to protect the rights of non voting shareholders, I implore you to take the following actions in order to enhance
shareholder value:

1)

2) 3)

Amend the Investment Management Agreement to exclude incentive compensation on the reversal of the AcceleratedLoss Reserve ("ALR"); Increase corporate communication by conducting openquarterly conference calls followed by a question and answerperiod for all shareholders; Utilizeexcess cashto tender for up to 10%of common shares as long as the stock sells at a 20% or greater discount to NAV and we are confident in the
business outlook;

4) 5)

Increasedividend payoutas a percentage of cash flows from operations back

to 2007 level; and

Provide additional portfolio disclosure on TFG holdings with performance

metrics.

Incentive Compensation

Based on numerous conversations with existing and potential shareholders, there is a consensus around the fact that the incentive compensation on the reversal of the ALR is

blatantly excessive. Most investors view the compensation as inequitable and refuse to invest in a vehicle that permits the Investment Manager to write down asset values during a

downturn in the credit cycle and then simply write up the values in subsequent quarters and take 25% of the "appreciation" for doing nothing. This compensation arrangement is not in the spirit of the IMA, and it is contributing to TFG's stock price underperformance. I request that the Independent Directors force Polygon to waive its contractual right to an incentive fee on the reversal of the ALR. As a result, investors would gain considerable comfort that the Investment Manager and shareholders are receiving equitable compensation in the event of value creation. This action will contribute to reducing TFG's significant
discount to NAV.

Corporate Communication

I have been investing in stocks for decades and cannot recall a management team refusing to conduct interactive conference calls with shareholders. This is a highly unusual corporate 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 investment companies, conduct interactive conference calls. Existing shareholders and, more importantly, potential shareholders find this policy unacceptable, making them wary about the Investment Managers' actions and motives. Shareholders are tired of Polygon's charade of asking for questions in advance and then simply ignoring them. Shareholders are entitled to an open dialogue with the Investment Manager in an open forum to confirm investment merits as well as discuss potential issues with the portfolio or strategy. By denying investors the opportunity to ask direct questions, the Investment Manager can operate in a vacuum and ignore investor concerns and demands. This closed minded communication style leads to investor skepticism and discourages potential investors from purchasing TFG shares. Furthermore, Polygon has a storied past with regards to upholding investor rights. The Wall Street Journal reported on September 4, 2010 that investors petitioned the Cayman Island court to appoint independent liquidators to wind up the Polygon Global Opportunities Fund because the fund manager, Reade Griffith, has returned just half of the money since announcing in late 2008 that he would wind up the fund. In addition, he continues to charge fees 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 acceptable and is causing TFG stock to underperform. I request that the Independent Directors force Polygon to hold quarterly conference calls with an open question and answer period so that investors can have a direct and honest dialogue with Polygon. This is standard protocol for large, public entities and will help ease investor concerns regarding Polygon's management of the portfolio. This action will also contribute to reducing TFG's significant discount to
NAV.

Excess Cash

The Board has elected, at the urging of Polygon, to retain an excessive amount of cash in TFG instead of paying out a one-time dividend or tendering for a meaningful percentage of the common stock. Since 3Q 2009, TFG has maintained a cash balance in excess of $149 million and elected not to deploy it during the greatest credit bull market in modern 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, an asset class outside of TFG's core competency. Shareholders would be better served if the Board 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 tremendous confidence in their CLO investments and future prospects. In November 2009, I recommended that the Board consider a tender offer for 10% of the outstanding shares at a price of approximately $3.00. The Board elected not to pursue a tender offer, and instead, they elected to purchase 6.5 million shares in the secondary market over the past four

quarters 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 still stand given the significant share price discount to NAV. A meaningful tender offer would add to pro forma EPS, increase book value and significantly contribute to reducing TFG's discountto NAV. I wouldrecommend that the Boardestablisha policy of significant equity repurchase when the shares sell at a 20% or greater discount to NAV and we are comfortable
with our outlook.

Dividend Payout

The current dividend policy is unacceptable given current cash balance and cash

flows fromoperations ("CFO"). I request that the Board increase the dividend payoutratio to 40% of CFO, which is in line with what was originally contemplated when the company went public in 2007. As highlighted in table 1 below, the total dividend paid to shareholders in 2007 was $48.9 million, 41% of CFO, and total management and incentive fees ("M&I Fees") paid to Polygon was $29.0 million, 24% of CFO. This resulted in M&I Fees being 59% of the dividends paid to shareholders. Although shareholders may not approve of that ratio, it was at least more reasonable than what is occurring today.
This year, through October 29, 2010, the total dividends paid or declared to shareholders was $26.8 million, 14% of CFO, and M&I Fees paid to Polygon was $88.0 million. In other words, Polygon has received $61.2 million more in distributions than the shareholders, who have capital 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 the dividends paid to shareholders. This is not equitable. Existing shareholders and, more importantly, potential shareholders find this payout policy unacceptable. The Board must recognize that the dividend payout ratio needs to be increased 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 contribute to reducing TFG's significant discount to NAV.

Table 1: Tetragon Financial Group Payout Ratio

Year Ended December 31,
YTD 2009
2010 Total

($mm)
CFO Dividends

2607

2008

$120.4
$48.9
41%

$345.3 $97.9
28%

$139.0
$15.1
11%

$186.1

$790.8

$26.8
14%

$188.7
24%

Percent of cash flow M&I Fees

Percent of cash flow

$29.0
24%

$41.5
12%

$411
30%

$88.0
47%

$200.6
25%

:;$i!!ir)if$^
Through October 29,2010 Source:TFG annualand Interim reports

Portfolio Disclosure

TFG portfolio disclosure is unacceptable and does not provide investors adequate information with which to accurately analyze the CLO holdings. Therefore, investors have no choice but to employ draconian assumptions when valuing TFG's CLO positions. The Board's decision to limit CLO disclosure is causing the stock to trade at a significant discount to NAV. For example, KFN provides quarterly updates that highlight capital structure, portfolio composition, deal dates, key portfolio metrics and over collateralization tests for each CLO (see table 2 below). This level of disclosure is necessary in order for investors to determine the risk profile of each CLO and, thus, the underlying value of TFG holdings and stock. I argue that this is one of the reasons KFN trades at a premium to book value. I have previously requested that the Board disclose CLO metrics but to no avail. In fact, Polygon has indicated that the information is "strategic" and that "investors would not understand it." If this is accurate, then why has KFN decided otherwise? I request that the Independent Directors force the Board to provide CLO level detail similar to KFN. This action will contribute to reducing TFG's significant discount to NAV.

Table 2: KKR Financial CLO 2005-1, Ltd.

KmOwiwrihlp
through OlhrrClOa
-

KFNDiracI Tranche

Total Dtrt;indlrl

Ownttiblp
t
-

KFNOwnmhlp

OulatdiOrrrirKhlp
$ 715.000 O00
6(400

Tolal

Clew A ClwB
ClaaaC

715.000
58,000 61400
52.000

!.

Coupon La 27bps 45bpj La (Sbpa

cta*sr>
CtaiB

S2,0C

51XM0

La205bp*

15,000

ISjOOO
3,000

15,000 3,000

ClasaF

9.000
.

l530bpj I.a850bpa
RcaHual

Subordinated Note!
Total

6K00

5vJ00

85,500
* (37.M0

9M0O

!,K>

njm

17,5o0

AuH

Par /Notional Amount

WtdAvg Coupon*

Principal Caah
Honda FtatdRatc

33,134
31413 36.942
6.47% Senior Srcutrd loan*
ton

FloatingRata
toana

t>4.26%

' cod/7ndl.trni
M*

PbcdRate

floating Kato
Total

920J39

ifiis/m

LH97% L.VlMt

,T.i,iwNM.t4jMailjaORa,wMfe^aNp.nMif<v*kA* dosing Date

KclnvcaimoiM end Par*

^BMJttHtHnAMllftitt/WK
Number of luuors
92

March 30,2009

Urgoit Obligor at % of Total Collateral

2.6X 02

FinalMaturity
Nonfat End Data

April26,201) April26.2017
April 46,2008

vVklAvg Ratingof Asada Net Ariel Spreadh> SeniorDcbl

WtdAvfiUfeotAjMts

281 boa
4.43

AoofDat*

Join 30,4009
OC<9mlor Minimum OC-Smhr Ratio 119,40% 12431% Pa* IOS.00%

Septan*** 30,2009
119.40% IJ7.II*
Paaa

DtnMbtrSl.tOIrt
119.40%

March 31.2010
119.40%
130.71% Pas*

1IIM30.2010
119.40% 131.68%
Paaa

Senior Test Paaa/PaD

OC'Mcnonlne M tnlmu m

128.10% Paaa
106.00% 111.30% Paaa

106A0%

106X0%

104.00%

OCMer/anlnc Ratio MenanbtaTest Paaa / Fan OC-Stibordtnate M bum um

106.65%
Pasa

11032%
Pasa

113.66%
Paaa

11450%
Fan 106.20%
112.60% Pa

106.20%
104.91% Fall

10620% tW.69%
l*J

106.20% 109.53%
Pan

106.20%
111.77% Pan

OC-Subordlnato Ratio
Subordinate Pasa/Fall

Source: KKH FinancialCorporation disclosure

I hope this commentary has been insightful, andI would liketo meet with a Board representative; tq discuss thecontents of this letter and onlypublicly available information.

Leon G. Cooperman