FILED: NEW YORK COUNTY CLERK 09/21/2011

NYSCEF DOC. NO. 1

INDEX NO. 652599/2011 RECEIVED NYSCEF: 09/21/2011

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK AVENUE INVESTMENTS, L.P., AVENUE SPECIAL SITUATIONS FUND VI (MASTER), L.P., AVENUE INTERNATIONAL MASTER, L.P., AVENUE CDP-GLOBAL OPPORTUNITIES FUND, L.P., CASPIAN SELECT CREDIT MASTER FUND LTD., CASPIAN CAPITAL PARTNERS, L.P., CASPIAN SOLITUDE MASTER FUND, L.P., CASPIAN ALPHA LONG CREDIT FUND, L.P., MARINER LDC, OAKTREE HIGH YIELD FUND, L.P., OAKTREE HIGH YIELD FUND II, L.P, OCM HIGH YIELD TRUST, OAKTREE CAPITAL MANAGEMENT FUND II, OAKTREE OPPORTUNITIES FUND VIII DELAWARE, L.P., OAKTREE HUNTINGTON INVESTMENT FUND, L.P., OAKTREE OPPORTUNITIES FUND VIII (PARALLEL 2), L.P., OAKTREE VALUE OPPORTUNITIES FUND HOLDINGS, L.P. and WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO Plaintiffs, v. DYNEGY INC., DYNEGY HOLDINGS, LLC, DYNEGY GAS INVESTMENTS, LLC, CLINT C. FREELAND, KEVIN T. HOWELL, and ROBERT C. FLEXON Defendants. Index No.

SUMMONS

SUMMONS TO THE ABOVE NAMED DEFENDANTS:

YOU ARE HEREBY SUMMONED to answer the Complaint in this action and to serve a copy of your Answer upon plaintiffs within 20 days after the service of this Summons, exclusive of the date of service, or within 30 days after completion of service where service is made in any manner other than by personal delivery within the state. In case of your failure to appear or answer, judgment will be taken against you by default for the relief demanded in the Complaint. Plaintiffs designate New York County as the place of trial. Venue is based upon the residence of plaintiffs Avenue Investments, L.P. and Avenue Special Situations Fund VI (Master), which each have their principal place of business at 399 Park Avenue, New York, New York 10022. Dated: New York, New York September 21, 2011 PAUL, WEISS, RIFKIND, WHARTON & GARRISON, LLP By: /s/ Gerard E. Harper Gerard E. Harper

1285 Avenue of the Americas New York, New York 10019-6064 (212) 373-3000 Attorneys for Plaintiffs

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SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK AVENUE INVESTMENTS, L.P., AVENUE SPECIAL SITUATIONS FUND VI (MASTER), L.P., AVENUE INTERNATIONAL MASTER, L.P., AVENUE CDP-GLOBAL OPPORTUNITIES FUND, L.P., CASPIAN SELECT CREDIT MASTER FUND LTD., CASPIAN CAPITAL PARTNERS, L.P., CASPIAN SOLITUDE MASTER FUND, L.P., CASPIAN ALPHA LONG CREDIT FUND, L.P., MARINER LDC, OAKTREE HIGH YIELD FUND, L.P., OAKTREE HIGH YIELD FUND II, L.P, OCM HIGH YIELD TRUST, OAKTREE CAPITAL MANAGEMENT FUND II, OAKTREE OPPORTUNITIES FUND VIII DELAWARE, L.P., OAKTREE HUNTINGTON INVESTMENT FUND, L.P., OAKTREE OPPORTUNITIES FUND VIII (PARALLEL 2), L.P., OAKTREE VALUE OPPORTUNITIES FUND HOLDINGS, L.P., and WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO Plaintiffs, v. DYNEGY INC., DYNEGY HOLDINGS, LLC, DYNEGY GAS INVESTMENTS, LLC, CLINT C. FREELAND, KEVIN T. HOWELL, and ROBERT C. FLEXON Defendants. Index No.

COMPLAINT

Plaintiffs, by their attorneys, for their complaint, allege on their own knowledge or otherwise on information and belief:

NATURE OF THE ACTION 1. This is an action to undo a fraudulent conveyance or, in the

alternative, an illicit dividend. The fraudulent character of the transfer is unprecedented in the annals of corporate finance and, if not annulled, would fundamentally alter the public bond markets. Only the unembarrassed, multiple, and explicit indicia of fraud outpace the novelty of the transactions, the unwelcome effects of which would have wide-ranging adverse consequences for investors previously willing to lend capital with the confidence that, if things turn sour, the borrowers, and not the lenders, would first bear the burden of the downturn. 2. Defendants are distressed companies (and their senior

management) in the energy business, principally the generation, marketing and sale of electricity through coal-powered and gas-powered facilities. Until the events at issue here, the only material asset of the publicly-traded parent company was ownership of an operating subsidiary in which the coal and gas assets resided. The operating subsidiary borrowed money from the public markets through the issuance of approximately $3.6 billion in Notes with varying interest rates and maturities dates ranging from 2012 to 2027. Plaintiffs are holders of these Notes. In a series of recent self-dealing transactions, the parent company has restructured itself to remove the coal assets from the reach of its public creditor bondholders and transfer them to the public equity holders. The sole, unabashed, and illicit purpose of these self-dealing transactions is to hinder, delay, and defraud its public creditors for the benefit of its equity holders. Simply put, despite the parent company’s repeated and unambiguous calls of distress and gloomy outlooks, the company has pilfered one of the most valuable assets of the operating subsidiary that

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issued the Notes, and removed it from the reach of creditors, for no reason other than to benefit the parent’s equity holders, prominent among them Carl C. Icahn. 3. This it may not do. The transactions at issue violate sections 275

and 276 of the New York Debtor and Creditor Law as transfers intentionally designed to defeat or hinder the rights of creditors. The transactions also violate sections 273 and 274 of the same statute, because they constitute constructive fraudulent conveyances by an insolvent entity that did not receive reasonably equivalent value in return. If not a fraudulent conveyance, the transfers constitute an illegal dividend from a subsidiary to a parent company, for which the directors of the transferor company are liable. Those same directors are liable to the public creditors for various breaches of fiduciary duties owed by the company to such creditors; such duties having arisen in favor of such creditors upon the company’s admitted insolvency. Plaintiffs bring this action to set aside this fraudulent conveyance or to obtain damages for its consequences. THE PARTIES 4. Plaintiff Avenue Investments, L.P. (“Avenue Investments”) is a

Delaware limited partnership with its principal place of business at 399 Park Avenue, New York, New York 10022. Avenue Investments holds the 2016, 2018, 2019 and 2026 Notes. 5. Plaintiff Avenue Special Situations Fund VI (Master), L.P.

(“Avenue Special Situations Fund”) is a Delaware limited partnership with its principal place of business at 399 Park Avenue, New York, New York 10022. Avenue Special Situations Fund holds the 2016, 2018, 2019 and 2026 Notes.

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6.

Plaintiff Avenue International Master, L.P. (“Avenue International

Master”) is a Cayman Islands exempted partnership with a place of business at 399 Park Avenue, New York, New York 10022. Avenue International Master holds the 2016, 2018, 2019 and 2026 Notes. 7. Plaintiff Avenue CDP-Global Opportunities Fund, L.P. (“Avenue

CDP-Global”) is a Cayman Islands exempted partnership with a place of business at 399 Park Avenue, New York, New York 10022. Avenue CDP-Global holds the 2019 and 2026 Notes. 8. Plaintiff Caspian Select Credit Master Fund Ltd. (“Caspian

Select”) is a Cayman Islands exempted company, the investment manager of which is Caspian Capital LP, having its place of business at 767 Fifth Avenue, New York, New York 10153. Caspian Select holds various series of the Notes. 9. Plaintiff Caspian Capital Partners, L.P. (“Caspian Capital

Partners”) is a Delaware limited partnership, the investment manager of which is Caspian Capital LP, having its place of business at 767 Fifth Avenue, New York, New York 10153. Caspian Capital Partners holds various series of the Notes. 10. Plaintiff Caspian Solitude Master Fund, L.P. (“Caspian Solitude

Master Fund”) is a Cayman Islands exempted limited partnership, the investment manager of which is Caspian Capital LP, having its place of business at 767 Fifth Avenue, New York, New York 10153. Caspian Solitude Master Fund holds various series of the Notes.

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11.

Plaintiff Caspian Alpha Long Credit Fund, L.P. (“Caspian Alpha

Long Credit Fund”) is a Delaware limited partnership, the investment manager of which is Caspian Capital LP, having its place of business at 767 Fifth Avenue, New York, New York 10153. Caspian Alpha Long Credit Fund holds various series of the Notes. 12. Plaintiff Mariner LDC (“Mariner”) is a Cayman Islands limited

duration company, the advisor to which is Caspian Capital LP, having its place of business at 767 Fifth Avenue, New York, New York 10153. Mariner holds various series of the Notes. 13. Plaintiff Oaktree High Yield Fund, L.P. (“Oaktree High Yield

Fund”) is a Delaware limited partnership with a place of business at 1301 Avenue of the Americas, New York, New York 10019. Oaktree High Yield Fund holds the 2015 Notes. 14. Plaintiff Oaktree High Yield Fund II, L.P. (“Oaktree High Yield

Fund II”) is a Delaware limited partnership with a place of business at 1301 Avenue of the Americas, New York, New York 10019. Oaktree High Yield Fund II holds the 2015 Notes. 15. Plaintiff OCM High Yield Trust (“OCM High Yield Trust”) is a

domestic trust with a place of business at 1301 Avenue of the Americas, New York, New York 10019. OCM High Yield Trust holds the 2015 Notes. 16. Plaintiff Oaktree Capital Management Fund II (“Oaktree Capital

Management Fund”) is a Luxembourg Société d’investissement à capital variable with a

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registered office at 2-4 rue Eugène Ruppert, L-2453 Luxembourg, R.C.S. Luxembourg 94820. Oaktree Capital Management Fund High Yield Fund holds the 2015 Notes. 17. Plaintiff Oaktree Opportunities Fund VIII Delaware, L.P.

(“Oaktree Opportunities Fund VIII”) is a Delaware limited partnership with a place of business at 1301 Avenue of the Americas, New York, New York 10019. Opportunities Fund VIII holds the 2015, 2016, 2018, 2019 and 2026 Notes. 18. Plaintiff Oaktree Huntington Investment Fund, L.P. (“Oaktree Oaktree

Huntington Investment Fund”) is a Cayman Islands limited partnership with a place of business at 1301 Avenue of the Americas, New York, New York 10019. Oaktree High Yield Fund II holds the 2015, 2016, 2018, 2019 and 2026 Notes. 19. Plaintiff Oaktree Opportunities Fund VIII (Parallel 2), L.P.

(“Oaktree Opportunities Fund VIII (Parallel 2)”) is a Cayman Islands limited partnership with a place of business at 1301 Avenue of the Americas, New York, New York 10019. Oaktree High Yield Fund II holds the 2015, 2016, 2018, 2019 and 2026 Notes. 20. Plaintiff Oaktree Value Opportunities Fund Holdings, L.P.

(“Oaktree Value Opportunities Fund Holdings”) is a Delaware limited partnership with a place of business at 1301 Avenue of the Americas, New York, New York 10019. Oaktree High Yield Fund II holds the 2019 Notes. 21. Plaintiff Western Reserve Life Assurance Co. of Ohio (“Western

Reserve”) is an Ohio corporation with its principal place of business at 366 E. Broad, Columbus Ohio, 43215. Western Reserve is a holder of the 2015 Notes.

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22.

Defendant Dynegy Inc., or “DYN,” is a Delaware corporation with

its principal place of business in Houston, Texas. DYN is a holding company the subsidiaries of which produce and sell electric energy, capacity and ancillary services. Corporate raider and newly-self-styled “shareholder activist” Carl C. Icahn is a substantial stockholder in, and is represented on the board of, DYN. DYN owns 100% of the equity interests of Dynegy Holdings, LLC. 23. Defendant Dynegy Holdings, LLC (f/k/a Dynegy Holdings Inc.) or

“DHI,” is a Delaware limited liability company with its principal place of business in Houston, Texas. DHI is a direct, wholly-owned subsidiary of DYN and is the issuer and sole obligor on the “Notes,” meaning the 8.75% Notes due 2012 (the “2012 Notes”), the 7.5% Notes due 2015 (the “2015 Notes”), the 8.375% Notes due 2016 (the “2016 Notes”), the 7.125% Notes due 2018 (the “2018 Notes”), the 7.75% Notes due 2019 (the “2019 Notes”), the 7.625% Notes due 2026 (the “2026 Notes”) and the 8.316% Notes due 2027 (the “2027 Notes”). 24. Defendant Dynegy Gas Investments, LLC, or “DGI,” is a

Delaware limited liability company with its principal place of business in Houston, Texas. DGI is a direct, wholly-owned subsidiary of DHI and, before the events set out below, owned 100% of the equity interests of Dynegy Coal Holdco, LLC which in turn owned 100% of the equity interests in Dynegy Coal Investments Holdings, LLC. 25. DHI’s subsidiaries have significant business operations in New

York by virtue of their operation of the (i) Roseton; (ii) Danskammer; and (iii)

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Independence facilities.

The Roseton and Danskammer facilitates are located in

Newburg, New York, while the Independence facility is located in Scriba, New York. 26. Defendant Robert C. Flexon is the President and Chief Executive

Officer of DHI, as well as a Manager of DHI. Mr. Flexon is also the President and Chief Executive Officer of DYN and a Director of DYN. 27. Defendant Clint C. Freeland is the Executive Vice President and

Chief Financial Officer of DHI, as well as a Manager of DHI. Mr. Freeland is also the Executive Vice President and Chief Financial Officer of DYN. 28. Defendant Kevin T. Howell is the Executive Vice President and

Chief Operating Officer of DHI, as well as a Manager of DHI. Upon information and belief, Defendant Howell, together with Defendants Flexon and Freeland, constituted the entirety of DHI’s Board of Directors, and now constitute the entirety of DHI’s Board of Managers. We refer to them herein as the “Director Defendants.” JURISDICTION AND VENUE 29. This court has personal jurisdiction over each defendant because

each is present in this State by reason of regularly doing business here and because Plaintiffs’ causes of action arise out of actions taken here or that caused injury in this State. Among other things, DYN and DHI directly or indirectly own or operate the Roseton, Danskammer and Independence facilities in this State. In addition, DHI sold the Notes in this State, and various of the transactions at issue here were formulated and

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executed here. In connection with each of these activities, the Director Defendants traveled to New York and engaged in business here. 30. Venue is proper in New York County because at least one Plaintiff

resides here and because Plaintiffs choose this forum as the venue of this action. DEFENDANTS’ ILLEGAL SCHEMES DHI’s Distressed Condition 31. The widespread and well-known problems in the electric energy

industry have hit DYN and DHI especially hard, as DYN has made repeatedly clear in its public filings. In 2010, DYN’s audited financial reports included a going-concern

qualification from its auditor, expressing doubt about the company’s ability to continue as a going concern. Also in its Form 10-K filed with the SEC for 2010, DYN cautioned that its substantial indebtedness may “make it difficult to satisfy [its] financial obligations, including debt service requirements.” DYN also warned in the 2010 10-K that it likely would “not be able to comply with [its] EBITDA to Consolidated Interest Expense covenant, as currently set forth in [its] Credit Facility, particularly in the third and fourth quarters of 2011.” In 2010, DYN reported substantial net losses attributable to DYN and DHI of approximately $234 million and $242 million, respectively. 32. DYN’s and DHI’s losses and faltering financial situation have

continued to date. In DYN’s most recent Form 10-Q filed with the SEC for the period ending on June 30, 2011, DYN reported net losses of $116 million and $193 million for the three month and six month periods ending June 30, 2011, respectively. DYN also disclosed in the June 2011 10-Q that “continued low power prices over the past two years

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have had a significant adverse impact on our business and continue to negatively impact our projected future liquidity,” and also that DHI will have “minimal liquidity … subsequent to funding of the debt service requirements and operating lease payment obligations beyond the next eighteen months absent a significant positive change in the forecasted operating results of the Roseton and Danskammer facilities.” In sum, the

depressed nationwide prices for electricity have had a significant adverse impact on DYN and its sole material asset DHI, which in consequence have lost hundreds of millions of dollars over the past two years, to the end that recent public filings have estimated that DHI will generate negative cash flow of approximately $1.2 billion over the next three years. That DHI’s unsecured and publicly traded bonds currently trade at a very

substantial discount to par only confirms its deteriorating financial condition. The Failed Blackstone Merger 33. On August 13, 2010, DYN entered into a merger agreement with

an affiliate of The Blackstone Group L.P. whereby DYN was to be acquired and DYN’s equity holders were to receive $4.50 per share in cash. On November 16, 2010, the agreement was amended to increase per-share all-cash consideration to $5.00. In an unusual public filing urging shareholders to support the Blackstone offer, DYN unveiled an investor presentation in October 2010 that highlighted many of the risks of continuing to operate DYN as a stand-alone going concern. This “Investor Presentation” noted that “Dynegy’s substantial leverage and forecasted negative free cash flow create a very challenging liquidity position over time” and that, “[a]bsent significant improvements in BOTH commodity and financial/capital markets, operating as a stand-alone company involves substantial risk to Dynegy stockholders.” Continuing, DYN warned further that

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“there are several market and company-specific challenges in the near-to medium-term, many of which are beyond our control, that pose a significant risk to [stockholder’s] reaching a recovery,” including “[l]ow and declining commodity prices” and substantial negative cash flow. 34. Similarly, on October 26, 2010, DYN issued a press release in

which DYN forecast the risks of failing to consummate the Blackstone transaction due to the continued decline in DYN’s business and financial condition. DYN disclosed that “[f]orward natural gas prices have declined steadily over the past two years and . . . [c]urrently, there is no near-term recovery in sight for natural gas prices, and the abundance of gas appears to be a long-term driver of prices.” DYN observed, too, that its “stock price is highly correlated with natural gas prices, which have fallen dramatically” and that, owing to the continued decline in commodity prices, its total projected negative cash flow over the next five years had increased to $1.5 billion. 35. In a separate investor presentation also published in October 2010

and entitled “Setting the Record Straight: The Truth About Asset Sales, Dividends and Debt Facilities” DYN admitted that it was insolvent. DYN stated that its “[c]urrent high fixed-cost structure, projected negative cash flow and substantial debt obligations make issuing a dividend imprudent at best.” DYN then went on to alert its shareholders that “[d]ividends would not be permitted as a public company under Delaware law given Dynegy’s current financial forecasts” and that “[n]o public company in Dynegy’s condition should issue a dividend.”

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36.

Notwithstanding DYN’s admonition of the risks of not

consummating the merger with Blackstone, shareholders did not approve the merger agreement. Rather than shifting its attention to its creditors, including the holders of its

public Notes (the “Noteholders”), to which it now owed enhanced duties, DYN decided, it appears, to try to squeeze those creditors in favor of its heedless shareholders. The 2011 Restructuring 37. On August 5, 2011, certain subsidiaries of DHI consummated a Pursuant to this “2011

significant organizational and financial restructuring.

Restructuring,” certain of DHI’s indirect wholly-owned subsidiaries, which collectively hold substantially all of DHI’s assets, were reorganized primarily into two so-called “ring-fenced” silos – that is to say, transactions aimed at protecting the entities from bankruptcy – one for the company’s coal-powered generating facilities, and one for the company’s gas-powered generating facilities. As a result of the 2011 Restructuring, DHI now owns 100% of the equity interests of DGI, a newly formed shell intermediate holding company, which owns 100% of the equity interests of Dynegy Coal Holdco, LLC (“Coal Holdco”) and Dynegy Gas Holdco, LLC (“Gas Holdco”). Coal Holdco and Gas Holdco are the holding companies that own, directly or indirectly, all of the equity interests of the entities in, respectively, the coal and gas “silos” that DYN engineered. 38. One object of the ring-fencing silos was to facilitate the incurrence

of about $1.7 billion of new senior secured debt. Thus, also on August 5, 2011, certain of DHI’s subsidiaries entered into two new senior secured credit facilities consisting of (i) a $1.1 billion, five-year senior secured term loan facility among Dynegy Power, LLC,

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Credit Suisse AG, Cayman Islands Branch, as Administrative Agent and as Collateral Trustee, other agents named therein and other financial institutions party thereto as lenders (the “GasCo Term Loan Facility”); and (ii) a $600 million, five-year senior secured term loan facility among Dynegy Midwest Generation, LLC, Credit Suisse AG, Cayman Islands Branch, as Administrative Agent and as Collateral Trustee, other agents named therein and other financial institutions party thereto as lenders (the “CoalCo Term Loan Facility” and, together with the GasCo Term Loan Facility, the “2011 Credit Facilities”). Securing the GasCo Term Loan Facility and CoalCo Term Loan Facility are substantially all of the assets of the entities in, respectively, the gas and coal “silos.” 39. The 2011 Credit Facilities include onerous covenants that restrict

the entities within the two silos from issuing dividends or otherwise upstreaming assets to DHI in excess of $225 million per year to service DHI’s substantial indebtedness, including the Notes – a wholly inadequate sum and an amount insufficient to cover even DHI’s annual interest expense on the Notes between now and 2015. Public analyst reports further confirm the dire liquidity position that DHI has purposely placed itself in. Standard & Poor’s concluded that “[b]ecause distributions to DHI from Gasco and Coalco are capped at a total of $225 million, we believe that DHI will run out of cash and default . . . .” See Dynegy Inc. ‘CC’ Rating Remains On CreditWatch As It Restructures, S&P Research Update, July 19, 2011, at 3. Bank of America Merrill Lynch projects that DHI will simply run out of cash in 2012. See Updating Our Work on DYN As

Restructuring Activity Picks Up, Bank of America Merrill Lynch, Sept. 19, 2011, at 4. 40. Accordingly, by allowing its subsidiaries to enter into the 2011

Credit Facilities, DHI effectively sought to deny itself sufficient liquidity to service its

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own debt. The only possible explanation for such reckless financing is that DHI intended to use the restrictive covenants in the 2011 Credit Facilities to coerce DHI’s bondholders to participate in future exchange offers, by guaranteeing that it would have insufficient cash to satisfy its obligations as they come due. Mildly put, DHI put a gun to its head and pulled the trigger to enable it to tell its creditors that it would inevitably end up in bankruptcy unless the creditors took less than what is due them. The Fraudulent Transfer/Illicit Dividend 41. On September 1, 2011, without any apparent legitimate business

purpose, DHI converted itself from a Delaware corporation to a Delaware limited liability company. No purpose exists for such a change other than DHI’s hope that, under Delaware law, it may be more difficult for creditors of a limited liability company to assert claims against the LLC’s managers than it would be for such creditors to assert claims against a corporation’s directors. DHI opted to convert to a limited liability company in an attempt to shield its directors from personal liability for the fraudulent actions described in this complaint, and to frustrate DHI’s creditors’ ability to bring suit against such individuals. The conversion reflects DHI’s fraudulent intent. 42. Immediately after this bogus conversion, on September 1, 2011,

DYN and DGI executed a Membership Interest Purchase Agreement (the “Purchase Agreement”) pursuant to which DYN purchased from DGI 100% of the membership interests of Coal Holdco. In exchange, DYN did not provide any direct cash or other tangible assets. Instead, it contemporaneously entered into an “undertaking” in which it agreed to make payments to DGI in the amounts and at the times when DHI is obligated

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to make principal and interest payments under the 2019 Notes and 2026 Notes (the “Undertaking”). Specifically, the Undertaking purportedly obligates DYN to make (i) annual payments of approximately $96.7 million through June 2019, and then declining to $13.3 million per annum thereafter through October 2026 (which correspond with the annual interest payments under the 2019 Notes and 2026 Notes) and (ii) balloon payments of $1.12 billion and $181.67 million in 2019 and 2026, respectively (which correspond with the principal payments due at maturity on the 2019 Notes and 2026 Notes, respectively). 43. In the next step in this fraudulent scheme, DGI assigned the

Undertaking (the “Assignment”) to DHI in exchange for a $1.25 billion inter-company note issued by DHI to DGI that matures in 2027 (the “Intercompany Note”). The Intercompany Note was allegedly intended to be equal in value to the stream of payments due under the Undertaking, which were in turn supposedly equal to the equity value of Coal Holdco. In other words, DHI doubtless contends that this series of insider

transactions is fair to DHI’s creditors because DHI’s asset – Coal Holdco – was assigned an equity value of $1.25 billion and DHI received $1.25 billion for it. This insider scheme, however, collapses from the start. Fairly marketed to third parties, the equity of Coal Holdco is easily worth much more than $1.25 billion. The $1.25 billion starting equity value is solely based on a determination by DYN’s Board of Directors of the equity value of Coal Holdco, a determination apparently made without any attempt to value Coal Holdco through any type of actual market test, which would have inevitably produced a far higher value. What’s worse, upon information and belief, Coal Holdco may contain approximately $500 million in cash (which was previously to be used to

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service DHI’s debt obligations). The fact that so much cash was in the entity makes the $1.25 billion valuation more patently flawed. The audacity of the action, then, is

breathtaking: DHI did not, in fact, receive any new capital as a result of the Acquisition, but instead sold one of its two most valuable assets in a private, insider deal to its parent company for a 100% seller-financed “undertaking” with a self-dealing artificially low price created solely for the exercise. 44. It gets worse because DHI didn’t even receive $1.25 billion back.

In connection with the Assignment, the Undertaking was amended and restated (the “Amended Undertaking”) in order allegedly to obtain the consent of DYN to an intercompany assignment between its own subsidiaries. The Amended Undertaking is materially more favorable to DYN than the original Undertaking, because as amended the Undertaking includes a “Payment Reduction” provision under which, if any of the Notes are retired as a result of a tender offer or exchange offer or are otherwise repurchased by DYN or Coal Holdco, then DYN’s payment obligations under the Amended Undertaking will be reduced by $1.678 for every $1.00 of Notes so retired. This is true even if DYN purchases the Notes at steep discounts to their face value (as indeed DHI now proposes in the Coercive Exchange discussed below). While the appropriate application and effect of the Payment Reduction provision is unclear, the intent is unambiguous – to permit DYN to purchase certain of the Notes at a deep discount pursuant to a coercive exchange offer, thereby simultaneously reducing DYN’s obligation under the Amended Undertaking for the sole benefit of DYN’s equity holders and at the expense of DHI’s creditors. Indeed, if DYN purchases enough Notes, even if such purchases are at prices far below par, then DYN’s payment obligations can be reduced to zero. This means that DHI will have sold

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its indirect equity interest in Coal Holdco for no cash, and instead received in return only a reduction in its debt that was already trading at highly distressed prices. In light of the current trading prices of the Notes, the payment reduction provision renders the Amended Undertaking completely illusory and worth far less to DHI than even the already artificially low $1.25 billion value that DYN’s Board of Directors assigned to the equity value of Coal Holdco which DYN received from DHI. 45. The Amended Undertaking – even without the Payment Reduction

mechanism – is, in any event, not worth even the $1.25 billion non-arms’ length value assigned to it by DYN’s Board of Directors. Calculation of the net present value of DYN’s payment stream under the Amended Undertaking necessarily requires use of an appropriate discount rate. In valuing the Amended Undertaking at $1.25 billion, DYN has implicitly adopted a discount rate equal to the blended interest rate on the 2019 Notes and 2026 Notes, or approximately 7.9%. This discount rate is far too low and does not properly reflect DYN’s credit profile, and therefore vastly overstates the value of the Amended Undertaking. One data point is that the CoalCo Term Loan, which is secured by substantially all of the assets in the “coal silo,” has a yield to maturity of approximately 10%. By comparison, the Amended Undertaking is an unsecured

contractual obligation which was allegedly issued as an unheard of 100% seller financing. The vast majority of payments required under the Amended Undertaking will not be made until 2019 or later. Taking into account these and other factors, including the back-end weighted average final maturity, financial leverage, and the assets and cash flows of the obligor, a market based discount rate on the Amended Undertaking would be far higher than 7.9%, and therefore DHI did not receive even the $1.25 billion allegedly

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provided to it.

Analysts at Bank of America Merrill Lynch have stated that the

appropriate discount rate would have to be at a minimum in the mid-teens, which would translate into an approximately $840 million valuation (or $410 million less than $1.25 billion) for the Amended Undertaking. See DYN: Printing Presses Ink New Currency

To Acquire CoalCo, Bank of America Merrill Lynch, Sept. 6, 2011, at 5. 46. In sum, DHI indirectly sold its equity interest in Coal Holdco for

an unsecured and potentially hollow promise by DYN to make certain payments to DHI over a fifteen-year period. An unaffiliated third-party in an arm’s length transaction would never accept such terms. It follows that DGI (and, as a result, DHI) could not have received reasonably equivalent value as part of the Acquisition, for without the Acquisition, DHI would have otherwise been entitled to all of Coal Holdco’s cash flow during this period, instead of only the capped amounts set forth in the Amended Undertaking, as well as the value of the equity option to participate in any future upside in the business. 47. The Purchase Agreement is also littered with additional badges of

DHI’s fraudulent scheme. In an implicit acknowledgement of the fraudulent nature of the transactions at issue, the Purchase Agreement actually includes an unheard of mechanism for fraudulent conveyance claims to be raised by creditors. The Purchase Agreement also purports to, among other things, (i) limit to two years the time period during which the parties can challenge whether DYN provided sufficient value for Coal Holdco, notwithstanding the longer limitations period under New York’s fraudulent conveyance laws and (ii) require that all claims arising from the Acquisition and related transactions be determined by binding arbitration. In effect, the two affiliated parties to this insider-

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orchestrated fraudulent transfer agreed among themselves to modify the otherwise applicable rules with respect to the statute of limitations and subject matter jurisdiction. DYN and DHI presciently included these provisions in the Purchase Agreement for the sole, shameless, but ultimately futile purpose of frustrating future attempts by DHI’s creditors to unwind these transactions. 48. The fraudulent nature of the Acquisition is evident. Transferring

Coal Holdco from a subsidiary of DHI to DYN does not serve any legitimate business or financial purpose. Operationally, nothing will change at Coal Holdco or its subsidiaries as a result of the Acquisition. From the perspective of Coal Holdco, the Acquisition will not allow it to gain access to any new financial or capital market opportunities. Rather, the Acquisition can be understood only as a transparent component of DHI’s broader scheme to defraud its creditors. DHI first severely constrained its own liquidity and available cash flow to an amount insufficient to service its own debt. DHI then

fraudulently conveyed its indirect equity ownership of Coal Holdco to DYN for less than reasonably equivalent value, thereby unjustly enriching DYN’s equity holders, who now will benefit from any potential future upside in the value of Coal Holdco’s assets, whereas they previously could have participated in such a future recovery only after all of DHI’s creditors had first been paid in full. DHI converted from a Delaware corporation to a Delaware LLC on the eve of the Acquisition for the sole purpose of frustrating creditors from pursuing claims against DHI’s management arising from these transactions. Finally, in a step for which the foregoing was an obvious prelude, DHI has now commenced a coercive exchange offer pursuant to which existing Noteholders have been left with the untenable decision to either remain a DHI creditor, with its self-

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imposed insufficient cash flow and depleted asset base, or agree to a steep reduction in principal in exchange for cash and a new note issued by DYN and secured by its acquired equity interest in Coal Holdco. This series of events among affiliated entities cannot be explained by any rational business purpose. They are instead the unambiguous

components of an elaborate plan to defraud and hinder DHI’s creditors. The Coercive Exchange Offer 49. Any doubt about the fraudulent nature of these integrated

transactions is further belied by the recently announced coercive exchange offer (the “Coercive Exchange”). On September 15, 2011, DYN announced a tender offer to purchase up to $1.25 billion of the Notes in exchange for consideration that varies by series, but which, in the aggregate, is approximately (a) $150 million in cash, which is only available to Noteholders that tender exceedingly early, on less than two weeks’ notice, timing that DHI likely chose in an effort to coerce Noteholders to tender their Notes prior to any potential substantive developments with respect to this complaint; and (b) $690 million in new notes (the “Coercive Notes”). The Coercive Notes will be issued by DYN and secured by DYN’s recently-acquired equity interest in Coal Holdco. Having stripped Coal Holdco away from DHI’s creditors, DYN has now given the DHI public creditors the Hobson’s choice of either taking new Coercive Notes, which are to be issued at a fraction of the face amount of the existing Notes but which have access to DHI’s former coal assets, or keeping their existing Notes, which remain the obligations of the DHI entity which has been stripped of much of its value.

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50.

The Coercive Exchange is the culmination, though perhaps not the

final act, in DHI’s ploy to defraud its creditors. DYN’s obligations pursuant to the Amended Undertaking are reduced by $1.678 for every $1.00 of Notes it retires in connection with the Coercive Exchange. This is true even though DYN is purchasing the Notes for substantially less than par. Thus, if the Coercive Exchange is successful and sufficient Noteholders tender, DYN’s payment obligations under the Amended Undertaking will be reduced to zero. DHI’s only remaining asset will then be its indirect equity interest in Gas Holdco, which DHI has already contractually prevented from providing sufficient cash flow to service DHI’s remaining $2.3 billion of Notes after the Coercive Exchange. DYN, on the other hand, will have purchased Coal Holdco,

purportedly valued at $1.25 billion in an insider transaction but in fact worth substantially more, in exchange for approximately $150 million in cash and the issuance of approximately $690 million of Coercive Notes (secured by its acquired equity interest in Coal Holdco). The net result of these fraudulent transactions is that DHI will be unable to satisfy its obligations when they come due and therefore will almost certainly have to file for bankruptcy or require its creditors to accept even greater reductions in principal in future coercive exchange offers, while DYN will have accomplished a brazen theft of potentially hundreds of millions or more in value for its equity holders. 51. DHI thus embarked on a deliberate strategy of stripping itself of

assets, making those assets available only to equity holders, and disabling itself from meeting its obligations to its creditors. There is a phrase for such a strategy: it is “fraudulent transfer,” which the law does not permit under the guise of an affiliate acquisition or otherwise.

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DHI Was or Is Now Insolvent 52. Reasonable pro forma adjustments to DHI’s balance sheet to

reflect the fair saleable value of its assets in light of, among other things, the current economic environment and the price of various commodities, including natural gas, indicate that, if it was not insolvent before the Acquisition, DHI surely is today. 53. DHI was also left with unreasonably small capital as a result of the

Acquisition and will be unable to pay its debts when they come due. Even before the Acquisition and as part of the 2011 Restructuring, DHI contractually prevented its subsidiaries from issuing dividends or otherwise upstreaming cash to DHI in excess of $225 million per year, thereby ensuring that DHI would be unable to satisfy its debts as they come due. After consummation of the Acquisition and assuming the Coercive Exchange is successful, DYN will have zero payment obligations pursuant to the Amended Undertaking, and therefore DHI’s only cash-generating asset available to support its required principal and interest payments on approximately $2.3 billion of the Notes, among other debt obligations, will be its indirect equity interest in Gas Holdco. Yet because of the covenants in the GasCo Term Loan Facility, Gas Holdco is not permitted to upstream sufficient cash to service this substantial indebtedness. 54. A Standard & Poors Bulletin, issued on September 19, 2011,

highlights the harm to creditors resulting from the 2011 Restructuring and Acquisition. The Bulletin notes that “Given this level of proposed repayment and the precarious financial condition of Dynegy, the exchange is coercive and tantamount to default in our view.” S&P also notes that “Upon completion of the offer, DHI will have no assets

other than the Roseton-Danskammer lease, which is hugely unprofitable for Dynegy.”

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Bulletin: Dynegy Inc.'s Exchange Offer Will Have Rating Implications When it Closes, Sept. 19, 2011. 55. The message to DHI’s Noteholders from the 2011 Restructuring

and the Acquisition is abundantly clear: accept significant concessions pursuant to the Coercive Exchange, and any additional future coercive exchange offers that may still be in the offing, or risk the dire consequences, because DHI has made sure that it will not have sufficient assets left to satisfy the Noteholder claims when they are due. This represents not only an unjust inversion of the traditional preference for debt holders over equity holders, but such actions are barred by New York’s Debtor and Creditor Law. DHI Dominated and Controlled DGI 56. As noted above, DGI was formed pursuant to the 2011

Restructuring. DGI is a shell holding company with no operations. At all times relevant to this complaint, DHI dominated, controlled and manipulated DGI for its sole benefit and in furtherance of its fraudulent scheme. DGI was created and exists for the sole purpose of frustrating the ability of DHI’s creditors to seek to unwind or annul the Acquisition as an unlawful fraudulent conveyance or illicit dividend. DGI is therefore an alter ego of DHI and all of the transfers and conveyances discussed herein by DGI should be ascribed to DHI. DHI’s Directors Breached Their Fiduciary Duties 57. DHI has admitted that it is insolvent or at a minimum in the zone

of insolvency. At such point, the DHI’s directors’ fiduciary duties expanded to include

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the interests of creditors. The DHI directors’ approval of the transaction at issue – which was designed to defeat or hinder the interests and rights of both DHI and DHI’s creditors for the benefit of DYN’s equity holders – is a blatant violation of these duties. DHI’s conversion to a limited liability company to effectuate this fraudulent scheme does not shield its directors from the consequences of their actions, but instead represents yet another breach of their fiduciary duties to both DHI and its creditors. Demand Would be Futile 58. Plaintiffs, as creditors of DHI, seek on behalf of DHI monetary

damages for the Director Defendants’ breach of their fiduciary duties. The transaction at issue here could not have been the product of legitimate business judgment as it was based on intentional, reckless and self-interested misconduct. Thus, the Director

Defendants are not, and cannot be presumed to be, capable of exercising independent and disinterested judgment about whether to pursue this action on behalf of DHI’s creditors. 59. In addition, Plaintiffs are unable to make demand upon the

Director Defendants because the DHI that once existed is no longer. DHI has converted from a corporation to a limited liability company. This conversion was done in an effort by the Director Defendants to shield themselves from personal liability for the fraudulent actions described in this complaint, and to frustrate the DHI’s creditors’ ability to bring suit against them. The conversion itself is evidence of the Director Defendants’ self interest and misconduct. 60. futile. Accordingly, demand is excused in these circumstances as being

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FIRST CAUSE OF ACTION (Intentional Fraudulent Conveyance against DHI, DGI and DYN) 61. Plaintiffs repeat the prior allegations of this complaint as if the

same were made part of and fully set forth at length herein. 62. Each of the transactions made pursuant to the Acquisition

constitutes a conveyance as defined under N.Y. D.C.L. § 270. 63. business. 64. DHI was insolvent at the time of the Acquisition, or was rendered The Acquisition was not consummated in the course of usual

insolvent as a result of the Acquisition, and can no longer satisfy its obligations to creditors as they come due. 65. The Acquisition was made in furtherance of the scheme to defraud

DHI’s creditors and therefore had the effect of hindering, delaying and defrauding such creditors. 66. DHI and the Director Defendants acted with an actual intent to

hinder, delay and/or defraud DHI’s creditors, including the Plaintiffs, in consummating the Acquisition. 67. 68. Plaintiffs are creditors of DHI. The Acquisition was fraudulent as to Plaintiffs under N.Y. D.C.L.

§§ 275 and 276, and the Plaintiffs are entitled to have the Acquisition set aside, and any additional obligations of DHI to DGI annulled.

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69.

In addition, Plaintiffs are entitled to recover their reasonable

attorneys’ fees under N.Y. D.C.L. § 276-a as well as punitive damages in an amount to be determined. SECOND CAUSE OF ACTION (Constructive Fraudulent Conveyance against DHI, DGI and DYN) 70. Plaintiffs repeat the prior allegations of this complaint as if the

same were made part of and fully set forth at length herein. 71. Each of the transactions made pursuant to the Acquisition

constitutes a conveyance as defined under N.Y. D.C.L. § 270. 72. DHI was insolvent at the time of the Acquisition, or was rendered

insolvent as a result of the Acquisition, and can no longer satisfy its obligations to creditors as they come due. 73. DHI conveyed one of its most valuable assets, its indirect equity

ownership of Coal Holdco, and received in exchange the Amended Undertaking. 74. The Acquisition was not in good faith, was not for legitimate

business purposes and was made without fair consideration. 75. 76. Plaintiffs are creditors of DHI. The Acquisition was fraudulent as to Plaintiffs under N.Y. D.C.L.

§ 273, and Plaintiffs are entitled to have the Acquisition set aside and any additional obligations of DHI to DGI annulled under N.Y. D.C.L. § 279(c).

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THIRD CAUSE OF ACTION (Constructive Fraudulent Conveyance against DHI, DGI and DYN) 77. Plaintiffs repeat the prior allegations of this complaint as if the

same were made part of and fully set forth at length herein. 78. Each of the transactions made pursuant to the Acquisition

constitutes a conveyance as defined under N.Y. D.C.L. § 270. 79. DHI conveyed one of its most valuable assets, its indirect equity

ownership of Coal Holdco, and received in exchange the Amended Undertaking. 80. Acquisition. 81. The Acquisition was not in good faith, was not for legitimate DHI was left with unreasonably small capital as a result of the

business purposes and was made without fair consideration. 82. 83. Plaintiffs are creditors of DHI. The Acquisition was fraudulent as to Plaintiffs under N.Y. D.C.L.

§ 274, and Plaintiffs are entitled to have the Acquisition set aside and any additional obligations of DHI to DGI annulled under N.Y. D.C.L. § 279(c). FOURTH CAUSE OF ACTION (Unlawful Distribution against DYN and the Director Defendants) 84. Plaintiffs repeat the prior allegations of this complaint as if the

same were made part of and fully set forth at length herein. 85. DHI was insolvent at the time of the Acquisition.

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86.

The indirect transfer by DHI to DYN of DHI’s indirect equity

interest in Coal Holdco was in essence a distribution by DHI to its sole member, DYN. 87. DYN was on notice of the impropriety of the distribution it

received in that it knew DHI did not have a surplus and/or was insolvent or would be rendered insolvent as a result of the Acquisition. 88. The Director Defendants willfully or negligently approved the

distribution despite their knowledge that DHI did not have a surplus and/or was insolvent or would be rendered insolvent as a result of the Acquisition. 89. The Acquisition therefore violated section 18-607(a) of the

Delaware Limited Liability Company Act because it was an impermissible distribution made while DHI was insolvent. The Plaintiffs are therefore entitled to repayment of the unlawful distribution pursuant to section 18-607(b) of the Delaware Limited Liability Company Act. FIFTH CAUSE OF ACTION (Unlawful Dividend against DYN and the Director Defendants) 90. Plaintiffs repeat the prior allegations of this complaint as if the

same were made part of and fully set forth at length herein. 91. 92. DHI was insolvent at the time of the Acquisition. The conversion of DHI from a corporation to a limited liability

company was part of a single, integrated scheme to defraud DHI’s creditors and to frustrate their ability to bring claims against DHI’s directors who were responsible for

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orchestrating these transactions. The conversion should therefore be rescinded and DHI should be treated for purposes of this Complaint as a Delaware corporation. 93. The indirect transfer by DHI to DYN of DHI’s indirect equity

interest in Coal Holdco was in essence a dividend by DHI to its sole shareholder, DYN, made while DHI was insolvent or did not have a surplus. 94. DYN was on notice of the impropriety of the dividend it received

in that it knew DHI did not have a surplus and/or was insolvent or would be rendered insolvent as a result of the Acquisition. 95. The Director Defendants willfully or negligently approved the

dividend despite their knowledge that DHI did not have a surplus and/or was insolvent or would be rendered insolvent as a result of the Acquisition. 96. The Acquisition therefore violated Del. C. §§ 160 and 173 and

Plaintiffs are entitled to repayment of the unlawful dividend pursuant to Del. C. § 174. SIXTH CAUSE OF ACTION (Alter Ego or Corporate Veil Piercing Against DHI and DGI) 97. Plaintiffs repeat the prior allegations of this complaint as if the

same were made part of and fully set forth at length herein. 98. DGI is a shell holding company that was formed pursuant to the

2011 Restructuring for the sole purpose of facilitating the Defendants’ fraudulent scheme.

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99.

DGI does not serve any legitimate business purpose, but rather was

only created by DHI to frustrate the ability of DHI’s creditors to unwind the Acquisition as a fraudulent conveyance. 100. At all relevant times DHI controlled and dominated DGI such that

DGI was an alter ego of DHI. DHI abused its dominion and control over DGI to perpetrate the fraudulent acts described herein. 101. Therefore, DGI is a mere alter ego of DHI and Plaintiffs are

entitled to pierce the corporate veil and assert their causes of action described above against DGI and DHI with respect to the Acquisition and other transactions described above. SEVENTH CAUSE OF ACTION (Breach of Fiduciary Duties of Care, Loyalty and Good Faith Against the Director Defendants As Directors of An Insolvent Corporation) 102. Plaintiffs repeat the prior allegations of this complaint as if the

same were made part of and fully set forth at length herein. 103. directors of DHI. 104. DHI was either rendered insolvent or placed in the zone of At all relevant times, the Director Defendants were officers and/or

insolvency prior to, as a result of or in connection with the Acquisition and remained insolvent at all times from and after the Acquisition closed. 105. During the time that DHI was insolvent, rendered insolvent or

placed in the zone of insolvency, each of the Director Defendants, as directors and/or

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officers of DHI, therefore owed fiduciary duties to DHI and DHI’s creditors and not just DHI’s direct and indirect equity owners. 106. The Director Defendants breached their fiduciary duty to DHI and

DHI’s creditors by allowing consummation of the transactions underlying the Acquisition, knowing that DHI was insolvent, the Acquisition would reduce DHI’s value and was not in the best interests of either DHI or its creditors. 107. As a result of the Director Defendants’ breach of their fiduciary

duties, DHI and DHI’s creditors have been damaged and will be damaged in amount unknown to DHI and DHI’s creditors at present. Plaintiffs, as creditors of DHI, seek on behalf of DHI monetary damages for the Director Defendants’ breaches of their fiduciary duties to DHI in an amount to be determined in this action. WHEREFORE, Plaintiffs demand judgment: (a) setting aside and annulling the Acquisition, the

Assignment, and all related transactions set forth above; (b) determined at trial; (c) costs; (d) deem just and proper. granting such other and further relief as the Court may awarding Plaintiffs their reasonable attorneys’ fees and awarding damages to Plaintiffs in an amount to be

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DATED:

New York, New York September 21, 2011

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP Attorneys for Plaintiffs

By:

/s/ Gerard E. Harper Gerard E. Harper Andrew N. Rosenberg Alice Belisle Eaton Steven C. Herzog 1285 Avenue of the Americas New York, NY 10019-6064 (212) 373-3000

Doc#: US1:7370757v1

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