FILED: NEW YORK COUNTY CLERK 07/11/2013 INDEX NO /2013 NYSCEF DOC. NO. 1 RECEIVED NYSCEF: 07/11/2013

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1 FILED: NEW YORK COUNTY CLERK 07/11/2013 INDEX NO /2013 NYSCEF DOC. NO. 1 RECEIVED NYSCEF: 07/11/2013 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK X JEFFREY L. DOPPELT, derivatively on behalf of ANNALY CAPITAL MANAGEMENT, INC. Index No.: Date Purchased: Plaintiff, - against- WELLINGTON J. DENAHAN; KEVIN G. KEYES; JONATHAN D. GREEN; MICHAEL HAYLON; KEVIN P. BRADY; JOHN A. LAMBIASE; E. WAYNE NORDBERG; DONNELL A. SEGALAS; JOHN H. SCHAEFER; ANNALY MANAGEMENT COMPANY LLC Defendants, SUMMONS Plaintiff designates New York County as the place of trial The Basis of Venue is Defendants Residence and/or Place of Business - and- ANNALY CAPITAL MANAGEMENT, INC., Nominal Defendant X TO THE ABOVE NAMED DEFENDANTS: YOU ARE HEREBY SUMMONED to answer the Complaint in this action and to serve a copy of your Answer or, if the Complaint is not served with this Summons, to serve a Notice of Appearance on plaintiff s attorney within twenty (20) days after service of this Summons, exclusive of the day of service (or within thirty (30) days after the service is complete if this Summons is not personally delivered to you within the State of New York); 1

2 and in case of your failure to appear or answer, judgment will be taken against you by default for the relief demanded in the Complaint. Dated: New York, New York July 11, 2013 SHAHMOON & ELLISEN LLP By: /s/ Carol S. Shahmoon Carol S. Shahmoon Hays Ellisen Attorneys for Plaintiff JEFFREY L. DOPPELT 370 Lexington Avenue 24th Floor New York, New York (646) CHITWOOD HARLEY HARNES LLP By: /s/ Gregory E. Keller Gregory E. Keller Attorneys for Plaintiff JEFFREY L. DOPPELT 1350 Broadway Suite 908 New York, New York (917) To: WELLINGTON J. DENAHAN- NORRIS c/o Annaly Capital Management, Inc Avenue of the Americas Suite 2902 New York, NY KEVIN G. KEYES c/o Annaly Capital Management, Inc Avenue of the Americas Suite 2902 New York, NY

3 ANNALY CAPITAL MANAGEMENT, INC Avenue of the Americas Suite 2902 New York, NY ANNALY MANAGEMENT COMPANY LLC 1211 Avenue of the Americas Suite 2902 New York, NY KEVIN P. BRADY 12 Makatom Drive Cranford, NJ JONATHAN D. GREEN 7 Rumsen Trace Carmel, CA MICHAEL HAYLON 319 Mountain Spring Road Farmington, CT JOHN A. LAMBIASE 1489 NW Sweet Bay Circle Palm City, FL E. WAYNE NORDBERG 520 E. 86 th Street New York, NY JOHN H. SCHAEFER 3 East 77 th Street, Apt. 15C New York, NY DONNELL A. SEGALAS 88 Village Road Green Village, NJ

4 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK X JEFFREY L. DOPPELT, derivatively on behalf of ANNALY CAPITAL MANAGEMENT, INC. - against- Plaintiff, WELLINGTON J. DENAHAN; KEVIN G. KEYES; JONATHAN D. GREEN; MICHAEL HAYLON; KEVIN P. BRADY; JOHN A. LAMBIASE; E. WAYNE NORDBERG; DONNELL A. SEGALAS; JOHN H. SCHAEFER; ANNALY MANAGEMENT COMPANY LLC Index No.: VERIFIED COMPLAINT Jury Trial Demanded Defendants, - and- ANNALY CAPITAL MANAGEMENT, INC., Nominal Defendant X VERIFIED SHAREHOLDER DERIVATIVE COMPLAINT Plaintiff, by his attorneys, makes the following allegations upon information and belief, except as to allegations specifically pertaining to Plaintiff, which are based on personal knowledge. NATURE OF THE ACTION 1. This is a shareholder derivative action on behalf of nominal defendant Annaly Capital Management, Inc. ( Annaly or the Company ) against the members of Annaly s Board of Directors (the Board ), and Annaly Management Company LLC (the

5 Manager ) regarding a transaction (the Externalization ), in which Annaly s management capability is to be transferred to the Manager, an entity owned by Annaly s management, in exchange for no consideration. In connection with the Externalization, the Manager will enter into a management agreement with Annaly (the Management Agreement ) to manage Annaly s assets and receive a fee. 2. Annaly has been a self- advised and self- managed real estate investment trust since it was formed in 1997, which had 147 full- time employees and $133.5 billion in gross assets as of year- end In the Externalization, Annaly will give its entire management capability to the Manager, and all of the employees that Annaly has retained and trained will work for the Manager. This transfer comes after Annaly has paid millions of dollars to its top executives purportedly to retain them and build up its management capability. 3. The Externalization permits the Manager to engage in other investment management business by managing the assets of third parties for a fee. This business of earning investment management fees, a corporate opportunity belonging to Annaly, has been usurped by Annaly s executives. The Management Agreement permits the Manager to be sold, which would allow the Manager s members to recognize liquidation value immediately, as a result of the transfer of Annaly s management capability to the Manager. 4. The value of Annaly s entire management capability is substantial when compared to a 2004 transaction in which Annaly purchased the management capability of Fixed Income Discount Advisory Company ( FIDAC ), an investment advisor that had at the time of purchase, gross assets under management of $13.1 billion and was owned 2

6 by Annaly s executives. In the FIDAC purchase Annaly paid up to $90 million, and thus, using it is a comparable transaction, the value of the management capability transferred to the Manager in the Externalization is approximately $917 million. And using a more recent transaction as a guide, in which Annaly paid at least $42.5 million for Merganser, an investment advisor with assets under management of $4.6 billion, the value of the transfer to the Manager in the Externalization is approximately $1.2 billion. Although the Board was aware that the Company s management capability had substantial value, it made no effort to measure the value conveyed to the Manager or to obtain any consideration for it. The Board did not disclose that it was transferring value to the Manager; nor did it disclose that the value transferred, when using previous transactions as a guide, was in the range of $1 billion. 5. Plaintiff issued a demand (the Demand ) on the Board on June 3, 2013 to remedy the fiduciary breaches and other causes of action. The Demand detailed the factual basis and set forth reasoned analysis, which support the legal claims asserted herein. A true and correct copy of the Demand is attached hereto as Exhibit A. 6. By letter dated June 26, 2013 from Annaly s counsel E. William Bates, II ( Demand Refusal Letter ), Annaly refused to take action in accordance with the Demand. The Demand Refusal Letter does not indicate that an independent committee was convened to consider the Demand; it contains no information about the Board s investigation or substantive findings; it provides no details of the Board s process or methodology in considering the Demand; and it does not respond directly to any of the concerns raised in the Demand. The Demand Refusal Letter, like the Proxy, does not indicate that the Board did any analysis of the value transferred to the Manager or 3

7 explain how the Board can support the conclusion that the transfer was not a gift. The Demand Refusal Letter explains only that before the Board made its decision to approve the Externalization, certain purportedly independent directors allegedly considered the benefits and risks at a number of meetings. A true and correct copy of the Demand Refusal Letter is attached hereto as Exhibit B. 7. The Board s refusal to provide any information about how it analyzed the items in the Demand or to set forth any reasonable methodology to justify making a transfer of corporate assets for no value precludes it from relying on any business judgment presumption in connection with its Demand Refusal Letter. Accordingly, Plaintiff properly brings this shareholder derivative suit on behalf of Annaly for claims of breach of fiduciary duty of good faith, loyalty, care and candor; waste; usurpation of corporate opportunity; unjust enrichment; and aiding and abetting breaches of fiduciary duty. THE PARTIES 8. Plaintiff Jeffrey L. Doppelt ( Doppelt ) is a shareholder of Annaly and has been a shareholder continuously since Doppelt resides in, and is a citizen of, the state of New York, and the County of Nassau. Doppelt holds shares of Annaly that have a fair value in excess of $50, Nominal defendant Annaly Capital Management, Inc. is a Maryland corporation, with its executive office at 1211 Avenue of the Americas, Suite 2902, New York, New York. Annaly became a public company in 1997 and is in the business of purchasing and managing an investment portfolio of mortgage- backed securities. Annaly holds its annual meetings in New York, New York, at which the shareholder vote 4

8 for directors and other matters takes place. Annaly s directors are required to attend annual meetings. Annaly s board of directors and committees of the board hold meetings, and non- employee directors are paid $500 for attendance at each such board or committee meeting (and $250 for any meeting at which the director participates by conference call). Directors are reimbursed for costs and expenses for attending these meetings. 10. Defendant Wellington J. Denahan ( Denahan ) is Chairman of the Board and Chief Executive Officer of Annaly. She was appointed to these positions in November Prior to that, Denahan served as Vice Chairman of the Board, Chief Investment Officer, and Chief Operating Officer. She has been a member of the Board of Directors since Denahan received $25,810,129 in salary and bonus during 2012; $35,009,956 in 2011; $23,034,800 in Her sister is also an employee of the Company and received $4,500,000 in salary and bonus during Defendant Kevin G. Keyes ( Keyes ) is President of Annaly and a member of the Board of Directors. He has been a member of the Board of Directors since Mr. Keyes received $6,990,000 in salary and bonus during 2012; $7,109,956 in 2011; $5,056,191 in Defendant Jonathan D. Green ( Green ) is and has been a member of Annaly s Board of Directors since Defendant Michael Haylon ( Haylon ) is and has been a member of Annaly s Board of Directors since Defendant Kevin P. Brady ( Brady ) is and has been a member of Annaly s Board of Directors since

9 15. Defendant John A. Lambiase ( Lambiase ) is and has been a member of Annaly s Board of Directors since Annaly s definitive proxy, dated April 10, 2013 (the Proxy ) indicates that Lambiase is not independent of management, because his son is an employee who received $5.1 million in salary and bonus for Defendant E. Wayne Nordberg ( Nordberg ) is and has been a member of Annaly s Board of Directors since Defendant Donnell A. Segalas ( Segalas ) is and has been a member of Annaly s Board of Directors since Defendant John H. Schaefer ( Schaefer ) is and has been a member of Annaly s Board of Directors since March Defendant Annaly Management Company LLC is a Delaware limited liability company, with its executive office at 1211 Avenue of the Americas, Suite 2902, New York, New York Annaly Management Company LLC is owned by Annaly s management. The Managing Member of Annaly Management Company LLC is Wellington J. Denahan. The other individual members of the Manager are not disclosed in the Proxy. 20. Defendants Denahan and Keyes are collectively referred to herein as the Management Directors. Defendants Green, Haylon, Brady, Lambiase, Nordberg, Segalas, and Schaefer are collectively referred to herein as the Non- Management Directors. The Management Directors and Non- Management Directors are collectively referred to herein as the Individual Defendants. 6

10 JURISDICTION AND VENUE 21. Annaly is headquartered in New York, and the management of Annaly and all acts associated with its management take place in New York. 22. Venue is proper pursuant to CPLR 503 in that Annaly and the Manager are headquartered in New York, New York, and the acts of the director defendants that form the basis of this action occurred in New York. 23. The Court has personal jurisdiction over all the Defendants pursuant to CPLR 302(a), in that the Manager is headquartered in New York; Annaly is headquartered in New York; Annaly holds its shareholder meetings in New York, which the individual directors are required to attend. The meetings of the Board occur predominantly in New York, and the claims are directly related to business transacted by Annaly in New York. FACTUAL ALLEGATIONS A. Background 24. Annaly operates as a real estate investment trust that generates income from the spread between the interest income on its investment securities, primarily mortgage backed securities, and the cost of borrowing to finance their acquisition. 25. Since 1997, Annaly has been self- managed and self- advised. As of year- end 2012 Annaly had 147 full- time employees and gross assets of $133.5 billion, the bulk of which are invested. Annaly has built up its own investment management capability over the years, paying its top executives millions of dollars purportedly to retain them and to establish and maintain its own internal management capability. 7

11 Annaly s six named officers earned a total of $87.4 million in 2012 and $105.3 million in B. Annaly s Prior Similar Transactions: Purchasing FIDAC and Merganser 26. In 2004 Annaly acquired FIDAC, a registered investment advisor, as a subsidiary. At the time of the purchase, FIDAC managed or supervised approximately $13.1 billion in gross assets on a fee- based discretionary basis, earning investment advisory fees of approximately 10 to15 basis points of the gross assets it managed or supervised. 27. At the time of Annaly s purchase, FIDAC was owned by Annaly s management, including among others, the late Mr. Michael A.J. Farrell (then Annaly s CEO, President and Chairman of the Board), Wellington J. Denahan, Kathryn Fagan, James P. Fortescue, Rose- Marie Lyght, and Kristopher R. Konrad. These individuals (other than Mr. Farrell) are current employees of Annaly, who will become employees of the Manager after the Externalization. 28. Mr. Farrell proposed the FIDAC purchase transaction to the Board. Annaly paid $40.5 million, plus an earn- out up to an additional $49.5 million, to purchase FIDAC from its own employees. 29. In 2008 Annaly acquired Merganser, a fixed income manager and registered investment advisor, as a subsidiary of Annaly. At the time of the acquisition, Merganser had assets under management of $4.6 billion. 30. Annaly paid over $15 million for Merganser, plus an earn- out provision, under which Merganser owners were paid at least an additional $27.5 million ($14.1 million in 2010 and $13.4 million in 2012). 8

12 31. The FIDAC and Merganser transactions are close analogies to the Externalization in that all three transactions involve the transfer of investment management capability to another company. In the case of FIDAC and Merganser, Annaly paid millions of dollars for that transfer, but in the Externalization, the Manager acquires Annaly s investment management business without paying Annaly anything for it. C. Management s Externalization Proposal Terms 32. The Proxy was issued on April 10, 2013 and was used to solicit shareholder votes at the May 23, 2013 meeting to approve our entering into a management agreement with Annaly Management Company LLC, or the Manager, under which the Manager will assume responsibility for our management, and therefore, we will be externally managed. This will result in all members of our management, including all of our executive officers, being employed by the Manager. The Proxy did not offer shareholders the opportunity to vote on the Externalization transaction as a whole, including the transfer of Annaly s entire management capability to the Manager in exchange for no consideration. 33. The Management Agreement provides that Annaly will pay a fee of 1.05% annually of stockholders equity (as defined in the Management Agreement) to the Manager, and that the Manager will be responsible for the selection, purchase and sale of assets for the investment portfolio; recommending alternative forms of capital raising; supervising or financing and hedging activities; and day- to- day management. 34. Following the Externalization, Annaly will have no employees or internal management capabilities. 9

13 35. Although the Manager will acquire Annaly s management capability for nothing, it will use that capability to manage Annaly in exchange for fees of approximately $160 million annually and to seek business opportunities managing other similar investment entities independent of Annaly. 36. The Proxy does not disclose any individual owners of the Manager. It contains only the following description of the ownership structure: Q: Who is the Manager? A: The Manager is Annaly Management Company LLC, a Delaware limited liability company. The Manager is owned by our management. The signatory line of the form of Management Agreement appended to the Proxy as Exhibit 1 indicates that Denahan is the Managing Member of the Manager. 37. The Management Agreement has a one- year term, with automatic renewals. It is terminable without cause provided either party gives 180 days notice to the other party. This means that Annaly s entire management team can terminate, leaving Annaly without the management capability that it built up, at enormous expense, over the years. This termination right creates unfair bargaining leverage for the Manager in which Annaly can be threatened with the loss of its entire management capability on an annual basis. Should Annaly wish to cancel the Management Agreement immediately and without notice, it would likely owe damages to the Manager of approximately six months of fees, or approximately $80 million and would have to replace the management capability that it is giving away in connection with the Externalization 38. Without the Externalization, Annaly s executive officers owe fiduciary duties to the company. By contrast, the new arrangement creates a conflict of interest 10

14 among Annaly s current employees and Annaly, even though those employees would continue to be executive officers of Annaly in their current positions. Thus, the Externalization leaves Annaly with no executives dedicated to Annaly s business exclusively. 39. The Management Agreement permits the Manager to use the management capabilities that it received from the Company to advise other clients, leaving management less time to devote to Annaly and permitting the Manager to earn additional fees, that could have been earned by Annaly instead. 40. The Management Agreement has a very limited non- compete clause, prohibiting the Manager (unless it has Annaly s consent) from advising a REIT whose business strategy involves trading or management of mortgage- backed securities in the geographical regions in which Annaly engages in business. This non- compete imposes few limits on the business opportunities that the Manager can pursue and provides little protection to Annaly from its tough competition. As stated in Annaly s 10- K for the year ended December 31, 2012: We operate in a highly competitive market for investment opportunities, and competition may limit our ability to acquire desirable investments in our target assets and could also affect the pricing of these securities. The 10- K lists a number of non- REIT competitors, including specialty finance companies, public and private funds, commercial finance companies, which the 10- K indicates may put Annaly at a competitive disadvantage and could have a material adverse effect on the business. The Manager is thus free to pursue business opportunities with all of these competitor non- REIT entities, as well as competitor REIT entities that operate in different geographical regions from Annaly. Also, because 11

15 Annaly s asset acquisition strategy may change over time as market conditions change and as we evolve, the non- compete is illusory. 41. The Manager s fee is calculated based on stockholders equity as defined in the Management Agreement, which results in increased compensation when Annaly issues equity securities. Mr. Doppelt has already notified the Board, by letters dated August 9, 2011 and August 1, 2012 that using stockholders equity as a basis for compensating management results in excessive compensation and improperly incentivizes management to issue equity even if that would negatively affect returns. 42. Annaly continues to run an accumulated deficit on its financial statements, and dividends (which have been falling) far exceed earnings, yet Annaly s executives receive multi- million dollar bonuses, based on the stockholders equity compensation calculation. The Proxy acknowledges that compensation based on stockholders equity creates a disconnect between pay and performance: We would be responsible for paying the management fee irrespective of our performance (unless we terminate the management agreement)." 43. Although the Externalization gives the Manager the entirety of Annaly s investment management capability, Annaly appears to bear many costs of running that business such as rent, utilities, equipment, furniture, costs associated with computer software, hardware, and equipment. Annaly is required to reimburse the Manager for those costs over and above the fee that Annaly must pay, causing Annaly to further subsidize the business that it gave to the Manager for nothing. 12

16 D. Purported Reasons For The Transaction and Lack of Candor 44. Although the Board solicited proxies on the Management Agreement, it did not ask shareholders to vote on the Externalization itself. Also, the Proxy failed to disclose a number of material items. It did not disclose that the management capability it transferred to the Manager had inherent value or the magnitude of that value. Nor did it disclose that in two previous transactions in which Annaly purchased investment management capability, Annaly paid millions of dollars for that value. Nor did it disclose that using as a guide, the ratio of consideration to assets under management in those two previous transactions, the value transferred in the Externalization is in the range of $1 billion. Nor did the Proxy disclose the identities of individual owners of the Manager who would be the beneficiaries of that transfer. Nor did the Board disclose that it had the ability to set a cap on compensation without giving away its entire management capability, because the Board is itself responsible for setting executive compensation. Nor did the Board disclose that it could externalize without making the gift of Annaly s entire management capability to the Manager. 45. Most of the purported reasons for the Board s recommendation in favor of the Externalization are based on the same principle that the fee the Manager will charge sets a cap on compensation. The purported savings of the cap is based on the assumption that, in the absence of Externalization, the Board would not exercise its corporate power in accordance with its fiduciary duty to set appropriate bonuses, and as a result such compensation would exceed the cap. This cost- cutting rationale suggests that the Board must tie its own hands, or it cannot trust itself to pay its employees compensation that is competitive but not wasteful. The purported savings 13

17 from the Externalization also assumes that the Manager will not cancel the Management Agreement and renegotiate its fees. 46. The Proxy provides no explanation of why the Board cannot simply resolve to pay no more than a pre- determined total amount of compensation without externalizing and giving away the management capability that Annaly developed over decades. 47. The Proxy does not disclose that externalizing management could be accomplished through a separate subsidiary owned by Annaly or by its shareholders. The Proxy does not disclose why it was necessary to create a significant gift to employees, which the Board did not make any effort to value. The Proxy does not disclose any other alternatives considered by the Board to cap compensation. 48. The Board touted as a benefit of the Externalization greater ability to retain the proven expertise and substantial experience of our executive officers who we believe are critical to our successful performance in the future and a greater anticipated ability to retain and develop executives as part of our executive succession planning. The Board did not explain that it was giving away this proven expertise and the business opportunities associated with it, or that, as a result, Annaly is in the vulnerable position of having no management capability and no executives of its own. 49. The Externalization, by transferring every employee to the Manager, gives those employees bargaining power to act collectively, leaving Annaly exposed to rising fees that it cannot control. Without explaining this risk attributable to the Manager s termination right, the Proxy discloses only that: The management agreement may reduce long- term flexibility to manage operating expense levels. The 14

18 risk posed by the Externalization is not long- term, but could be suffered immediately, and the issue is not only lack of flexibility but the potential for a dramatic rise in fees, with no contractual limit in place. 50. There is no restriction in the Management Agreement precluding the Manager from being sold. Although a sale would terminate the Management Agreement, the Board would be under pressure to consent to the sale in order to retain management services. At the same time, management would realize immediate profit from the sale of this business, even though management paid nothing to acquire it. 51. It appears that an unstated motivation for doing the Externalization is to allow management to avoid scrutiny for indefensible pay practices. Mr. Doppelt s correspondence to the Board raised his concerns about outsized pay. And the most recent say- on- pay vote sent the message to Annaly s directors that their practices are not in Annaly s best interest. Votes against 2012 compensation exceeded votes in favor by a margin of over 2 1/2 to Externalizing Annaly s management precludes shareholders from reviewing compensation practices, and, thus, management has been given ultimate authority to allocate the management fee to pay themselves without transparency and allows management to earn additional compensation from managing assets other than Annaly s. E. Analysis of Procedural and Substantive Fairness 53. The Proxy states that management proposed the Externalization transaction to members of Annaly s Board in December 2012, and that it was approved 15

19 at a March 14, 2013 board meeting by a unanimous vote of Annaly s purportedly independent directors. 54. The Proxy indicates that King & Spalding LLP was engaged to provide legal advice, and Credit Suisse was engaged to provide financial advice. 55. However, Credit Suisse was not engaged to pass upon the fairness of the transaction and did not provide a fairness opinion. As explained in the proxy statement, Credit Suisse was not requested to, and it did not, recommend the specific terms of the proposed management agreement. 56. Credit Suisse did not address the business decision of Annaly to proceed with the proposed externalization, and did not do any investigation of the value of the business or business opportunities that were being transferred to the Manager. 57. Credit Suisse s role was limited to reviewing and reporting on the material terms of certain publicly available management agreements between various externally managed mortgage REITs and their respective external managers. 58. No effort was made by Annaly or its advisors to assess what would be fair terms for an externalization transaction, in which the entire management capability is transferred to an entity owned by another company that is also awarded a management contract to manage gross assets of approximately $133.5 billion. 59. Credit Suisse is not independent of management. Credit Suisse and its affiliates have in the past provided and are currently providing investment banking and other financial services to Annaly and its affiliates. During the past two years, Credit Suisse acted as underwriter on issuances of common and preferred equity and convertible senior notes; entered into repurchase agreements and interest rate swaps 16

20 with Annaly and its affiliates; advised CreXus Investment Corp., an affiliate of Annaly; among other engagements. During 2012, Annaly entered into a Distribution Agency Agreement to sell shares of Annaly common stock through Credit Suisse as sales agent. 60. No effort was made to obtain any value for the transfer of the entire investment management capability of Annaly and a contract to manage more than 100 billion dollars of assets. And no effort was made to assess that value. That value was given away for no consideration to the Manager, which was not disclosed in the Proxy. 61. The value transferred in the Externalization could be immediately liquidated by the members of the Manager when the Manager is sold to a third party. While the Board made no effort to assess the value being transferred to the Manager or obtain any consideration for it, it did recognize that such value existed. According to the Proxy, [t]he independent members of our board of directors and our management had initially agreed that the proceeds of any sale of the Manager would be paid to us. However we subsequently determined based on further advice from certain of our external advisors, that for tax and accounting reasons the proceeds of any sale of the Manager would be paid to the Manager and not us. 62. The Proxy s reference to tax and accounting reasons is opaque and does not provide a justification for unquantified waste - - giving away the Company s management capability in exchange for no consideration. It also does not explain that the Board decided to approve a gift of significant value without gaining an understanding of the value that the Board gave away and without disclosing that amount in the Proxy. Nor does it address why other alternatives that would avoid waste were not considered. 17

21 63. The Proxy admits that: The management agreement was not negotiated on an arms- length basis and the terms, including fees payable, may not be as favorable to us as if it were negotiated with an unaffiliated third party. The Board is obligated to take all reasonable steps to ensure that Annaly is paid fair value in its transactions, which it did not do here. 64. That the Externalization is unfair, unjustly enriches management, and is waste is demonstrated by Annaly s earlier acquisitions of FIDAC and Merganser. FIDAC is roughly one- tenth the size of Annaly in terms of assets under management, and the Company paid management up to $90 million dollars to purchase FIDAC. By that calculation, Annaly s internal investment manager built up over the years at substantial expense to the Company approaches $1 billion. Similarly, using the Merganser transaction as a guide, the value of the transfer to the Manager in the Externalization approximates $1.2 billion. 65. Moreover, the externalization, or transfer of management capability to a separate investment advisory company, with a corresponding contract to manage a company with $133.5 billion in assets, was a corporate opportunity that was usurped from Annaly by management. If externalization of management capability is believed to be a value- enhancing strategy, then it could have and should have been accomplished by externalizing to an Annaly subsidiary, so that Annaly not its management - - could also get the benefit of any additional investment advisory fees that could be generated from other clients. Annaly currently has two investment manager subsidiaries, FIDAC and Merganser, and there is no reason why Annaly s employees could not work for either of those entities or that a third investment advisor subsidiary could not be 18

22 created and possibly spun- off to shareholders. The Board did not consider these or other alternatives to corporate waste. DERIVATIVE AND DEMAND ALLEGATIONS 66. Plaintiff incorporates the above- referenced paragraphs as if fully set forth herein. 67. Plaintiff was a shareholder of Annaly when the Externalization was approved by Annaly s Board, and has owned stock continuously since then. Plaintiff brings this action derivatively on behalf of Annaly, to seek a remedy for harm to Annaly resulting from the Externalization, and associated transfer of its management capability for no consideration. 68. Plaintiff issued the Demand to Annaly s Board of Directors in accordance with Maryland law. 69. Once the Demand was made, Annaly s Board of Directors was required to conduct an investigation into the allegations of the Demand and determine whether the demanded litigation is in the best interests of the corporation. 70. Annaly responded to the Demand by having its counsel deliver the Demand Refusal Letter, which states: The Independent Directors have reviewed the Letter, have considered the demands made in the Letter and have determined that no change in the Management Externalization Proposal or the management agreement is necessary or appropriate and have directed us to so advise you. The Demand Refusal letter notes that the Proxy states that certain purportedly independent directors undertook a detailed analysis of whether Annaly should consider externalizing its 19

23 management and then after holding a number of meetings purportedly decided it was fair, but does not disclose the basis of that decision. 71. Because Annaly refused to take the action requested in the Demand, Plaintiff may bring a demand refused action. 72. In refusing the Demand, Annaly s board did not act independently, in good faith and within the realm of sound business judgment. The Board provided no information about the method, process and self- interest of the decision- makers in refusing demand. There is no presumption that the Board is qualified and independent or followed reasonable procedures, did a thorough investigation based on relevant information, or applied an adequate, appropriate, and principled methodology. That Annaly held a number of board meetings before the Demand was even presented is not sufficient evidence of the Board s procedural and methodological reasonableness in refusing the Demand. 73. The Board s purported review of the Demand, like the Board s process in approving the Externalization is not reliable or methodologically sound. The Board did not use a reasonable methodology, because it addressed the wrong issues. Neither the Proxy nor the Demand Refusal Letter indicates that the Board made any effort at any time to measure the value of the transfer to the Manager or that Annaly obtained any consideration for it. Nor did it inform itself about the corporate opportunity to obtain investment advisory fees from third parties. 74. No fairness opinion was obtained. Credit Suisse was not engaged to ask the right questions whether the Externalization transaction provides a net benefit to Annaly; whether the Externalization transaction is fair to Annaly; what is the fair 20

24 market value of Annaly s investment management business; what business opportunities would accrue to the Manager as a result of the Externalization; whether the compensation cap could be accomplished in a different way that would not result in a transfer for no consideration of Annaly s entire management capability. 75. The selection of Credit Suisse is not reasonable, because Credit Suisse is not independent of management. 76. The transaction was not arms- length and not on terms that could be obtained from an independent third party. 77. The Demand Refusal Letter indicates that the board of directors did nothing in response to the Demand other than review the Doppelt s demand letter. The Demand Refusal Letter contains none of the required information to accord it any deference in regard to Plaintiff s right as a shareholder to bring this litigation. The Demand Refusal Letter does not specify details to support a good faith, independent and procedurally thorough review of the concerns raised in the Demand using a reasonable methodology. Nor does the Demand Refusal Letter indicate substantive findings of the Board or any analysis that would undermine Doppelt s claims of breach of fiduciary duty of due care, loyalty, good faith and candor, usurpation of a corporate opportunity, unjust enrichment and aiding and abetting breaches of fiduciary duty. 78. Because the Demand Refusal Letter does not adequately respond to the Demand, the Board s decision not to act on the Demand is not protected by the business judgment rule. Plaintiff properly brings this shareholder derivative suit on behalf of Annaly. 21

25 herein. FIRST CAUSE OF ACTION Against Individual Defendants for Breach of Fiduciary Duties of Good Faith, Loyalty, Care and Candor 79. Plaintiff incorporates the above- referenced paragraphs as if fully set forth 80. Annaly is incorporated in Maryland, and Maryland corporate law governs standards applicable to shareholder derivative suits for claims of breach of fiduciary duty and waste. Maryland law, Md. Corp. & Assns Code, Section , requires a corporate director to perform his or her duties in good faith, in a manner he or she reasonably believes to be in the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Although a director may rely on information reasonably believed to be reliable and competent in the matters presented, a director is not acting in good faith if he has any knowledge concerning the matter in question which would cause such reliance to be unwarranted. 81. Under Maryland common law, directors also have a duty of loyalty to act to advance the best interests of the corporation above all else. 82. Under Maryland common law, directors and officers of a corporation owe a duty of candor to their shareholders to reveal all facts material to corporate transactions. 83. The Individual Defendants, directors of Annaly, approved the Externalization, which results in the transfer of Annaly s entire management capability to the Manager for no consideration. In doing so, the Individual Defendants made no 22

26 effort to assess the value of what Annaly would transfer to the Manager in the Externalization. 84. The Individual Defendants knew that the Externalization was a transfer of value in exchange for no consideration. In two prior transactions in which Annaly purchased, rather than sold, management capability, it spent millions of dollars for that type of asset. Using as a guide Annaly s purchase of management capability in its acquisition of FIDAC, in which Annaly paid up to $90 million for a manager with assets under management of $13.1 billion, Annaly s transfer to the Manager was worth approximately $917 million. Similarly, using the Merganser transaction as a guide, the value of the transfer to the Manager in the Externalization approximates $1.2 billion. 85. The Individual Defendants failure to assess or inquire into the value transferred to the Manager in the Externalization or to obtain any consideration for it, as well as the decision to give away a corporate opportunity to the Manager, violated their fiduciary duties, because an ordinarily prudent person would not give away value to a third party without even quantifying it and because the duty of loyalty required the Individual Defendants to assess and obtain value for the substantial management capability and corporate opportunity transferred to the Manager. The Individual Defendants knew that Annaly paid substantial consideration to purchase investment management capability, and thus did not reasonably believe that the transfer to the Manager had no value and were grossly negligent and disloyal for permitting the transfer for no consideration. 86. The Proxy admits that the Management Agreement was not negotiated on an arms- length basis and the terms may not be as favorable to Annaly as with an 23

27 unaffiliated third party, even though the Board has an obligation of good faith, loyalty and due care, to take all reasonable steps to ensure that Annaly is paid fair value in all its transactions. It was unreasonable, grossly negligent and disloyal for the Individual Defendants to approve a transaction not conducted on an arms- length basis without obtaining an independent fairness opinion to advance Annaly s interests above all else. 87. The Individual Defendants cannot rely on information provided by Credit Suisse in support of the fairness of the Externalization, because Credit Suisse was not requested to and did not provide a fairness opinion and did not address the business decision of Annaly to proceed with the Externalization. Also, Credit Suisse was not independent of Annaly s management. 88. The Individual Defendants through the Proxy solicited the votes of Annaly s shareholders in favor of the Management Agreement. However, the Proxy did not permit shareholders to vote on the Externalization itself and also failed to disclose a number of material items. The Proxy indicated that the Externalization would serve as a cost- cutting measure by setting a cap on compensation, but did not disclose that the management capability it transferred to the Manager had inherent value that Annaly simply gave away. Nor did it disclose that in two previous transactions in which Annaly purchased investment management capability, Annaly paid millions of dollars for that value. Nor did it disclose that using as a guide, the ratio of consideration to assets under management in those two previous transactions, the value transferred to the Manager in the Externalization is in the range of $1 billion. Nor did it disclose any details about the magnitude of that transfer. Nor did it disclose the value that the owners of the Manager would receive if they immediately sold the Manager. Nor did 24

28 the Proxy disclose the identities of individual owners of the Manager who would be the beneficiary of that transfer or their relative ownership interests in the Manager. The shareholders overwhelmingly voted no on the executive compensation of top executives, but shareholders were not informed that those same top executives would be the beneficiaries of an immense value transfer for no consideration. Nor did the Board disclose that it had the ability to set a cap on compensation without giving away its entire management capability, because the Board is itself responsible for setting executive compensation. Nor did the Board disclose that it could externalize without making the gift of Annaly s entire management capability to the Manager. By failing to disclose these material items, the Individual Defendants have violated their duty of candor to shareholders. 89. The Individual Defendants owe the Company fiduciary obligations, including the duty of due care, loyalty, good faith and candor. The Individual Defendants have violated each of these duties in connection with the Externalization. 90. Annaly and its shareholders have suffered and will continue to suffer harm as a result of these fiduciary breaches. SECOND CAUSE OF ACTION Against the Individual Defendants for Committing Corporate Waste 91. Plaintiff incorporates the above- referenced paragraphs as if fully set forth herein. 92. Directors have a duty to advance the interests of the corporation and must not waste corporate assets. The standard for waste is whether what the 25

29 corporation has received is so inadequate in value that no person of ordinary, sound business judgment would deem it worth that which the corporation has paid. 93. The Individual Defendants, directors of Annaly, approved the Externalization. 94. The Externalization results in the transfer of Annaly s entire management capability to the Manager for no consideration. 95. The Individual Defendants made no effort to assess the value of what Annaly would transfer to the Manager in the Externalization. 96. In two prior transactions in which Annaly purchased, rather than sold, management capability, it spent millions of dollars for that type of asset. Using as a guide Annaly s purchase of management capability in its acquisition of FIDAC, in which Annaly paid up to $90 million for a manager with assets under management of $13.1 billion, Annaly s transfer to the Manager was worth approximately $917 million. Similarly, using the Merganser transaction as a guide, the value of the transfer to the Manager in the Externalization approximates $1.2 billion. Annaly received no consideration in the Externalization for transferring its entire management capability. 97. The Proxy admits that the Management Agreement was not negotiated on an arms- length basis and the terms may not be as favorable to Annaly as with an unaffiliated third party. 98. The failure to obtain adequate value for the transfer of Annaly s management capability and associated Management Agreement is corporate waste. 99. Annaly and its shareholders have suffered and will continue to suffer harm as a result of the Individual Defendants decision to commit waste. 26

30 THIRD CAUSE OF ACTION Against the Individual Defendants for Usurpation of Corporate Opportunity 100. Plaintiff incorporates the above- referenced paragraphs as if fully set forth herein Under Maryland common law, directors and officers have a duty of loyalty to act to advance the best interests of the corporation, and may not usurp a corporate opportunity, or permit a corporate opportunity to be usurped without being adequately informed about it Annaly built up its management capability over a number of years. It paid millions of dollars to each of its top executives to retain this capability. By building a management team, Annaly acquired the ability to engage in investment management for third party investors for a fee. It could have entered that business by externalizing its management into a subsidiary, which could have charged fees for its services. Those fees would have benefited Annaly. In the alternative, Annaly could have spun- off a separate investment management subsidiary to shareholders, and that spun- off subsidiary would have the benefit of income from third party management fees Instead that management capability and the corporate opportunity presented by the associated investment management fee business was usurped by management The board of directors was not informed of the value of that corporate opportunity and did not have information about what benefit that opportunity could have generated for Annaly. Yet the Board allowed the Management Directors to usurp that corporate opportunity about which it was not fully informed. 27

31 105. Annaly and its shareholders have suffered and will continue to suffer harm as a result of the usurpation of corporate opportunity, and a constructive trust should be imposed on any financial benefit the Manager and/or the Management Directors obtains by managing third party investments. FOURTH CAUSE OF ACTION Against Management Directors and the Manager for Unjust Enrichment 106. Plaintiff incorporates the above- referenced paragraphs as if fully set forth herein The elements of unjust enrichment are (1) plaintiff confers a benefit upon the defendant; (2) defendant will obtain the benefit without adequately compensating plaintiff therefor; and (3) equity and good conscience require that defendant make restitution Annaly conferred a benefit on the Manager by transferring its management capability for no consideration The Manager thereby obtained the benefit of the management capability without compensating Annaly therefor. Denahan, Managing Member of Manager, knew of the benefit, because she was a participant in an earlier transaction with FIDAC, in which Annaly purchased management capability for up to $90 million It would be inequitable to Annaly for the Manager to retain the benefit, without paying restitution or value in return As a result of the transfer of Annaly s management capability to the Manager in exchange for no consideration, the Manager and the Management Directors have been unjustly enriched at the expense of Annaly. 28

32 112. All benefits of the Manager and Management Directors as a result of the Externalization should be ordered to be returned to Annaly, and the Manager and the Management Directors should be required to pay for the benefit conferred upon them. FIFTH CAUSE OF ACTION Against Manager for Aiding and Abetting Fiduciary Breaches 113. Plaintiff incorporates the above- referenced paragraphs as if fully set forth herein A person can be liable for aiding and abetting a fiduciary breach if (1) there is a breach by a fiduciary of obligations to another; (2) the defendant knowingly induced or participated in the breach; and (3) plaintiff suffered damage as a result of the breach The Individual Defendants are liable for breach of fiduciary duty by approving and executing the Externalization The Manager entered into the Management Agreement and participated in the Externalization, aiding and abetting the Individual Defendants in breaching their fiduciary duties. Denahan, Managing Member of Manager, knew that the Externalization was a transfer for no value. She was a participant in an earlier transaction with FIDAC, in which Annaly purchased management capability for up to $90 million. Denahan was among the individuals who approached Annaly s directors to instigate the Externalization and the associated fiduciary breaches to the benefit of the Manager and to the detriment of Annaly The Externalization is the product of fiduciary breaches and the Manager knowingly aided and abetted those breaches. 29

33 118. Annaly and its shareholders have suffered and will continue to suffer harm as a result of the Manager s conduct in aiding and abetting the fiduciary breaches. PRAYER FOR RELIEF WHEREFORE, Plaintiff, on his own behalf and derivatively on behalf of Annaly, hereby demands judgment as follows: A. Determining that the suit is a proper derivative action and certifying the Plaintiff as the appropriate representative of Annaly for said action; B. Declaring that the Individual Defendants have breached their fiduciary duties of due care, loyalty, good faith and candor, have committed waste, and are liable for usurpation of corporate opportunity in connection with the Externalization; C. Declaring that each of the Management Directors and the Manager has been unjustly enriched by the Externalization; D. Declaring that the Manager has aided and abetted fiduciary breaches; E. Rescinding the Externalization, including all agreements executed in connection with the Externalization; F. Enjoining consummation of the Externalization and further actions of waste and breach of fiduciary duty; G. Enjoining the Manager from acting as manager to third party clients and earning fees from such third party clients; H. Imposing a constructive trust on any fees earned by the Manager from Annaly or any third party client engagements; 30

34 I. Awarding rescissionary and other damages, together with pre- and post- judgment interest to Annaly; J. Awarding Plaintiff the costs and disbursements of the action, including reasonable attorneys fees, accountants and experts fees, costs and expenses; and K. Granting such other and further relief as the Court deems just and proper. Dated: New York, New York July 11, 2013 Respectfully submitted, SHAHMOON & ELLISEN LLP By: /s/ Carol S. Shahmoon Carol S. Shahmoon Hays Ellisen Attorneys for Plaintiff JEFFREY L. DOPPELT 370 Lexington Avenue 24th Floor New York, New York (646) CHITWOOD HARLEY HARNES LLP By: /s/ Gregory E. Keller Gregory E. Keller Attorneys for Plaintiff JEFFREY L. DOPPELT 1350 Broadway Suite 908 New York, New York (917)

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