CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 1 of 23 UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA

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1 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 1 of 23 UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA R.J. ZAYED, IN HIS CAPACITY AS COURT- APPOINTED RECEIVER FOR TREVOR G. COOK, ET AL., Case No. ll-cv-oi042 SRNIFLN Petitioner, vs. DA VID BUYSSE, STEVEN AND PAMELA CHENEY, WALTERDEFIEL, JOHN DZIK, TERRY FRAHM, STEVEN AND JENENE FREDELL, WILLIAM HARRIS, MICHAEL HEISE, MICHAEL AND CYNTHIA HILLESHEIM, LARRY HOPFENSPIRGER, STEVEN KAUTZMAN, JAMES MCINTOSH, GEORGE AND KAREN MORIS SET, AND REYNOLD SUNDSTROM, AND DOT ANDERSON, Respondents. EXPERT REPORT OF STEVEN M. ADAMS I. Retention 1. I have been retained by Mohrman & Kaardal, P.A., counsel for Respondents Steven and Pamela Cheney, David Buysse, Walter Defiel, Steven and Jenene Fredell, Michael and Jennifer Heise, Michael and Cynthia Hillesheim, Larry Hopfenspirger, Steven Kautzman, James McIntosh, George and Karen Morisset, Terry Frahm, and Reynold and Judith Sundstrom (collectively, the "Lender Respondents") in

2 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 2 of 23 connection with the above-captioned action. I have been retained to provide an expert opinion as to whether certain (i) representations made by or on behalf of entities with which Trevor Cook ("Cook") was involved (the "Cook Entities") to certain of the Lender Respondents; (ii) account-opening documents employed by the Cook Entities to open accounts for certain of the Lender Respondents; or (iii) facts available to the Lender Respondents, should have put a reasonable investor (e.g. the Lender Respondents) objectively on notice of the fraud or insolvency of the Cook Entities. 2. In preparing my report, I relied upon my education and experience in the areas of investment management, returns on investment and the formation and structure of investment funds. In addition, Exhibit 2 contains a list of the materials I considered in preparing this report. 3. I am being compensated at a rate of$500 per hour for my independent review and analysis provided in this case, including any testimony. 4. My work on this matter is ongoing, and my opinions are subject to revision based on new information (including expert reports or testimony), which subsequently may be provided to (or obtained by) me. 5. I was previously engaged as an expert witness in Board o/trustees, Sheet Metal Workers Pension Fund, et al. v. Palladium Equity Partners, LLC, et at., No Lwas engaged by counsel for Palladium. I prepared an expert report in the matter. However, the matter settled prior to my providing any oral testimony either at a deposition or trial. 2

3 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 3 of 23 II. Qualifications 6. I have acted as Senior Advisor to Wayzata Partners ("Wayzata") an investment fund manger located in Wayzata, Minnesota with over $5 billion under management. Presently, I serve as the Chairman of the Board of Directors of two portfolio companies controlled by Wayzata: Special Devices, Inc. headquartered in Mesa, Arizona and Arrow Sheds Holdings, LLC headquartered in Wayne, New Jersey. I previously was a founding partner and General Counsel to Wayzata. Prior to joining Wayzata, I was an Investment Principal with a predecessor to Wayzata, Cargill Financial Services Corporation ("CFSC"), performing essentially the same functions which I performed for Wayzata. 7. At Wayzata and CFSC, I structured and participated in the offering of over ten separate private equity funds and hedge funds fonned over the course of twelve years. In connection with these offerings, I met with prospective investors, both institutions and individuals. I participated in the drafting of offering documents explaining the investment strategies, rate of return expectations and historical investment performance of these funds. Additionally, I participated in numerous meetings, both in person and telephonically, with prospective investors to answer their questions on these matters. I participated in the drafting of the documents necessary to open an investment in these funds and participated in the review of documents completed by investors. I negotiated the acquisition and disposition of numerous portfolio companies and was the lead partner in charge of investments in several portfolio companies. I participated in the process of selecting investments for the funds, including analyses of prospective 3

4 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 4 of 23 returns on investment. I led the bankruptcy reorganization involvement of Wayzata and CFSC in many investments in distressed companies. In my role as Senior Advisor, I have advised Wayzata on fund structure and disclosure matters as well as acquisitions and dispositions of portfolio companies and bankruptcy reorganization matters. 8. Since 2007, I have been an Adjunct Professor of Law at the University of St. Thomas School of Law in Minneapolis, Minnesota. I teach Mergers and Acquisiti ons. 9. In addition to my present Board of Director Chairmanships mentioned above, I have previously served on the Boards of Directors of several companies. From 2002 to 2004, I was a director of WPO Shipholding Limited, a Hong Kong entity involved in international trade. From 2003 to 2005, I was a director of Norse Merchant Group Limited ("Norse Merchant"), a British entity involving in international shipping and logistics. Norse Merchant was a portfolio company of Wayzata created through the conversion of secured bonds into post-reorganization equity in a United Kingdom creditors' voluntary arrangement. This was the first creditors' voluntary arrangement in the UK converting a large public debt into reorganized equity. 10. I have participated in devising foreign exchange trading strategies to hedge the exposure ofcfsc and Wayzata investment funds to the fluctuation of foreign currencies. These currency transactions were of a magnitude far larger than the largest currency transaction purportedly made on behalf of the Lender Respondents. For example, Norse Merchant derived revenues in British Pounds and Euros. A Wayzata investment fund controlled Norse Merchant and all the fund's investors contributed their 4

5 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 5 of 23 fund capital in U.S. Dollars and required that all distributions be made to them in U.S. Dollars. To the extent Norse Merchant would be paying dividends to the fund, they would be paying them in the Pounds and/or Euros they generated in their business. When the fund sold Norse Merchant to a buyer, the consideration would likely be in Pounds or Euros (as it happened, the buyer paid partially in Pounds and partially in Euros). I participated in creating on-going foreign exchange trades designed to stabilize the Dollar value of any Pounds or Euros the fund might have, or expected to, receive in the future, and limit the impact of fluctuations in foreign exchange rates on such Dollar values. Since the investments in Norse Merchant were not levered, the currency hedges were not levered, as will be discussed below. 11. My curriculum vitae is attached hereto as Exhibit 1. III. Representations Regarding Rates of Return 12. Certain representations were made to the Lender Respondents regarding the rate of return they should expect for their respective investments in demand notes issued by the Cook Entities. Certain of the Lender Respondents were told that they should expect a 10% rate of return (see Heise deposition pp ; Buysse deposition p. 11; Sundstrom deposition p. 61). Others were told that they should expect a 10.5% rate of return (see Terry Frahm deposition p. 244; Steven Fredell deposition p. 41). Others were told that they should receive between 10% and 11 % on their investments in demand notes (see Kautzman deposition p. 31). Certain of these same and other investors were told that a rate of return of 12% would be paid on their investment in demand notes 5

6 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 6 of 23 made by the Cook Entities (see Terry Frahm deposition pp. 47, 226; Steven Fredell deposition p. 50; Sundstrom deposition p. 63; Steven Cheney deposition p. 51; Federal Funds Income Advantage marketing materials dated February 16,2007, cover page; UBS Diversified Capital Guaranteed Note Series Subscription Form). In summary, the representations made to the Lender Respondents were that they could expect to receive between 10% and 12% per annum on their investment in demand notes made by the Cook Entities. 13. The investment strategy that was the basis of the returns on the demand notes offered to the Lender Respondents by the Cook Entities was one of foreign exchange trading (see Federal Funds Income Advantage marketing materials dated February 16,2007, p. 3; marketing material provided to certain Lender Respondents entitled "Currencies - the emergence of a new asset class;" General Business Terms of the UBS Diversified Client Application Form; UBS Diversified Capital Guaranteed Note Series Subscription Form; The Oxford Global Advisor newsletter dated August 2008; Heise deposition pp. 32, 111; Frahm deposition p. 29; Buysse deposition p. 44; Steven Cheney deposition p. 32). Thus, the representation made to the Lender Respondents was that the Cook entities would achieve these indicated rates of return by investing in a foreign exchange trading strategy. 14. Foreign exchange trading is conducted in electronic markets involving all of the free-floating currencies of the world. It is a massive market, with an average daily turnover of at least $1.2 trillion (see Exhibit 2, item 6, p. 5), much larger than the daily volume of the u.s. stock market. Many participants in the foreign exchange market seek 6

7 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 7 of 23 something other than profit, for example expediting trade and service payments across borders and hedging exposure to revenues or incomes in a foreign currency. Others, such as the Cook entities purported to do, seek profits by buying and selling currencies. This can be done in a similar manner to stocks by selling positions for more than one paid for them. Another way to seek profits in the foreign exchange market is by employing variants of the so-called "carry trade," which consists of borrowing (or selling short) currencies with low interest rates and purchasing (or going long) instruments denominated in currencies where higher interest rates are available. These types of trades are typically levered and involve high sensitivity to market movements. 15. For a reasonable investor in assessing the reasonableness of an indicated rate of return of between 10% and 12% to be received employing a foreign exchange trading strategy, historical returns obtained by such a strategy should be examined. Because of the barriers to entry for the average nonprofessional investor to participate in foreign exchange trading, many of the Lender Respondents would have experienced great difficulty in finding historical returns. To the extent that an ordinary reasonable investor would investigate historical returns of foreign exchange trading strategy, the results of the inquiry are discussed below. 16. In the first and second editions of his work on foreign exchange trading, Dr. Rai Xin indicates that historical return data for foreign exchange trading managers is scarce. In his analysis of performance, he employs indices developed and published by Parker Global Strategies ("PGS") and notes the claim by PGS that they are the first to develop indices to measure the performance skill of foreign exchange asset managers 7

8 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 8 of 23 (see Exhibit 2, Item 7, pp , 135). 17. The primary index published by PGS is the Parker Blacktree Currency Index ("PBCI") (see Exhibit 2, Item 8). The PBCI is designed to help investors determine the performance of specialist foreign exchange managers together with the factors that drive returns in the foreign exchange market. The PBCI is comprised of two sub-indices, the Currency Managers Index ("CMI") and the Investment Strategies Index ("lsi"). The CMI is weighted 65% and the lsi is weighted 35% in the composition of the PBCI. The CMI is compiled by PGS and represents the performance of at least 19 separate specialist foreign exchange managers with over 80 separate currency investment programs. The lsi is compiled by Blacktree Investment Partners LLP and measures the performance of a set of rules-based fundamental and technical investment strategies developed by Blacktree employing macro-economic analysis and behavioral logic. These are critical strategies of the type which would be employed by foreign exchange managers to capture returns in the currency markets. 18. The PBCI is publicly available on the subscription-based Bloomberg electronic news service at PBCI<GO> (see Exhibit 2, Item 10). Return information begins in June The PBCI returns for the calendar years are as follows: % % % % % 8

9 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 9 of % % 19. The PBCI returns are net of expected transactions costs and fees and are unleveraged (see Exhibit 2, Item 8). Thus, to the extent they are net of costs and fees they are directly comparable to the returns offered to the Lender Respondents, which would also be net of transactions costs and fees. The investments offered to the Lender Respondents, however, were described as levered 2.7 times (see the UBS Subscription Form, as defined below). Thus, in order to compare the PBCI returns head-to-head with the returns offered to the Lender Respondents, the PBCI results should have 2.7 times leverage applied to them. 20. In assessing the reasonableness of the return offered by the Cook Entities, it is appropriate to examine the return infonnation available at the time of their respective decisions to make an initial investment in demand notes supported by the currency trading platform of the Cook Entities. The earliest initial investment of the Lender Respondents was Hillesheim on June 18, 2007 and the latest was McIntosh on August 22, 2008 (see Exhibit 2, Item 5). The average (unlevered) return on the PBCI for the five years ending December 31,2006 (which would be the latest results available before deciding to invest in 2007) is 7.96%. The average (unlevered) return on the PBCI for the six years ended December 31,2007 (which would be the latest results available before deciding to invest in 2008) is 8.34%. 21. A reasonable investor examining expected returns on a foreign exchange trading strategy would look to indicators of returns achieved by managers employing this 9

10 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 10 of 23 strategy, the leading such indicator being the PBCI. An investor examining the PBCI during 2007 would see that the strategy had produced an average return of 7.96% over the preceding five years, a return of 4.48% for the immediately preceding calendar year and a high return of 13.46% in the year 2003 (all figures unlevered). An investor examining the PBCI during 2008 would see that the strategy had produced an average return of 8.34% over the preceding six years, a return of 10.25% for the immediately preceding calendar year and a high return of 13.46% in the year 2003 (all figures unlevered). 22. In order to directly compare the PBCI results to the returns offered to the Lender Respondents, however, one must apply the indicated leverage of2.7 times. Leverage of2.7 times is equivalent to 27% equity (or in this case, subordinated notes) and 73% debt. In my opinion, it is reasonable (and probably conservative) to assume that during 2007, an investment manager could obtain interest on 73% debt financing of an investment portfolio at a rate of between 5 and 6 percent. Assuming such leverage pricing and unlevered returns on the foreign exchange portfolio of7.96% (five years PBCI ending 2007) or 8.34% (six years PBCI ending 2008) results in the following levered returns available to the foreign exchange manager employing such leverage: Levered returns on equity by cost of leverage and portfolio return. 7.96% 5% 15.96% 6% 13.26% 8.34% 17.37% 14.67% Thus, it would be reasonable to expect that the average foreign exchange manager could 10

11 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 11 of 23 produce a 2.7 times levered return on equity investment of between 13.26% and 17.37% for the preceding six year time period. In fact, one of the Lender Respondents who directly questioned Cook believed that the levered portfolio should be expected to produce a return of 15% (a figure which would have been virtually identical to the mean levered currency trading returns which could have been achieved during this time period) and Cook was paying the Lender Respondents 12%, the difference being earnings for the Cook Entities (see Steven Cheney deposition p. 124). 23. In evaluating an investment in a foreign exchange trading strategy, a reasonable investor would discover that the returns from foreign exchange trading are not correlated with equity market returns. In fact, the correlation of the PBCI with the S&P 500 index of broad equity market returns is only 0.07 over the preceding seven years (see Exhibit 2, Item 9). A correlation that low means that there is essentially no association of returns from the two strategies. As one of the Lender Respondents recognized, currency investing and stock markets are "two completely different things," (see Steven Cheney deposition p. 37). During my review of the deposition transcripts of many Lender Respondents, it became apparent that many of them looked at currency trading as an alternative trading strategy to the "then collapsing" equity markets. Because of this complete lack of correlation between currency trading and the equity markets, in periods of declining stock market returns (and at any time) an investment in foreign exchange trading is a logical diversification to reduce exposure to the equity markets. 11

12 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 12 of 23 IV. Account opening documents employed by the Cook Entities A. UBS Diversified Client Application Form 24. Part 1 of the UBS Diversified Client Application Form (the "UBS Form") seeks general client information such as address and contact information as well as social security numbers. Social security numbers would be requested for tax reporting purposes. Part 2 of the UBS Form seeks information regarding Investor experience. This could serve to demonstrate that the advisor/manager has sought information to determine that an account, strategy or investment is suitable for a particular investor. Part 3 of the UBS Form seeks information on annual income and net worth. Such information could be used as an aid to a determination of whether a particular investor qualifies as an "accredited investor" for purposes of federal securities law. It could also be used for compliance purposes to establish suitability of investments. Parts 4 and 5 of the UBS Form relate to corporate clients, so are not relevant for the Lender Respondents. In any case, they contain nothing unusual. 25. The instructions for completion of the UBS Form require that individual clients submit a copy of their passport and/or government issued photo ID. This information could be required for compliance with anti-money laundering rules and regulations. 26. Part 6 of the UBS Form contains confirmations to be attested to by client signature. These confirmations are not unusual and include statements affirming that the client has read the product information material and that the investment amount has been chosen by the client. Part 6 also incorporates the General Business Terms. The General 12

13 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 13 of 23 Business Terms are an agreement authorizing Oxford PCG, LLC to enter into discretionary foreign exchange trades on behalf of the client. They allow co-mingling of the client's funds with other client funds. Such co-mingling is much easier for trading and accounting and is a standard practice of pooled investment vehicles such as mutual funds, private equity funds and hedge funds. They allow leverage up to 10:1 and contain limits on the risk exposure of any given trade and all combined open positions. Only certain currencies are permitted for trades in the account. Furthermore, if there is a loss of20% or more of the principal balance of the account, all trading shall cease unless authorized by the client in writing. 27. The UBS Form and its incorporated General Business Terms contain no material which would put a reasonable investor on notice of fraud or insolvency. B. Crown Forex Client Information Form 28. The Crown Forex Customer Trading Agreement and Customer Order AuthorizationlLimited Power of Attorney form (the "Crown Forex Agreements") establish a foreign exchange trading account and authorize an agent to place orders for trades in the account. The example ofthe Crown Forex Agreements I reviewed was blank in the agent designation space, but presumably would be employed for an investor to authorize one of the Cook Entities as agent to place foreign exchange trades. The Crown Forex Agreements require employment, income and net worth information. Again, this could be used to establish suitability of the account for the investor. Also, it requires the designation of a single bank account and states that all transfers into the account and payments out of the account will be done with this one designated account. 13

14 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 14 of 23 The agreement states that this information is required to comply with anti-money laundering regulations, which is plausible. 29. The Crown Forex Agreements require four specimen signatures. I have not seen that before and the purpose is not clear. The agreement provides that Crown Forex may close the account "at any time and without any prior notice" (p. 8). In addition, if the account has been inactive for more than one month, it will be closed without "any prior notice" to the customer (p. 9). The agreement also provides that Crown Forex has the authority to liquidate positions if the customer does not promptly comply with a request for additional funds and that the customer will be liable for any resulting deficit in the account (p. 10). None of these provisions would be an indicator of fraud or insolvency. 30. The limited power of attorney contains terms which protect Crown Forex in relying on the instructions of the agent. It also provides that any withdrawals or payments shall be made only to the customer opening the account. 31. The Crown F orex Agreements contain no material which would put a reasonable investor on notice of fraud or insolvency. C. Entrust Group Application materials 32. The Entrust Group Application materials (the "Entrust Forms") constitute an application to open an IRA account and associated documents. The Entrust Forms request contact information; selection of means of funding the account; designation of beneficiaries; a request for information on how the client heard about Entrust; and consent of spouse. The Entrust Forms also include an appointment of custodian; 14

15 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 15 of 23 acknowledgment of receipt of certain disclosures and documents; an assumption of responsibility for tax consequences; instructions to the custodian; assumption of responsibility for the investments in the account; agreement to bear the litigation expenses of the custodian and/or administrator; and a release of liability. 33. Other elements of the Entrust Forms include simple transfer and rollover forms and a selection of fee option. In addition, Ryan Moeller ofthe Cook Entities is designated as an interested person to receive information about the account. This is logical in connection with opening an investment account with the Cook Entities. Additionally, the Entrust Forms comprise buy direction letters to invest account assets with Crown Forex and directions to establish foreign exchange-related accounts. Finally, the Entrust Forms include disclosures regarding certain rules applicable to IRA accounts. 34. Prior to employing Entrust, the Cook Entities used Millennium Trust Company. The Millenium Trust deposit and direction forms are essentially similar to the Entrust forms and for purposes of this opinion, are intended to be included in the definition of the "Entrust Forms." 35. The Entrust Forms contain no material which would put a reasonable investor on notice of fraud or insolvency. D. UBS Diversified Capital Guaranteed Note Series Subscription Form 36. The UBS Diversified Capital Guaranteed Note Series Subscription Form (the "UBS Subscription Form") contains a commitment to invest in the UBS Diversified Capital Guaranteed Notes (the "Notes") and a summary of certain terms of the Notes. It 15

16 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 16 of 23 indicates that the Notes have a term of four years and that they will have an annual interest coupon of 12% credited monthly at 1 %. Further, the "Capital Yield Level" is indicated to adjust every 12 months at 2.7 times (the amount ofleverage) the "largest spread less 1.5 basis points." In addition, "should interest rate spreads collapse the locked in period capital yield will be Fed Funds %." 37. The UBS Subscription Form indicates that there will be "a minimum redemption value at maturity of 100%" and a "Guaranteed Capital Level" of"100%." These statements should be read as equivalent to a statement that the investment is a loan and is guaranteed to be paid back at maturity. It is reasonable for an investor to expect that a loan will be paid off 100% at maturity. 38. The UBS Subscription Form contains no material which would put a reasonable investor on notice of fraud or insolvency. E. Oxford Global Advisors Management Agreement 39. The Oxford Global Advisors Management Agreement (the "Oxford Agreement") authorizes Oxford Global Advisors (presumed to be part of the Cook entities) to conduct buy and sell orders and make trades in a foreign exchange trading account intended to be established with a third party, such as Crown Forex. The Oxford Agreement allows withdrawals from the cash balance of the account by the client customer upon prior notice to Oxford Global. 40. The Oxford Agreement contains no material which would put a reasonable investor on notice of fraud or insolvency. 16

17 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 17 of 23 V. Certain Facts available to the Lender Respondents at Account Opening 41. Certain of the Lender Respondents did no research or investigation, or at most cursory investigation, before investing with the Cook Entities (see Heise deposition pp ; Sundstrom deposition pp ). Generally, the Lender Respondents were motivated by their understanding that other investors who they respected and/or friends of theirs were making investments with the Cook Entities (see Heise deposition pp. 38 ("Steve Cheney") and 54 ("people I respected"); Steven Fredell deposition p. 196 ("Bill Harris"); Kautzman deposition p. 106 ("Cliff Berg... just his reputation"); Sundstrom deposition pp (Cheney, Kautzman, Heise and Berg). 42. Literature on the psychology of investment recognizes the phenomenon of the herd instinct in investing behavior (see Exhibit 2, Item 11, pp ; Exhibit 2, Item 12, pp. 8-31; Exhibit 2, Item 13). To quote a recent doctoral dissertation on the subject: "Choices are made everyday. During the decision process, we rely on some preset and established information (signal) which provides the consequences of selecting each alternative. Gathering information and analyzing the payoff of different available options, however, can be time-consuming and costly. Attempting to avoid or mitigate this burdensome process, apart from our private signal, we are tempted to take use of the observable actions of previous agents who faced a similar decision scenario to support our own choice" (see Exhibit 2, Item 12, p. 9). This is especially the case where prior respected individuals have made the decision to invest and the decision makers are riskaverse (such as the Lender Respondents): "when the players become increasingly riskaverse, the likelihood to instigate an informational cascade "moves" to earlier decision 17

18 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 18 of 23 makers in the sequential selection process. Thus, when individuals are cautious and conservative, previous players could trigger a bandwagon with a significant likelihood and reinforce the statement that early decision makers have a substantial influence on convergent mass behavior when individuals have risk-averse preferences" (see Exhibit 2, Item 12, p. 24). In layman's terms, the more conservative the investor, the more likely they are to follow the example of someone they trust and respect. From my review of the deposition transcripts, many of the Lender Respondents consider themselves conservative investors. In my own experience with professional investors, I have observed investments made where the decisions of respected members of the industry are directly followed by decision makers selecting the same investment based in large part on the prior decision by "respected members of the industry." 43. Given this accepted understanding of the psychology of investment decision making, it would not be unusual to observe a set of investors, such as the Lender Respondents, making investment decisions on the basis of observing the investment decisions of individuals and friends who are respected for their investing acumen. This is particularly the case where the investors are not professionals and are risk-averse, such as the Lender Respondents. Moreover, as set forth above, the fact that underlying performance information regarding currency trading is difficult to obtain makes this type of investment decision making even more likely for those engaged in the currency trading. 44. The type of due diligence a reasonable investor could perform on the Cook Entities could include, for instance a litigation search to seek evidence of any bankruptcy 18

19 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 19 of 23 or concerning litigation involving the Cook Entities. Had they done such a search, they would not have found any evidence of bankruptcy or litigation affecting the Cook Entities. (See Exhibit 2, Item 15). At the time of the initial investment and through the period when the Lender Respondents received a distribution of their funds, there were no litigation cases affecting Trevor Cook or Oxford which would have given notice of fraud or insolvency. They could have searched the broker and investment adviser databases through the SEC website. To my knowledge, however, the Cook Entities were not registered with the SEC as either brokers or investment advisers (nor would it appear that they were required to register with the SEC). Lacking such registration, the Cook Entities would not have appeared in these databases. Thus, the facts reasonably available through investigation to the Lender Respondents at the time of their initial investment to the time when they received distributions of their funds would not have given a reasonable investor notice of fraud or insolvency of the Cook Entities. VI. Statements and Monitoring during the Investment Period 45. The Lender Respondents either (i) received statements in the mail on a monthly basis describing their investments with the Cook Entities (see Buysse deposition pp ; Sundstrom deposition pp , ); (ii) reviewed online accounts on a regular basis to monitor their investments with the Cook Entities (see Heise deposition pp ; Terry Frahm deposition p. 261); or (iii) received monthly checks with their interest payment (see Steven Cheney deposition pp , ). Availability of statements and consistent receipt of interest would be incidental to 19

20 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 20 of 23 normal nonfraudulent investments and thus would not have indicated to a reasonable investor that the Cook Entities were engaged in a fraud. VII. Return of Investment Circumstances 46. The Lender Respondents received a return of their investment in the Cook Entities in four different circumstances. First, at least one of the Lender Respondents (see Terry Frahm deposition pp ) determined that the time had come to liquidate his investment in the foreign exchange trading strategy and move back into the stock market. He spoke to Cook, who told him that performance in the foreign exchange strategy was weakening. Also, his accountant infonned him that the gains from his investment with the Cook Entities would be taxed at ordinary income rates rather than the lower capital gains rates he had expected. Second, at least one of the Lender Respondents (see Steven Cheney depositionpp , ) was in direct communications with Cook, who told him that other companies which were part of the Oxford Group "had an issue" or problem and that Trevor Cook was planning on leaving Oxford and joining a different finn (Schwab). Under these circumstances, he asked to have his investment in the Cook Entities liquidated. Third, some of the Lender Respondents (for example, see Buysse deposition pp. l3-l4) received a call from Cliff Berg, who made a statement to them similar to "the fund is no longer accepting deposits, and we are closing the account." Under these circumstances, they received a check or checks liquidating their account as they had been told. Fourth, some of the Lender Respondents (for example, see Sundstrom deposition pp , 199) received a call 20

21 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 21 of 23 or in-person visit from Cliff Berg, who told them that another part of the Oxford Group, involving Bo Beckman, was being investigated. Berg told them that this investigation did not affect their investment with the Cook Entities (see Sundstrom deposition pp ). Typically, these Lender Respondents had an understanding with Berg that they could get their funds out of the investment by calling him (see Sundstrom deposition pp ) and that Berg would generally ''watch out for them" with their investment in the Cook Entities (see Sundstrom deposition pp ). 47. Managers of private investment vehicles, such as hedge funds, private equity funds and the investments made by the Lender Respondents with the Cook Entities, typically have discretion to make distributions of profits and returns of principal to their investors when they wish. While there may be exceptions from time to time, managers would not necessarily give prior notice of such distributions or returns. Here, under the terms of the Limited Power of Attorney described in section IV (B) above, the agent (presumably one of the Cook Entities) had the authority to make trades on behalf of the customer, including a liquidation or sale of all positions. While not having the authority to terminate the Customer Account Agreement (presumably meaning the Customer Trading Agreement), the agent did have the authority to instruct that payment be made to the customer. Thus, the Lender Respondents had executed agreements which gave authority to the Cook Entities to liquidate and return their investments. 48. Many of the Lender Respondents were told that Cook would likely leave the Oxford Group and set up his foreign exchange trading strategy through Charles Schwab, where investors could re-invest with him (see for example Sundstrom 21

22 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 22 of 23 deposition pp ). It is worth noting that some of the Lender Respondents stated that after receiving a return of their investment in the Cook Entities, they were waiting for instructions on how to re-invest the sums with Cook through Schwab and expressed a clear desire to do so (see Sundstrom deposition pp. 134, 201; Heise deposition p. 263). If the Lender Respondents, or a reasonable investor, had any inkling of fraud or insolvency on the part of the Cook Entities, neither the Lender Respondents nor a reasonable investor would seek to re-invest with Cook. 49. Notwithstanding the four different circumstances under which the Lender Respondents received their return of investment, the circumstances under which they received a return of their investments with the Cook Entities would not have put the Lender Respondents on notice of fraud or insolvency of the Cook Entities. VIII. Summary of Conclusions Based upon the above, it is my expert opinion that none of: (i) the representations made to the Lender Respondents summarized in Paragraphs 12 and 13 above; (ii) the UBS Form; (iii) the Crown Forex Agreements; (iv) the Entrust Forms; (v) the UBS Subscription Forms; (vi) the Oxford Agreement; (vii) the absence of any publicly available negative information relating to Trevor Cook or the Cook Entities as summarized in Section V above; or (viii) the circumstances of the return of the Lender Respondents' investments would provide notice to a reasonable investor of fraud or insolvency on the part of the Cook Entities. Based upon my investigation of the factors and circumstances referenced above, and all of the materials, attached as exhibits, it is 22

23 CASE 0:11-cv SRN-FLN Document Filed 03/15/12 Page 23 of 23 my expert opinion that all of the Lender Respondents received their distributions of funds from the Cook entities in "good faith" under the Minnesota's codification of the Uniform Fraudulent Transfer Act, Minn. Stat , et seq. because there were no facts surrounding the Cook Entities which would have been available to a reasonable investor sufficient for that reasonable investor to suspect that the Cook Entities were engaged in a fraud. Dated: July 1,