SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK PARSIFAL PARTNERS B, LP, - against - Plaintiff, CHRISTIAN ZUGEL, MICHAEL SZYMANSKI, R. BRUCE CAMERON, ZAIS GROUP HOLDINGS, INC. and BERKSHIRE CAPITAL SECURITIES LLC, Defendants. Index No. Date Filed: March 6, 2017 Plaintiff designates New York County as the place for trial. 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, or if the complaint is not served with this summons, to serve a notice of appearance, on the Plaintiff s Attorneys within 20 days after the service of this summons, exclusive of the day of service (or within 30 days after the service is complete if this summons is not personally delivered to you within the State of New York); 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 March 6, 2017 HOGUET NEWMAN REGAL & KENNEY, LLP By: Joshua L. Blosveren Helene R. Hechtkopf Fredric S. Newman 1 of 29
10 East 40 th Street, 35 th Floor New York, NY 10016 Phone: 212-689-8808 Attorneys for Plaintiff Parsifal Partners B, LP Defendants Addresses: Christian Zugel c/o ZAIS Group Holdings, Inc. 2 Bridge Ave #322 Red Bank, NJ 07701 Michael Szymanski c/o ZAIS Group Holdings, Inc. 2 Bridge Ave #322 Red Bank, NJ 07701 R. Bruce Cameron c/o Berkshire Capital Securities LLC 535 Madison Ave # 19 New York, NY 10022 ZAIS Group Holdings, Inc. 2 Bridge Ave #322 Red Bank, NJ 07701 Berkshire Capital Securities LLC 535 Madison Ave # 19 New York, NY 10022 2 of 29
SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK PARSIFAL PARTNERS B, LP, - against - Plaintiff, CHRISTIAN ZUGEL, MICHAEL SZYMANSKI, R. BRUCE CAMERON, ZAIS GROUP HOLDINGS, INC. and BERKSHIRE CAPITAL SECURITIES LLC, Index No. COMPLAINT JURY TRIAL DEMANDED Defendants. Plaintiff Parsifal Partners B, LP ( Parsifal or Plaintiff ), by and through its undersigned counsel, Hoguet Newman Regal & Kenney, LLP, alleges as follows: NATURE OF THE CLAIMS 1. This action is brought by Plaintiff against individual defendants Christian Zugel ( Zugel ), Chairman, Chief Investment Officer and director of ZAIS Group Holdings, Inc., Michael Szymanski ( Szymanski ), Chief Executive Officer, President and director of ZAIS Group Holdings, Inc., and R. Bruce Cameron ( Cameron ), former Chairman, Chief Executive Officer and director of HF2 Financial Management Inc. ( HF2 ), former director of ZAIS Group Holdings, Inc., and Executive Chairman and Chief Executive Officer of Berkshire Capital Securities LLC, and corporate defendants ZAIS Group Holdings, Inc. and Berkshire Capital Securities LLC ( Berkshire ) (collectively, the Defendants ), for Defendants fraud, tortious interference and breaches of their fiduciary duties and contractual obligations. Defendants tortious conduct and breaches, which caused Plaintiff s injuries, occurred in connection with the March 17, 2015, business combination transaction between HF2 and ZAIS Group Parent, LLC, through which HF2 acquired a majority interest in ZAIS Group Parent, LLC (the parent of ZAIS 1 3 of 29
Group, LLC ( ZAIS )) and changed its name to ZAIS Group Holdings, Inc. ( ZGH ), and the restraint on the alienation of Plaintiff s shares of stock following the closing of the business combination. 2. Plaintiff was victimized by a scheme, carefully planned and carried out with precision by Zugel and Szymanski, with the aid of Cameron, to infuse scores of millions of dollars of cash into a failing company in which all control including control over decisions relating to executive compensation and benefits would rest with Zugel and Szymanski, and, on information to belief, to then manipulate the stock price downward by reducing investor interest before taking the company private. 3. For at least five critical months, Zugel and Szymanski intentionally and wantonly concealed the amount of ZAIS s assets under management ( AUM ) and misrepresented the company s financial condition and outlook in order to defraud the public and ensure the consummation of the business combination and their own future enrichment. 4. Cameron and Berkshire, motivated by their desire that Berkshire be retained after the closing of the business transaction as ZGH s investment banker, breached their fiduciary duties to Plaintiff by failing to reasonably perform due diligence and by failing to take any steps to protect the Plaintiff once they knew or should have known about ZAIS s true financial condition. Berkshire did in fact become ZGH s investment banker after the closing. 5. Cameron was additionally motivated by his expectation that he would receive compensation as a director of the company after the closing of the business combination. He did in fact become a director of ZGH upon the closing. 6. Zugel and Szymanski s fraud and Cameron and Berkshire s breaches of their fiduciary duties also led to the vast majority of Plaintiff s founders shares of Class A common 2 4 of 29
stock (which it received for being one of HF2 s initial investors) unreasonably being stripped from it and reallocated to others, including Zugel, his ex-wife, two trusts controlled by him, and, on information and belief, certain entities and individuals who did not provide any new investments or provide any services to the company. 7. After the closing of the business combination, Zugel and Szymanski tortiously interfered with Plaintiff s prospective sale of shares to a ZGH director, Paul Guenther, and Defendant ZGH breached its contractual obligations under a March 21, 2013 Registration Rights Agreement, to which the company and Plaintiff were parties, by unreasonably failing to register the shares of ZGH for nearly 10 months, during which time ZGH s share price plummeted. 8. Since March 2015, Defendants have allowed Zugel, Szymanski and other company executives to loot the company by removing millions of dollars in compensation and other benefits from ZGH, thereby wasting the company s assets, harming the company s share price, and causing or significantly contributing to ZGH s consistently and continuously poor performance. 9. On information and belief, after manipulating ZGH s stock price downward by reducing investor interest in the company, Zugel and Szymanski, over the last quarter of 2016 and the first two months of 2017, have purchased hundreds of thousands of shares of ZGH stock at low stock prices, with the intention of consolidating control and taking the company private. JURISDICTION AND VENUE 10. This Court has jurisdiction pursuant to CPLR 302 as the Defendants transact business within the state. 11. Venue is proper in this county pursuant CPLR 503 as Plaintiff Parsifal and Defendant Berkshire have their principal places of business in New York County. 3 5 of 29
PARTIES 12. Plaintiff Parsifal is a limited partnership organized under the laws of Delaware with its principal place of business in New York. 13. Defendant Zugel is an individual who, on information and belief, resides in New Jersey. 14. Defendant Szymanski is an individual who, on information and belief, resides in New Jersey. 15. Defendant Cameron is an individual who, on information and belief, resides in New York. 16. Defendant ZGH is a company organized under the laws of Delaware with its principal place of business in New Jersey. 17. Defendant Berkshire is a company organized under the laws of Delaware with its principal place of business in New York. FACTUAL BACKGROUND The Creation of HF2 and Plaintiff s Investment 18. HF2 (originally called H2 Financial Management Inc.) was formed in 2012 as a blank check company, or a special purpose acquisition company ( SPAC ), for the purpose of acquiring control of one or more businesses or entities in the financial sector. 19. The original Chief Executive Officer of HF2 was Richard Foote ( Foote ), Chief Executive Officer of Berkshire. 20. At all relevant times, Berkshire served as HF2 s financial advisor and was responsible for performing due diligence in connection with the SPAC. 4 6 of 29
21. Before forming HF2, Foote successfully led a previous SPAC, Highbury Financial Inc., which acquired Aston Asset Management, an investment management business, in 2006 and exited the investment through a profitable sale in April 2010. 22. In the Fall of 2012, Foote approached various entities and individuals, including Plaintiff, about potentially becoming early investors, i.e., Sponsors, in HF2. 23. Plaintiff entered into an agreement with HF2 on or around November 30, 2012 (the Sponsor Agreement ), in which Plaintiff agreed to purchase a certain number of Sponsors Shares of Class A common stock at $10.00 per Sponsors Share. As consideration for being a Sponsor and contributing to the pool of cash from which redemptions by future stockholders could be paid, Plaintiff was also given a certain number of Founders Shares, for which it agreed to pay $0.0001 per Founders Share. 24. Under the Sponsor Agreement between Plaintiff and HF2, Plaintiff purchased 294,350 Founders Shares at $0.0001 per share and 110,649 Sponsors Shares at $10.00 per share. Plaintiff ultimately purchased a total of 125,000 Sponsors Shares at $10.00 per share. The March 2013 IPO 25. On March 21, 2013, HF2 s Registration Statement for its initial public offering ( IPO ) was declared effective. 26. Under the terms of the Registration Statement, HF2 had 18 months from March 21, 2013 to execute a letter of intent, agreement in principle or definitive agreement for an initial business combination. If it did so, it would have another six months (24 months from March 21, 2013) to consummate the transaction. This timeline is typical for SPACs. It is also typical for stockholders in SPACs to agree to extend this period for additional time, if needed, to negotiate and close a beneficial transaction. 5 7 of 29
27. Under the terms of the Registration Statement, investors who purchased stock in connection with the IPO could redeem their shares at $10.50 per share prior to the business combination, retain their shares, or retain some portion of their shares and redeem the rest. 28. Under the terms of the Registration Rights Agreement filed on March 21, 2013, following the business combination, the holders of a majority-in-interest of any class of Registrable Securities would be entitled to make a written demand for registration under the Securities Act of 1933 (as amended) of all or part of each such class of Registrable Securities held by such holders. 29. The Registration Rights Agreement further provided that if the filing of a registration statement in respect of a demand registration would require HF2 to make an Adverse Disclosure, HF2 could, upon giving prompt written notice of such action to the holders, delay the filing of the registration statement for the shortest possible period of time determined in good faith by HF2 to be necessary for such purpose. 30. The Registration Rights Agreement defined Adverse Disclosure as public disclosure of material non-public information, which disclosure, in the good faith judgment of the chief executive officer or principal financial officer of the Company after consultation with counsel to the Company, (i) would be required to be made in any Registration Statement or prospectus in order for the applicable Registration Statement or prospectus not to contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein (in the case of any prospectus and any preliminary prospectus, in the light of the circumstances under which they were made) not misleading, (ii) would not be required to be made at such time if the Registration Statement were not being filed, and (iii) the Company has a bona fide business purpose for not publicly making it. 6 8 of 29
31. On March 27, 2013, the IPO closed, generating net proceeds of approximately $186 million. The September 2014 Agreement with ZAIS 32. Foote died on April 25, 2014. 33. Following Foote s death, Berkshire continued to serve as HF2 s financial advisor. 34. Cameron, Berkshire s Chairman, assumed the role of Chief Executive Officer of HF2. 35. In July 2014, HF2 agreed on a term sheet with Tennenbaum Capital Partners, an alternative investment manager located in Los Angeles. 36. Throughout July 2014, Cameron, on behalf of HF2, had continuing discussions with the management of other potential acquisition targets. By July 18, 2014, Cameron had narrowed HF2 s targets to Tennenbaum Capital Partners, Tocqueville Asset Management (a New York-based manager of mutual funds and institutional and private wealth), and ZAIS. 37. Cameron ultimately recommended, and HF2 s Board of Directors approved, entering into a definitive agreement with ZAIS, which had agreed that all Founders Shares would be retained by the Sponsors upon the closing. 38. On September 16, 2014, HF2 entered into a definitive agreement to acquire a majority equity interest in ZAIS Group Parent, LLC, the sole member of ZAIS. 39. At the time HF2 and ZAIS entered into the definitive agreement, ZAIS represented that its assets under management as of June 30, 2014 were approximately $5.0 billion. 7 9 of 29
40. Entering into the definitive agreement had the effect of extending the amount of time for a business combination to be consummated under the Registration Statement until March 21, 2015. 41. The agreement provided that as a condition of closing, HF2 was required to have $100 million in cash after giving effect to redemptions and expense payments. Zugel and Syzmanski s Fraud and Berkshire and Cameron s Failure to Perform Their Fiduciary Duties 42. On information and belief, by October 1, 2014, ZAIS had received a demand from one of its two largest institutional investors that approximately $600 million be returned to it, which Zugel and Szymanski knew would have the effect of reducing ZAIS s assets under management to approximately $4.1 billion, thereby substantially reducing the amounts of incentive fees and management fees ZAIS would receive in 2015. 43. On October 28, 2014, Plaintiff s managing partner and principals of various other Sponsors attended a meeting at ZAIS s offices. At this meeting, Zugel personally assured Plaintiff s managing partner and others in attendance that ZAIS s business was highly profitable and growing, although he knew this statement to be false. Zugel and Szymanski showed all in attendance an Investor Presentation that stated that ZAIS had approximately $5.0 billion of assets under management as of June 30, 2014, without disclosing either (a) that ZAIS s assets under management had shrunk to approximately $4.7 billion as of September 30, 2014 or (b) that one of ZAIS s two largest institutional investors had demanded that approximately $600 million be returned to it, which had reduced or would reduce ZAIS s assets under management to approximately $4.1 billion. The Investor Presentation further represented that [o]n a modified cash basis, ZAIS has been profitable in every year since its inception. 8 10 of 29
44. On October 28, 2014, HF2 filed an 8-K. Attached to the 8-K as Exhibits 99.1 and 99.2, respectively, were the October 28, 2014 Investor Presentation and a press release of that date. Both the Investor Presentation and the press release were prepared by or using information provided by Zugel and Szymanski. Like the Investor Presentation, the press release stated that ZAIS had approximately $5.0 billion of assets under management as of June 30, 2014, without disclosing either (a) that ZAIS s assets under management had shrunk to approximately $4.7 billion as of September 30, 2014 or (b) that one of ZAIS s two largest institutional investors had demanded that approximately $600 million be returned to it, which had reduced or would reduce ZAIS s assets under management to approximately $4.1 billion. 45. On December 15, 2014, HF2 filed an 8-K. Attached to the 8-K as Exhibits 99.1 and 99.2, respectively, were an Investor Presentation and a Press Release, both dated December 15, 2014. Both were prepared by or using information provided by Zugel and Szymanski. Both the Investor Presentation and the Press Release stated that ZAIS had approximately $4.7 billion of assets under management as of September 30, 2014, without disclosing that one of ZAIS s two largest institutional investors had demanded that approximately $600 million be returned to it, which had reduced or would reduce ZAIS s assets under management to approximately $4.1 billion. The Investor Presentation further represented that [o]n a modified cash basis, ZAIS has been profitable in every year since its inception. 46. On January 8, 2015, HF2 filed an 8-K. Attached to the 8-K as Exhibit 99.1 was a press release of that date announcing that HF2 anticipated mailing proxy statements for its special meeting of stockholders in the last week of January and to stockholders of record as of January 26, 2015, and anticipated holding its special meeting of stockholders to approve the business combination on February 19, 2015. The January 8, 2015 press release, which was 9 11 of 29
prepared by or using information provided by Zugel and Szymanski, stated that ZAIS had approximately $4.7 billion of assets under management as of September 30, 2014, without disclosing that ZAIS s assets under management as of December 31, 2014 (or earlier) had been reduced to approximately $4.1 billion due to the approximately $600 million redemption by one ZAIS s two largest institutional investors. 47. On January 8, 2015, Cameron informed Plaintiff that he was working with EarlyBirdCapital, Inc. and Sandler O Neill & Partners, L.P. ( Sandler ), who with Berkshire were serving as financial advisors to HF2, to plan a final road show with institutional investors over the next two weeks, and that [t]hough we haven t seen any material volume in the stock, Sandler continues to express strong confidence they will bring significant investors (at least $100m) into the company in the coming weeks. 48. Later in January 2015, however, Cameron told Plaintiff s managing partner by telephone that Sandler had informed Cameron that there was virtually no interest from investors in the secondary market. 49. On information and belief, Cameron and Berkshire made no efforts to determine why interest among investors in the secondary market was virtually nonexistent. 50. On information and belief, the lack of interest was due to concern among investors as to the future profitability of ZAIS, which, because of Zugel and Szymanski s refusal to reveal the company s true financial condition and outlook, had declined to share detailed projections with potential investors despite being advised to do by at least one member of HF2 s Board of Directors. 51. Plaintiff s managing partner suggested to Cameron that he approach ZAIS to renegotiate the terms of the agreement, but Cameron refused. 10 12 of 29
52. Despite working closely with ZAIS in January 2015 to prepare investor presentations and public filings, at no point did Berkshire and Cameron perform due diligence sufficient to reveal the decrease in ZAIS s assets under management due to the approximately $600 million redemption by one of ZAIS s two major institutional investors or the true financial condition of ZAIS. 53. Had Berkshire and Cameron performed such due diligence in January 2015, they would have learned of the $600 million decrease in ZAIS s assets under management and would have been able to (a) renegotiate the terms of the agreement with ZAIS, (b) re-engage with Tennenbaum Capital Partners or Tocqueville Asset Management, or (c) find another acquisition target. A renegotiated combination or new business transaction could have been consummated by March 21, 2015 or, if not, that date could have been extended by a vote of HF2 s stockholders. Such extensions are customary in the SPAC context. 54. Berkshire and Cameron were motivated to not perform such due diligence or do anything that might jeopardize the consummation of the business combination because they believed that ZGH would retain Berkshire as its investment banker after the closing. 55. Cameron was also motivated to not perform such due diligence or do anything that might jeopardize the consummation of the business combination because he expected to serve as a director of the company, for which he would receive compensation, upon the closing. 56. On January 29, 2015, HF2 filed a Proxy Statement. The Proxy Statement, which was prepared using information provided by Zugel and Szymanski, stated that ZAIS s revenue is derived principally from two sources: (1) management fee income, based on the size of ZAIS s funds and (2) incentive income, based on the performance of ZAIS s funds. Thus, revenues vary directly with increases or decreases in the aggregate size and the investment performance of 11 13 of 29
ZAIS s funds. The Proxy Statement further stated that a significant portion of ZAIS s AUM is or may be derived from a small number of clients, the loss of which could significantly reduce ZAIS s management fees and have a material adverse effect on ZAIS s results of operations and that [a]s of September 30, 2014, two investors accounted for approximately 27% of ZAIS s AUM and ZAIS s 10 largest investors accounted for approximately 55% of ZAIS s AUM. The Proxy Statement further stated: If any such clients withdraw all or a portion of their AUM, ZAIS s business would be significantly affected, which would negatively impact ZAIS s management fees and could have a material adverse effect on ZAIS s results of operations and financial condition. 57. The Proxy Statement further stated that ZAIS s assets under management were $4.7 billion as of September 30, 2014. 58. The Proxy Statement failed to disclose that ZAIS s assets under management as of December 31, 2014 (or earlier) had been reduced to approximately $4.1 billion due to the approximately $600 million redemption by one of ZAIS s two largest institutional investors. The Proxy Statement also failed to disclose that because of this redemption, ZAIS s business had been significantly affected, negatively impacting ZAIS s management fee and incentive fee income and thus having a material adverse effect on ZAIS s results of operations and financial condition. 59. The Proxy Statement further stated that with the proceeds from the business combination, ZAIS expected to (1) expand its corporate collateralized loan obligation ( CLO ) business, (2) scale its residential mortgage conduit business, (3) seed a credit trading fund focused on emerging credit trading opportunities arising from ongoing regulatory changes, and (4) build a commercial real estate CLO business. 12 14 of 29
60. On February 3, 2015, HF2 filed a Schedule 14A to provide Definitive Additional Materials relating to its Proxy Statement. Schedule 14A attached an Investor Presentation dated February 3, 2015. The Investor Presentation, which was prepared by or using information provided by Zugel and Szymanski, stated that ZAIS had approximately $4.7 billion of assets under management as of September 30, 2014, without disclosing that ZAIS s assets under management as of December 31, 2014 (or earlier) was approximately $4.1 billion. The Investor Presentation further represented that ZAIS has been profitable in every year since its inception and that ZAIS has generated incentive income in every year since 2004. 61. On February 12, 2015, HF2 filed a 10-K. The 10-K, which was prepared using information provided by Zugel and Szymanski, stated that ZAIS s revenue is derived principally from two sources: (1) management fee income, based on the size of ZAIS s funds and (2) incentive income, based on the performance of ZAIS s funds. Thus, revenues vary directly with increases or decreases in the aggregate size and the investment performance of ZAIS s funds. The 10-K further stated that a significant portion of ZAIS s AUM is or may be derived from a small number of clients, the loss of which could significantly reduce ZAIS s management fees and have a material adverse effect on ZAIS s results of operations and that [a]s of September 30, 2014, two investors accounted for approximately 27% of ZAIS s AUM and ZAIS s 10 largest investors accounted for approximately 55% of ZAIS s AUM. The 10-K further stated: If any such clients withdraw all or a portion of their AUM, ZAIS s business would be significantly affected, which would negatively impact ZAIS s management fees and could have a material adverse effect on ZAIS s results of operations and financial condition. 62. The 10-K further stated that ZAIS s assets under management were $4.7 billion as of September 30, 2014. 13 15 of 29
63. The 10-K failed to disclose that ZAIS s assets under management as of December 31, 2014 (or earlier) had been reduced to approximately $4.1 billion due to the approximately $600 million redemption by one ZAIS s two largest institutional investors. The 10-K also failed to disclose that because of this redemption, ZAIS s business had been significantly affected, negatively impacting ZAIS s management fee and incentive fee income and thus having a material adverse effect on ZAIS s results of operations and financial condition. The Stripping of Plaintiff s Founders Shares 64. By February 2015, it was clear to Defendants that because of the lack of interest from investors in the secondary market and the likelihood that an overwhelming number of shares purchased in connection with the IPO would be redeemed, HF2 would not have $100 million in cash at the closing. 65. In February 2015, Defendants approached Neil Ramsey ( Ramsey ), principal of NAR Special Global LLC, a Sponsor, about making a substantial additional investment. 66. On February 19, 2015, HF2 announced that it had postponed the special meeting of stockholders to approve the business combination, originally scheduled for that day, until March 9, 2015. 67. On or around February 20, 2015, Ramsey committed to having another entity in which he was a principal, dquant Special Opportunities Fund, LP ( dquant ), invest approximately $60 million in HF2. In exchange, Defendants committed to paying Ramsey an incentive fee of $3,400,000 and reallocating to dquant all but 500,000 of the Founders Shares originally sold to the Sponsors. 14 16 of 29
68. On information and belief, Ramsey was not aware of the true financial condition of ZAIS at the time he committed to having dquant make an investment of approximately $60 million. 69. On March 4, 2015, HF2 filed an 8-K. The 8-K, which was prepared using information provided by Zugel and Szymanski, disclosed for the first time that ZAIS s assets under management ( AUM ) as of December 31, 2014 are approximately $4.1 billion. The 8-K further stated: The decline in AUM since September 30, 2014 from $4.7 billion is primarily attributable to redemptions by one institutional investor. 70. The 8-K further disclosed that on March 4, 2015, HF2 and ZAIS had entered into an agreement amending the amount of cash required to be in HF2 s trust account as a condition to the closing of the business combination from $100 million to $65 million. 71. The 8-K further disclosed that on March 4, 2015, ZAIS Group Parent, LLC had entered into an agreement with Neil Ramsey, an affiliate of NAR Special Global, LLC (of which Mr. Ramsey was and is the managing member), and dquant Special Opportunities Fund, LP (also managed by Mr. Ramsey) (collectively, the Ramsey Investors ), under which ZAIS Group Parent, LLC agreed to pay Mr. Ramsey an incentive fee of $3.4 million if Mr. Ramsey caused the Ramsey Investors to purchase from stockholders who had tendered their shares of Class A common stock for redemption such number of shares as was necessary to meet the closing condition that there be at least $65 million in the trust account. 72. In connection with dquant s investment, the vast majority of Plaintiff s Founders Shares were stripped from them and the other Sponsors. The stripped Founders Shares were reallocated not only to dquant, but also to Zugel, his ex-wife, two trusts controlled by him, and, on information and belief, a number of individuals and entities who did not invest any additional 15 17 of 29
money into the company or perform any services to the company, including Rodney Yanker, who received 2,500 Founders Shares. 73. As a result of the reallocation of Founders Shares, Plaintiff s number of Founders Shares was reduced from 293,869 to 14,466. The Closing of the Business Combination 74. On March 9, 2015, HF2 filed an 8-K. Attached to the 8-K as Exhibit 99-1 was a press release dated March 9, 2015, which was prepared by or with information provided by Zugel and Szymanski. 75. The press release stated that the company had held its special meeting of stockholders, who had approved the business combination. 76. The press release further stated that the following individuals had been elected to be the directors of ZGH: Zugel, Szymanski, Cameron, Paul Guenther ( Guenther ), and James Zinn. 77. The press release also disclosed that 9,741,193 shares of Class A common stock had been redeemed by the public stockholders, and that the company expected to deliver an aggregate amount of approximately $102 million (i.e., $10.50 per share redeemed) to such redeeming stockholders. 78. The press release further stated that HF2 anticipated that the consummation of the business combination would occur on March 17, 2015, and that upon the closing, HF2 would deliver approximately $78 million in cash to ZAIS Group Parent, LLC. 79. The closing of the business combination occurred on March 17, 2015. 16 18 of 29
The Restriction on the Alienation of Plaintiff s Stock 80. On March 25, 2015, the holders of a majority-in-interest of Sponsors Shares (including Plaintiff) and the holders of a majority-in-interest of the Founders Shares (including Plaintiff) sent a letter to ZGH requesting that it file a Registration Statement on Form S-3 under the Securities Act of 1933 (as amended) with respect to the Sponsors Shares and Founders Shares, as ZGH was required to do under the March 21, 2013 Registration Rights Agreement. 81. On March 31, 2015, Szymanski, on behalf of ZGH, sent a letter denying the March 25, 2015 request for the filing of a Registration Statement. Szymanski asserted that filing a Registration Statement on Form S-3 would require ZGH to make an Adverse Disclosure as that the term is defined in the March 21, 2013 Registration Rights Agreement. 82. On April 2, 2015, Cameron informed Plaintiff and various other Sponsors that ZGH was denying the registration request because of some key strategic initiatives that are in process. Cameron further noted that ZGH was required to file the S-3 as soon as possible once the adverse disclosure condition is no longer an issue. 83. The key strategic initiatives referred to by Cameron were never shared with Plaintiff. 84. On information and belief, ZGH had no bona fide business purpose for rejecting the March 25, 2015 request for the filing of a Registration Statement. 85. ZGH did not file a Registration Statement until January 2016, nearly 10 months after the registration request. On information and belief, ZGH had no bona fide business purpose for delaying the filing of the Registration Statement for nearly 10 months. 17 19 of 29
86. On or around May 11, 2015, Plaintiff s managing partner and Guenther had a telephone conversation in which they agreed that Plaintiff would sell its shares in ZGH to Guenther at $10.00 per share. 87. On May 13, 2015, Guenther advised Plaintiff s managing partner by email that he was no longer interested in buying Plaintiff s shares. 88. On information and belief, Zugel and Szymanski had told Guenther not to purchase Plaintiff s shares, knowing that ZGH s stock price would decline and, thus, that interfering with the purchase would have the effect of harming Plaintiff and protecting Guenther as ZGH s stock price declined. 89. On information and belief, Zugel and Szymanski interfered with the purchase not to advance their own normal economic self-interest, but to ensure that Guenther, in return for being protected, would not stand their way as they looted and wasted the company s assets and manipulated its stock price downward. The Poor Performance and Looting of ZGH and the Manipulation of its Stock Price 90. Since the closing of the business combination, both ZGH s stock price and its amount of cash on hand have drastically declined. 91. While ZGH s stock price was $10.00 on March 20, 2015, by January 22, 2016 it had fallen to $5.78. It eventually hit a low of $1.32 on December 16, 2016. 92. Due to large-volume purchases of stock by Zugel in February 2017, ZGH s stock price is now $2.39. 93. While ZGH had cash and cash equivalents of $79.7 million as of March 31, 2015, as of December 31, 2015 it had cash and cash equivalents of only $44.4 million. As of September 30, 3016, ZGH had cash and cash equivalents of only $29.4 million. 18 20 of 29
94. Since the closing of the business combination, ZGH has not used the $78 million in cash delivered by the closing to successfully implement any of the four growth strategies outlined in the January 29, 2015 Proxy Statement. 95. ZGH has exited the mortgage conduit business entirely. 96. ZAIS s GAAP net loss for 2015 was $(23.9) million, compared to GAAP net income of $74.5 million for 2014. Its non-gaap net loss for 2015 was $(24.0) million, compared to non-gaap net income of $35.0 million for 2014. Its negative Adjusted EBITDA for 2015 was $(14.3) million, compared to positive Adjusted EBITDA of $41.1 million for 2014. 97. On information and belief, ZAIS had a GAAP net loss, a non-gaap net loss and a negative Adjusted EBITDA again in 2016. 98. On November 30, 2016, Donna Blank, ZGH s Chief Financial Officer, resigned. 99. ZAIS s poor performance in 2015 and 2016 was due in large part to a reduction in assets under management. 100. According to ZGH s 2015 10-K, the reduction in the company s assets under management resulted in a $77.6 million decrease in incentive income for 2015 and a $12.5 million decrease in management fee income for 2015. 101. Despite ZAIS s poor performance, Zugel and Szymanski have continued to reward themselves and other ZAIS executives with excessive compensation and benefits. 102. These excessive payments to Zugel, Szymanski and other ZAIS executives have left ZGH with an insufficient amount of cash to successfully implement any of the growth strategies discussed in the Proxy Statement and have further harmed ZGH s stock price. 19 21 of 29
103. On April 22, 2016, ZGH announced that Cameron was resigning from its Board of Directors in light of the Company s intended engagement of Berkshire Capital Securities LLC, of which Mr. Cameron serves as President, as a financial advisor to the Company. 104. Berkshire continues to serve as ZGH s investment banker. 105. On information and belief, Zugel and Szymanski intended to manipulate the company s stock price downward, purchase shares at a reduced price, and then take the company private. 106. In furtherance of their scheme to manipulate ZGH s stock price downward, Zugel and Szymanski have reduced investor interest in the company s stock by withholding the type of information about the company s operations typically shared with the public, by refusing to answer questions during the conference calls that followed the company s quarterly earnings releases at the end of the second and third quarters of 2015, and by refusing to even hold any such conference calls since the close of the third quarter of 2015. Zugel and Szymanski s conduct has caused a reduction in interest among analysts and potential investors which, in turn, has caused a reduction in the trading volume of ZGH s stock and the company s stock price. 107. On information and belief, over the last quarter of 2016 and the first two months of 2017, Zugel and Szymanski have purchased hundreds of thousands of shares of ZGH stock at low stock prices. 108. On February 14, 2017, ZGH filed a 13D in which Zugel disclosed that he has considered and may discuss with ZGH s Board of Directors taking ZGH private. FIRST CAUSE OF ACTION (Zugel and Szymanski s Fraudulent Concealment of the True Financial Condition of ZAIS) 109. Plaintiff repeats and realleges each and every allegation set forth in paragraphs 1-108 as if fully set forth herein. 20 22 of 29
110. Plaintiff brings this First Cause of Action against Defendants Zugel and Szymanski. 111. On information and belief, by October 1, 2014, Zugel and Syzmanski knew that ZAIS s assets under management would be reduced by approximately $600 million due to a redemption by one ZAIS s two largest institutional investors. 112. By December 31, 2014, Zugel and Syzmanski knew that ZAIS s assets under management had been reduced by approximately $600 million to approximately $4.1 billion. 113. Until March 4, 2015, Zugel and Szymanski fraudulently misrepresented and concealed ZAIS s actual assets under management and its true financial condition and outlook. 114. On multiple occasions between October 1, 2014 and March 4, 2015, Zugel and Szymanski represented falsely and wantonly that ZAIS s assets under management were $4.7 billion in order to defraud the public and induce Plaintiff and HF2 to go forward with the business combination. 115. Plaintiff reasonably relied on these misrepresentations in agreeing to go forward with the business combination. 116. Plaintiff reasonably relied on these misrepresentations in permitting the vast majority of its Founders Shares to be stripped from it. 117. The delayed disclosure by Zugel and Szymanski of ZAIS s actual assets under management was intentionally timed so as to deprive Plaintiff and HF2 of the opportunity to renegotiate the terms of the agreement or close another transaction. 118. Plaintiff s reliance on Zugel and Szymanski s fraudulent concealment and misrepresentations caused Plaintiff s injuries by causing it to lose the vast majority of its Founders Shares and to forego other available business opportunities and instead maintain its 21 23 of 29
investment in a company whose stock price was virtually guaranteed to and did fall in light of the company s actual assets under management and true financial condition and outlook. SECOND CAUSE OF ACTION (Cameron s Breaches of Fiduciary Duties Relating to His Failure to Reasonably Perform Due Diligence and His Failure to Protect the Plaintiff) 119. Plaintiff repeats and realleges each and every allegation set forth in paragraphs 1-118 as if fully set forth herein. 120. Plaintiff bring this Second Cause of Action against Defendant Cameron. 121. As the Chief Executive Officer and a director of HF2, Cameron owed fiduciary duties to the Plaintiff, namely duties of good faith, care and loyalty. 122. Cameron had a duty to perform due diligence sufficient to determine ZAIS s actual assets under management and its true financial condition and outlook. 123. As of January 2015, Cameron had, or should have had, reason to believe that ZAIS s assets under management were not $4.7 billion, despite Zugel and Szymanski s continuing false representations that the company s assets under management were $4.7 billion. 124. Cameron failed to perform the duties of good faith, care and loyalty he owed to Plaintiff due to a conflict of interest caused by his desire that Berkshire be retained as ZGH s investment banker after the closing of the business combination. Since April 2016, Berkshire has served as ZGH s investment banker. 125. Cameron failed to perform the duties of good faith, care and loyalty he owed to Plaintiff due to a conflict of interest caused by his desire to be compensated as a director of ZGH after the closing of the business combination. From March 17, 2015 until on or around April 22, 2016, Cameron served as a director of ZGH. 126. Cameron s breaches caused Plaintiff s injuries by causing it to lose the vast majority of its Founders Shares and to forego other available business opportunities and instead 22 24 of 29
maintain its investment in a company whose stock price was virtually guaranteed to and did fall in light of the company s actual assets under management and true financial condition and outlook. THIRD CAUSE OF ACTION (Berkshire s Breaches of Fiduciary Duties Relating to Its Failure to Reasonably Perform Due Diligence and Its Failure to Protect the Plaintiff) 127. Plaintiff repeats and realleges each and every allegation set forth in paragraphs 1-126 as if fully set forth herein. 128. Plaintiff brings this Third Cause of Action against Defendant Berkshire. 129. As the financial advisor to HF2 and its shareholders in connection with the SPAC, Berkshire owed fiduciary duties to the Plaintiff, namely duties of good faith, care and loyalty. 130. Berkshire had a duty to perform due diligence sufficient to determine ZAIS s actual assets under management and its true financial condition and outlook. 131. As of January 2015, Berkshire had, or should have had, reason to believe that ZAIS s assets under management were not $4.7 billion, despite the fact that Zugel and Szymanski continued to falsely represent that the company s assets under management were $4.7 billion. 132. Berkshire failed to perform the duties of good faith, care and loyalty it owed to Plaintiff due to a conflict of interest caused by its desire to be retained as ZGH s investment banker after the closing of the business combination. Since April 2016, Berkshire has served as ZGH s investment banker. 133. Berkshire s breaches caused Plaintiff s injuries by causing it to lose the vast majority of its Founders Shares and to forego other available business opportunities and instead maintain its investment in a company whose stock price was virtually guaranteed to and did 23 25 of 29
fall in light of the company s actual assets under management and true financial condition and outlook. FOURTH CAUSE OF ACTION (ZGH s Breach of Contract Relating to Its Failure to Timely File a Registration Statement on Form S-3) 134. Plaintiff repeats and realleges each and every allegation set forth in paragraphs 1-133 as if fully set forth herein. 135. Plaintiff brings this Fourth Cause of Action against Defendant ZGH. 136. Under the Registration Rights Agreement, ZGH was required to file a Registration Statement within the shortest period of time necessary after receiving a valid registration request. 137. Although ZGH received a valid registration request on March 25, 2015, it delayed the filing of a Registration Statement for nearly 10 months, until January 2016. 138. ZGH s delay was caused by Zugel and Szymanski and motivated by their desire to prevent Plaintiff from selling its shares, not for any bona fide business purpose. 139. ZGH s nearly 10-month delay in filing the Registration Statement was unreasonable and not attributable to a bona fide business purpose. 140. ZGH s breach caused Plaintiff s injuries by restricting the alienation of Plaintiff s shares of ZGH stock during a period of time in which ZGH s stock price plummeted. FIFTH CAUSE OF ACTION (Zugel and Szymanski s Tortious Interference with Plaintiff s Prospective Business Relations with Guenther) 141. Plaintiff repeats and realleges each and every allegation set forth in paragraphs 1-140 as if fully set forth herein. Szymanski. 142. Plaintiff brings this Fifth Cause of Action against Defendants Zugel and 24 26 of 29
143. In May 2015, Plaintiff agreed with Guenther to sell him its shares at $10.00 per share. 144. On information and belief, Zugel and Szymanski interfered with Plaintiff s prospective business relations with Guenther, by inducing Guenther not to purchase Plaintiff s shares, not to advance their own normal economic self-interest, but to advance their scheme of looting the company s assets and manipulating the company s stock price. 145. Zugel s tortious interference caused Plaintiff s injury by restricting the alienation of Plaintiff s shares of ZGH stock during a period of time in which ZGH s stock price plummeted. SIXTH CAUSE OF ACTION (Zugel and Szymanski s Unjust Enrichment) 146. Plaintiff repeats and realleges each and every allegation set forth in paragraphs 1-145 as if fully set forth herein. Szymanski. 147. Plaintiff brings this Sixth Cause of Action against Defendants Zugel and 148. From at least October 1, 2014 until, at the earliest, March 4, 2015, Zugel and Szymanski intentionally concealed ZAIS s actual assets under management and true financial condition and outlook for the purpose of ensuring the consummation of the business combination and their own enrichment. 149. The consummation of the business combination unjustly enriched Zugel and Szymanski without adequately compensating Plaintiff. not entitled. 150. Zugel and Szymanski have received compensation and benefits to which they are 25 27 of 29
151. Equity and good conscience require restitution by Zugel and Szymanski to Plaintiff. PRAYER FOR RELIEF WHEREFORE, Plaintiff respectfully requests that this Court enter judgment and grant the following relief: a. On the first cause of action, for the injuries caused to Plaintiff as a result of Zugel and Szymanski s fraud relating to the true financial condition of ZGH, an award in an amount to be proven at trial, but in no case less than $4.2 million, plus interest, and punitive damages; b. On the second cause of action, for the injuries caused to Plaintiff as a result of Cameron s breaches of his fiduciary duties relating to his failure to reasonably perform due diligence and his failure to protect Plaintiff, an award in an amount to be proven at trial, but in no case less than $4.2 million, plus interest; a. On the third cause of action, for the injuries caused to Plaintiff as a result of Berkshire s breaches of its fiduciary duties relating to its failure to reasonably perform due diligence and its failure to protect Plaintiff, an award in an amount to be proven at trial, but in no case less than $4.2 million, plus interest; b. On the fourth cause of action, for the injuries caused to Plaintiff as a result of ZGH s breach of its contractual obligation to timely file a Registration Statement, an award in an amount to be proven at trial, but in no case less than $4.2 million, plus interest; c. On the fifth cause of action, for the injuries caused to Plaintiff as a result of Zugel and Szymanski s tortious interference with Plaintiff s prospective business relations with Guenther, an award in an amount to be proven at trial, but in no case less than $4.2 million, plus interest; 26 28 of 29
d. On the sixth cause of action, for Zugel and Szymanski s unjust enrichment, an award in an amount to be proven at trial, plus interest; e. Attorneys fees and such other and further relief as the Court may deem just and proper. JURY TRIAL DEMANDED Plaintiff demands a trial by jury on all Counts so triable. Dated: New York, New York March 6, 2017 HOGUET NEWMAN REGAL & KENNEY, LLP By: Joshua L. Blosveren Helene R. Hechtkopf Fredric S. Newman 10 East 40 th Street, 35 th Floor New York, NY 10016 Phone: 212-689-8808 Attorneys for Plaintiff Parsifal Partners B, LP 27 29 of 29