UED ON411412005

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SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF NEW YORK
X
_ _ _ _ _ _ _ _ _ _ _ _ - - - _ _ _ _ _ _ _ _ _ _ _ r _ _ _ _ _ l _ _ _

HARCH INTERNATIONAL LIMITED, a foreign : Index No.

corporation, Date Purchased:

Plaintiff, Plaintiff designates New York County as

the place of trial.
-against- The basis of the venue is contractual
provisions.
HARCH CAPITAL MANAGEMENT, INC., a :
Florida corporation, and HARCH CLO I LIMITED, : SUMMONS
a foreign corporation,

Defendants.

TO THE ABOVE-NAMED DEFENDANTS:

YOU 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 twenty (20) days after the 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). In

case of 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

April 13,2005 HERRICK, FEINSTEIN LLP

Attobeys For Plaintiff”’

2 Park Avenue ,‘
New York, New York 10016
(212) 592-1400
TO: Harch Capital Management Inc.
Harch CLO I Limited

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SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF NEW YORK
_ _ _ _ _ _ I _ _ c r _ r - _ _ _ _ _ _ _ I _ _ _ _ _ _ _ _ c _ _ _ I I
X
HARCH INTERNATIONAL LIMITED, a foreign :
corporation,
: IndexNo.
Plaintiff,

-against- : COMPLAINT

HARCH CAPITAL MANAGEMENT, INC., a :

Florida corporation, and HARCH CLO I LIMITED, :
a foreign corporation, 05Gc)1=512

Defendants.

Herrick, Feinstein LLP, sues Defendants Harch Capital Management, Inc. (“Harch Advisor”)

and Harch CLO I Limited (“Harch CLO”) and alleges as follows:

NATURE OF THE ACTION

1. This is an action for breach of contract, conversion, breach of fiduciary

duty, fraud and a demand for an accounting arising out of Defendants’ failure to honor the terms

of a Collateral Management Agreement and a Trust Indenture governing the allocation of monies

upon redemption of outstanding note securities issued by Harch CEO, and also arising out of

Harch Advisor’s abuse of its fiduciary obligations to Harch Fund and its shareholders, as

evidenced by a series of investments on behalf of Harch Fund which served only to enrich Harch

Advisor at the expense of Harch Fund and its shareholders.

THE PARTIES

2. Harch Fund is a corporation organized under the laws of the Cayman

Islands. Heretofore, Harch Fund has operated as a hedge fund with its principal place of

business in Hamilton, Bermuda.

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3. Upon information and belief, Harch Advisor is a corporation organized

under the laws of Florida, with its principal place of business in Boca Raton, Florida. Harch

Advisor is an investment advisor registered with the Securities and Exchange Commission under

the U.S. Investment Advisers Act of 1940.

4. Upon information and belief, Harch CLO is an exempted company with

limited liability organized under the laws of the Cayman Islands to act as a collateralized loan

obligation entity, or “CLO”; i.e. a special purpose entity organized for the purpose of (i)

investing in a portfolio of corporate loan obligations and other corporate debt instruments (the

“Portfolio”) and (ii) issuing note securities (the ‘Votes”) collateralized by the Portfolio.

JURISDICTION AND VENUE

5. This Court has jurisdiction over Harch Advisor and Harch CLO based on

contractual provisions whereby they have submitted to the jurisdiction of New York state and

federal courts in the Borough of Manhattan. Venue of this action is proper pursuant to CPLR 5
501.

FACT ALLEGATIONS
, .
Harch Advisor Sponsors Harch Fund
And Becomes Its Investment Advisor

6. Upon information and belief, in 1997 Harch Advisor sponsored the

formation of Harch Fund and arranged for the private offering of its common shares to

sophisticated investors seeking hedge fund investment returns with periodic redemption rights.

7. Hedge fund sponsors such a s Harch Advisor generally manage the

formation of the hedge fund entities, arrange for the retention of hedge fund service-providers

and prepare the hedge fund disclosure documents.

8. Upon information and belief, in connection with the formation of Harch

Fund, Harch Advisor arranged for the election of the following four individuals as Directors to
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Hard Fund: Oskar Lewnowski, Gerald Rokoff, Alan Brown, and Paul Schreiber (the “Original

Directors”).

9. Upon information and belief, in connection with the formation of Harch

Fund, Harch Advisor and the Original Directors arranged for Harch Fund to retain Blue Highway

Management Limited (“Blue Highway”) as Manager for Harch Fund.

10. Oskar Lewnowski, one of Harch Fund’s Original Directors, was also the

President of Blue Highway.

11. Upon information and belief, in connection with the formation of Harch

Fund, Harch Advisor and the Original Directors arranged for Blue Highway to retain Olympia

Capital (Cayman) Limited (“Olympia Capital”) as Administrator for Harch Fund.

12. Upon information and belief, in connection with the formation of Harch

Fund, Harch Advisor and the Original Directors arranged for Harch Fund to retain Shearman &

Sterling as counsel to Harch Fund.

13. One of Harch Fund’s Original Directors, Oskar Lewnowski, was the

Chairman of Olympia Capital International, Olympia Capital’s parent company. Another

Original Director, Paul Schreiber, was a director of Olympia Capital International, while a third

Original Director, Alan Brown, was an employee of Olympia Capital (Bermuda) Limited, an

affiliate of Olympia Capital. The fourth Original Director, Gerald Rokoff, was the director of

international investment companies related to Olympia Capital International.

14. Upon information and belief, two of Harch Fund’s Original Directors,

Paul Schreiber and Gerald Rokoff, were partners of Shearman & Sterling.

15. Upon information and belief, Shearman & Sterling acted as counsel to

Harch Advisor as well as counsel to Harch Fund.

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16. Upon information and belief, in connection with the formation of Harch

Fund, Harch Advisor and the Original Directors arranged for Blue Highway to retain Harch

Advisor as investment advisor for Harch Fund.

17. Blue Highway and Harch Advisor entered into a Subadvisory Agreement

(the “Subadvisory Agreement”; Exhibit A) which entitled Harch Advisor to receive two types of

fees for managing Harch Fund: i) an annual management fee of no less than 0.5% of the net asset

value of Harch Fund’s assets at the end of each month; and ii) an annual performance fee of no

less than 10% of the amount by which the annual increase in the net asset value of Harch Fund’s

assets exceeded 5%.

18. The Subadvisory Agreement gave Harch Advisor investment discretion

with respect to all of Harch Fund’s investments.

19. The Subadvisory Agreement also required that Harch Advisor act at all

times in accordance with Harch Fund’s investment objectives.

20. Under the terms of the Subadvisory Agreement, Harch Advisor owed its

fiduciary duties directly to Harch Fund.

21. Harch Fund was the intended third party beneficiary of the Subadvisory

Agreement.

22. Further or alternatively, there was a collateral contract between Harch

Fund and Harch Advisor (made n consideration of the indemnity contained in section 3 of the

Subadvisory Agreement) under which Harch Advisor owed its fiduciary duties and duties of care

as investment advisor directly to Harch Fund. The terms of the Subadvisory Agreement were

continually considered and approved by the Directors of Harch Fund.

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23. Upon information and belief, in September 1997, Harch Advisor prepared

a confidential offering memorandum (the “Offering Memorandum”; Exhibit B) in connection

with the private offering of common shares of Harch Fund.

24. The Offering Memorandum promised shareholders that Harch Fund would

pursue the following investment objective and strategy:

The investment objective of [Harch Fund] is to provide

investors with attractive risk-adjusted rates of return through a
portfolio that generally has the following characteristics: (a) low
volatility; (b) a short duration (generally less than two (2) years,
measured retrospectively); and (c) an overall high degree of
liquidity in the underlying securities. [Harch Fund] will attempt to
achieve this objective through a two-pronged investment strategy:
(x) an emphasis on non-investment grade fixed income and equity
financial instruments (including bonds and bank loans) that, in
[Harch Advisor’s] judgment, are likely to be repurchased,
redeemed or retired by the issuer at a premium within twelve (12) .
to eighteen (18) months as the result of the occurrence of a
corporate event such as an initial public offering, asset sale, merger
or rehancing; and (y) active trading of the portfolio.
25. The Offering Memorandum promised that shareholders would, ‘in general,

be able to redeem their shares on a quarterly basis. The Offering Memorandum also warned

shareholders that redemptions might be suspended upon the occurrence of any of the.following

circumstances:

(i) when any exchange, board of trade or organized

interdealer market on which a significant portion of [Harch
Fund’s] assets is regularly quoted or traded is closed (other than
for holidays) or trading thereon has been restricted or suspended;
(ii) whenever, as a result of events, conditions or circumstances
beyond the control or responsibility of [Harch Fund], disposal of
the assets of [Harch Fund’s] business involving the sale, transfer,
delivery or withdrawal of funds is not reasonably practicable
without being detrimental to the interests of [Harch Fund] or the
Shareholders; (iii) if it is not reasonably practical to determine the
Net Asset Value per Share on an accurate and timely basis or the
Board of Directors otherwise determines that such action is in the
best interest of [Harch Fund]; or (iv) [Harch Fund] has adopted a
resolution calling for the liquidation and dissolution of [Harch

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 Fund3.

Harch Advisor Sponsors Harch CLO And

Becomes Its Collateral Manaver

26. In 2000, Harch Advisor sponsored the formation of Harch CLO and the

private offering of Notes of Harch CLO to institutional investors seeking CLO investment

returns.

27, Investment managers such as Harch Advisor generally participate in the

formation of the CLO entities, the retention of CEO service-providers and the preparation of the

CLO disclosure documents.

28. Upon information and belief, in connection with the formation of Harch

CLOYHarch Advisor arranged for Harch CLO to appoint Harch Advisor as its Collateral

Manager pursuant to the terms of a Collateral Management Agreement (the “Collateral

Management Agreement”; Exhibit C).

29. Pursuant to Section 28 of the Collateral Management Agreement, Harch

Advisor and Harch CLO agreed that “the Trustee on behalf of the Noteholders shall be a third
, .
party beneficiary” of the Collateral Management Agreement.

30. Upon Harch CLO’s successful launching, Harch Advisor would act as an

agent for Harch CLO and would be responsible for discharging many of the obligations of Harch

CLO under the terms of a Trust Indenture (the “Trust Indenture”; Exhibit D) pursuant to which

Harch CLO’s Notes would be issued.

31. Upon information and belief, in February of 2000, Harch Advisor

promoted a private offering of Notes of Harch CLO to institutional investors. The offering,

which closed on March 15,2000, raised gross proceeds of approximately $425 million for Harch

CLO.

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32. As a result of the offering, four classes of Notes were issued by Harch

CLO: Class A Notes, Class B Notes, Class C Notes and Class D Subordinated Notes. Harch

CLO issued the Notes pursuant to the Trust Indenture, with JP Morgan Chase as trustee (the

“Trustee”) for the Noteholders.

33. Pursuant to the Granting Clause of the Trust Indenture, Harch CLO

granted the Trustee “all of its right, title and interest in” all of the property of Harch CLO for the

benefit and security of the Harch CLO Noteholders. The Trustee, therefore, acted as

representative of the Harch CLO Noteholders under the terms of the Trust Indenture.

34. Harch CLO issued $327 million aggregate principal amount Class A

Notes, which received an “Am” rating by Moody’s Investors Service, Inc. (“Moody’s’’); $35

million aggregate principal amount Class B Notes, which received an “A3” Moody’s rating; and

$33 million aggregate principal amount Class C Notes, which received a “Baa2” Moody’s rating.

These Class A, Class B and Class C Notes had investment grade ratings; were fixed obligations

of Harch CLO and could be resold by their investors pursuant to Rule 144A of the U.S.

Securities Act of 1933, as amended (the “Securities Act”).

. .
35. Institutional investors generally regard CLO Notes with the attributes of

the Class A, Class B and Class C Notes as being liquid securities.

36. By contrast, the Class D Subordinated Notes of Harch CLO were offered

without an investment grade rating; were subordinated in right of payment to the payment o f the

Class A, Class B, and Class C Notes of Harch CLO; constituted claims on the residual value of

the Harch CLO Portfolio after payment of all fixed claims; and were completely restricted for

purposes of resale under the private placement rules of the Securities Act.

37. Institutional investors generally regard CLO Notes with the attributes of

the Class D Subordinated Notes as being highly illiquid securities.

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38. Because of the high degree of illiquidity and subordination risk of CLO

Notes with the attributes of the Class D Subordinated Notes (generally, “Residual Notes”),

sponsors of CLOs often find Residual Notes difficult to promote. However, the successful

formation and private offering of a CLO, and the related arrangements with its collateral

manager, require that the CLO issue a class of Residual Notes.

39. In some instances an investment adviser will use its own capital to invest

in Residual Notes so that the CLO may be successfully offered, and so that the investment

advisor may be retained as collateral manager to the CLO and be in a position to receive

significant base management and incentive fees from the CLO.

40. In connection with the formation and private offering of Harch CLO,

Harch Advisor, in its capacity as discretionary investment advisor to Harch Fund, invested $30

million of Harch Fund’s capital in 100% of the Class D Subordinated Notes.

41. The investment in the Class D Subordinated Notes did not comply with

the investment objectives and strategies which Harch Advisor had promised to the Harch Fund

investors in the Offering Memorandum. Specifically, the Class D Subordinated Notes did not

have low volatility, did not have a short duration and did not have a high degree of liquidity.

Moreover, an investment manager such as Harch Advisor could not reasonably expect that

Residual Notes such as the Class D Subordinated Notes would be likely to be repurchased,

redeemed or retired within 12 to 18 months of issuance, or that such Notes could be actively

traded.

42. The investment in the Class D Subordinated Notes created a significant

conflict of interest for Harch Advisor. By investing a substantial portion of the assets of Harch

Fund in Harch CLO, Harch Advisor positioned itself to earn two asset-based fees on the same

assets of Harch Fund, and potentially, two incentive fees relating to the performance of the same

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assets of Harch Fund. Moreover, as Collateral Manager to Harch CLO, Harch Advisor owed

fiduciary duties to a broader range of Note investors whose interests would likely conflict with

those of Harch Fund in the event of a deterioration in the performance of Harch CLO.

Specifically, the holders of the Class A, Class B and Class C Notes would expect an acceleration

of the paydown of their investments in the event of a deterioration in the performance of Harch

CLO, which could terminate distributions on the Class D Subordinated Notes, and would reduce

the value of the Class D Subordinated Notes, By contrast, the investors in Harch Fund would

expect the portfolio investments of Harch Fund, including the Class D Subordinated Notes, to be

liquid and retrievable at their carried value.

43. Upon information and belief, Harch Advisor never sought (i) approval

from the Board of Directors of Harch Fund for the investment of $30 million of Harch Fund’s

capital in the Class D Subordinated Notes; or (ii) a waiver from the Directors of Harch Fund for

the violation of the investment objectives of Harch Fund which such investment entailed; or (iii)

the consent of the Directors of Harch Fund to the conflict of interest created for Harch Advisor

as a result of the investment.

44. The private offering of Harch CLO was successfully closed on March 15,

2000.

45. As provided under the terms of the Collateral Management Agreement, in

Section 8, Harch Advisor was to be paid a “base collateral management fee” equal to 0.375% per

annum of the Aggregate Principal Balance of the Collateral Portfolio.

46. In addition, as provided under the terms of the Collateral Management

Agreement, in Section 8, after the internal rate of return on the original principal amount o f the

Class D Subordinated Notes exceeded 10% on an annualized basis, Harch Advisor was t o be

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paid an “incentive collateral management fee” equal to 0.375% per annum of the Aggregate

Principal Balance of the Collateral Portfolio.

47. The Collateral Management Agreement, in Section 9, stated that Harch

Advisor’s obligations were for the direct benefit of Harch CLO Noteholders:

(a) The Collateral Manager [Harch Advisor] shall

perfom its obligations hereunder in accordance with the terms of
this Agreement and the terms of the Indenture applicable to it and
shall use all reasonable endeavors, in the course of carrying out
such obligations, to act in the best interests of the holders of the
Notes.

48. Both Harch Advisor and Harch CLO agreed, pursuant to Section 22(a) of

the Collateral Management Agreement and Section 14.10 of the Trust Indenture, to submit to the

jurisdiction of the New York state or federal courts in the Borough of Manhattan for m y action

or proceeding arising out of or relating to the Harch CLO Notes, the Trust Indenture or the

Collateral Management Agreement.

Harch Advisor’s Investment Of Harch

Fund’s Capital In Harch CLO’s Class D
Subordinated Notes Creates Liquidity
And Valuation Problems For Harch Fund
, .
49. Upon information and belief, the investment by Harch Advisor of Harch

Fund’s $30 million on March 15,2000 in Hnrch CLO’s Class D Subordinated Notes precipitated

a severe and prolonged liquidity problem for Harch Fund and its shareholders which coincided

with a significant deterioration in the US.corporate credit markets.

50. Upon information and belief, many institutional investors reacted to the

deterioration of the US.corporate credit markets in the year 2000 by liquidating credit-sensitive

investments in favor of more liquid, higher rated investments.

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5 1. The ability of shareholders of Harch Fund to pursue this defensive strategy

was severely impaired by the extraordinary limitations imposed upon the redemption of shares of

Harch Fund.

52. For the first quarter following the investment, ending June 30, 2000,

Harch Fund was able to honor only 90% of each redemption request submitted by its

shareholders because it lacked sufficient liquid assets to honor 100%.

53. For the second quarter following the investment, ending September 30,

2000, redemptions of Harch Fund shares were suspended in their entirety,

54. For the quarter ended December 3 1,2000, redemptions of shares of Harch

Fund were limited to 38% of requested amounts and paid part in cash and part in kind.

55. For the year ended December 3 1,2001, redemptions of Harch Fund shares

were suspended in their entirety.

56. At the meeting of the Directors of Harch Fund held on June 7, 2000, the

Directors reviewed the letter dated April 26, 2000 (the “Management Letter”) of

PriceWaterhouseCoopers, auditor of the financial statements of Harch Fund (the “Auditor”),

, .

submitted to the Board with respect to its audit of Harch Fund’s financial statements for fiscal

year ended December 3 1, 1999. The Directors cited portions of the Management Letter stating

that the Auditor was “unable to obtain independent verification of a number of the [Hmch]

Fund’s assets which had been valued by Harch [Advisor] on a ‘fair value’ basis and that in

certain cases where independent values had been obtained by [the Auditor], these prices differed

from Harch [Advisor’s] valuations by amounts in excess of $200,000 per position.” The

Directors further noted the Auditor’s statement that “an inherent conflict of interest arose in

relation to the reliance on Harch [Advisor] for asset valuations in light of the fact that Harch

[Advisor] receives management and incentive fees from the [Harch] Fund based on the net asset

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value and the annual performance of the [Harch] Fund and also that Harch [Advisor] has a

significant financial interest in Premier Holding Limited.. ., the issuer of a number of debt and

equity instruments held by the [Harch] Fund.” In the Management Letter, the Auditor requested

the Directors to confirm the valuations made by Harch Advisor of Harch Fund investments.

57. At the same meeting, the Directors also reviewed memoranda produced by

Harch Advisor to justify its valuations. In connection with such review, the Board noted that

Joseph Harch and Michael Lewitt, two principals of Harch Advisor, also served as two of the

five Directors of Premier Holding Limited and “exercise effective control over the company”.

The Board also recorded that it had discussed the foregoing with Michael Lewitt and other

personnel of Harch Advisor responsible for Liaising with the Harch Fund Directors.

58. The Directors determined at the conclusion of their deliberations in June,

2000 to confirm to the Auditor the valuations made by Harch Advisor which were reflected in

Harch Fund’s financial statements for the year ending on December 31, 1999. As a condition of

doing so, the Directors required personal indemnities from Harch Advisor.

59. At a meeting of the Directors held on September 15, 2000, Oskar

Lewnowski and Paul Schreiber, the only two remaining Directors of Harch Fund at that time,

acknowledged to each other that they each had interests in other entities which dealt with, or

were affiliated with other entities which dealt with, Harch Fund and would therefore have

differing interests in any matters concerning Harch Fund. Having declared their interests, the

interested Directors determined that each Director was nevertheless entitled to vote on any

matters in which he had such a differing interest.

60. The two Directors then elected a third Director, William Maycock, who

also disclosed interests in other entities which dealt with, or were affiliated with entities which

dealt with, Harch Fund. The interested Directors then determined that the differing interests of

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the newly elected Director would not disqualify him from voting on any matter in which he had

such a differing interest.

61. At the September 15,2000 meeting, the Directors took note of the “severe

liquidity problems” affecting Harch Fund’s portfolio and the “impact of these problems on the

[Harch Fund’s] ability to honor outstanding redemption requests” from its shareholders for June

30, 2000, as well as redemption requests received for September 30,2000. In their deliberations,

the Directors took into account the representations and advice they had been given by Hakh

Advisor’s Executive Vice-president, Michael Lewitt.

62. Michael Lewitt informed the Directors that as of June 30, 2000, Harch

Fund held a percentage of its investments in illiquid securities which it could not sell, or could

not sell without a substantial discount. Mr. Lewitt stated that as a result of these positions, Harch

Fund was not in a position to honor redemptions in full at June 30, 2000 without significant

adverse effects to remaining investors.

63. Michael Lewitt also explained that the liquidity problems of Harch‘Fund

persisted after June 30, 2000 as a result of the total loss of the investment made by Harch

Advisor for Harch Fund in convertible bonds issued by Premier Cruises.

64. Michael Lewitt represented, on behalf of Harch Advisor, that Harch

Advisor had addressed the liquidity situation with each shareholder of Harch Fund which had

been affected thereby, and had obtained the agreement of each such shareholder to limit

redemptions on June 30,2000 to 90% of the demanded redemption amount.

65. The Directors of Harch Fund ratified the withholding of 10% of each

amount demanded for redemption as of June 30, 2000, and approved the suspension of

redemptions for the calendar quarter ending September 30,2000.

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66. Paul Schreiber then reminded the other Directors that Sheaman &

Sterling, counsel to Harch Fund, also acted as counsel to Harch Advisor.

67. The Directors of Harch Fund then voted to approve the renewal of the

Subadvisory Agreement between Blue Highway and Harch Advisor, which was expiring at the

end of its initial three year term.

68. In October of 2000, the Directors of Harch Fund convened a special

meeting to consider the demands of a shareholder (the “First Dissenting Shareholder”) which

objected to the limitations on redemptions on June 30,2000 and denied that it had ever agreed to

the limitations on redemptions proposed by Harch Advisor.

69. Michael Lewitt, as representative of Harch Advisor, informed the

Directors through correspondence dated October 23, 2000, that there had been a

miscommunication between Hxch Advisor and the First Dissenting Shareholder and that it

would be appropriate to honor the redemption requests of the First Dissenting Shareholder in

full.

70. The Directors determined that Harch Fund would honor the redemption
, .
requests of the First Dissenting Shareholder.

71. In November of 2000, the Directors of the Harch Fund convened a special

meeting to consider the demands of a second shareholder (the “Second Dissenting Shareholder”)

which objected to the limitations on redemptions on June 30, 2000 and also denied that it had

ever agreed to the limitations on redemptions proposed by Harch Advisor.

72. Michael Lewitt, as representative of Harch Advisor, informed the

Directors through correspondence dated November 15, 2000, that there had been a

miscommunication between Harch Advisor and the Second Dissenting Shareholder, that this

shareholder was the only shareholder, other than the First Dissenting Shareholder, which had not

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effectively agreed to the limitations and suspensions, and that it would be appropriate to honor

the redemption requests of the Second Dissenting Shareholder in full.

73. The Directors determined that Harch Fund would honor the redemption

requests of the Second Dissenting Shareholder.

74. On January 19, 2001, the Directors of Harch Fund convened a special

meeting to review the ongoing liquidity problems of Harch Fund and to determine what

restrictions should be placed upon the redemptions for December 3 1,2000, and what restrictions

should be placed upon redemptions throughout 2001.

75. The Directors noted that redemption requests for 61% of the outstanding

shares of Harch Fund, representing $56 million in net asset value of Harch Fund investments,

had been tendered for December 31,2000.

76. However, 62% of the Harch Fund assets consisted of bank loans, private

debt and other positions which had very burdensome transfer restrictions and could not

practically be transferred and therefore were characterized by Harch Advisor as illiquid.

77. The Directors also considered Harch Advisor’s M e r representations that

selling the majority of Harch Fund’s remaining marketable positions or applying all of Harch

Fund’s cash on hand to meet the outstanding redemption requests would not be possible without

having a very significant and disproportionately adverse effect on non-redeeming shareholders.

78. The Directors approved a partial redemption of redemption requests for

December 3 1, 2000, in which 26% of the amount of the redemption requests would be honored

in cash and 12% of the amount of the redemption requests would be honored by distribution of

liquid securities in kind. The Directors then approved the complete suspension of redemptions

for 200 1.

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79. In a meeting held March 27, 2001, the Directors took note of the

suggestion of Harch Advisor to replace PriceWaterhouseCoopers with Emst & Young as Auditor

for Harch Fund’s fiscal year ended December 3 1,2000. Mr. Maycock, acting as Chairman of the

meeting, noted that “there were no disputes with the current auditors.” The Directors then

approved the appointment of Ernst & Young as Auditor in place of PriceWaterhouseCoopers.

Harch Advisor Invests More Than $15.2

Million Of Additional Capital Of Harch
Fund In Harch CLO

80. Upon information and belief, in the year 2001, Harch CLO experienced a

significant deterioration in the credit quality of its Portfolio investments.

81. Under the terms of the Trust Indenture, if Harch CLO failed certain

financial tests it would be required to begin the liquidation of its Portfolio in order to pay off the

investment grade-rated Class A, Class B and Class C Notes it had issued.

82. If‘Harch CLO began to liquidate its Portfolio, Harch Advisor would lose a

substantial portion of its base collateral management fee and would be at risk of losing all of its

fee.

83. If Harch CLO began to liquidate its Portfolio, the Class D Subordinated

Notes would begin to lose value, and would be exposed to extreme risk of loss.

84. An infusion of additional subordinated capital achieved by the issuance of

additional Class D Subordinated Notes would serve to provide Harch Advisor with the means to

improve the financial condition of Harch CLO and possibly to avoid liquidation of the Harch

CLO Portfolio.

85. However, an investment in additional Class D Subordinated Notes at a

time in which the financial condition of Harch CLO had deteriorated would present extreme risks

to the investor. Such an investment would primarily benefit the Class A, Class B and Class C

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Noteholders, and the Collateral Manager. In such a circumstance, all of the outstanding Class D

Subordinated Notes, including the newly issued Class D Subordinated Notes, would be exposed

to a significant risk of diminution of value or loss.

86. On June 22, 2001, Harch CLO made a distribution of over $3.3 million to

Harch Fund as holder of its Class D Subordinated Notes. On or about that same day, Harch

Advisor reinvested this distribution in additional Class D Subordinated Notes.

87. On September 22, 2001, Hnrch CLO made a distribution of more than $1

million to Harch Fund as holder of its Class D Subordinated Notes, On or about that same day,

Harch Advisor reinvested the distribution in additional Clam D Subordinated Notes.

88. On December 22,2001, Harch CLO made a distribution of more than $1.6

million to Harch Fund as holder of its Class D Subordinated Notes. On or about that same day,

Harch Advisor reinvested the distribution in additional Class D Subordinated Notes.

89. On March 22, 2002, Harch CLO made a distribution of more than $1.8
million to Harch Fund as holder of its Class D Subordinated Notes. On or about that same day,

Harch Advisor reinvested the distribution in additional Class D Subordinated Notes.

90. On June 22, 2002, Harch CLO made a distribution of more than $2.5

million to Harch Fund as holder of its Class D Subordinated Notes. On or about that same day,

Harch Advisor reinvested the distribution in additional Class D Subordinated Notes.

91. On September 22, 2002, Harch CLO made a distribution of more than

$1.8 million to Harch Fund as holder of its Class D subordinated Notes. On or about that same

day, Harch Advisor reinvested the distribution in additional Class D Subordinated Notes.

92. On December 22,2002, Harch CLO made a distribution of more than $2.6

million to Harch Fund as holder of its Class D Subordinated Notes. On or about that same day,

17
M 2 : #826893 v.1 #11375-0001 04/13L!005
Harch Advisor reinvested more than $1.3 million of this distribution ip additional Class D

Subordinated Notes.

93. On March 22, 2003, Harch CLO made a distribution of more than $1.8

million to Harch Fund as holder of its Class D Subordinated Notes. On or about that same day,

Harch Advisor reinvested more than $900,000 of this distribution in additional Class D

Subordinated Notes.

94. On June 22, 2003, Harch CLO made a distribution of more than $2.4

million to Harch Fund as holder of its Class D Subordinated Notes. On or about that same day,

Harch Advisor reinvested more than $600,000 of this distribution in additional Class D

Subordinated Notes.

95. The total amount of monies distributed by Harch CLO to Harch Fund and

immediately reinvested by Harch Advisor in additional Class D Subordinated Notes exceeded

$15.2 million (the “Reinvestment”).

96. As a result of the Reinvestment, the aggregate capital’ of Harch Fund

invested by Harch Advisor in Class D Subordinated Notes exceeded $45.2 million.

, .
97. Upon information and belief, Harch Advisor did not procure the issuance

of additional Class D Subordinated Notes to Harch Fund to evidence the Reinvestment. Harch

Advisor did not renegotiate any of the terms of the Trust Indenture or the Collateral Management

Agreement to provide Harch Fund with additional or improved claims against Harch CLO in

consideration of the Reinvestment. Harch Advisor did not make payment of a fee or transfer of

any asset of value to Harch Fund a condition of the Reinvestment. Harch Advisor did not obtain

consideration of any kind for Harch Fund in connection with the Reinvestment.

98. The Reinvestment did not comply with the investment objectives and

strategies which Harch Advisor had promised to the Harch Fund investors in the Offering

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 8 b W

Memorandum. Specifically, the Reinvestment did not have low volatility, did not have a short

duration and did not have a high degree of liquidity. Moreover, an investment manager such as

Harch Advisor could not reasonably expect that the Reinvestment would be likely to be

repurchased, redeemed or retired within 12 to 18 months of issuance, or that the Reinvestment

could be actively traded.

99. The Reinvestment was made by Harch Advisor at a time when Harch

Advisor was subject to a significant conflict of interest. By reinvesting a substantial portion of

the assets of Harch Fund in Harch CLO, Harch Advisor preserved its ongoing base collateral

management fee ftom Harch CLO. Moreover, the Reinvestment primarily benefited other Harch

CLO Noteholders to which Harch Advisor also owed fiduciary duties, at a time when the

interests of the other Note investors were in conflict with those of Harch Fund.

100. Upon information and belief, Harch Advisor never sought: (i) approval

from the Directors of Harch Fund for the Reinvestment; or (ii) a waiver horn the Directors of

Harch Fund for the violation of the investment objectives of Harch Fund which the Reinvestment

entailed; or (iii) the consent of the Directors of Harch Fund to the conflict of interest to which
, .
Harch Advisor was subject at the time of the Reinvestment.

Harch Fund Demands Redemption

Of Its Class D Subordinated Notes
101. On June 11, 2004, Harch Fund notified its shareholders that it had

liquidated all of its investments except for the Class D Subordinated Notes, and had distributed

substantially all of the net proceeds of such investments to the shareholders of Harch Fund.

Harch Fund further stated that the Class D Subordinated Notes were illiquid and that the only

source of valuation for the investment was Harch Advisor, which employed a valuation model

developed with the assistance of Ernst & Young, the Auditor of Harch Fund’s fmancial

statements. Harch Fund then informed the shareholders that Ernst & Young had detected a
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mistake in the valuation by Harch Advisor of the Class D Subordinated Notes which resulted in

an overstatement of value in the range of $3 million. Harch Fund explained that it would

therefore be necessary to restate its financial statements for the year ended December 3 1, 2003

to reduce the recorded value of Harch Fund’s investment in the Class D Subordinated Notes

from approximately $21 million to approximately $18 million.

102. On June 30, 2004, Harch Advisor, in its capacity as Collateral Manager to

Harch CLO, reported to the Class A, Class €3, Class C and Class D Subordinated Noteholders of

Harch CEO on the performance of Harch CLO. While generally positive in tone, the June 2004

Report disclosed that “[wlhile the CLO is meeting all (original emphasis) of the most important

tests, it is failing several other less important tests including (1) the Minimum Par Value Test, (2)

the maximum allowable Caal or below collateral basket, (3) issuers located outside of the United

States or Canada, (4) the Weighted Average Fixed Rate Coupon Test and ( 5 ) the Weighted

Average Spread Test (other than senior secured loans).” Harch Advisor commented on the

reasons for failing each such financial test and the outlook for improving compliance in the

hture.
. .
103. The June 2004 Report made the following specific statement with respect

to the performance of the Class D Subordinated Notes: “In the most recent quarter we

distributed $1,922,977.20 to holders of the Class D Notes. This is the fourth consecutive 100%

distribution to Class D Noteholders. We have now made a net distribution of $14,446,089.71 to

Class D Noteholders since inception.” (emphasis supplied)

104. The disclosure to the Class A, Class €3 and Class C Noteholders of a “net

distribution of $14,446,089.71 to Class D Noteholders since inception” excluded more than

$15.2 million which was distributed to Harch Fund but concurrently reinvested by Harch

Advisor in additional Class D Subordinated Notes.

20
HFNYZ: #E26893 v.1 #11375-0001 04/13RM35
 105. Upon information and belief, Harch Advisor never informed the Trustee

that more than $15.2 million recorded as distributions on the Class D Subordinated Notes were

in fact concurrently reinvested in additional Class D Subordinated Notes.

106. Upon information and belief, Harch Advisor never informed the Trustee

that more than $15.2 million recorded as distributions on the Class D Subordinated Notes were

not included in the performance data for the Class D Subordinated Notes which Harch Advisor

supplied to all of the Noteholders.

107. Upon information and belief, Harch Advisor never lnformed the Trustee

that the infusion of more than $15.2 million of subordinated capital into Harch CLO was a

reinvestment by Harch Fund in additional Class D Subordinated Notes.

108. Under the terms of the Trust Indenture for Harch CLO, the holders of

more than 66 2/3% of the Class D Subordinated Notes had the right at June 30, 2004 and

thereafter to demand the redemption of the Class D Subordinated Notes, thereby liquidating the

investment. Such a redemption would have required the prior liquidation of Harch CLO

Portfolio and the payment in full of all outstanding Notes of Harch CLO in order of priority.

Such a liquidation would have also terminated Harch CLO and the ongoing related fee income to

its collateral manager, Harch Advisor.

109. As holder of 100% of the Class D Subordinated Notes, either Harch Fund

or Harch Advisor, as discretionary investment advisor for Harch Fund, had the ability to demand

the redemption of the Class D Subordinated Notes.

110. On January 17, 2005, in an extraordinary general meeting of the

shareholders of Harch Fund, the existing Directors of Harch Fund were removed and replaced by

a new Board of Directors (the ‘‘New Board”).

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 0

111. On January 17, 2005, the New Board convened a special meeting of the

Board to reorganize itself and to review the remaining investments of Harch Fund. The New

Board considered, after careful reflection, that it would be in the best interests<ofHarch Fund to

liquidate its investment of more than $45.2 million in the Class D Subordinated Notes.

112. The New Board approved the liquidation of Harch Fund’s investment in

the Class D Subordinated Notes and resolved to demand the redemption of the Class D

Subordinated Notes in order to liquidate the investment.

113. Upon the conclusion of the special meeting, Harch Fund made the demand

for redemption of the Class D Subordinated Notes to Harch CLO, to Harch Advisor in its

capacity as Collateral Manager to Harch CLO, and to JP Morgan Chase in its capacity as Trustee

under the Trust Indenture.

114. Upon information and belief, prior to March 22, 2005, Harch Advisor

arranged for the liquidation of the Harch CLO Portfolio in order to fund the redemptions of the

outstanding Notes of Harch CLO.

115. On March 22,2005, the interest proceeds in the Harch CLO Portfolio were
, .
distributed to pay accrued interest on the Harch CLO Notes and accrued expenses of providers of

services for Harch CLO.

116. In connection with the distribution of interest proceeds, Harch Fund

received approximately $1 million.

117. On March 22, 2005, the liquidation proceeds of Harch CLO were

distributed in redemption of its outstanding Class A, Class B, Class C and Class D Subordinated

Notes.

118. In connection with the distribution of liquidation proceeds, Harch Fund

received approximately $14.3 million.

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h

119. After receipt of its distribution, Harch Fund obtained from the Trustee a

copy of the Note Valuation Report (the “Note Valuation Report”; Exhibit E), which purported to

show how the liquidation proceeds of the Harch CLO Portfolio were distributed in connection

with the redemption of March 22,2005.

120. The Note Valuation Report disclosed a principal balance of approximately

$418 million in the Harch CLO Portfolio as of March 22,2005.

121. According to the Note Valuation Report, aRer application of liquidation

proceeds to pay the outstanding principal of the Class A, Class B and Class C Notes, the residual

value of Harch CLO was approximately $23.1 million.

122. As holder of 100% of the Class D Subordinated Notes, Harch Fund was

entitled to and expected to receive 92.5% of the entire residual value of the Harch CLO, which

would approximate $21.3 million.

123. The holders of the Class C Notes were entitled to and expected to receive

7.5% of the entire residual value of Harch CLO in payment of a liquidation yield distribution

amount, which would approximate $1.8 million.

1
, .
124. The Note Valuation Report disclosed, however, that over $7.6 million of

the residual value of Harch CLO had been paid to Harch Advisor as an additional “collateral

management fee”.

125. The New Board of Harch Fund immediately demanded an explanation

from Harch Advisor as to this payment and Harch Advisor responded by characterizing the

approximately $7.6 million as an incentive fee owed to it under the terms of the Collateral

Management Agreement.

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126. In a five year period beginning March 15, 2000 and ending March 22,

2005, Harch Advisor invested more than $45.2 million of Harch Fund’s capital in Class D

Subordinated Notes.

127. In that same time period, Harch Fund received a total return on its

investment in Class D Subordinated Notes of approximately $47.7 million.

128. After giving effect to the redemption on March 22, 2005, the annualized

internal rate of return on the Class D Subordinated Notes was materially below the 10%

threshold required in order for such an incentive fee to be payable.

129. ARer giving effect to the redemption on March 22, 2005, Harch Advisor

was not entitled to payment of an incentive fee out of the residual value of Harch CLO.

130. Upon information and belief, Harch Advisor knew that it was not entitled

to payment of an incentive fee from the residual value of the Harch CLO as contemplated by the

Collateral Management Agreement. .

131. At the time that Harch Advisor received payment of the incentive fee,

Harch Advisor was subject to material conflicts of interest.

132. As Collateral Manager for the Harch CLO, Harch Advisor owed a

fiduciary duty to the Class D Subordinated Noteholders to maximize their recovery in connection

with the redemption of the outstanding Notes of Harch CLO.

133. As investment advisor to Harch Fund, Harch Advisor owed a fiduciary

duty to Harch Fund to maximize its recovery on its $45.2 million investment in Class D

Subordinated Notes.

134. The wrongful acceptance by Harch Advisor of a $7.6 million incentive fee

to which it was not entitled resulted in an immediate and substantial reduction in the return to

Harch Fund on its $45.2 million investment in Class D Subordinated Notes.

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135. In wrongfully accepting an incentive fee to which it was not entitled,

Harch Advisor placed its own self-interests ahead of its fiduciary obligations.

136. Upon information and belief, Harch Advisor did not inform the Trustee of

material facts essential to the correct calculation of the annualized internal rate of return on the

Class D Subordinated Notes.

137. Upon information and belief, Harch Advisor did not inform the Trustee

that it was not entitled to the incentive fee.

138. Harch Advisor did not return the incentive fee payment to the Trustee for

the benefit of Harch Advisor’s fiduciary client, Harch Fund.

139. Harch Advisor did not provide Harch Fund with an opportunity to object

to the payment of the incentive fee or to object to the basis of its calculation before Harch

Advisor received payment of the fee.

AS AND FOR ITS FIMT CAUSE OF ACTION

(Breach of Contract - Harch Advisor and Harch CLO)
140. Harch Fund repeats and realleges each of the allegations contained in

paragraphs 1 through 139 hereof with the same force and effect as if fully set forth herein.

141. Harch Fund was entitled to 92.5% of the entire residual value of Harch

CLO leR after payment of priority claims.

142. The entire residual value of Harch CLO after satisfaction of priority

claims was approximately $23.1 million.

143. Harch Fund was therefore entitled to a distribution of more than $21.3

million of the entire residual value of Harch CLO, but received only approximately $14.3

million.

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Q 6

144. In connection with the redemption on March 22, 2005, Harch CLO was

0 liged to pay 92.5% of its entire residual value to Harch Fund, and to direct the Trustee to make

the payment on its behalf.

145. In connection with the redemption on March 22,2005, Harch Advisor was

obliged to discharge the obligations of Harch CLO to pay 92.5% of the entire residual value of

Harch CLO to Harch Fund, and to direct the Trustee to make the payment on behalf of Harch

CLO.

146. Harch CLO and Harch Advisor breached the Collateral Management

Agreement by directing payment to Harch Advisor of an incentive fee of approximately $7.6

million out of the residual value of Harch CLO.

147. Harch CLO and Harch Advisor breached the Trust Indenture by directing

payment to Harch Fund of approximately $14.3 million of the residual value of Harch CLO,

which was an amount approximately $7 million less than the amount to which Harch Fund was

entitled.

148. Defendants Harch Advisor and Harch CLO have materially breached the

terms of the Collateral Management Agreement and Trust Indenture by paying Harch Advisor an

incentive fee in excess of $7.6 million to which Harch Advisor was not entitled, and by failing to

distribute 92.5% of the entire residual value of the Harch CLO to Harch Fund as holder of 100%

of the Class D Subordinated Notes.

149. By reason of the foregoing, Harch Fund has been damaged.

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AS AND FOR ITS SECOND CAUSE OF ACTION

-
(Conversion Harch Advisor )

150. Harch Fund repeats and realleges each of the allegations contained in

paragraphs 1 through 149 hereof with the same force and effect as if fully set forth herein.

151. Upon information and belief, Harch Advisor wrongfully converted to its

own use and benefit money belonging to Harch Fund in excess of $7 million.

152. Upon infomation and belief, the conversion by Harch Advisor was

intentional.

153. By reason of the foregoing, Harch Fund has been damaged.

AS AND FOR ITS THIRD CAUSE OF ACTION

-
(Breach Of Fiduciary Duty Harch Advisor)

154. Harch Fund repeats and realleges each of the allegations contained in

paragraphs 1 through 153 hereof with the same force and effect as if fully set forth herein.

155. As collateral manager for Harch CLOYHarch Advisor owed a fiduciary

duty to Harch Fund as holder of the Class D Subordinated Notes.

156. Harch Advisor was under a duty to act with loyalty, care, skill and

diligence in fulfilling its fiduciary obligations to Harch Fund and Harch Fund relied on Harch

Advisor’s loyalty, care, skill and diligence.

157. Harch Advisor wrongfully and knowingly accepted an incentive fee of

$7.6 million to which it was not entitled, which resulted in an immediate and substantial

reductio11 in the return to Harch Fund on its $45.2 million investment in Class D Subordinated

Notes.

158. By engaging in the conduct alleged above, Harch Advisor’s actions

constituted bad faith, willful misconduct, gross negligence andor reckless disregard with respect

to its fiduciary obligations.

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HFNYZ: #a26893 v , l #I 1375-0001 04/13/2005
 159, Harch Advisor failed to act in accordance with the fiduciary duties it owed

Harch Fund and breached those duties.

160. By reason of the foregoing, Harch Fund has been damaged.

AS AND FOR ITS FOURTH CAUSE OF ACTION

-
(Fraud Harch Advisor)
161. Harch Fund repeats and realleges each of the allegations contained in

paragraphs 1 through 160 hereof with the same force and effect as if fully set forth herein.

162. Upon information and belief, at all relevant times, Harch Advisor

represented to the holders of Harch CLO’s Class D Subordinated Notes that it would collect an

incentive fee under the terns of the Collateral Management Agreement and Trust Indenture only

if the annuaIized internal rate of return on the original principal amount of the Class D

Subordinated Notes exceeded 10%.

163. Pursuant to the terms of the Trust Indenture, the Trustee was required to

act for the benefit and security of the Noteholders, including Harch Fund as holder of 100% of

the Class D Subordinated Notes.

164. Harch Advisor had a duty, .asa fiduciary to the Class D Noteholders and to

the Trustee as their representative, to disclose to the Trustee all material information concerning

investments in the Class D Subordinated Notes and distributions on the Class D Subordinated

Notes, so that the Trustee would be able to calculate the correct annualized internal rate of return

on the Class D Subordinated Notes and thereby determine whether Harch Advisor was entitled to

an incentive fee.

165, Upon information and belief, Harch Advisor intentionally withheld

material information from the Trustee concerning: i) distributions of approximately $15.2

million on the Class D Subordinated Notes; and ii) the aggregate subordinated capital infused in

the Harch CLO of approximately $ 15.2 million (the “Material Omission”).

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166. Upon information and belief, the Trustee relied on Harch Advisor to

provide it with all material information concerning the distributions on and investments in the

Class D Subordinated Notes. As a result of the Material Omission, the Trustee incorrectly

calculated an annualized internal rate of return on the Class D Subordinated Notes in excess of

10% and therefore distributed more than $7.6 million from the entire residual value of the Harch

CLO to Harch Advisor in payment of an incentive fee to which Harch Advisor was not entitled.

167. Upon information and belief, when Harch Advisor accepted payment of

the incentive fee, Harch Advisor knew that the annualized internal rate of return on the Class D

Subordinated Notes which the Trustee had used as a basis for calculating the incentive fee was

materially incorrect, as a result of the Material Omission.

168. Upon information and belief, Harch Advisor's conduct was, malicious,

willful and in reckless disregard of Harch Fund's rights.

169. By reason of the foregoing, Harch Fund has been damaged.

AS AND FOR ITS FIFTH CAUSE OF ACTION

(Breach of Fiduciary Duty - Harch Advisor)

170, Harch Fund repeats and realleges each of the allegations contained in

paragraphs 1 through 169 hereof with the same force and effect as if fully set forth herein.

171. As Harch Fund's investment advisor, Harch Advisor was under a duty to
act with loyalty, care, skill and diligence in fulfilling its fiduciary obligations to Harch Fund, and

Harch Fund relied on Harch Advisor's loyalty, care, skill and diligence.

172. The initial investment by Harch Adviser of $30 million of Harch Fund's

capital in the Class D Subordinated Notes of Harch CLO violated the investment objectives set

forth in the Offering Memorandum.

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 C?

173. The initial investment by Harch Advisor of $30 million of Harch Fund’s

capital in the Class D Subordinated Notes of Harch CLO involved a conflict of interest which

Harch Advisor did not disclose to Harch Fund and to which Harch Fund did not consent.

174. Upon information and belief, the initial investment by Harch Advisor of

$30 million of Harch Fund’s capital into Harch CLO was intended not to benefit Harch Fund or

its shareholders, but rather to enable Harch Advisor as the sponsor of Harch CLO to complete

the successhl offering and closing of Harch CLO and thereby obtain a steady flow of fees from

Harch CLO in its capacity as collateral manager to Harch CLO.

175. Upon information and belief, Harch Advisor’s initial $30 million

investment of Harch Fund’s capital in Class D Subordinated Notes precipitated a severe and

prolonged liquidity crisis for Harch Fund and its shareholders, resulting in extraordinary

restrictions on the ability of the shareholders to redeem their investments in the Harch Fund.

176. Upon information and belief, Harch Advisor provided incorrect valuations

for illiquid portfolio investments of Harch Fund while subject to a conflict of interest.

177. Upon information and belief, the Reinvestxnent by Harch Advispr of more
, .
than $15.2 million of Harch Fund’s capital in additional Class D Subordinated Notes was

intended not to benefit Harch Fund or its shareholders, but rather to preserve Harch CLO and the

stream of collateral management fee income received by Harch Advisor from the Harch CLO.

178. Upon information and belief, Harch Advisor in its capacity as fiduciary for

Harch Fund executed the Reinvestment without procuring the issuance of additional Class D

Subordinated Notes for Harch Fund, and without bargaining for consideration or value of any

kind for the benefit of Harch Fund.

179. The Reinvestment violated the investment objectives set forth in the

Offering Memorandum.

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HFNYZ: #E26893 v.1 #I 1375-0001 04/13R005
 180. Harch Advisor had a conflict of interest in making the Reinvestment,

which served to preserve the substantial stream of base collateral management fees paid by

Harch CLO to Harch Adviser.

181. Harch Advisor’s actions were dishonest and constitute gross negligence,

fraud and willful andor reckless misconduct with respect to its fiduciary obligations.

182. By the actions alleged above, Harch Advisor failed to act in accordance

with the fiduciary duties it owed to Harch Fund, and breached its fiduciary duties to Harch Fund.

183. By reason of the foregoing, Harch Fund has been damaged.

AS AND FOR ITS SIXTH CAUSE OF ACTION

(Fraud - Harch Advisor)

184. Harch Fund repeats and realleges each of the allegations contained in

paragraphs 1 through 183 hereof with the same force and effect as if fully set forth herein.

185. Upon information and belief, at all relevant times, Harch Advisor

represented to Harch Fund that it was reinvesting Harch Fund’s capital of more than $15.2

million in additional Class D Subordinated Notes in exchange for valuable consideration. Upon

information and belief, when these representations were made they were false and misleading

and Harch Advisor knew that Harch Fund was not receiving any valuable consideration for the

Reinvestment.

186. Upon information and belief, Harch Advisor made these representations

knowing they were false and misleading with the intent to deceive Harch Fund and to induce

Harch Fund to continue to entrust Harch Advisor with investment discretion over Harch Fund’s

investment portfolio, including additional reinvestments of Harch Fund capital in additional

Class D Subordinated Notes.

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entrust Harch Advisor with investment discretion over Harch Fund’s portfolio, including

reinvestments of Harch Fund capital in additional Class D Subordinated Notes.

188. As a result of Harch Fund’s reliance upon Harch Advisor’s misrep-

resentations, more than $ 5.2 million of Harch Fund capital was reinvested in additional Class D

Subordinated Notes without any inurement for the benefit of Harch Fund.

189. Harch Advisor’s conduct was malicious, willful and in reckless disregard

of Harch Fund’s rights.

190. By reason of the foregoing, Harch Fund has been damaged.

AS AND FOR ITS SEVENTH CAUSE OF ACTION

(Demand for an Accounting- Harch Advisor)

191. Harch Fund repeats and realleges each of the allegations contained in

paragraphs 1 through 190 hereof with the same force and effect as if fully set forth herein.

192. As Collateral Manager for Harch CLO, Harch Advisor owed a fiduciary

duty to Harch Fund.

193. Harch Advisor was entrusted with the proper management of Harch

Fund’s investments in Harch CLO and With directing the proper distribution of Harch Fund’s

capital upon the redemption of its Class D Subordinated Notes.

194. Upon information and belief, Harch Advisor intentionally directed the

misapplication of Harch CLO’s residual value, to which Harch Advisor was entitled, in violation

of the Collateral Management Agreement and Trust Indenture and caused in excess of $7.6

million of Harch CLO’s residual value to be wrongfully diverted to itself as an improper

incentive fee.

195.

196.
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197. Harch Fund has demanded that Harch Advisor provide a full accounting as

to the distribution of funds to Harch Advisor in connection with the redemption of the

outstanding Notes of Harch CLO.

198. Harch Advisor has failed to provide such an accounting.

199. An accounting is necessary to determine the rights of the parties in regard

to the funds in excess of $7.6 million claimed by Harch Advisor as an incentive fee.

PRAYER FOR RELIEF

WHEREFORE, Harch Fund demands judgment as follows:

A. As to the First Cause of Action, a s u m in excess of $7 million, plus

interest and costs.

B. As to the Second Cause of Action, a sum in excess of $7 million,

plus interest and costs and punitive damages in the amount of $50 million.

C. As to the Third Cause of Action, a sum in excess of $7 million,

plus interest and costs and punitive damages in the amount of $SO million.

D. As to the Fowth Cause of Action, a sum in excess of $7 million,

plus interest and costs and punitive damages in the amount of $50 million.

E. As to the Fifth Cause of Action, damages to be determined at trial,

plus interest and costs and punitive damages in the amount of $50 million.

F. As to the Sixth Cause of Action, damages to be determined at trial,

plus interest and costs, and punitive damages in the amount of $50 million.

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G. As to the Seventh Cause of Action, an accounting for all monies

paid to larch Advisor as collateral management fees as set forth in the Note Valuation Report.

H. Granting Harch Fund such other and hrther relief as the Court

deems just and proper.

Dated: New York, New York

April 13,2005

HERRTCK, FEINSTEIN LLP

Attorneys for Plaintiff

(212) 592-1400

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