Professional Documents
Culture Documents
656932/2017
NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 11/15/2017
Plaintiffs David H. Storper, David Wax, and Pamela K. Wilson (collectively, Plaintiffs)
by their undersigned attorneys, for their Complaint against defendants WL Ross & Co., LLC
(WL Ross), WL Ross Group, L.P. (Ross Group), and Wilbur Ross (collectively,
Defendants) in the right of WLR Recovery Associates II, LLC, WLR Recovery Associates III,
LLC, and WLR Recovery Associates IV, LLC, and suing on behalf of all members thereof
1. WL Ross is a global private equity firm, which creates and manages private
equity funds, and has approximately $4.6 billion in assets under management.
companies (defined herein as GPs) formed to help manage the associated private equity funds.
In return, the employees received rights to receive shares of the profits and other gains earned by
the GPs. These rights to share in the gains of the GPs were a significant part of employee
1 of 17
FILED: NEW YORK COUNTY CLERK 11/15/2017 11:27 AM INDEX NO. 656932/2017
NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 11/15/2017
compensation at WL Ross. Moreover, these rights are retained by employees even after they
leave WL Ross.
3. The derivative plaintiffs in this action are former employees of WL Ross, who
collectively invested millions of dollars in GPs during their WL Ross careers, and collectively
4. The Defendants, as fiduciaries of the GPs, had obligations to ensure the GPs
received the appropriate economic benefits. But the Defendants blatantly violated those
obligations to enrich themselves. They charged the GPs millions of dollars in fees (at rates even
exceeding what could be charged to investors), took those fees for themselves, and completely
millions of dollars of management fees to the general partner entities it created to manage its
flagship private equity funds. In all, Plaintiffs found that at least $48 million in management fees
6. These charges are barred by the limited partnership agreements governing the
private equity funds. The agreements allow management fees to be charged to fund investors,
not the general partners. Moreover, the management fees charged to the general partners were
assessed at rates far beyond what is even allowed to be charged to the investors in the funds.
fiduciary duty of care to the members of those entities by causing and allowing the fees to be
charged, and breached its duty of loyalty by directing the fees to itself.
-2-
2 of 17
FILED: NEW YORK COUNTY CLERK 11/15/2017 11:27 AM INDEX NO. 656932/2017
NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 11/15/2017
8. Further, WL Ross concealed these management fees from the members of the
general partner entities by failing to disclose capital statements to its members which included a
line item for management fees until, upon information and belief, the summer of 2016.
received incoherent and incomplete answers which did not match up with data on the face of the
capital statements WL Ross had itself prepared and disseminated. Plaintiffs followed up, but
received no response.
10. Plaintiffs bring this action on behalf of the general partner entities to force WL
Ross to provide a full accounting of the affairs of the general partner entities and to pay
restitution and disgorge any improper payments it received or caused the entities to pay.
11. This Court may exercise personal jurisdiction over Defendants pursuant to
Sections 301 and 302 of the New York Civil Practice Law and Rules (CPLR). Among other
things, Defendants regularly transacts business in New York. Moreover, the events, actions and
12. Venue is proper in this Court pursuant to CPLR Section 503 because Plaintiff
David Storper resides in this county and the principal offices of the entities Plaintiffs are
PARTIES
13. Mr. Storper was a Senior Managing Director of WL Ross from approximately
April 2000 until late 2012. In addition, Mr. Storper is a member of WLR Recovery Associates II
LLC (WLR II), WLR Recovery Associates III LLC (WLR III), and WLR Recovery
Associates IV LLC (WLR IV) (collectively, the WLR GPs). Mr. Storper is, and has at all
-3-
3 of 17
FILED: NEW YORK COUNTY CLERK 11/15/2017 11:27 AM INDEX NO. 656932/2017
NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 11/15/2017
14. Mr. Wax was former employee of WL Ross from approximately 2000 until mid-
2015. In addition, Mr. Wax is a member of the WLR GPs. Mr. Wax is a resident of the State of
Florida.
15. Ms. Wilson was former employee of WL Ross from approximately 2000 until
early 2013. In addition, Ms. Wilson is a member of the WLR GPs. Ms. Wilson is a resident of
16. WLR II is a Delaware limited liability company, with its principal office in New
York. WLR II is a resident of New York. WLR II is the general partner of WLR Recovery Fund
II, L.P. (WLR Fund II). Upon information and belief, defendant WL Ross is the managing
17. WLR III is a Delaware limited liability company, with its principal office in New
York. WLR III is a resident of New York. WLR III is the general partner of WLR Recovery
Fund III, L.P. (WLR Fund III). Upon information and belief, Defendant WL Ross is the
18. WLR IV is a Delaware limited liability company, with its principal office in New
York. WLR IV is a resident of New York. WLR IV is the general partner of WLR Recovery
Fund IV, L.P. (WLR Fund IV). Upon information and belief, Defendant WL Ross is the
19. Defendant WL Ross is a global investment and private equity firm which is well-
known for its strategies of investing in distressed companies and for helping restructure and
turnaround struggling businesses. WL Ross is, and has at all relevant times been, a Delaware
limited liability company registered to transact business in the State of New York with its
-4-
4 of 17
FILED: NEW YORK COUNTY CLERK 11/15/2017 11:27 AM INDEX NO. 656932/2017
NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 11/15/2017
20. Defendant Ross Group is a New York limited partnership, with its principal office
in New York, New York. Upon information and belief, Ross Group was the managing member
of WLR GPs until recently, when it was succeeded in those roles by WL Ross. Ross Group is an
entity which is completely controlled by Wilbur Ross, through a single member LLC, El
21. Defendant Wilbur L. Ross was the Chairman and Chief Strategy Officer of WL
Ross until earlier this year, when he was appointed Secretary of the United States Department of
Commerce. Mr. Ross was also previously the Chief Executive Officer of Invesco Private
Capital, Inc., the direct parent company of WL Ross. Mr. Ross was the original managing
member of WLR II and WLR III, until he assigned his interest to Ross Group, an entity under his
sole control and authority. On information and belief, Mr. Ross is a resident of the State of New
York.
FACTUAL BACKGROUND
22. Private equity firms like WL Ross are investment management businesses which
source, execute, and manage investments in the debt and equity of various types of companies on
behalf of their clients. They do this by raising individual private equity funds which invest
23. The individual investment funds are typically structured as partnerships, which
are composed of general and limited partners. Most of the capital of the funds is solicited from
outside investors, each of whom is a limited partner, or LP. Despite contributing much of the
capital, LPs are passive investors who do not participate in management of the fund.
24. The funds general partner, or GP, is formed by investment managers employed
by the private equity firm, and (in the case of WL Ross funds), is usually structured as an LLC.
-5-
5 of 17
FILED: NEW YORK COUNTY CLERK 11/15/2017 11:27 AM INDEX NO. 656932/2017
NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 11/15/2017
The investment managers are members of the LLC and will invest some amount of their own
capital into the underlying fund. The invested capital of the GP members is aggregated and
fund assets. The GP earns a fixed management fee for its time and services (for example, one
and one-half percent of the aggregate subscriptions of the LPs) which it may (and often does)
pass on to the private equity firm. The GP also earns a portion of the gross profits from the fund
(for example, twenty percent of the funds profits above some defined benchmark), referred to as
carried interest.
26. In practice, private equity firms and their employees control everything related to
the individual funds they raise. However, the GP entities for each fund are legally vested with
sole authority to manage and control the funds, although they may delegate management
27. The managing member of the LLCs owe the non-managing members fiduciary
duties, and because of its legal authority and control over the GP and underlying fund, it must
make sure that the non-managing members of the GP receive the appropriate economic benefits,
28. In late 2001, WLR II was formed to act as the GP of WLR Fund II. WLR Fund II
is a Delaware limited partnership formed for the purpose of operating as a private equity fund
29. The management, policies and control of WLR Fund II is vested exclusively in
its GP, WLR II. The managing member of WLR II is, in turn, vested with exclusive control over
-6-
6 of 17
FILED: NEW YORK COUNTY CLERK 11/15/2017 11:27 AM INDEX NO. 656932/2017
NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 11/15/2017
WLR II. Accordingly, the managing member of WLR II holds all authority and control of WLR
Fund II itself.
30. The original managing member of WLR II was Wilbur Ross. In 2005, Mr. Ross
assigned his membership, including his managing member status, to Ross Group, an entity under
his sole control and authority. On information and belief, Ross Group recently assigned its
membership and status as managing member to WL Ross. On information and belief, WL Ross
is the current managing member of WLR II and is a successor-in-interest to Ross Group and Mr.
Ross (the Prior Managing Members). The managing member of WLR II owes a fiduciary duty
31. WLR II is entitled to an annual management fee from WLR Fund II.
32. The operative agreement for WLR Fund II provides that it must pay an annual
management fee to the general partner, WLR II, or an entity designated by WLR II; if the
general partner earns any other fees in connection with its role in managing WLR Fund II or its
investments (such as transaction or board fees), it must partially reduce its management fee
accordingly and provide notice of such fees in certain circumstances; and the general partner
shall receive no salaries from the WLR Fund II for its management efforts other than the
management fee.
33. Although the agreement states that management fees are calculated based on
subscription as well, it is clear from the language and context of this and other provisions, that
34. For example, management fees are paid to the GP or an entity it designates; it
makes no sense for the GP to pay a management fee to itself, and it would be self-defeating for
-7-
7 of 17
FILED: NEW YORK COUNTY CLERK 11/15/2017 11:27 AM INDEX NO. 656932/2017
NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 11/15/2017
the GP to assess a management fee on itself and hand it over to another entity. Moreover, the
agreement provides that management fees are the only compensation the GP receives, and if it
receives any other fees or compensation in excess of the management fees, it must provide notice
to the limited partners (only) and reduce its management fee. There are many other clauses in
the agreement which further indicate that management fees are only to be charged to the limited
partners.
35. Similarly, in 2005, WLR III was formed to act as the GP of WLR Fund III. WLR
Fund III is a Delaware limited partnership formed for the purpose of operating as a private equity
fund and investing its capital for the benefit of its LPs.
36. The management, policies and control of WLR Fund III are vested exclusively
in its GP, WLR III. The managing member of WLR III is, in turn, vested with exclusive control
over WLR III. Accordingly, the managing member of WLR III holds all authority and control of
37. The original managing member of WLR III was Mr. Ross. Mr. Ross later
assigned his membership, including his managing member status, to Ross Group, an entity under
his sole control and authority. On information and belief, Ross Group recently assigned its
membership and status as managing member to WL Ross. On information and belief, WL Ross
is the current managing member of WLR III and is a successor-in-interest to the Prior Managing
Members. The managing member of WLR III owes a fiduciary duty to WLR III and its non-
managing members.
38. WLR III is entitled to an annual management fee from WLR Fund III.
39. The operative agreement for WLR Fund III provides that it must pay an annual
management fee to the general partner, WLR III, or an entity designated by WLR III; if the
-8-
8 of 17
FILED: NEW YORK COUNTY CLERK 11/15/2017 11:27 AM INDEX NO. 656932/2017
NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 11/15/2017
general partner earns any other fees in connection with its role in managing WLR Fund III or its
investments (such as transaction or board fees), it must partially reduce its management fee
accordingly and provide notice of such fees in certain circumstances; and the general partner
shall receive no salaries from the WLR Fund III for its management efforts other than the
management fee.
40. Although the agreement states that management fees are calculated based on
subscription as well, just as with the WLR Fund II agreement, it is clear from the language and
context of this and other provisions that management fees are only to be charged to the LPs.
41. In 2007, WLR IV was formed to act as the GP of WLR Fund IV. WLR Fund IV
is a Delaware limited partnership formed for the purpose of operating as a private equity fund
42. The management, policies and control of WLR Fund IV is vested exclusively
in its GP, WLR IV. The managing member of WLR IV is, in turn, vested with exclusive control
over WLR IV. Accordingly, the managing member of WLR IV holds all authority and control of
43. The original managing member of WLR IV was Ross Group an entity under the
sole control and authority of Wilbur Ross. On information and belief, Ross Group recently
assigned its membership and status as managing member to WL Ross. On information and
Ross Group. The managing member of WLR IV owes a fiduciary duty to WLR IV and its non-
managing members.
-9-
9 of 17
FILED: NEW YORK COUNTY CLERK 11/15/2017 11:27 AM INDEX NO. 656932/2017
NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 11/15/2017
Company.
45. The operative agreement for WLR Fund IV provides that the annual management
fee is paid by WLR Fund IV based on the subscriptions of its limited partners only; management
Plaintiffs helped manage investments made by private equity funds created by the firm.
47. In that role, Plaintiffs were also was required to invest personally in several GP
entities. Plaintiffs subscribed to and thus became a member of several GP entities, including the
WLR GPs.
belief, Plaintiff David Storper is currently the member with the largest interest in these entities
49. On or about August 2016, WL Ross made certain capital statements and fund
documents for the WLR GPs available to Plaintiffs via a cloud-based web portal.
50. In the fall of 2017, Plaintiff Storper reviewed certain of these capital statements.
The statements showed, to his astonishment, that millions of dollars of management fees had
51. Specifically, the financial statements showed that more than $4.8 million in
management fees has been charged to WLR II, more than $10.8 million had been charged to
WLR III, and more than $32,500,000 had been charged to WLR IV, since the creation of those
-10-
10 of 17
FILED: NEW YORK COUNTY CLERK 11/15/2017 11:27 AM INDEX NO. 656932/2017
NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 11/15/2017
52. These charges were entirely improper. First, as discussed above, the operative
fund agreements provide that management fees are to be charged to limited partners only.
53. Second, these fees were at rates far in excess of what was even permitted to be
54. WL Ross and the Prior Managing Members violated their fiduciary duties to the
WLR GPs and their members by allowing and causing these management fees to be charged to
55. WL Ross further breached its duty of loyalty to the WLR GPs and their members
because, on information and belief, WL Ross was the party that received and benefited from the
management fees.
56. In addition, WL Ross and the Prior Managing Members concealed these fees from
the members of the WLR GPs by failing to provide their members with capital statements which
included a line item for management fees until, upon information and belief, the summer of
2016. This was the first time WL Ross provided Plaintiffs with any documents or information
which showed that management fees were charged to the WLR GPs and, on information and
belief, other members of the WLR GPs were likewise kept in the dark.
57. This is not the only time that WL Ross has acted improperly vis--vis
management fees. In August 2016, the Securities and Exchange Commission found that WL
Ross violated the Investment Advisors Act of 1940 by failing to disclose its fee allocation
practices to certain private equity funds it advised and their investors, which resulted in the funds
paying higher management fees between 2001 and 2011. On information and belief, Invesco,
Ltd. and Invesco Private Capital, Inc., the parent companies of WL Ross, have also paid millions
-11-
11 of 17
FILED: NEW YORK COUNTY CLERK 11/15/2017 11:27 AM INDEX NO. 656932/2017
NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 11/15/2017
of dollars in penalties and reimbursements related to bad management fee practices in the last
few years.
58. On October 2, 2017, Plaintiff Storper sent an email to Gregory Stoeckle and
Stephen Toy, co-heads of WL Ross, in which he demanded answers and additional documents
regarding the charging of management fees to the WLR GPs. (See Exhibit A.)
59. Messrs. Stoeckle and Toy responded to Storper on October 4, 2017. (See Exhibit
B.) They failed to provide a coherent explanation for why management fees were being charged
to the WLR GPs. For example, they admitted that management fees were not allowed to be
charged to WLR IV, but failed to explain why more than $32,500,000 in management fees had
already been charged to that entity. The executives completely failed to address Storpers
clear explanation for the charging of management fees to the WLR GPs, including the formula
Demand Futility
62. Plaintiffs bring this action derivatively as members of WLR GPs. It would be
futile to make a demand that the WLR GPs initiate litigation to pursue these claims because
those entities are managed by WL Ross, the entity that caused these fees to be paid and received
and benefited from the improper payment of management fees. Making such a demand would
essentially be asking WL Ross to commence litigation against itself. Furthermore, the co-heads
of WL Ross were already presented with the evidence of improperly charging the WLR GPs
-12-
12 of 17
FILED: NEW YORK COUNTY CLERK 11/15/2017 11:27 AM INDEX NO. 656932/2017
NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 11/15/2017
63. Plaintiffs will adequately and fairly represent the interests of the WLR GPs, and
their members, in enforcing and prosecuting their rights, and have retained counsel experienced
in litigating this type of action. Furthermore, on information and belief, Plaintiff Storper is the
member with the largest interest in the WLR GPs that is unaffiliated with WL Ross. Thus,
Plaintiffs have a significant financial motive for zealously representing the WLR GP entities and
forcing any party that has committed impropriety to return and disgorge any ill-gotten gains.
(Seeking an Accounting for WLR Recovery Associates II, LLC against all Defendants)
64. Plaintiffs repeat and reallege the allegations above as if fully set forth herein.
65. Plaintiffs and other members of WLR II entrusted their capital to the managing
66. As the managing member of WLR II, a Delaware LLC, WL Ross owes WLR II
67. WL Ross and its predecessors-in-interest, Ross Group and Wilbur Ross,
wrongfully caused and allowed management fees to be charged to WLR II, thereby
misappropriating assets of WLR II and depriving its members of substantial sums of money,
which is rightfully due to them. Such conduct constituted a breach of Defendants fiduciary
duties to the members of WLR II. Defendants further breached their fiduciary duties as set forth
above.
68. Plaintiffs duly demanded that WL Ross account for improperly charging WLR II
69. The non-managing members accounts have not been judicially settled and there
has been no open repudiation by the managing member of its obligations. Furthermore, the
-13-
13 of 17
FILED: NEW YORK COUNTY CLERK 11/15/2017 11:27 AM INDEX NO. 656932/2017
NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 11/15/2017
managing member and its predecessors-in-interest have fraudulently concealed the information
70. Plaintiffs have no adequate remedy at law for Defendants wrongful conduct as
71. By reason of the foregoing, Plaintiffs are entitled to a full accounting of the affairs
of WLR II. Plaintiffs are also entitled to restitution, and disgorgement for any sum or balance
found to be due to WLR II following an accounting, and interest, costs, and disbursements,
Ross, or any affiliates under its control, from causing or allowing management fees to be charged
to WLR II.
(Seeking an Accounting for WLR Recovery Associates III, LLC against all Defendants)
73. Plaintiffs repeat and reallege the allegations above as if fully set forth herein.
74. Plaintiffs and other members of WLR III entrusted their capital to the managing
75. As the managing member of WLR III, a Delaware LLC, WL Ross owes WLR III
76. WL Ross, and its predecessors-in-interest, Ross Group and Wilbur Ross,
wrongfully caused and allowed management fees to be charged to WLR III, thereby
misappropriating assets of WLR III and depriving its members of substantial sums of money,
which is rightfully due to them. Such conduct constituted a breach of Defendants fiduciary
duties to the members of WLR III. Defendants further breached their fiduciary duties as set forth
above.
-14-
14 of 17
FILED: NEW YORK COUNTY CLERK 11/15/2017 11:27 AM INDEX NO. 656932/2017
NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 11/15/2017
77. Plaintiffs duly demanded that WL Ross account for improperly charging WLR III
78. The non-managing members accounts have not been judicially settled and there
has been no open repudiation by the managing member of its obligations. Furthermore, the
managing member and its predecessors-in-interest have fraudulently concealed the information
79. Plaintiffs have no adequate remedy at law for Defendants wrongful conduct as
80. By reason of the foregoing, Plaintiffs are entitled to a full accounting of the affairs
of WLR III. Plaintiffs are also entitled to restitution, and disgorgement for any sum or balance
found to be due to WLR III following an accounting, and interest, costs, and disbursements,
Ross, or any affiliates under its control, from causing or allowing management fees to be charged
to WLR III.
82. Plaintiffs repeats and reallege the allegations above as if fully set forth herein.
83. Plaintiffs and other members of WLR IV entrusted their capital to the managing
84. As the managing member of WLR IV, a Delaware LLC, WL Ross owes WLR IV
-15-
15 of 17
FILED: NEW YORK COUNTY CLERK 11/15/2017 11:27 AM INDEX NO. 656932/2017
NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 11/15/2017
85. WL Ross, and its predecessor-in-interest, Ross Group, wrongfully caused and
allowed management fees to be charged to WLR IV, thereby misappropriating assets of WLR IV
and depriving its members of substantial sums of money, which is rightfully due to them. Such
conduct constituted a breach of WL Ross and Ross Groups fiduciary duties to the members of
WLR IV. Defendants further breached their fiduciary duties as set forth above.
86. Plaintiffs duly demanded that WL Ross account for improperly charging WLR IV
87. The non-managing members accounts have not been judicially settled and there
has been no open repudiation by the managing member of its obligations. Furthermore, the
managing member and its predecessor-in-interest have fraudulently concealed the information
88. Plaintiffs have no adequate remedy at law for Defendants wrongful conduct as set
forth above.
89. By reason of the foregoing, Plaintiffs are entitled to a full accounting of the affairs
of WLR IV. Plaintiffs are also entitled to restitution, and disgorgement for any sum or balance
found to be due to WLR IV following an accounting, and interest, costs, and disbursements,
Ross, or any affiliates under its control, from causing or allowing management fees to be charged
to WLR IV.
a) Compel WL Ross & Co., LLC, with the assistance, if necessary, of any
predecessors-in-interest, to account to Plaintiffs for the affairs of WLR Recovery
Associates II, LLC, WLR Recovery Associates III, LLC, and WLR Recovery
-16-
16 of 17
FILED: NEW YORK COUNTY CLERK 11/15/2017 11:27 AM INDEX NO. 656932/2017
NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 11/15/2017
Associates IV, LLC, including but not limited to, all money and property received
and disbursed or assigned by those entities;
b) Order judgment, restitution, and disgorgement from Defendants for any sum or
balance found to be due to WLR Recovery Associates II, LLC, WLR Recovery
Associates III, LLC, and WLR Recovery Associates IV, LLC following an
accounting;
c) Permanently restrain and enjoin WL Ross & Co., LLC or any affiliate under its
control, from causing or allowing management fees to be charged to WLR
Recovery Associates II, LLC, WLR Recovery Associates III, LLC, and WLR
Recovery Associates IV, LLC;
d) Award Plaintiffs interest and costs and disbursements, including attorneys fees;
and
COOLEY LLP
-17-
17 of 17