5(&200(1'(' )25 )8//7(;7 38%/,&$7,21 3XUVXDQW WR 6L[WK &LUFXLW 5XOH (/(&7521,& &,7$7,21 )(' $SS 3 WK &LU )LOH 1DPH DS 81,7('67$7(6&28572)$33($/6 )257+(6,;7+&,5&8,7 BBBBBBBBBBBBBBBBB ),567 7(11(66(( %$1. ; 1$7,21$/ $662&,$7,21 3ODLQWLII$SSHOODQW 1R Y ! +(&725 9 %$55(72LQKLV RIILFLDOFDSDFLW\DV $GPLQLVWUDWRURIWKH6PDOO %XVLQHVV$GPLQLVWUDWLRQ 'HIHQGDQW$SSHOOHH 1 $SSHDOIURPWKH8QLWHG6WDWHV'LVWULFW&RXUW IRUWKH0LGGOH'LVWULFWRI7HQQHVVHHDW1DVKYLOOH 1R ²7RGG-&DPSEHOO'LVWULFW-XGJH $UJXHG $XJXVW 'HFLGHGDQG)LOHG 2FWREHU 3XUVXDQW WR )HG 5 $SS 3 F +HFWRU 9 %DUUHWR LV DXWRPDWLFDOO\ VXEVWLWXWHG IRU $LGD $OYDUH] IRUPHU $GPLQLVWUDWRU RI WKH 6PDOO %XVLQHVV $GPLQLVWUDWLRQ DV D GHIHQGDQW LQ WKLV DFWLRQ )LUVW71%DQN1DW¶O$VV¶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³)LUVW 7HQQHVVHH´ DQGWKH6PDOO%XVLQHVV$GPLQLVWUDWLRQ ³6%$´ $IWHUWKH6%$IDLOHGWRKRQRUWKHDJUHHPHQW)LUVW7HQQHVVHH ILOHGDQRIILFLDOFDSDFLW\VXLWDJDLQVWWKH$GPLQLVWUDWRURIWKH 6%$)LUVW7HQQHVVHH¶VODZVXLWVRXJKWWRFRPSHOWKH6%$WR KRQRU WKH JXDUDQW\ DJUHHPHQW E\ UHSXUFKDVLQJ D GHIDXOWHG ORDQ)ROORZLQJDEHQFKWULDOWKHGLVWULFWFRXUWHQWHUHGILQDO MXGJPHQWLQIDYRURIWKH6%$RQ-XQH 7KHGLVWULFW FRXUWFRQFOXGHGLQWHUDOLD WKDW6%$UHJXODWLRQVSODFHG WKHEXUGHQXSRQ)LUVW7HQQHVVHHWRHVWDEOLVKLWVVXEVWDQWLDO FRPSOLDQFHZLWKWKHWHUPVRIWKHJXDUDQW\DJUHHPHQWDQG WKDW)LUVW7HQQHVVHHKDGPDWHULDOO\EUHDFKHGWKHDJUHHPHQW )LUVW 7HQQHVVHH KDV ILOHG D WLPHO\ DSSHDO IURP WKH GLVWULFW FRXUW¶VUXOLQJDGYDQFLQJWZRDUJXPHQWV)LUVWLWDVVHUWVWKDW 7KH +RQRUDEOH :DOWHU +HUEHUW 5LFH &KLHI 8QLWHG 6WDWHV 'LVWULFW -XGJH IRU WKH 6RXWKHUQ 'LVWULFW RI 2KLR VLWWLQJ E\ GHVLJQDWLRQ )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR 1R 1R )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR ,,,&RQFOXVLRQ WKH GLVWULFW FRXUW PLVDOORFDWHG WKH EXUGHQ RI SURRI E\ UHTXLULQJLWWRGHPRQVWUDWHVXEVWDQWLDOFRPSOLDQFHZLWKWKH %DVHGXSRQWKHUHDVRQLQJVHWIRUWKDERYHWKHMXGJPHQWRI WHUPVRIWKHJXDUDQW\DJUHHPHQW6HFRQGWKHEDQNFRQWHQGV WKH 8QLWHG 6WDWHV 'LVWULFW &RXUW IRU WKH 0LGGOH 'LVWULFW RI WKDW WKH GLVWULFW FRXUW HUUHG LQ UXOLQJ WKDW LW KDG PDWHULDOO\ 7HQQHVVHH1DVKYLOOH'LYLVLRQLVKHUHE\$)),50(' EUHDFKHGWKHDJUHHPHQW)RUWKHUHDVRQVVHWIRUWKEHORZZH ILQG ERWK DUJXPHQWV XQSHUVXDVLYH DQG ZH DIILUP WKH MXGJPHQWRIWKHGLVWULFWFRXUW ,)DFWXDODQG3URFHGXUDO%DFNJURXQG )LUVW7HQQHVVHHDQGWKH6%$HQWHUHGLQWRDQDJUHHPHQWRQ 6HSWHPEHU XQGHU ZKLFK WKH 6%$ SURPLVHG WR JXDUDQW\FHUWDLQORDQVWKDWWKHEDQNPDGHWRVPDOOEXVLQHVVHV 7KHDJUHHPHQWFRYHUHG³RQO\ORDQVGXO\DSSURYHGKHUHDIWHU IRUJXDUDQW\E\>WKHEDQN@DQG6%$VXEMHFWWR6%$¶V5XOHV DQG5HJXODWLRQVDVSURPXOJDWHGIURPWLPHWRWLPH´$PRQJ RWKHU WKLQJV WKH DJUHHPHQW REOLJDWHG )LUVW 7HQQHVVHH WR ³FORVHDQGGLVEXUVHHDFKORDQLQDFFRUGDQFHZLWKWKHWHUPV DQGFRQGLWLRQVRIWKHDSSURYHGORDQDXWKRUL]DWLRQ>@´,WDOVR UHTXLUHG WKH EDQN WR H[HFXWH GRFXPHQWV DQG WR ³WDNH VXFK RWKHU DFWLRQV ZKLFK VKDOO FRQVLVWHQW ZLWK SUXGHQW FORVLQJ SUDFWLFHVEHUHTXLUHGLQRUGHUIXOO\WRSURWHFWRUSUHVHUYHWKH LQWHUHVWRI/HQGHU>)LUVW7HQQHVVHH@DQG6%$LQWKHORDQ´ 2Q-XQH )LUVW7HQQHVVHHILOHGDQDSSOLFDWLRQZLWK WKH6%$DVNLQJWKHDJHQF\WRJXDUDQW\DUHYROYLQJOLQHRI FUHGLW ORDQ WKDW WKH EDQN ZLVKHG WR H[WHQG WR 7HOZDUH ,QWHUQDWLRQDO ,QF ³7HOZDUH´ DQ H[SRUW FRPSDQ\ 'HU\O %DXPDQ 9LFH 3UHVLGHQW DQG &RPPHUFLDO /RDQ 2IILFHU5HODWLRQVKLS0DQDJHUIRU)LUVW7HQQHVVHHVHUYHGDV WKHORDQRIILFHUZKRDVVLVWHG7HOZDUHLQREWDLQLQJWKH6%$ JXDUDQW\ 6SHFLILFDOO\ %DXPDQ KHOSHG 7HOZDUH SUHSDUH D ORDQJXDUDQW\DSSOLFDWLRQDQGKHQHJRWLDWHGZLWK5RQ5HHG WKH&KLHI&UHGLW$GPLQLVWUDWRUDWWKH6%$¶V1DVKYLOOHRIILFH 7KH6%$VXEVHTXHQWO\DSSURYHG)LUVW7HQQHVVHH¶VUHTXHVW DQGLVVXHGDORDQDXWKRUL]DWLRQDJUHHLQJWRJXDUDQW\HLJKW\ ILYHSHUFHQWRIWKHEDQN¶VUHYROYLQJOLQHRIFUHGLWWR7HOZDUH XS WR $Q LQLWLDO GUDIW RI WKH ORDQ DXWKRUL]DWLRQ SURYLGHG WKDW DQ\ ³OHWWHU RI FUHGLW´ LVVXHG RQ EHKDOI RI D SXUFKDVHU RI 7HOZDUH¶V JRRGV ZRXOG EH FRQILUPHG E\ D )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR 1R 1R )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR 8QLWHG6WDWHVEDQNRUDEDQNDFFHSWDEOHWRWKHOHQGHUDQGWKDW +HULWDJH%DQN 7UXVW&R )GDW UHDVRQLQJ WKHJRRGVDWLVVXHZRXOGEHLQVXUHGZLWK)&,$LQVXUDQFH WKDW D EDQN¶V QRQFRPSOLDQFH ZLWK 6%$ UHJXODWLRQV 7KHILQDOYHUVLRQRIWKHORDQDXWKRUL]DWLRQSHUPLWWHGDOHWWHU FRQVWLWXWHVDPDWHULDOEUHDFKRIDORDQJXDUDQW\DJUHHPHQW RIFUHGLWHLWKHUWREHFRQILUPHGRUWREH)&,$LQVXUHG7KH 3LWWVEXUJK1DW¶O%DQN )GDW UHFRJQL]LQJWKDWD ORDQDXWKRUL]DWLRQDOVRZDVPDGHVXEMHFWWRWKHWHUPVRIWKH OHQGHU¶V IDLOXUH WR VHUYLFH DQ 6%$EDFNHG ORDQ LQ D )LUVW7HQQHVVHH±6%$JXDUDQW\DJUHHPHQWPHQWLRQHGDERYH FRPPHUFLDOO\ SUXGHQW PDQQHU PD\ FRQVWLWXWH D PDWHULDO EUHDFKRIDJXDUDQW\DJUHHPHQW &LWL]HQV0DULQH1DW¶O%DQN 7HOZDUHVXEVHTXHQWO\REWDLQHGWKHUHYROYLQJOLQHRIFUHGLW Y8QLWHG6WDWHV'HSWRI&RPPHUFH)G WK ORDQ IURP )LUVW 7HQQHVVHH DQG VXFFHVVIXOO\ FRQVXPPDWHG &LU UHDVRQLQJWKDWWKHIDLOXUHWRXVHFDUHDQGGLOLJHQFH VHYHUDOH[SRUWWUDQVDFWLRQV2QWZRRFFDVLRQVLQSDUWLFXODU LQ WKH DGPLQLVWUDWLRQ RI DQ (FRQRPLF 'HYHORSPHQW 7HOZDUHXVHGWKHOLQHRIFUHGLWWRILQDQFHLWVVDOHRIEHDQVWR $GPLQLVWUDWLRQ ORDQ FRQVWLWXWHV D PDWHULDO EUHDFK RI WKH &HQWURFRRSD@´ ,Q UH *UDKDP 6TXDUH ,QF )G REOLJDWLRQ XQGRXEWHGO\ ZLOO ZRUN WR WKH DJHQF\¶V ³DGYDQWDJH´ 6XFK DQ WK &LU ,Q WKH FRQWH[W RI WKH SUHVHQW GLVSXWH VXFK OHWWHUV ZHUH DGYDQWDJH KRZHYHU LV QHLWKHU XQIDLU QRU XQUHDVRQDEOH JLYHQ )LUVW XVHG E\ 7HOZDUH DQG )LUVW 7HQQHVVHH WR DYRLG GLVSXWHV RYHU WKH TXDOLW\ RI 7HQQHVVHH¶V YLRODWLRQ RI LWV FRQWUDFWXDO REOLJDWLRQ WR VHUYLFH LWV 7HOZDUH WKH JRRGV WUDQVSRUWHG E\ 7HOZDUH WR SXUFKDVHUV ZKR ZHUH ORFDWHG LQ ORDQ SUXGHQWO\ DQG WKH SRVVLELOLW\ WKDW WKH EDQN¶V LQDFWLRQ PD\ KDYH GLIIHUHQW FRXQWULHV 6XFK OHWWHUV JHQHUDOO\ DUH LVVXHG E\ D IRUHLJQ EX\HU¶V UHVXOWHG LQ WKH ORDQ GHIDXOW &I )LUVW ,QWHUVWDWH %DQN RI ,GDKR Y 6PDOO EDQN ZKLFK REOLJDWHV LWVHOI WR SD\ WKH IXQGV UHSUHVHQWHG E\ WKH OHWWHU RI %XV $GPLQ )G WK &LU ³,Q WKLV FDVH DIILUPDQFH FUHGLW XSRQ WKH SUHVHQWDWLRQ RI FHUWDLQ GRFXPHQWV E\ WKH KROGHU RI WKH XQGRXEWHGO\ UHOHDVHV WKH 6%$ IURP D FRQWUDFWXDO OLDELOLW\ %XW WKH OHWWHU ,Q W\SLFDO VDOHV WUDQVDFWLRQV WKRVH GRFXPHQWV LQFOXGH ELOOV RI DGYDQWDJH LV QRW XQUHDVRQDEOH JLYHQ WKH EDQN¶V FOHDU YLRODWLRQ RI WKH ODGLQJ IURP WKH VKLSSHU RU FHUWLILFDWHV RI TXDOLW\ WKDW PD\ EH UHTXLUHG E\ FRQWUDFWHGIRU GLVEXUVHPHQW DPRXQWV DQG SXUSRVHV DQG WKH EDQN¶V WKH WHUPV RI D OHWWHU RI FUHGLW -$ ³&RQILUPDWLRQ´ RI D OHWWHU IUDXGXOHQW FRQGXFW LQ ILOLQJ IDOVH VWDWHPHQWV´ 3LWWVEXUJK 1DW¶O %DQN RI FUHGLW LV D SURFHVV WKURXJK ZKLFK D EDQN RWKHU WKDQ WKH EDQN ZKLFK )G DW ³)LQDOO\ QR XQIDLU DGYDQWDJH ZLOO DFFUXH WR 6%$ DV D LVVXHG WKH OHWWHU DJUHHV WR SD\ WKH DPRXQW VWDWHG LQ WKH OHWWHU XSRQ WKH UHVXOW RI UHOHDVLQJ LW IURP LWV FRQWUDFWXDO OLDELOLW\ VLQFH LW ZDV >WKH SUHVHQWDWLRQ RI SURSHU GRFXPHQWDWLRQ ³)&,$ LQVXUDQFH´ UHIHUV WR D EDQN¶V@ RZQ GHOD\ ZKLFK FDXVHG WKH ORVV RI WKH SURFHHGV IURP WKH IHGHUDO SURJUDP WKDW SURYLGHV LQVXUDQFH FRYHUDJH IRU H[SRUW WUDQVDFWLRQV FKHFN´ )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR 1R 1R )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR )LUVW7HQQHVVHHH[SHUWZLWQHVV-DPHV(%\UQHDJUHHGWKDW %HRJUDGVND%DQNDSURYLGHG7HOZDUHZLWKDOHWWHURIFUHGLWLQ ³IURP WLPH WR WLPH´ RQH EDQN FDQ GLVSXWH D SHUFHLYHG WKHDPRXQWRIWRVHFXUH&HQWURFRRS¶VSD\PHQWIRU GLVFUHSDQF\DQGREWDLQSD\PHQWRQDOHWWHURIFUHGLW)LQDOO\ WKHEHDQV3XUVXDQWWRWKHORDQDXWKRUL]DWLRQ)LUVW7HQQHVVHH 6%$H[SHUW3HWHU,RUODQRUHFDOOHGWLPHVZKHQDSD\LQJEDQN DGYDQFHGIXQGVWR7HOZDUHZKLFKHQDEOHGWKHFRPSDQ\WR LQLWLDOO\KDGFODLPHGDGRFXPHQWGLVFUHSDQF\EXWWKHQKDG SXUFKDVHWKHEHDQVIRUUHVDOHWR&HQWURFRRS)LUVW7HQQHVVHH KRQRUHGDOHWWHURIFUHGLWDIWHUD³VWUHQXRXVREMHFWLRQ´E\WKH DOVR UHFHLYHG FRQILUPDWLRQ WKDW %HRJUDGVND %DQND LQ 1HZ GRFXPHQWSUHVHQWLQJEDQN$GGLWLRQDOO\,RUODQRH[SODLQHG K@DSSHQVDOOWKHWLPH´DQGWKDW³WKHUHPD\KDYHEHHQDWLPH RUWZR´ZKHQ)LUVW7HQQHVVHHKDG³LQVLVWHGIRUFHIXOO\´WKDW QRVXFKGLVFUHSDQF\H[LVWHGDQGDIRUHLJQEDQNKDGDFFHSWHG $W WULDO WKH SDUWLHV VWLSXODWHG WKDW WKH GRFXPHQWV SUHVHQWHG E\ 7HOZDUH FRPSOLHG ZLWK WKH WHUPV RI WKH OHWWHU RI FUHGLW DQG VKRXOG KDYH LWV LQWHUSUHWDWLRQ WKHUHE\ UHVROYLQJ WKH GLVSXWH /LNHZLVH EHHQ DFFHSWHG E\ %HRJUDGVND %DQND )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR 1R 1R )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR ZKLFKKDVQRWEHHQFLWHGE\)LUVW7HQQHVVHHLQWKH $W WULDO %DXPDQ WHVWLILHG WKDW KLV RQO\ DFWLRQ XSRQ SUHVHQWFDVH2XUDQDO\VLVKHUHLQLVFRQILQHGWR623 GLVFRYHULQJ%HRJUDGVND%DQND¶VUHMHFWLRQRIWKHGRFXPHQWV D 8QGHUWKDWUHJXODWLRQLWLVQRWQHFHVVDU\IRUDORVVRQ ZDVWRVSHDNZLWK)DWLPD7HOZDUHZKRDVVXUHGKLPWKDWVKH DQ6%$EDFNHGORDQWREHWUDFHDEOHZLWKFHUWDLQW\WR)LUVW ZRXOGKDQGOHWKHSUREOHP%DXPDQGLGQRWDSSURDFK)LUVW 7HQQHVVHH¶VQHJOLJHQWVHUYLFLQJ9DOOH\1DW¶O%DQN )G 7HQQHVVHH¶VLQWHUQDWLRQDOGHSDUWPHQWGHVSLWHKLVDZDUHQHVV DW ,QVRIDU DV )LUVW 7HQQHVVHH VHHNV WR DSSO\ WKH WKDW$OODQ*RRGDPDQDJHURIWKHGHSDUWPHQWZDVIDPLOLDU 6HYHQWK &LUFXLW¶V UXOLQJ WR 623 D ZKLFK ZLWK ³LPSRUWDQW´ SHRSOH DW %HRJUDGVND %DQND ERWK LQ UHOLHYHVWKH6%$IURPLWVREOLJDWLRQLIWKHOHQGHU¶VDFWLRQV %HOJUDGH DQG 1HZ K@DSSHQV DOO WKH WLPH´ XSRQ WKH LQLWLDO PDGH E\ )LUVW 7HQQHVVHH EH TXHVWLRQHG LQ OLJKW RI WKH SUHVHQWDWLRQRIDOHWWHURIFUHGLW+HDGGHGWKDW³WKHUHPD\ XQMXVWLILHGUHIXVDOE\%HRJUDGVND%DQNDWRKRQRUWKHOHWWHURI KDYH EHHQ D WLPH RU WZR´ ZKHQ )LUVW 7HQQHVVHH ³LQVLVWHG FUHGLW´:HILQGWKLVDUJXPHQWWREHXQSHUVXDVLYH$VNLQJ IRUFHIXOO\´WKDWQRVXFKGLVFUHSDQF\H[LVWHGDQGDIRUHLJQ ZKHWKHUDOHQGHUZDV³VXEVWDQWLDOO\QHJOLJHQW´RUZKHWKHULW EDQN DFFHGHG WR LWV LQWHUSUHWDWLRQ WKHUHE\ UHVROYLQJ WKH ³VXEVWDQWLDOO\FRPSOLHG´ZLWKDORDQJXDUDQW\DJUHHPHQWLV GLVSXWH*RRGDWWULEXWHGVXFKSDVWVXFFHVVHVLQSDUWWR)LUVW VLPSO\DQRWKHUZD\RIDVNLQJZKHWKHUWKHOHQGHU³PDWHULDOO\ 7HQQHVVHH¶VUHSXWDWLRQDVDEDQNWKDWGRHVLQWHUQDWLRQDOZRUN EUHDFKHG´WKHDJUHHPHQW&I+HULWDJH%DQN 7UXVW&R *RRGDOVRWHVWLILHGKRZHYHUWKDW)LUVW7HQQHVVHHFRXOGQRW )GDW KDYHIRUFHG%HRJUDGVND%DQNDWRDFFHSWWKHGRFXPHQWDWLRQ RUWRSD\7HOZDUH ,QWKHSUHVHQWFDVHWKHGLVWULFWFRXUWGHWHUPLQHGWKDW)LUVW 7HQQHVVHH KDG PDWHULDOO\ EUHDFKHG WKH ORDQ JXDUDQW\ 7KHUHFRUGDOVRFRQWDLQVWHVWLPRQ\IURP-DPHV(%\UQH DJUHHPHQWE\ IDLOLQJWRUHYLHZ7HOZDUH¶VGRFXPHQWVDQG DQ DWWRUQH\ DQG ODZ SURIHVVRU ZKR WHVWLILHG DW WULDO DV DQ H[SHUWZLWQHVVIRU)LUVW7HQQHVVHH%\UQHDJUHHGWKDW³IURP WLPHWRWLPH´RQHEDQNFDQGLVSXWHDGRFXPHQWGLVFUHSDQF\ UHVROYHWKHSUREOHPDQGREWDLQSD\PHQWRQDOHWWHURIFUHGLW ,Q DQ\ HYHQW WKH UHFRUG HYLGHQFH ZRXOG VXSSRUW D ILQGLQJ WKDW )LUVW 7HQQHVVHH KDG VHUYLFHG WKH 7HOZDUH ORDQ LQ D VXEVWDQWLDOO\ QHJOLJHQW +HDGGHGKRZHYHUWKDW³>L@WGRHVQ¶WKDSSHQDOOWKDWRIWHQ´ PDQQHU DQG WKDW LW KDG PDWHULDOO\ EUHDFKHG WKH ORDQ JXDUDQW\ DJUHHPHQW )LQDOO\ 3HWHU ,RUODQR WHVWLILHG DV DQ H[SHUW ZLWQHVV IRU WKH $V WKH GLVWULFW FRXUW QRWHG DIWHU GLVFRYHULQJ %HRJUDGVND %DQND¶V 6%$ ,RUODQR ZRUNHG LQ WKH LQWHUQDWLRQDO GHSDUWPHQWV RI GLVKRQRU RI WKH OHWWHU RI FUHGLW DQG DFFRPSDQ\LQJ GRFXPHQWV )LUVW QR DFWLRQ UHO\LQJ YDULRXV EDQNV IURP WR +LV UHVSRQVLELOLWLHV LQFOXGHGOHWWHURIFUHGLWVXSHUYLVLRQORDQVHUYLFLQJGRFXPHQW 7HQQHVVHH UHSUHVHQWDWLYH 'HU\O %DXPDQ HVVHQWLDOO\ WRRN LQVWHDG XSRQ 7HOZDUH WR UHVROYH WKH GLVSXWH :H DJUHH ZLWK WKH GLVWULFW FRXUW¶V DVVHVVPHQW WKDW ³SUXGHQW EDQNHUV DW D PLQLPXP IROORZ XS LQ UHYLHZ DQG FROOHFWLRQ DQG RYHUVHHLQJ LPSRUWH[SRUW VRPH ZD\ ZKHQ OHWWHUV RI FUHGLW DUH GLVKRQRUHG IRU D GLVFUHSDQF\ LQ WKH WUDQVDFWLRQV ,RUODQR WHVWLILHG WKDW D GRFXPHQW SUHVHQWHU LV GRFXPHQWV´ )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR 1R 1R )LUVW71%DQN1DW¶O$VV¶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³VWUHQXRXV REMHFWLRQ´ E\ WKH GRFXPHQWSUHVHQWLQJ EDQN WKHWULDOFRXUWEHFDXVHWKHRQO\UHDVRQVIRUWKHIDLOXUHRI ,RUODQRH[SODLQHGWKDWDIWHUGLVSXWLQJDGRFXPHQWGLVFUHSDQF\ (DJOH /LPRXVLQ ZHUH 0LOOHU¶V GLVKRQHVW\ DQG WKH D EDQN VXFK DV )LUVW 7HQQHVVHH PLJKW QHHG WR VSHDN ZLWK LQKHUHQWULVNLQWKLVH[SHULPHQWDOYHQWXUH KLJKHUOHYHOLQGLYLGXDOVDWWKHIRUHLJQEDQNLQRUGHUWRREWDLQ GRFXPHQW DSSURYDO +H DOVR WHVWLILHG WKDW RWKHU DYDLODEOH 7KLVGHIHQVHPXVWIDLOIRUVHYHUDOUHDVRQV)LUVWWKH RSWLRQVLQFOXGH KDYLQJDYLFHSUHVLGHQWRIWKHGRFXPHQW ODQJXDJH UHOLHG XSRQ E\ WKH %DQN VWDWHV WKDW WKH 6%$ SUHVHQWLQJEDQNFRPPXQLFDWHSHUVRQDOO\ZLWKFRQWDFWVDWWKH ZLOOEHH[FXVHGRIOLDELOLW\LIWKHQHJOLJHQWFRQGXFW³PD\ IRUHLJQEDQNRUHOVHZKHUHLQWKHIRUHLJQFRXQWU\LQDQHIIRUW UHVXOW LQ D VXEVWDQWLDO ORVV RQ WKH ORDQ´ &)5 WRDVVHUWVRPHSUHVVXUH SUHVVXULQJDQ\UHSUHVHQWDWLYHVRI D HPSKDVLV DGGHG ,Q DGGLWLRQ 623 WKHIRUHLJQEDQNZKRPLJKWEHORFDWHGLQWKH8QLWHG6WDWHV D HPSKDVL]HV WKDW DQ DFWXDO ORVV LV QRW RU SUHVHQWLQJ WKH GLVSXWH WR DQ LQWHUQDWLRQDO EDQNLQJ QHFHVVDU\VWDWLQJWKDW³>W@KHFRPELQDWLRQRIDVXEVWDQWLDO RUJDQL]DWLRQ IRU LWV UHYLHZ DQG DVVLVWDQFH $FFRUGLQJ WR IDLOXUHE\SDUWLFLSDQWZKLFKUHVXOWVRUPD\UHVXOWLQD ,RUODQR D EDQN¶V LQWHUQDWLRQDO GHSDUWPHQW LV EHVW VXLWHG WR VXEVWDQWLDO ORVV´ LV D SUHGLFDWH WR DQ 6%$ GHQLDO RI DGGUHVV GRFXPHQW GLVFUHSDQFLHV LQ D PDQQHU WKDW PLJKW OLDELOLW\ 7KXV WKH WULDO FRXUW¶V LQWHUSUHWDWLRQ RI WKH SHUVXDGHDIRUHLJQEDQNWRDFFHSWWKHGRFXPHQWVDQGWRKRQRU WHUPVRIWKHDJUHHPHQWRQWKLVLVVXHLVVXSSRUWHGE\WKH D OHWWHU RI FUHGLW &RQVHTXHQWO\ KH RSLQHG WKDW )LUVW UHJXODWLRQVIRUPLQJDSDUWRIWKHDJUHHPHQW8QGHUWKH 7HQQHVVHHKDGDFWHGLPSUXGHQWO\E\IDLOLQJWRWDNHDQ\RIWKH 6%$UHJXODWLRQVDQGSROLF\VWDWHPHQWVUHOLHGXSRQE\WKH IRUHJRLQJ VWHSV DQG E\ DOORZLQJ 7HOZDUH WR LQWHUDFW ZLWK SDUWLHVLWLVVXIILFLHQWLIWKHOHQGHU¶VDFWLRQVDUHRIVXFK %HRJUDGVND%DQND D QDWXUH WKDW WKH\ PD\ EH H[SHFWHG WR UHVXOW LQ D VXEVWDQWLDOORVVRQWKHORDQ 2Q-XQH WKHGLVWULFWFRXUWHQWHUHGDMXGJPHQWLQ IDYRURIWKH6%$,QLWVGHFLVLRQWKHFRXUWILUVWUHDVRQHGWKDW ,GDW 6%$UXOHVDQGUHJXODWLRQVSODFHGWKHEXUGHQRISURRIXSRQ )LUVW7HQQHVVHHWRHVWDEOLVKLWV³VXEVWDQWLDOFRPSOLDQFH´ZLWK ,QUHVSRQVHWRWKHIRUHJRLQJDQDO\VLV)LUVW7HQQHVVHHFLWHV WKHWHUPVRIWKHORDQJXDUDQW\DJUHHPHQW7KHGLVWULFWFRXUW (,OO7UXVW 6DY%DQNY6DQGHUV)G WK&LU WKHQ GHWHUPLQHG WKDW )LUVW 7HQQHVVHH KDG EUHDFKHG LWV IRUWKHSURSRVLWLRQWKDWWKH6%$PD\UHIXVHWRKRQRU FRQWUDFWXDOREOLJDWLRQVWRWKH6%$LQWZRZD\V E\IDLOLQJ DJXDUDQW\DJUHHPHQWRQO\ZKHQDOHQGHU¶VLPSUXGHQWFRQGXFW WRUHYLHZDQ\RIWKHUHOHYDQWGRFXPHQWVXQWLODIWHUWKHOHWWHU DFWXDOO\UHVXOWVLQDVXEVWDQWLDOORVV,Q6DQGHUVWKHFRXUW RIFUHGLWKDGH[SLUHG DQG E\IDLOLQJWRWDNHDQ\DFWLRQWR UHDG 623 DV RXWOLQLQJ ³WZR SUHUHTXLVLWHV WR SURWHFWLWVLQWHUHVWVRUWKH6%$¶VLQWHUHVWVDIWHU%HRJUDGVND UHSXGLDWLQJDJXDUDQW\ DVXEVWDQWLDOIDLOXUHRIFRPSOLDQFHDQG %DQND LQLWLDOO\ KDG GLVKRQRUHG WKH OHWWHU RI FUHGLW DQG DUHVXOWLQJVXEVWDQWLDOORVVRQWKHORDQ´,GDW1RWDEO\ KRZHYHUWKH6HYHQWK&LUFXLW¶VDQDO\VLVFRQFHUQHG623 )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR 1R 1R )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR WR SURWHFW WKH LQWHUHVWV RI WKH 6%$ 7KH DJUHHPHQW DOVR VXSSRUWLQJ GRFXPHQWDWLRQ )LQDOO\ WKH GLVWULFW FRXUW UHTXLUHGWKHEDQN¶VFRQGXFWZLWKUHVSHFWWR6%$JXDUDQWHHG FRQFOXGHG WKDW )LUVW 7HQQHVVHH¶V EUHDFK RI WKH JXDUDQW\ ORDQV WR FRQIRUP ZLWK WKDW RI SUXGHQW OHQGHUV JHQHUDOO\ DJUHHPHQWZDVD³PDWHULDO´RQHWKHUHE\UHOLHYLQJWKH6%$RI 1RWDEO\&)5UHOHDVHVWKH6%$ IURP LWV LWVREOLJDWLRQWRUHSXUFKDVHWKHGHIDXOWHGORDQ JXDUDQW\ REOLJDWLRQ LI LPSUXGHQW ORDQ VHUYLFLQJ PD\ KDYH UHVXOWHGLQDVXEVWDQWLDOORVVRQDORDQ6LPLODUO\623 ,,$QDO\VLV SURYLGHVWKDW³VXEVWDQWLDOO\QHJOLJHQW´ORDQVHUYLFLQJE\D OHQGHUEDQNZLOOUHOHDVHWKH6%$IURPLWVJXDUDQW\REOLJDWLRQ )LUVW7HQQHVVHHDUJXHVRQDSSHDOWKDWWKHGLVWULFWFRXUW¶V LIVXFKVHUYLFLQJPD\KDYHUHVXOWHGLQDVXEVWDQWLDOORVV UXOLQJLVHUURQHRXVLQWZRUHVSHFWV)LUVWWKHEDQNFRQWHQGV WKDW WKH ORZHU FRXUW HUUHG E\ UHTXLULQJ LW WR SURYH LWV 7KH IRUHJRLQJ UXOHV DQG UHJXODWLRQV VXSSRUW WKH GLVWULFW VXEVWDQWLDOFRPSOLDQFHZLWKWKHWHUPVRIWKHORDQJXDUDQW\ FRXUW¶V GHWHUPLQDWLRQ WKDW WKH 6%$ ZDV UHOHDVHG IURP LWV DJUHHPHQWUDWKHUWKDQUHTXLULQJWKH6%$WRSURYHWKHEDQN¶V JXDUDQW\ REOLJDWLRQ LI )LUVW 7HQQHVVHH¶V DFWLRQV PD\ KDYH QRQSHUIRUPDQFHRILWVREOLJDWLRQV6HFRQG)LUVW7HQQHVVHH UHVXOWHGLQDVXEVWDQWLDOORVVRQWKH7HOZDUHORDQ,QGHHGWKH FRQWHQGVWKDWWKHGLVWULFWFRXUWHUUHGE\FRQFOXGLQJWKDWLWKDG WH[W RI 623 DQG &)5 H[SUHVVO\ PDWHULDOO\EUHDFKHGWKHJXDUDQW\DJUHHPHQWE\ IDLOLQJWR VWDWHV WKDW DFWLRQV E\ D OHQGHU ZKLFK PD\ UHVXOW LQ D UHYLHZ WKH GRFXPHQWV WKDW 7HOZDUH KDG SUHVHQWHG WR VXEVWDQWLDO ORVV ZLOO MXVWLI\ WKH 6%$¶V UHIXVDO WR KRQRU LWV %HRJUDGVND%DQNDDQG IDLOLQJWRDFWDIWHUWKHW@KH QRQSHUIRUPDQFH RI D NQRZOHGJH )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR 1R 1R )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR 'DXEHUW@ IUDPHZRUN ZHUH WR EH H[WHQGHG WR RXWVLGH WKH 7HQQHVVHH FRQWHQGV WKDW WKH GLVWULFW FRXUW SURSHUO\ VFLHQWLILFUHDOPPDQ\W\SHVRIUHOHYDQWDQGUHOLDEOHH[SHUW DFNQRZOHGJHG /LIH &DUH &HQWHUV DV WKH ³JHQHUDO ODZ RQ WHVWLPRQ\²WKDW GHULYHG VXEVWDQWLDOO\ IURP SUDFWLFDO FRQWUDFWVLQ7HQQHVVHH´\HWLQH[SOLFDEO\IDLOHGWRIROORZLWV H[SHULHQFH²ZRXOGEHH[FOXGHG6XFKDUHVXOWWUXO\ZRXOG DOORFDWLRQRIWKHEXUGHQRISURRI WXUQ 'DXEHUW D FDVH LQWHQGHG WR UHOD[ WKH DGPLVVLELOLW\ UHTXLUHPHQWVIRUH[SHUWVFLHQWLILFHYLGHQFHRQLWVKHDG´,G )LQDOO\)LUVW7HQQHVVHHFLWHV%UXQVZLFN%DQN 7UXVW&R DW,QGHHGHYHQWKH%HUU\FRXUWLWVHOIUHFRJQL]HGWKDW Y8QLWHG6WDWHV)G )HG&LU LQVXSSRUW ³>W@KHGLVWLQFWLRQEHWZHHQVFLHQWLILFDQGQRQVFLHQWLILFH[SHUW RILWVDUJXPHQWWKDWWKH6%$ERUHWKHEXUGHQRISURRI,QWKDW WHVWLPRQ\LV DFULWLFDORQH>@´DQGWKDW'DXEHUWLV³RQO\RI FDVHWKHSODLQWLIIEDQNVRXJKWUHLPEXUVHPHQWXQGHUWKHWHUPV OLPLWHGKHOS´LQDVVHVVLQJWHFKQLFDORUH[SHULHQWLDOH[SHUWLVH RI D ORDQ JXDUDQW\ SURYLGHG E\ WKH IHGHUDO )DUPHUV +RPH %HUU\)GDW &RQVHTXHQWO\LQ-RQHVZHGHFOLQHG WKH DSSHOODQW¶V LQYLWDWLRQ WR DSSO\ WKH IDFWRUV RXWOLQHG LQ 'DXEHUWWRWHVWLPRQ\LQYROYLQJDQRQVFLHQWLILFILHOG-RQHV )GDW FRQGLWLRQ SUHFHGHQW LV DQ DIILUPDWLYH GHIHQVH WKDW PXVW EH SOHG ´ E\ WKH GHIHQGDQW +DUODQ 6:G DW (PSKDVLV DGGHG 1RWDEO\ 5XOH )ROORZLQJRXUUXOLQJLQ-RQHVWKH6XSUHPH&RXUWFODULILHG ZKLFK PLUURUV )HG5&LY3 F PHUHO\ LPSRVHV D SOHDGLQJ EXUGHQ XSRQ D GHIHQGDQW /LNH LWV IHGHUDO FRXQWHUSDUW LW SURYLGHV WKDW D SODLQWLII WKHDSSOLFDELOLW\RIWKHVRFDOOHG³'DXEHUWIDFWRUV´WRQRQ PD\ DYHU JHQHUDOO\ WKDW DOO FRQGLWLRQV SUHFHGHQW KDYH EHHQ SHUIRUPHG ,I VFLHQWLILFHYLGHQFHLQ.XPKR7LUH&R/WGY&DUPLFKDHO D GHIHQGDQW ZLVKHV WR FRQWHVW WKH LVVXH KH RU VKH PXVW GHQ\ WKH 86 ,Q .XPKR WKH &RXUW UHDIILUPHG SHUIRUPDQFH RI D FRQGLWLRQ SUHFHGHQW ZLWK SDUWLFXODULW\ 7HQQ5&LY3 'DXEHUW¶V FHQWUDO KROGLQJ WKDW D WULDO MXGJH¶V ³JDWHNHHSHU´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³>$@ 3ODLQWLII PXVW JHQHUDOO\ DOOHJH LQ KLV FRPSODLQW WKDW &RXUWKHOGWKDWWULDOFRXUWVPD\FRQVLGHUVXFKIDFWRUVZKHQ µDOO FRQGLWLRQV WKH LQVWLWXWLRQ RI WKH ODZVXLW KDYH EHHQ IXOILOOHG¶ DVVHVVLQJWKHUHOLDELOLW\RIDOOW\SHVRIH[SHUWWHVWLPRQ\,G )HG5&LY3 F ,I WKH GHIHQGDQW GRXEWV WKH YHUDFLW\ RI WKH SODLQWLII¶V DOOHJDWLRQ LQ ZKROH RU LQ SDUW WKHQ WKH GHIHQGDQW PD\ GHQ\ µVSHFLILFDOO\ DW 7KH&RXUWVWUHVVHGKRZHYHUWKDW³'DXEHUW¶VOLVW DQG ZLWK SDUWLFXODULW\¶ WKDW WKH SUHFRQGLWLRQV KDYH QRW EHHQ IXOILOOHG ,G RIVSHFLILFIDFWRUVQHLWKHUQHFHVVDULO\QRUH[FOXVLYHO\DSSOLHV 7KH SODLQWLII WKHQ EHDUV WKH EXUGHQ RI SURYLQJ WKDW WKH FRQGLWLRQV WRDOOH[SHUWVRULQHYHU\FDVH´,GDW,QVRPHFDVHV SUHFHGHQW ZKLFK WKH GHIHQGDQW KDV VSHFLILFDOO\ MRLQHG LQ LVVXH KDYH EHHQ HYHQ FDVHV LQYROYLQJ QRQVFLHQWLILF H[SHUW WHVWLPRQ\ WKH VDWLVILHG´ IDFWRUVPD\EHSHUWLQHQWZKLOHLQRWKHUFDVHV³WKHUHOHYDQW $ SDQHO RI WKLV FRXUW UHDFKHG D FRQWUDU\ FRQFOXVLRQ LQ 6DIHFR UHOLDELOLW\FRQFHUQVPD\IRFXVXSRQSHUVRQDONQRZOHGJHRU KRZHYHU DQG ZH DUH QRW DW OLEHUW\ WR GHSDUW IURP WKDW UXOLQJ 6DOPL Y H[SHULHQFH´ ,G DW ³>:@KHWKHU 'DXEHUW µV VSHFLILF 6HF¶\ RI +HDOWK DQG +XPDQ 6HUYV )G WK &LU ³$ IDFWRUVDUHRUDUHQRWUHDVRQDEOHPHDVXUHVRIUHOLDELOLW\LQD SDQHO RI WKLV &RXUW FDQQRW RYHUUXOH WKH GHFLVLRQ RI DQRWKHU SDQHO´ SDUWLFXODUFDVHLVDPDWWHUWKDWWKHODZJUDQWVWKHWULDOMXGJH &RQVHTXHQWO\ IRU SXUSRVHV RI RXU DQDO\VLV KHUHLQ ZH PXVW FRQFOXGH WKDW EURDGODWLWXGHWRGHWHUPLQH´,GDW XQGHU 7HQQHVVHH ODZ WKH 6%$ ZRXOG EHDU WKH EXUGHQ RI SURYLQJ )LUVW 7HQQHVVHH¶V QRQSHUIRUPDQFH RI D FRQGLWLRQ SUHFHGHQW )RU UHDVRQV WR EH VHW IRUWK PRUH IXOO\ LQIUD KRZHYHU ZH UHMHFW )LUVW 7HQQHVVHH¶V DUJXPHQW $IWHU UHYLHZLQJ ,RUODQR¶V WULDO WHVWLPRQ\ ZH FDQQRW VD\ WKDW VWDWH ODZ VXSSOLHV WKH DSSOLFDEOH UXOH RI GHFLVLRQ 5DWKHU DV ZH ZLOO WKDWWKHGLVWULFWFRXUWDEXVHGLWVGLVFUHWLRQE\DOORZLQJKLPWR H[SODLQ SHUWLQHQW 6%$ UHJXODWLRQV SODLQO\ DOORFDWH WKH EXUGHQ RI SURRI WR WHVWLI\DVDQH[SHUWZLWQHVV,QUHDFKLQJWKLVFRQFOXVLRQZH )LUVW 7HQQHVVHH 7KHUHIRUH 6DIHFR GRHV QRW FRQWURO WKH RXWFRPH RI WKH LQVWDQW FDVH )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR 1R 1R )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR $GPLQLVWUDWLRQ ³)P+$´ ,GDW 7KH)P+$UHIXVHG LVVXIILFLHQWO\³UHOLDEOH´6XFKIDFWRUVLQFOXGH ³ZKHWKHU WRKRQRUWKHJXDUDQW\KRZHYHUDUJXLQJLQWHUDOLDWKDWWKH DWKHRU\RUWHFKQLTXHFDQEH³DQGKDVEHHQWHVWHG´ EDQNKDGQHJOLJHQWO\VHUYLFHGWKHORDQDWLVVXH,GDWQ$W ³ZKHWKHUWKHWKHRU\RUWHFKQLTXHKDVEHHQVXEMHFWHGWRSHHU WULDO WKH 86 &RXUW RI &ODLPV SODFHG WKH EXUGHQ RI SURRI UHYLHZRUSXEOLFDWLRQ´ ³WKHNQRZQRUSRWHQWLDOUDWHRI XSRQWKHEDQNWRSURYHWKDWLWGLGQRWQHJOLJHQWO\VHUYLFHWKH HUURU´ DQG ³JHQHUDODFFHSWDQFH´,GDW $OWKRXJK ORDQ,GDW8SRQDSSHDOWKH)HGHUDO&LUFXLWKHOGWKDW 'DXEHUWVSHFLILFDOO\GHDOWZLWK³VFLHQWLILF´HYLGHQFHZHKDYH WKHWULDOFRXUWKDGPLVDOORFDWHGWKHEXUGHQRISURRI,QVR UHFRJQL]HGWKDWWKH³JDWHNHHSHU´DQDORJ\³µLVDSSOLFDEOHWRDOO UXOLQJ WKH DSSHOODWH FRXUW FRQVWUXHG WKH SDUWLHV¶ ³/HQGHU¶V H[SHUWWHVWLPRQ\RIIHUHGXQGHU5XOH¶´8QLWHG6WDWHVY $JUHHPHQW´ DV SURYLGLQJ WKH )P+$ ZLWK DQ DIILUPDWLYH 7KRPDV)G WK&LU FHUWGHQLHG86 GHIHQVHWROLDELOLW\RQWKHJXDUDQW\7KHUHIRUHWKHFRXUWKHOG DEURJDWHGRQRWKHUJURXQGVE\*HQ(OHF&R WKDWWKH)P+$ERUHWKHEXUGHQRISURRI,G)LUVW7HQQHVVHH Y -RLQHU 86 TXRWLQJ %HUU\ Y &LW\ RI LQVLVWVWKDWWKHVDPHUDWLRQDOH³ZKROO\DSSOLHVWRWKLVFDVH´ 'HWURLW)G WK&LU FHUWGHQLHG 86 &RRNY$PHULFDQ66&R)G 8SRQUHYLHZKRZHYHUZHFDQQRWDJUHHWKDWWKHGLVWULFW WK &LU QRWLQJ WKDW D GXW\ FRPSDUDEOH WR FRXUWPLVDOORFDWHGWKHEXUGHQRISURRI$VDWKUHVKROGPDWWHU 'DXEHUW¶V³JDWHNHHSLQJ´IXQFWLRQ³LVLPSRVHGXSRQDWULDO WKH IDFW WKDW WKH 6%$ LQLWLDOO\ UDLVHG WKH LVVXH RI )LUVW FRXUWZKHQWKHVXEMHFWRIWKHSURSRVHGRSLQLRQWHVWLPRQ\LV 7HQQHVVHH¶VQRQSHUIRUPDQFHDVDQDIILUPDWLYHGHIHQVHLVQRW QRWµVFLHQWLILF¶NQRZOHGJHEXWµWHFKQLFDORURWKHUVSHFLDOL]HG GLVSRVLWLYH:HORRNWRWKHODZQRWWRWKHSOHDGLQJVZKHQ NQRZOHGJH¶´ DEURJDWHG RQ RWKHU JURXQGV E\ -RLQHU GHWHUPLQLQJZKHUHWKHEXUGHQRISURRIUHVWV)XUWKHUPRUH 86 ZHILQGXQSHUVXDVLYH)LUVW7HQQHVVHH¶VDUJXPHQWWKDWVWDWH FRQWUDFWODZJRYHUQVWKHRXWFRPHRIWKHSUHVHQWGLVSXWH$V ,Q %HUU\ )G DW WKLV FRXUW DGRSWHG WKH QRWHG DERYH LW LV WUXH WKDW JHQHUDO IHGHUDO FRPPRQ ODZ DIRUHPHQWLRQHG IRXU 'DXEHUW IDFWRUV DV DQ DQDO\WLFDO W\SLFDOO\DSSOLHVWRGLVSXWHVLQYROYLQJ6%$ORDQJXDUDQWHHV IUDPHZRUNZKHQDVVHVVLQJWKHUHOLDELOLW\RISURSRVHGQRQ )LUVW1DW¶O%DQNRI&LFHUR )GDW 3LWWVEXUJK1DW¶O VFLHQWLILFH[SHUWWHVWLPRQ\8WLOL]LQJWKRVHVDPHIDFWRUV LH %DQN )GDW )LUVW,QWHUVWDWH%DQNRI,GDKR WHVWLQJRIWKHH[SHUW¶VWKHRU\SHHUUHYLHZDQGSXEOLFDWLRQ )G DW ,W LV HTXDOO\ WUXH WKDW WKH 6XSUHPH &RXUW LQ UDWHRIHUURUDQGJHQHUDODFFHSWDQFH LQWKHSUHVHQWFDVH)LUVW .LPEHOO)RRGVORRNHGWRUHOHYDQWVWDWHODZZKHQIDVKLRQLQJ 7HQQHVVHHFRQWHQGVWKDWWKH6%$IDLOHGWRGHPRQVWUDWHWKDW WKH IHGHUDO FRPPRQ ODZ DSSOLFDEOH WR 6%$ OLHQ SULRULWLHV WHFKQLFDOO\ YDOLG UHDVRQLQJ DQG PHWKRGRORJ\ VXSSRUWHG .LPEHOO)RRGV86DW 1RUGRZHTXDUUHOZLWK)LUVW ,RUODQR¶VRSLQLRQV7KHUHIRUHWKHEDQNDVVHUWVWKDWKLVVR 7HQQHVVHH¶VDUJXPHQWWKDW XQGHUFRQWUROOLQJ6L[WK&LUFXLW FDOOHG³H[SHUW´WHVWLPRQ\ZDVQRWSURYHQWREHUHOLDEOH SUHFHGHQW LQWHUSUHWLQJ WKH 7HQQHVVHH FRPPRQ ODZ RI :HFDQQRWDJUHH&RQWUDU\WR)LUVW7HQQHVVHH¶VDUJXPHQW WKHIDFWWKDW,RUODQR¶VRSLQLRQVPD\QRWKDYHEHHQVXEMHFWHG WRWKHFUXFLEOHRISHHUUHYLHZRUWKDWWKHLUYDOLGLW\KDVQRW 7KH SHUWLQHQW ODQJXDJH RI WKH /HQGHU¶V $JUHHPHQW LQ %UXQVZLFN EHHQFRQILUPHGWKURXJKHPSLULFDODQDO\VLVGRHVQRWUHQGHU %DQN SURYLGHG WKDW WKH JRYHUQPHQW¶V JXDUDQW\ REOLJDWLRQ ³µ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¶´ QRQVFLHQWLILF H[SHUW WHVWLPRQ\ :H QRWHG WKDW ³>L@I >WKH %UXQVZLFN %DQN )G DW )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR 1R 1R )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR )LUVW 7HQQHVVHH¶V WUDGLWLRQDO OHQGHUERUURZHU UHODWLRQVKLS FRQWUDFWV WKH 6%$ ZRXOG EHDU WKH EXUGHQ RI SURYLQJ WKH ZLWK7HOZDUHEXWDOVRWKHVFRSHRILWVREOLJDWLRQWRPRQLWRU EDQN¶V QRQSHUIRUPDQFH XQGHU WKH JXDUDQW\ DJUHHPHQW 7HOZDUH¶V WUDQVDFWLRQ ZLWK %HRJUDGVND %DQND DQG LWV UHJDUGOHVVRIZKHWKHUVXFKQRQSHUIRUPDQFHLVFKDUDFWHUL]HG REOLJDWLRQ DQG DELOLW\ WR LQWHUFHGH RQ 7HOZDUH¶V EHKDOI DVDIDLOHGFRQGLWLRQSUHFHGHQWRUDVDQDIILUPDWLYHGHIHQVH SDUWLFXODUO\DIWHUGLVFRYHULQJWKDWWKHD@JRYHUQPHQWDJHQF\¶V ZHLJKWDQGFUHGLELOLW\RIKLVWHVWLPRQ\QRWLWVDGPLVVLELOLW\ UHJXODWLRQVWKDWKDYHEHHQSXEOLVKHGLQWKH&RGHRI)HGHUDO 0RUDOHV)GDW UHDVRQLQJWKDW³WKHMXU\ZDVIUHHWR 5HJXODWLRQV µKDYH WKH IRUFH DQG HIIHFW RI ODZ ¶´ JLYH>DQH[SHUW¶V@WHVWLPRQ\DVPXFKFUHGHQFHDVLWIHOWWKH 1DWLRQZLGH%OGJ0DLQW,QFY5HLFK)G WHVWLPRQ\GHVHUYHGSDUWLFXODUO\LQOLJKWRI'HIHQGDQW¶VFURVV WK &LU TXRWLQJ0RRG\Y8QLWHG6WDWHV)G H[DPLQDWLRQH[SRVLQJ>KLV@ODFNRIIDPLOLDULW\ZLWKWKHJLYHQ WK&LU FHUWGHQLHG 86 WRSLFV´ VHHDOVR'DYLVY&RPEXVWLRQ(QJ¶J,QF)G ,QWKHSUHVHQWFDVHWKHGLVWULFWFRXUWUHOLHGLQSDUWXSRQ WK &LU ³5XOH VKRXOG EH EURDGO\ &)5ZKLFKJRYHUQVWKH6%$¶VREOLJDWLRQWR LQWHUSUHWHGRQWKHEDVLVRIZKHWKHUWKHXVHRIH[SHUWWHVWLPRQ\ KRQRULWVORDQJXDUDQWHHVDQGSURYLGHV ZLOODVVLVWWKHWULHURIIDFW7KHIDFWWKDWDSURIIHUHGH[SHUW PD\ EH XQIDPLOLDU ZLWK SHUWLQHQW VWDWXWRU\ GHILQLWLRQV RU 6%$VKDOOEHUHOHDVHGIURPREOLJDWLRQWRSXUFKDVHLWV VWDQGDUGVLVQRWJURXQGVIRUGLVTXDOLILFDWLRQ6XFKODFNRI VKDUH RI WKH JXDUDQWHHG ORDQ XQOHVV WKH /HQGHU KDV IDPLOLDULW\ DIIHFWV WKH ZLWQHVV¶ FUHGLELOLW\ QRW KLV VXEVWDQWLDOO\FRPSOLHGZLWKDOORIWKHSURYLVLRQVRIWKHVH TXDOLILFDWLRQVWRWHVWLI\´ UHJXODWLRQV WKH *XDUDQW\ $JUHHPHQW DQG WKH /RDQ $XWKRUL]DWLRQ )LQDOO\)LUVW7HQQHVVHHVXJJHVWVWKDW,RUODQR¶VWHVWLPRQ\ ZDV QRW EDVHG XSRQ ³WHFKQLFDOO\ YDOLG UHDVRQLQJ RU 7KHGLVWULFWFRXUWLQWHUSUHWHGWKHIRUHJRLQJSRUWLRQRIWKH PHWKRGRORJ\´ HYHQ LI KH ZDV TXDOLILHG WR RIIHU VXFK &RGHRI)HGHUDO5HJXODWLRQVDVLPSRVLQJDEXUGHQXSRQ)LUVW WHVWLPRQ\ :H ILQG WKLV DUJXPHQW WR EH XQSHUVXDVLYH ,Q 7HQQHVVHH WR SURYH LWV ³VXEVWDQWLDO FRPSOLDQFH´ ZLWK WKH VXSSRUW RI LWV DVVHUWLRQ WKH EDQN GUDZV IURP WKH 6XSUHPH &RXUW¶VGHFLVLRQLQ'DXEHUWY0HUUHOO'RZ3KDUP,QF 86 DQGLWVSURJHQ\,Q'DXEHUWWKHPDMRULW\ ,Q LWV ZULWWHQ GHFLVLRQ WKH GLVWULFW FRXUW TXRWHG ZKLOH UHFRJQL]HG WKDW WKH IHGHUDO FRXUWV IXOILOO DQ LPSRUWDQW UHFRJQL]LQJ WKDW LW KDV EHHQ UHSODFHG E\ ZKLFK FRQWDLQV ³JDWHNHHSLQJ´ IXQFWLRQ JXDUDQWHHLQJ WKDW HYLGHQFH LV ERWK VRPHZKDW VLPLODU ODQJXDJH ,Q UHOHYDQW SDUW QRZ SURYLGHV WKDW UHOHYDQWDQGUHOLDEOH,GDW 7KH'DXEHUW&RXUWWKHQ WKH ³6%$ LV UHOHDVHG IURP OLDELOLW\ RQ D ORDQ JXDUDQWHH LI´ FHUWDLQ HYHQWV RFFXU 7R WKH H[WHQW WKDW WKH WZR UHJXODWLRQV GLIIHU KRZHYHU ZH VXJJHVWHGDQRQH[FOXVLYHOLVWRIIDFWRUVIRUFRXUWVWRFRQVLGHU EDVH RXU DQDO\VLV DV GLG WKH GLVWULFW FRXUW XSRQ WKH ODQJXDJH RI ZKHQGHFLGLQJZKHWKHUSURSRVHGVFLHQWLILFH[SHUWWHVWLPRQ\ ZKLFK ZDV LQ HIIHFW ZKHQ WKH 6%$ UHIXVHG WR KRQRU LWV ORDQ JXDUDQW\ )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR 1R 1R )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR WHUPVRIWKHORDQJXDUDQW\DJUHHPHQW,QRWKHUZRUGVWKH GRFXPHQWFROOHFWLRQDQGORDQVHUYLFLQJ³ZKLFKKDQGOHGWKH GLVWULFW FRXUW UHDG &)5 WR PHDQ WKDW WKH UHILQDQFLQJ RI OHWWHUV RI FUHGLW DQG EDQNHUV¶ DFFHSWDQFH´ 6%$¶VREOLJDWLRQWRUHSXUFKDVHWKHGHIDXOWHG7HOZDUHORDQ ,RUODQRDOVRWHVWLILHGWKDWKLVEDQNLQJFDUHHUH[SRVHGKLPWR GLG QRW DULVH XQOHVV )LUVW 7HQQHVVHH HVWDEOLVKHG LWV DOO DVSHFWV RI DQ LQWHUQDWLRQDO EDQNLQJ WUDQVDFWLRQ ,Q KLV SHUIRUPDQFHXQGHUWKHFRQWUDFW8SRQUHYLHZZHDJUHHWKDW FDSDFLW\DVWKHPDQDJHURIDOHWWHURIFUHGLWGHSDUWPHQWKH DOORFDWHG WKH EXUGHQ RI SURRI WR WKH EDQN WR EHFDPHIDPLOLDUZLWKKRZEDQNVLQ)LUVW7HQQHVVHH¶VSRVLWLRQ GHPRQVWUDWHLWVVXEVWDQWLDOFRPSOLDQFHZLWKWKHWHUPVRILWV KDQGOHGOHWWHURIFUHGLWILQDQFLQJWUDQVDFWLRQV DJUHHPHQWZLWKWKH6%$ 7KHUHJXODWLRQSURYLGHVWKDWWKH 6%$VKDOOEHUHOHDVHGIURPLWVJXDUDQW\REOLJDWLRQXQOHVVWKH $IWHUKHDULQJWKHIRUHJRLQJWHVWLPRQ\FRQFHUQLQJ,RUODQR¶V EDQNVXEVWDQWLDOO\FRPSOLHVZLWKLWVYDULRXVREOLJDWLRQV7KH TXDOLILFDWLRQVWKHGLVWULFWFRXUWVWDWHG RQO\ UHDVRQDEOH LQWHUSUHWDWLRQ RI WKH IRUHJRLQJ ODQJXDJH LV WKDW LW SODFHV WKH EXUGHQ XSRQ WKH OHQGLQJ LQVWLWXWLRQ KHUH ,WKLQNKHKDVVSHFLDOL]HGNQRZOHGJHWKDWZLOODVVLVWWKH )LUVW 7HQQHVVHH WR PDNH D WKUHVKROG VKRZLQJ WKDW LW KDV WULHU RI IDFW LQ XQGHUVWDQGLQJ WKH HYLGHQFH DQG DQ\ VHUYLFHG LWV JXDUDQWHHG ORDQ LQ D FRPPHUFLDOO\ UHDVRQDEOH ZHDNQHVVHVLQKLVEDFNJURXQGZLOOJRWRWKHZHLJKWWREH PDQQHU DQG RWKHUZLVH KDV FRPSOLHG ZLWK WKH WHUPV RI WKH DFFRUGHGWRKLVRSLQLRQ SDUWLHV¶DJUHHPHQWDQGWKHUHJXODWLRQV7KHUHIRUHLQVRIDU >3ODLQWLII¶V FRXQVHO@ LV IUHH WR H[DPLQH KLP LQ WKDW UHJDUG 7KLV JHQWOHPDQ KDV PDQDJHG OHWWHU RI FUHGLW GHSDUWPHQWVDQGZRUNHGLQOHWWHURIFUHGLWGHSDUWPHQWVLQ ,Q WKHLU UHVSHFWLYH EULHIV WKH SDUWLHV GLVSXWH ZKHWKHU WKH UHTXLUHPHQW RI ³VXEVWDQWLDO FRPSOLDQFH´ XQGHU VKRXOG EH FKDUDFWHUL]HG DV DQXPEHURIODUJHEDQNV+HLVFHUWDLQO\IDPLOLDUZLWK SURYLGLQJ WKH 6%$ ZLWK D SRWHQWLDO DIILUPDWLYH GHIHQVH WR OLDELOLW\ RQ LWV WKHSURFHVVRIKRQRULQJDQGGLVKRQRULQJOHWWHUVRIFUHGLW ORDQ JXDUDQW\ RU DV VHWWLQJ IRUWK D FRQGLWLRQ SUHFHGHQW WR WKH 6%$¶V DQGRIEDQNV¶DSSURDFKHVRQWKRVH JXDUDQW\ REOLJDWLRQ $V QRWHG DERYH D SODLQWLII W\SLFDOO\ EHDUV WKH EXUGHQ ,WKLQNKHKDVVXIILFLHQWVSHFLDOL]HGNQRZOHGJHWREH RI SURYLQJ LWV VDWLVIDFWLRQ RI D FRQGLWLRQ SUHFHGHQW ZKHUHDV D GHIHQGDQW KHOSIXOLQXQGHUVWDQGLQJWKLVSURFHVV7KDWGRHVQ¶WPHDQ RUGLQDULO\ EHDUV WKH EXUGHQ RI HVWDEOLVKLQJ WKH H[LVWHQFH RI DQ DIILUPDWLYH GHIHQVH $V ZH DOVR KDYH UHFRJQL]HG KRZHYHU XQGHU 7HQQHVVHH ODZ WKH ,ZLOOQHFHVVDULO\EHOLHYHHYHU\WKLQJKHWHOOVPH+HLV QRQRFFXUUHQFH RI D FRQGLWLRQ SUHFHGHQW LV DQ DIILUPDWLYH GHIHQVH DQG WKH TXDOLILHGWRUHQGHUDQRSLQLRQ GHIHQGDQW EHDUV WKH EXUGHQ RI SURRI RQ WKH LVVXH Safeco, 191 F.3d at 682 7KXV RXU KROGLQJ WKDW )LUVW 7HQQHVVHH ERUH WKH EXUGHQ RI SURRI ZLWK :HILQGQRHUURUPXFKOHVVDQDEXVHRIGLVFUHWLRQLQWKH UHVSHFW WR LWV ³VXEVWDQWLDO FRPSOLDQFH´ WXUQV QRW XSRQ WKH ODEHO WKDW ZH GLVWULFWFRXUW¶VDVVHVVPHQWRI,RUODQR¶VTXDOLILFDWLRQVDVDQ DIIL[ WR WKH UHTXLUHPHQWV VHW IRUWK LQ EXW XSRQ RXU FRQFOXVLRQ H[SHUWZLWQHVV$VLWGLGLQWKHWULDOFRXUW)LUVW7HQQHVVHH WKDW WKH UHJXODWLRQ VSHFLILFDOO\ DOORFDWHV WKH EXUGHQ RI SURRI $V QRWHG LQVLVWVRQDSSHDOWKDW,RUODQRODFNHGH[SHUWLVHZLWKUHVSHFWWR WKHLVVXHRIZKHWKHULW³PDQDJHGLWVUHODWLRQVKLSZLWKRQHRI DERYH WKH RQO\ UHDVRQDEOH LQWHUSUHWDWLRQ RI LV WKDW LW LPSRVHV WKH EXUGHQ RI SURRI XSRQ WKH SODLQWLII UHJDUGOHVV RI ZKHWKHU LWV UHTXLUHPHQWV DUH FKDUDFWHUL]HG DV D ³FRQGLWLRQ SUHFHGHQW´ RU DV DQ LWVERUURZHUVZLWKGXHFDUHDQGSUXGHQWEDQNNQRZOHGJH´ ³DIILUPDWLYH GHIHQVH´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³XQOHVV VXFK WKH FHQWUDO LVVXH DW WULDO 7KLV OLWLJDWLRQ FRQFHUQV QRW RQO\ H[DPLQDWLRQ RU LQTXLU\ LV VKRZQ WR EH MREUHODWHG DQG FRQVLVWHQW ZLWK )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR 1R 1R )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR ,QWKHSUHVHQWFDVH)LUVW7HQQHVVHHGRHVQRWVXJJHVWWKDW DVPLJKWFRQIOLFWZLWKWKH7HQQHVVHHFRPPRQ ,RUODQR RIIHUHG ³VFLHQWLILF´ H[SHUW WHVWLPRQ\ DQG ZH ILQG ODZ ZH FRQFOXGH WKDW VXFK LQFRQVLVWHQW VWDWH ODZ KDV QR QRWKLQJLQWKHUHFRUGWRVXSSRUWVXFKDFRQFOXVLRQ5DWKHU HIIHFW 6HH )LGHOLW\ )HG 6DY DQG /RDQ $VV¶Q Y GH OD ,RUODQR¶V WHVWLPRQ\ IDOOV XQGHU WKH ³WHFKQLFDO RU RWKHU &XHVWD 86 UHFRJQL]LQJ WKDW ³IHGHUDO VSHFLDOL]HGNQRZOHGJH´FRPSRQHQWRI5XOH,QHVVHQFH UHJXODWLRQV KDYH QR OHVV SUHHPSWLYH HIIHFW WKDQ IHGHUDO ,RUODQRRSLQHGDWWULDOWKDW)LUVW7HQQHVVHHLPSUXGHQWO\WRRN VWDWXWHV´ 8QLWHG6WDWHVY-RQHV)G WK LWVHOI ³RXW RI WKH ORRS´ E\ DOORZLQJ 7HOZDUH WR KDQGOH WKH &LU FRQFOXGLQJ WKDW DQ 6%$ UHJXODWLRQ SUHHPSWHG GLVSXWH ZLWK %HRJUDGVND %DQND $V QRWHG VXSUD ,RUODQR FRQIOLFWLQJ *HRUJLD ODZ :H DOVR ILQG WKH 7HQQHVVHH LGHQWLILHGYDULRXVSUREOHPVDVVRFLDWHGZLWKDOHQGHUVXFKDV FRPPRQODZRIFRQWUDFWVLQDSSOLFDEOHIRUDVHFRQGUHDVRQ )LUVW 7HQQHVVHH DOORZLQJ LWV FOLHQW WR QHJRWLDWH D OHWWHU RI QDPHO\WKHSDUWLHV¶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´ DV SODFLQJ WKH EXUGHQ RQ WKH HPSOR\HU WR PDNH WKH GLVWULFW FRXUW¶V GHWHUPLQDWLRQ WKDW ,RUODQR ZDV TXDOLILHG WR UHTXLVLWH VKRZLQJ (PSKDVLV DGGHG RIIHU KLV RSLQLRQ RQ WKH IRUHJRLQJ LVVXH E\ YLUWXH RI KLV VSHFLDOL]HG NQRZOHGJH VNLOO H[SHULHQFH WUDLQLQJ RU 3DUHQWKHWLFDOO\ DOWKRXJK ZH KDYH UHMHFWHG )LUVW 7HQQHVVHH¶V HGXFDWLRQ,RUODQRWHVWLILHGWKDWKHEHJDQKLVEDQNLQJFDUHHU DUJXPHQW WKDW VWDWH ODZ FRQWUROV RXU DQDO\VLV ZH QRWH WKDW WKH FRXUWV RI WKDW VWDWH KDYH LQWHUSUHWHG VLPLODU ³XQOHVV´ VWDWXWRU\ ODQJXDJH DV LPSRVLQJ LQ H[DPLQLQJOHWWHUVRIFUHGLWDQGUHODWHGGRFXPHQWV WKH EXUGHQ RI SURRI XSRQ D SODLQWLII 6HH /LWWOH Y 1DVKYLOOH &KDWWDQRRJD +HODWHUMRLQHGWKHLQWHUQDWLRQDORIILFH RIDGLIIHUHQWEDQN DQG 6W /RXLV 5\ &R 7HQQ $SS 6:G HYHQWXDOO\VXSHUYLVLQJHPSOR\HHVZKRSURYLGHGYDULRXVOHWWHU LQWHUSUHWLQJ D VWDWXWH ZKLFK SURYLGHG WKDW QR WUDLQ HQJLQHHU ³VKDOO EH RIFUHGLWVHUYLFHV/DWHU,RUODQRVHUYHGDVWKHPDQDJHURIDQ FRPSHOOHG WR EORZ WKH ZKLVWOH RU ULQJ WKH EHOO DW DQ\ FURVVLQJ XQOHVV LW LV HQWLUHOHWWHURIFUHGLWGHSDUWPHQWDQGWKHQDVDYLFHSUHVLGHQW VR GHVLJQDWHG >DV D SXEOLF FURVVLQJ@´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¶V ORDQ JXDUDQW\ REOLJDWLRQV &RQVHTXHQWO\ ZH DPHQGPHQW WR 5XOH GRHV QRW DOWHU WKH VWDQGDUG IRU HYDOXDWLQJ WKH QHHG QRW ORRN WR WKH IHGHUDO FRPPRQ ODZ WR ILOO D YRLG VXFK DV WKDW ZKLFK DGPLVVLELOLW\ RI H[SHUW WHVWLPRQ\ LQ WKLV FDVH H[LVWHG LQ.LPEHOO )RRGV )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR 1R 1R )LUVW71%DQN1DW¶O$VV¶QY%DUUHWR )LQDOO\ZHILQGXQSHUVXDVLYH)LUVW7HQQHVVHH¶VDUJXPHQW EUHDFKHGLWVDJUHHPHQWZLWKWKH6%$DQGLIVRZKHWKHUWKDW WKDW%UXQVZLFN%DQN)GDWFRPSHOVUHYHUVDORI EUHDFKZDVPDWHULDO WKH GLVWULFW FRXUW RQ WKH EXUGHQ RI SURRI LVVXH $OWKRXJK %UXQVZLFN%DQNEHDUVVRPHIDFWXDOVLPLODULW\WRWKHSUHVHQW $GPLVVLELOLW\RI,RUODQR¶V([SHUW7HVWLPRQ\ FDVHWKH)HGHUDO&LUFXLW&RXUWRI$SSHDOVFRQVWUXHGODQJXDJH LQD/HQGHU¶V$JUHHPHQWWKDWGLIIHUVIURPWKHODQJXDJHRI ,QGHWHUPLQLQJWKDW)LUVW7HQQHVVHHGLGQRWDFWFRQVLVWHQW &)5 ZKLFK ZH KDYH EHHQ FDOOHG XSRQ WR ZLWK SUXGHQW EDQNLQJ VWDQGDUGV WKH GLVWULFW FRXUW UHOLHG LQWHUSUHWLQWKHLQVWDQWFDVH*LYHQWKDWWKH%UXQVZLFN%DQN ODUJHO\XSRQWKHWHVWLPRQ\RI,RUODQRZKRWKHFRXUWIRXQGWR FRXUWKDGQRRFFDVLRQWRFRQVWUXHLWVDOORFDWLRQ EHTXDOLILHGDVDQH[SHUWZLWQHVV7KLVFRXUWUHYLHZVDGLVWULFW RIWKHEXUGHQRISURRIXSRQWKH)P+$XQGHUWKHWHUPVRID FRXUW¶V GHFLVLRQ WR DGPLW H[SHUW WHVWLPRQ\ IRU DQ DEXVH RI GLIIHUHQWDJUHHPHQWGRHVOLWWOHWRDGYDQFH)LUVW7HQQHVVHH¶V GLVFUHWLRQ*HQ(OHF&RY-RLQHU86 DUJXPHQW)RUWKHUHDVRQVVHWIRUWKDERYHZHFRQFOXGHWKDW 0RUDOHVY$P+RQGD0RWRU&R,QF)G &)5 SODFHG WKH EXUGHQ XSRQ )LUVW WK&LU 8SRQUHYLHZZHILQGQRDEXVHRIGLVFUHWLRQ 7HQQHVVHH WR GHPRQVWUDWH VXEVWDQWLDO FRPSOLDQFH ZLWK WKH LQWKHGLVWULFWFRXUW¶VGHFLVLRQWRDOORZ,RUODQR¶VWHVWLPRQ\ WHUPV RI WKH SDUWLHV¶ DJUHHPHQW $FFRUGLQJO\ ZH ILQG QR HUURULQWKHGLVWULFWFRXUW¶VDOORFDWLRQRIWKHEXUGHQRISURRI )HGHUDO5XOHRI(YLGHQFHVHWVIRUWKWKHUHTXLUHPHQWV DQGZHUHMHFWWKHDSSHOODQW¶VILUVWDUJXPHQW IRUWKHDGPLVVLELOLW\RIH[SHUWWHVWLPRQ\$WWKHWLPHRIWKH GLVWULFWFRXUW¶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¶VFRQFOXVLRQ)LUVW7HQQHVVHH DOVRDUJXHVWKDWLWVIDLOXUHWRDFWDIWHU%HRJUDGVND%DQND¶V LQLWLDOGLVKRQRURIWKHOHWWHURIFUHGLWGLGQRWFDXVHWKH6%$¶V 5XOH ZDV DPHQGHG HIIHFWLYH 'HFHPEHU WR UHDG DV ORVVRULQFUHDVHWKHULVNRIVXFKDORVV&RQVHTXHQWO\)LUVW IROORZV 7HQQHVVHH LQVLVWV WKDW LWV RZQ DFWLRQ RU LQDFWLRQ ZDV LPPDWHULDOWR7HOZDUH¶VGHIDXOW)LQDOO\LQFRQQHFWLRQZLWK ,I VFLHQWLILF WHFKQLFDO RU RWKHU VSHFLDOL]HG NQRZOHGJH ZLOO LWV PDWHULDOLW\ DUJXPHQW )LUVW 7HQQHVVHH FRQWHQGV WKDW WKH DVVLVW WKH WULHU RI IDFW WR XQGHUVWDQG WKH HYLGHQFH RU WR GHWHUPLQH D IDFW LQ LVVXH D ZLWQHVV TXDOLILHG DV DQ H[SHUW E\ NQRZOHGJH GLVWULFW FRXUW HUUHG E\ DOORZLQJ 3HWHU ,RUODQR WKH 6%$¶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¶V DUJXPHQWV UHJDUGLQJ WKH DGPLVVLELOLW\ RI ,RUODQR¶V 7KH IRUHJRLQJ DPHQGPHQW WR 5XOH PHUHO\ UHIOHFWV WKH WUDGLWLRQDO WHVWLPRQ\ $IWHU UHVROYLQJ WKDW LVVXH ZH ZLOO GHWHUPLQH 'DXEHUW LQTXLU\ ZKLFK ZLOO EH GLVFXVVHG PRUH IXOO\ LQIUD 6HH 1HOVRQ Y ZKHWKHU WKH UHFRUG VXSSRUWV D ILQGLQJ WKDW )LUVW 7HQQHVVHH 7HQQ *DV 3LSHOLQH &R )G Q WK &LU SHWLWLRQ IRU FHUW ILOHG 86/: -XQH $V DPHQGHG 5XOH