SEC v. PERRYA. GRUSS, Southern District of New York (Apr. 8, 2011) — Complaint

JUDGE SWEET
 
11 
LV 2420
George S. Canellos 
Attorney 
for Plaintiff 
SECURITIES AND EXCHANGE COMMISSION 
New York Regional Office 
3 
World Financial Center, Room 400 
New York, New York 10281-1022 
(212) 336-1100 
UNITED STATES DISTRICT COURT 
SOUTHERN DISTRICT OF NEW YORK 
11 Civ.__( ) 
COMPLAINT 
SECURITIES AND EXCHANGE COMMISSION, 
Plaintiff, 
. v. 
PERRYA. GRUSS, 
Defendant. 
-----------~-------_.. 
Plaintiff Securities and Exchange Commission ("Commission"), for its Complaint against Perry 
A. Gruss ("Gruss" or "Defendant"), alleges as follows: 
SUMMARY 
1. This action arises out of Gruss' actions while he was the Chief Financial Officer 
ofD.B. Zwim & Co., L.P. ("DBZCO"), a now defunct investment adviser that, at various times 
during the period 2002 through 2009, managed five hedge funds including the D.B. Zwim 
Special Opportunities Fund, Ltd. (the "Offshore Fund") and D.B. Zwim Special Opportunities 
Fund, L.P. (the "Onshore Fund"), along with several managed accounts. The Offshore Fund and 
the Onshore Fund were separate entities with largely distinct pools 
ofinvestors. 

2. During the period March 2004 through July 2006, Gruss knowingly misused the 
signatory and approval authority 
he had over funds held in client accounts and directed and/or 
authorized more than $870 million 
in improper transfers of client cash, both between client funds 
and from client funds to the investment adviser and third parties. 
3.· The impropertransfers directed and/or approved by Gruss included: (i) $576 
million in transfers between March 2004 and 
July 2006 from the Offshore Fund to the Onshore 
Fund 
or directly to third parties to fund Onshore Fund investments; (ii) $273 million in transfers 
between June 2005 and May 2006 from the Offshore Fund to repay the revolving credit facility 
ofthe Onshore Fund; (iii) $22 million in management fees due to DBZCO that were improperly 
withdrawn between May 2004 and March 2006 from accounts 
of client hedge funds before due 
and payable in order to cover DBZCO's operating cash shortfalls; and (iv) a total of$3.8 million 
taken from the Onshore FUnd and a managed account 
in September 2005 to fund a portion ofthe 
$17.95 million purchase price 
of a Gulfstream IV aircraft purchased by DBZCO's managing 
partner. 
4. 
The improper transfers were not permitted by the offering documents or the 
management agreements and were not disclosed to clients until after Gruss was terminated in 
October 2006. 
VIOLATIONS 
5. By virtue ofthe conduct described herein, Defendant, directly and indirectly, has 
engaged, and 
may again engage, in acts, practices and courses ofbusiness, that constitute aiding 
and abetting 
DBZCO's violations of Sections 206(1) and 206(2) ofthe Investment Advisers Act 
of 1940 ("Advisers Act").. 
2
 

6. Unless the Defendant is permanently.restrained and enjoined, he will continue to 
engage in the acts, practices, and courses 
of business of similar type and object. 
NATURE OF THE PROCEEDINGS AND RELIEF SOUGHT 
7. The Commission brings this action pursuant to the authority conferred upon it by 
Section 209(d) 
ofthe Advisers Act [15 U.S.C. § 80b-9(d)] and seeks a judgment permanently 
restraining and enjoining the Defendant from engaging in the acts, practices and courses 
of 
business alleged herein. 
8. In addition to the injunctive relief recited above, the Commission seeks: (i) final 
judgment ordering Gruss to disgorge any ill-gotten gains with prejudgment interest thereon; (ii) 
final judgment ordering Defendant to pay civil penalties pursuant to Section 209(e) 
of the 
Advisers Act [15 U.S.C. 
§ 80b-9(e)]; and (iii) such other relief as the Court deems just and 
appropriate. 
JURISDICTION AND VENUE 
9. This Court has subject matter jurisdiction over this action pursuant to Section 214 
ofthe Advisers Act [15 U.S.C. § 80b-14]. 
10. Venue 
is proper in the Southern Djstrict ofNew York pursuant to 28 U;S.C § 
1391. The Defendant, directly and indirectly, made use 
ofthe means or instrumentalities of 
interstate commerce, or ofthe mails and wires, in connection with the transactions, acts, 
practices, and courses 
of business alleged in this complaint. A substantial part ofthe events 
comprising Defendant's fraudulent activities giving rise to the Commission's claims occurred in 
the Southern District 
ofNew York, including, among other things, the approval and 
implementation 
ofthe transactions described herein.DBZCO also had its headquarters in New 
York, New York, and Gruss' principal office was located therein. 
3
 

THE DEFENDANT 
11. Perry A. Gruss ("Gruss"), age 43, is a resident of Manalapan, New Jersey. 
Gruss was DBZCO's chieffmancial officer at all times during the period March 1,2004 through 
October 
4, 2006, when, faced with termination, he resigned. Gruss had also been a DBZCO 
partner since January 1,2006. Gruss is currently employed in a marketing capacity at another 
investment adviser which is currently in liquidation. 
FACTS 
Overview 
12. From its founding in October 2001 through October 2006, DBZCO grew its assets 
under management from $0 to approximately 
$5 billion. DBZCO also expanded from a single 
office in New York with less than ten dedicated employees to more than ten offices across the 
globe with over 200 employees. DBZCO delivered consistent positive returns for its clients, 
accumulating forty-nine consecutive months 
ofpositive returns through October 2006. 
13. During the period March 1,2004 through October 4,2006, DBZCO had no 
written accounting policies or procedUres. The 
de facto policy was that all transfers of cash of 
any size had to be expressly approved by Gruss. (While the managing partner also had signatory 
authority over the accounts, his approval was not sought in practice.) Gruss' approval was 
effectuated by his affirmative response to emails sent to him by members 
ofthe finance 
department or 
by Gruss personally signing or authorizing his signature to be affixed to hard copy 
wire transfer requests. 
4
 

Misappropriation of Offshore Funds for Onshore Investments 
14. DBZCO's Onshore Fund faced a chronic cash shortage. Its investment 
opportunities exceeded available funds, threatening its ability to fulfill existing capital 
commitments and fund new investment opportunities. 
15. In contrast, DBZCO's Offshore Fund had more cash than investment 
opportunities due to its inability to make investments or loans directly in a 
u.s. trade or business 
without being subject to a U.S. tax liability. DBZCO's intent to conduct the business 
ofthe 
Offshore Fund in a manner "such that the Fund should not be deemed to be engaged in a U.S. 
trade or business"was stated in the Fund's offering documents. 
16. Because ofthe cash shortage in the Onshore Fund, Gruss instructed his staff to 
take cash from the Offshore Fund to make investments for the benefit 
ofthe Onshore Fund. 
Gruss knew that Offshore Fund cash was being used for these investments because the wire 
transfer request emails were explicit in that regard. Such transfers occurred at least eighty-five. 
times and, in total, $576 million was transferred from the Offshore Fund to make investments for 
the benefit 
ofthe Onshore Fund (the "Inter-fund Transfers"). No loan agreements were created 
to document the transfers. After periods ranging from two days to 285 days, and an average 
of 
sixty-six days outstanding, the Onshore Fund repaid the Offshore Fund for the cash transfers but 
with no interest at that time. 
17. The amount of Inter-fund Transfers outstanding between the Onshore and 
Offshore Funds grew 
to as much as $148 million in December 2005. At December 31, 2005, the 
net assets 
ofthe Offshore Fund were approximately $1.4 billion. 
18. The practice began when a senior member ofDBZCO's accounting staff 
("Accountant 1") received a request for funding 
of an investment by the Onshore Fund that the 
5
 

Onshore Fund did not have the money to fund. Accountant 1 then went to Gruss, who provided 
instruction to use cash from the Offshore Fund which would eventually be repaid when new
 
investor capital came into the Onshore Fund.
 
19. Thereafter, a practice developed ofusing cash from the Offshore Fund to fund 
Onshore Fund investments. Gruss typically conveyed his approval to these transfers by 
responding positively to an email requesting the transfer sent from someone 
in DBZCO's 
accounting department to individuals at the bank serving as the custodian ofboth the Onshore 
and Offshore Funds' cash. The emails included requests to transfer amounts 
of cash "from the 
LTD account #721600" 
to third parties and, less frequently, to the Onshore Fund and then third 
parties. Gruss knew that "LTD account #721600" was for the Offshore Fund because it was one 
ofthe accounts most frequently used at the custodian bank and was the shorthand way the 
accounting team referred to accounts. 
Gruss' Staff Expressed Concern Over the Inter-fund Transfers 
20. Both Accountant 1 and another accountant ("Accountant 2"), repeatedly 
expressed concern to Gruss about the practice 
oftransferring cash between funds, and each 
. resigned froin DBZCO in part due to the practice. 
21. As the size 
of the transfers began to grow, Accountant 1 became concerned they 
could not be repaid. Accountant 1 also grew increasingly uncomfortable with the practice and 
told Gruss it was improper. Accountant 1 repeatedly threatened to quit over the Inter-fund 
Transfers. Accountant 1 also communicated concern over the Inter-fund Transfer practice to 
Accountant 
2. Accountant 2 told Gruss that ifhe wanted Accountant 1 to stay, the practice 
would have to stop. When the practice did not stop, Accountant 1 resigned. 
6
 

22. Accountant 2 also raised concerns about the practice with Gruss. In an email 
exchange between Accountant 2 and Gruss on April 
18, 2005, Accountant 2 asked if a particular 
Onshore Fund deal should be funded from the "Ltd" -  the Offshore Fund. Gruss responded "Yes 
pis." 
A~countant 2 responded "[I]s there a game plan? Oris this something that the [DBZCO] 
backoffice must 'learn to accept'?" Gruss ultimately responded in another email "What's our 
altwrnatives [sic]." 
23. Responding to Gruss's request for alternatives, Accountant 2 suggested getting 
"all the partners/top mgmt in the loop (i.e. REALITY) 
... then have them make a joint mgmt 
decision." Gruss did not inform DBZCO's managing partner or any 
ofthe other DBZCO 
partners 
ofthe Inter-fund Transfer practice. 
24. As the Inter-fund Transfers continued, the balance due from the Onshore Fund to 
the Offshore Fund continued to grow. In November 2005, Accountant 2 provided Gruss with a 
spreadsheet which detailed, by investment, the amounts that were due from and to the clients 
managed by DBZCO. Accountant 2 discussed this spreadsheet in a late-2005 meeting with 
Gruss as DBZCO tried to clear as many receivables and payables as possible before the 
December 
31 year-end to avoid inquiries from the auditors. As a result of this meeting, certain 
amounts were repaid. 
25. In meetings with Gruss, Accountant 2 also expressed her concern that the inter-
fund transfers constituted commingling 
of funds, were not documented, and did not involve 
payment
ofinterest to the Offshore Fund for the use ofthe money at thattime. 
26. In June 2006, Accountant 2 resigned and, in discussing the resignation with 
Gruss, specifically cited concerns about the Inter-fund Transfers which AccoUhtant 2 had 
concluded were inappropriate. 
7 

27. In early 2006, DBZCO's treasurer questioned Gruss about the Inter-fund 
Transfers and whether a loan existed. Gruss informed the treasurer that there 
was no loan 
because the Offshore Fund could not make loans to the Onshore Fund because 
of the tax issues. 
Misappropriation of Offshore Fund's Cash for Credit Facility Repayment 
28. The Onshore Fund had a revolving credit facility whose terms required full 
repayment every seventy-five days. Beginning in June 2005 and continuing until May 2006, 
Gruss approved four transfers totaling $273 million from the Offshore Fund to the Onshore 
FUnd 
to enable the Onshore Fund to repay its outstariding obligations under the credit facility. While 
the credit facility was available to each fund, each fund was solely liable for its own debt, so the 
Offshore Fund had no obligation (or business purpose) 
to assist the Onshore Fund in paying 
. down the Onshore Fund's credit line. No loan agreements were created to document the 
transfers. 
29. In June 2005, $78 million was transferred from the Offshore Fund to the Onshore 
Fund so that the Onshore Fund could repay $80 million outstanding under its credit facility. 
30.. On June 13,2005, Gruss authorized the $78 million transfer by replying to an 
email sent by Accountant 1 to the Offshore Fund's 
banle 
The details ofthe email showed that 
the transfer was for payment to the provider 
of the revolving credit facility, and that the cash 
would move from the Offshore Fund to the Onshore Fund and then to the provider 
of the credit 
facility. 
31. The Onshore Fund did not repay the $78 million to the Offshore Fund until five 
months later via five wire transfers at the end 
of2005,leaving no amount due between the Funds 
at December 31,2005 related to the credit facility. No interest was paid to the Offshore Fund for 
the use 
ofthe $78 million over those five months at that time. 
8
 

32. In 2006, Gruss authorized via email three more transfers totaling $195 million for 
repayment 
of the credit facility. Wire transfers for $125 million, $50 million and $20 million 
were authorized by Gruss 
on January 9, March 3 and May 26,2006, respectively. Gruss 
authorized each wire transfer via email. 
33. Although $87 million had been repaid by the Onshore Fund to the Offshore Fund 
by the time this practice was discovered in October 2006, $108 million still remained 
outstanding at that time. 
Misappropriation of Client Cash for Early Management Fee Withdrawals 
34. From May 2004 through March 2006, DBZCO withdrew a total of $22.5 million 
in management fees from client accounts before the funds were due to DBZCO. DBZCO's bank 
records show that; without the funds provided by the early withdrawal 
of management fees, 
DBZCO would have faced severe liquidity constraints and might have been 
um~ble to fund its 
cash disbursements for its operating expenses. 
35. The Management Agreements between DBZCO and the funds under its 
management during the period from May 2004 through March 2006 specifically provided that 
"[t]he montWy Management Fee shall be accrued montWy and payable quarterly 
...."  Gruss 
was aware 
ofthe payment terms in the Management Agreements and recognized that the early 
withdrawals amounted to loans 
of fund money to DBZCO. 
36. Nevertheless, Gruss approved an early withdrawal 
on June 21, 2004, nine days 
before the fees were payable. Gruss repeated his approval for early withdrawals at least nineteen 
times through March 2006, for total withdrawals 
of$22.5 million. Numerous withdrawals were 
made thirty days or more before the fees were payable. No loan agreements were created to 
9
 

document the advance use of cash by DBZCO and no interest was paid to DBZCO's clients for 
the use 
offunds at that time. 
37. Without the early withdrawals, DBZCO would have had insufficient cash to fimd 
the payments it made in each 
ofthe months in which it withdrew the management fees before 
they were due. DBZCO's fee withdrawals were most significant in September 2005, December 
2005 and March 2006 where, were it not for the Management Fee Withdrawals, DBZCO would 
have been overdrawn in its operating account at month-end by $1.9 million, $4.0 million and 
$9.5 million, respectively. 
Misappropriation of Client Cash for Aircraft Purchase 
38. In April 2005, DBZCO's managing partner tasked the chief operating officer 
.("COO") with acquiring a Gulfstream IV aircraft. The aircraft was to be purchased by a single 
member LLC owned by 
DBZCO's managing partner with certain purchase related expenses paid 
for by 
DBZCOas advances on the managing partner's partnership distributions. Gruss 
frequently received emails from the COO and the managing partner about the purchase and from 
the COO when cash was needed to make payments related to the aircraft. 
39. By mid-September 2005, the COO had requested payment 
.of five invoices related 
to the aircraft purchase, all 
ofwhich were paid by DBZCO, and had copied Gruss on the email 
instructions which clearly identified the expenses as related to DBZCO. 
40. The total purchase price 
of the aircraft was $17.95 million, and DBZCO was 
faced with a $3.8 million shortfall in available funds to close on the purchase, including 
additional cash due to the seller, collateral for a letter 
of credit to secure certain non-recourse 
financing, other fees and closing costs. The funds needed were as follows: 
10
 

Funds Needed by DBZCO to Complete Aircraft Purchase 
Additional cash due to seller (after financing) 
$1,681,350 
Collateral for $1.9 million letter 
ofcredit 
1,900,000 
Financing fees 
80,250 
Closing costs to aircraft broker 
112,575 
Total DBZCO funds needed to close 
$3,774,175 
41. During the relevant period, DBZCO never had more than $827,000 available 
in its 
operating account -  far less than the $3.8 million needed to complete the aircraft purchase. 
42. The closing on the aircraft purchase went ahead in late September 2005. The 
COO sent four email requests for wire transfers to Accountant 2, with copies to Gruss, to provide 
for the funds. 
43. Accountant 2 set up wires to take the funds, as directed by Gruss, from accounts 
belonging to DBZCO's clients -  the Onshore Fund and 
a managed account. Gruss approved all 
ofthe transfers. 
44. The information contained on the face ofthe hard copy and email wire requests 
approved 
by Gruss provided clear identification ofthe Offshore Fund and one ofDBZCO's 
managed accounts as the source ofthe funds and that the funds were to be used for the aircraft 
purchase. Despite these indications, Gruss approved the following transfers: 
Client Cash Used for Aircraft Purchase 
Amount 
of Paid by 
Date 
Wire DBZCO Client 
Payee 
9/28/05 
. $1,900,000 
Managed account 
DBZCO cash collateral account at bank 
9/28/05 
80,250 
Managed account 
Bank providing financing 
9/29/05 
1,681,350 
Onshore Fund 
Escrow agent 
9/30105 
112,575 
Onshore Fund 
Aircraft broker 
Total 
$ 3,774,175 
11
 

Gruss Received Post-Purchase Notice of Use of Client Funds 
45. On November 4,2005, a working capital facility closed and $8.1 million was 
made available to DBZCO by its bank. On November 9,2005, Gruss received an email from the 
Accountant 2 with a detail 
of cash available, including the working capital loan received from 
the bank. The detailed information in the email included $3.8 million to "[r]epay LP fund for 
airplane wires." Also, on November 10,2005, Accountant 2 emailed Gruss a request to "send 
$3.77mm from the new account where we recvd the 
8.1 mm loan back to the LP fund for 
reimbursement 
ofthe ,airplane wires." The managed account waS subsequently repaid. 
46. Despitereceivingnotice 
oftheuse ofclientfunds,Grussdidnotinformany ofhis 
superiors or anyone outside 
ofDBZCO's accounting group that client funds had been used for 
the aircraft purchase. 
47. 
By November 23,2005, the amounts taken from client accounts were reimbursed. 
The amounts taken from the clients were not documented as loans and no interest was paid 
to the 
clients at that time. 
12
 

CLAIM FOR RELIEF
 
(Violations of Section 206(1) and 206(2) ofthe Advisers Act)
 
48. The Commission realleges and incorporates 
by reference herein each and every 
allegation contained in paragraphs 1 through 47, 
of this Complaint. 
49. DBZCO was an investment advisor under Section 202(a)(1l) 
of the Advisers Act 
[15 U.S.c. 
§§ 80b-2(a)(11)]. 
50. As DBZCO's CFO during all relevant time periods, and as 
aDBZCO partner 
from January 
1, 2006 through October 4, 2006, Gruss was a person associated with an 
investment adviser under Section 202(a)(17) 
ofthe Advisers Act [15 U.S.c. §§ 80b-2(a)(17)]. 
51. As a result 
ofthe transfers authorized by Gruss herein described, DBZCO 
directly or indirectly through the use 
of the mails or any means or instrumentality of interstate 
commerce: (a) employed devices, schemes, and artifices to defraud any client or prospective 
client; or (b) engaged in transactions, practices or courses 
ofbusiness which operated as a fraud 
or deceit upon any client or prospective client in violation 
of Sections 206(1) and 206(2) ofthe 
Advisers Act [15 U.S.C. §§ 80b-6(1), (2)]. 
52. Gruss, while associated with DBZCO, an investment adviser, knowingly provided 
substantial assistance to DBZCO's violations. 
53. 
By reason ofthe foregoing, Gruss aided and abetted, and unless enjoined, will 
continue to aid and abet violations 
of Sections 206(1) and 206(2) ofthe Advisers Act [15 U.S.C. 
§§ 80b-6(1), (2)]. 
PRAYER FOR RELIEF 
WHEREFORE, the Commission respectfully requests that this Court enter a Final 
Judgment: 
13 

1. Permanently enjoining Defendant, from, directly or indirectly, aiding and abetting 
violations 
of Sections 206(1) and 206(2) ofthe Advisers Act [15 U.S.C. §§ 80b-6(1), (2)]; and 
2. Ordering Defendant to disgorge any ill-gotten gains, plus prejudgment interest; 
3. Ordering Defendant to pay a civil money penalty pursuant to Section 209(e) 
of 
the Advisers Act [15 U.S.C. §80b-9]; and 
4. Granting such other and further relief 
as the Court deems appropriate. 
Dated: April 8,2011 
New York, New York 
eo 
S. Canellos 
ATTORNEY FORPLAlNTWF 
SECURITIES AND EXCHANGE COMMISSION 
Regional Director 
New York Regional Office 
Three World Financial Center, Suite 400 
New York, NY 10281-1022 
Tel. (212) 336-0149 
Of Counsel: 
Andrew 
M. Calamari 
Steven 
G. Rawlings 
Todd Brody 
Peter Altenbach 
III 
14
 

JUDGE SWEET
 

11 LV 2420George S. Canellos 
Attorney for Plaintiff 
SECURITIES AND EXCHANGE COMMISSION 
New York Regional Office 
3 World Financial Center, Room 400 
New York, New York 10281-1022 
(212) 336-1100 

UNITED STATES DISTRICT COURT 
SOUTHERN DISTRICT OF NEW YORK 

11 Civ. __ ( ) 

COMPLAINT 

SECURITIES AND EXCHANGE COMMISSION, 

Plaintiff, 

. v. 

PERRYA. GRUSS, 

Defendant. 

-----------~-------_.. 

Plaintiff Securities and Exchange Commission ("Commission"), for its Complaint against Perry 

A. Gruss ("Gruss" or "Defendant"), alleges as follows: 

SUMMARY 

1. This action arises out of Gruss' actions while he was the Chief Financial Officer 

ofD.B. Zwim & Co., L.P. ("DBZCO"), a now defunct investment adviser that, at various times 

during the period 2002 through 2009, managed five hedge funds including the D.B. Zwim 

Special Opportunities Fund, Ltd. (the "Offshore Fund") and D.B. Zwim Special Opportunities 

Fund, L.P. (the "Onshore Fund"), along with several managed accounts. The Offshore Fund and 

the Onshore Fund were separate entities with largely distinct pools of investors. 



2. During the period March 2004 through July 2006, Gruss knowingly misused the 

signatory and approval authority he had over funds held in client accounts and directed and/or 

authorized more than $870 million in improper transfers of client cash, both between client funds 

and from client funds to the investment adviser and third parties. 

3.· The impropertransfers directed and/or approved by Gruss included: (i) $576 

million in transfers between March 2004 and July 2006 from the Offshore Fund to the Onshore 

Fund or directly to third parties to fund Onshore Fund investments; (ii) $273 million in transfers 

between June 2005 and May 2006 from the Offshore Fund to repay the revolving credit facility 

of the Onshore Fund; (iii) $22 million in management fees due to DBZCO that were improperly 

withdrawn between May 2004 and March 2006 from accounts of client hedge funds before due 

and payable in order to cover DBZCO's operating cash shortfalls; and (iv) a total of$3.8 million 

taken from the Onshore FUnd and a managed account in September 2005 to fund a portion of the 

$17.95 million purchase price of a Gulfstream IV aircraft purchased by DBZCO's managing 

partner. 

4. The improper transfers were not permitted by the offering documents or the 

management agreements and were not disclosed to clients until after Gruss was terminated in 

October 2006. 

VIOLATIONS 

5. By virtue ofthe conduct described herein, Defendant, directly and indirectly, has 

engaged, and may again engage, in acts, practices and courses of business, that constitute aiding 

and abetting DBZCO's violations of Sections 206(1) and 206(2) ofthe Investment Advisers Act 

of 1940 ("Advisers Act") .. 

2
 



6. Unless the Defendant is permanently.restrained and enjoined, he will continue to 

engage in the acts, practices, and courses of business of similar type and object. 

NATURE OF THE PROCEEDINGS AND RELIEF SOUGHT 

7. The Commission brings this action pursuant to the authority conferred upon it by 

Section 209(d) of the Advisers Act [15 U.S.C. § 80b-9(d)] and seeks a judgment permanently 

restraining and enjoining the Defendant from engaging in the acts, practices and courses of 

business alleged herein. 

8. In addition to the injunctive relief recited above, the Commission seeks: (i) final 

judgment ordering Gruss to disgorge any ill-gotten gains with prejudgment interest thereon; (ii) 

final judgment ordering Defendant to pay civil penalties pursuant to Section 209(e) of the 

Advisers Act [15 U.S.C. § 80b-9(e)]; and (iii) such other relief as the Court deems just and 

appropriate. 

JURISDICTION AND VENUE 

9. This Court has subject matter jurisdiction over this action pursuant to Section 214 

of the Advisers Act [15 U.S.C. § 80b-14]. 

10. Venue is proper in the Southern Djstrict ofNew York pursuant to 28 U;S.C § 

1391. The Defendant, directly and indirectly, made use of the means or instrumentalities of 

interstate commerce, or ofthe mails and wires, in connection with the transactions, acts, 

practices, and courses of business alleged in this complaint. A substantial part ofthe events 

comprising Defendant's fraudulent activities giving rise to the Commission's claims occurred in 

the Southern District of New York, including, among other things, the approval and 

implementation of the transactions described herein.DBZCO also had its headquarters in New 

York, New York, and Gruss' principal office was located therein. 

3
 



THE DEFENDANT 

11. Perry A. Gruss ("Gruss"), age 43, is a resident of Manalapan, New Jersey. 

Gruss was DBZCO's chieffmancial officer at all times during the period March 1,2004 through 

October 4, 2006, when, faced with termination, he resigned. Gruss had also been a DBZCO 

partner since January 1,2006. Gruss is currently employed in a marketing capacity at another 

investment adviser which is currently in liquidation. 

FACTS 

Overview 

12. From its founding in October 2001 through October 2006, DBZCO grew its assets 

under management from $0 to approximately $5 billion. DBZCO also expanded from a single 

office in New York with less than ten dedicated employees to more than ten offices across the 

globe with over 200 employees. DBZCO delivered consistent positive returns for its clients, 

accumulating forty-nine consecutive months of positive returns through October 2006. 

13. During the period March 1,2004 through October 4,2006, DBZCO had no 

written accounting policies or procedUres. The de facto policy was that all transfers of cash of 

any size had to be expressly approved by Gruss. (While the managing partner also had signatory 

authority over the accounts, his approval was not sought in practice.) Gruss' approval was 

effectuated by his affirmative response to emails sent to him by members ofthe finance 

department or by Gruss personally signing or authorizing his signature to be affixed to hard copy 

wire transfer requests. 

4
 



Misappropriation of Offshore Funds for Onshore Investments 

14. DBZCO's Onshore Fund faced a chronic cash shortage. Its investment 

opportunities exceeded available funds, threatening its ability to fulfill existing capital 

commitments and fund new investment opportunities. 

15. In contrast, DBZCO's Offshore Fund had more cash than investment 

opportunities due to its inability to make investments or loans directly in a u.s. trade or business 

without being subject to a U.S. tax liability. DBZCO's intent to conduct the business ofthe 

Offshore Fund in a manner "such that the Fund should not be deemed to be engaged in a U.S. 

trade or business"was stated in the Fund's offering documents. 

16. Because of the cash shortage in the Onshore Fund, Gruss instructed his staff to 

take cash from the Offshore Fund to make investments for the benefit of the Onshore Fund. 

Gruss knew that Offshore Fund cash was being used for these investments because the wire 

transfer request emails were explicit in that regard. Such transfers occurred at least eighty-five. 

times and, in total, $576 million was transferred from the Offshore Fund to make investments for 

the benefit of the Onshore Fund (the "Inter-fund Transfers"). No loan agreements were created 

to document the transfers. After periods ranging from two days to 285 days, and an average of 

sixty-six days outstanding, the Onshore Fund repaid the Offshore Fund for the cash transfers but 

with no interest at that time. 

17. The amount of Inter-fund Transfers outstanding between the Onshore and 

Offshore Funds grew to as much as $148 million in December 2005. At December 31, 2005, the 

net assets of the Offshore Fund were approximately $1.4 billion. 

18. The practice began when a senior member ofDBZCO's accounting staff 

("Accountant 1") received a request for funding of an investment by the Onshore Fund that the 

5
 



Onshore Fund did not have the money to fund. Accountant 1 then went to Gruss, who provided 

instruction to use cash from the Offshore Fund which would eventually be repaid when new
 

investor capital came into the Onshore Fund.
 

19. Thereafter, a practice developed of using cash from the Offshore Fund to fund 

Onshore Fund investments. Gruss typically conveyed his approval to these transfers by 

responding positively to an email requesting the transfer sent from someone in DBZCO's 

accounting department to individuals at the bank serving as the custodian of both the Onshore 

and Offshore Funds' cash. The emails included requests to transfer amounts of cash "from the 

LTD account #721600" to third parties and, less frequently, to the Onshore Fund and then third 

parties. Gruss knew that "LTD account #721600" was for the Offshore Fund because it was one 

of the accounts most frequently used at the custodian bank and was the shorthand way the 

accounting team referred to accounts. 

Gruss' Staff Expressed Concern Over the Inter-fund Transfers 

20. Both Accountant 1 and another accountant ("Accountant 2"), repeatedly 

expressed concern to Gruss about the practice oftransferring cash between funds, and each 

. resigned froin DBZCO in part due to the practice. 

21. As the size of the transfers began to grow, Accountant 1 became concerned they 

could not be repaid. Accountant 1 also grew increasingly uncomfortable with the practice and 

told Gruss it was improper. Accountant 1 repeatedly threatened to quit over the Inter-fund 

Transfers. Accountant 1 also communicated concern over the Inter-fund Transfer practice to 

Accountant 2. Accountant 2 told Gruss that ifhe wanted Accountant 1 to stay, the practice 

would have to stop. When the practice did not stop, Accountant 1 resigned. 

6
 



22. Accountant 2 also raised concerns about the practice with Gruss. In an email 

exchange between Accountant 2 and Gruss on April 18, 2005, Accountant 2 asked if a particular 

Onshore Fund deal should be funded from the "Ltd" - the Offshore Fund. Gruss responded "Yes 

pis." A~countant 2 responded "[I]s there a game plan? Oris this something that the [DBZCO] 

backoffice must 'learn to accept'?" Gruss ultimately responded in another email "What's our 

altwrnatives [sic]." 

23. Responding to Gruss's request for alternatives, Accountant 2 suggested getting 

"all the partners/top mgmt in the loop (i.e. REALITY) ... then have them make a joint mgmt 

decision." Gruss did not inform DBZCO's managing partner or any ofthe other DBZCO 

partners of the Inter-fund Transfer practice. 

24. As the Inter-fund Transfers continued, the balance due from the Onshore Fund to 

the Offshore Fund continued to grow. In November 2005, Accountant 2 provided Gruss with a 

spreadsheet which detailed, by investment, the amounts that were due from and to the clients 

managed by DBZCO. Accountant 2 discussed this spreadsheet in a late-2005 meeting with 

Gruss as DBZCO tried to clear as many receivables and payables as possible before the 

December 31 year-end to avoid inquiries from the auditors. As a result of this meeting, certain 

amounts were repaid. 

25. In meetings with Gruss, Accountant 2 also expressed her concern that the inter-

fund transfers constituted commingling of funds, were not documented, and did not involve 

payment of interest to the Offshore Fund for the use of the money at that time. 

26. In June 2006, Accountant 2 resigned and, in discussing the resignation with 

Gruss, specifically cited concerns about the Inter-fund Transfers which AccoUhtant 2 had 

concluded were inappropriate. 

7 



27. In early 2006, DBZCO's treasurer questioned Gruss about the Inter-fund 

Transfers and whether a loan existed. Gruss informed the treasurer that there was no loan 

because the Offshore Fund could not make loans to the Onshore Fund because of the tax issues. 

Misappropriation of Offshore Fund's Cash for Credit Facility Repayment 

28. The Onshore Fund had a revolving credit facility whose terms required full 

repayment every seventy-five days. Beginning in June 2005 and continuing until May 2006, 

Gruss approved four transfers totaling $273 million from the Offshore Fund to the Onshore FUnd 

to enable the Onshore Fund to repay its outstariding obligations under the credit facility. While 

the credit facility was available to each fund, each fund was solely liable for its own debt, so the 

Offshore Fund had no obligation (or business purpose) to assist the Onshore Fund in paying 

. down the Onshore Fund's credit line. No loan agreements were created to document the 

transfers. 

29. In June 2005, $78 million was transferred from the Offshore Fund to the Onshore 

Fund so that the Onshore Fund could repay $80 million outstanding under its credit facility. 

30.. On June 13,2005, Gruss authorized the $78 million transfer by replying to an 

email sent by Accountant 1 to the Offshore Fund's banle The details of the email showed that 

the transfer was for payment to the provider of the revolving credit facility, and that the cash 

would move from the Offshore Fund to the Onshore Fund and then to the provider of the credit 

facility. 

31. The Onshore Fund did not repay the $78 million to the Offshore Fund until five 

months later via five wire transfers at the end of2005,leaving no amount due between the Funds 

at December 31,2005 related to the credit facility. No interest was paid to the Offshore Fund for 

the use of the $78 million over those five months at that time. 

8
 



32. In 2006, Gruss authorized via email three more transfers totaling $195 million for 

repayment of the credit facility. Wire transfers for $125 million, $50 million and $20 million 

were authorized by Gruss on January 9, March 3 and May 26,2006, respectively. Gruss 

authorized each wire transfer via email. 

33. Although $87 million had been repaid by the Onshore Fund to the Offshore Fund 

by the time this practice was discovered in October 2006, $108 million still remained 

outstanding at that time. 

Misappropriation of Client Cash for Early Management Fee Withdrawals 

34. From May 2004 through March 2006, DBZCO withdrew a total of $22.5 million 

in management fees from client accounts before the funds were due to DBZCO. DBZCO's bank 

records show that; without the funds provided by the early withdrawal of management fees, 

DBZCO would have faced severe liquidity constraints and might have been um~ble to fund its 

cash disbursements for its operating expenses. 

35. The Management Agreements between DBZCO and the funds under its 

management during the period from May 2004 through March 2006 specifically provided that 

"[t]he montWy Management Fee shall be accrued montWy and payable quarterly ...." Gruss 

was aware of the payment terms in the Management Agreements and recognized that the early 

withdrawals amounted to loans of fund money to DBZCO. 

36. Nevertheless, Gruss approved an early withdrawal on June 21, 2004, nine days 

before the fees were payable. Gruss repeated his approval for early withdrawals at least nineteen 

times through March 2006, for total withdrawals of $22.5 million. Numerous withdrawals were 

made thirty days or more before the fees were payable. No loan agreements were created to 

9
 



document the advance use of cash by DBZCO and no interest was paid to DBZCO's clients for 

the use of funds at that time. 

37. Without the early withdrawals, DBZCO would have had insufficient cash to fimd 

the payments it made in each of the months in which it withdrew the management fees before 

they were due. DBZCO's fee withdrawals were most significant in September 2005, December 

2005 and March 2006 where, were it not for the Management Fee Withdrawals, DBZCO would 

have been overdrawn in its operating account at month-end by $1.9 million, $4.0 million and 

$9.5 million, respectively. 

Misappropriation of Client Cash for Aircraft Purchase 

38. In April 2005, DBZCO's managing partner tasked the chief operating officer 

.("COO") with acquiring a Gulfstream IV aircraft. The aircraft was to be purchased by a single 

member LLC owned by DBZCO's managing partner with certain purchase related expenses paid 

for by DBZCOas advances on the managing partner's partnership distributions. Gruss 

frequently received emails from the COO and the managing partner about the purchase and from 

the COO when cash was needed to make payments related to the aircraft. 

39. By mid-September 2005, the COO had requested payment .of five invoices related 

to the aircraft purchase, all of which were paid by DBZCO, and had copied Gruss on the email 

instructions which clearly identified the expenses as related to DBZCO. 

40. The total purchase price of the aircraft was $17.95 million, and DBZCO was 

faced with a $3.8 million shortfall in available funds to close on the purchase, including 

additional cash due to the seller, collateral for a letter of credit to secure certain non-recourse 

financing, other fees and closing costs. The funds needed were as follows: 

10
 



Funds Needed by DBZCO to Complete Aircraft Purchase 

Additional cash due to seller (after financing) $1,681,350 
Collateral for $1.9 million letter of credit 1,900,000 
Financing fees 80,250 
Closing costs to aircraft broker 112,575 

Total DBZCO funds needed to close $3,774,175 

41. During the relevant period, DBZCO never had more than $827,000 available in its 

operating account - far less than the $3.8 million needed to complete the aircraft purchase. 

42. The closing on the aircraft purchase went ahead in late September 2005. The 

COO sent four email requests for wire transfers to Accountant 2, with copies to Gruss, to provide 

for the funds. 

43. Accountant 2 set up wires to take the funds, as directed by Gruss, from accounts 

belonging to DBZCO's clients - the Onshore Fund and a managed account. Gruss approved all 

of the transfers. 

44. The information contained on the face of the hard copy and email wire requests 

approved by Gruss provided clear identification of the Offshore Fund and one ofDBZCO's 

managed accounts as the source of the funds and that the funds were to be used for the aircraft 

purchase. Despite these indications, Gruss approved the following transfers: 

Client Cash Used for Aircraft Purchase 

Amount of Paid by 
Date Wire DBZCO Client Payee 

9/28/05 . $1,900,000 Managed account DBZCO cash collateral account at bank 
9/28/05 80,250 Managed account Bank providing financing 
9/29/05 1,681,350 Onshore Fund Escrow agent 
9/30105 112,575 Onshore Fund Aircraft broker 

Total $ 3,774,175 

11
 



Gruss Received Post-Purchase Notice of Use of Client Funds 

45. On November 4,2005, a working capital facility closed and $8.1 million was 

made available to DBZCO by its bank. On November 9,2005, Gruss received an email from the 

Accountant 2 with a detail of cash available, including the working capital loan received from 

the bank. The detailed information in the email included $3.8 million to "[r]epay LP fund for 

airplane wires." Also, on November 10,2005, Accountant 2 emailed Gruss a request to "send 

$3.77mm from the new account where we recvd the 8.1 mm loan back to the LP fund for 

reimbursement of the ,airplane wires." The managed account waS subsequently repaid. 

46. Despite receiving notice of the use of client funds, Gruss did not inform any ofhis 

superiors or anyone outside ofDBZCO's accounting group that client funds had been used for 

the aircraft purchase. 

47. By November 23,2005, the amounts taken from client accounts were reimbursed. 

The amounts taken from the clients were not documented as loans and no interest was paid to the 

clients at that time. 

12
 



CLAIM FOR RELIEF
 

(Violations of Section 206(1) and 206(2) of the Advisers Act)
 

48. The Commission realleges and incorporates by reference herein each and every 

allegation contained in paragraphs 1 through 47, of this Complaint. 

49. DBZCO was an investment advisor under Section 202(a)(1l) of the Advisers Act 

[15 U.S.c. §§ 80b-2(a)(11)]. 

50. As DBZCO's CFO during all relevant time periods, and as aDBZCO partner 

from January 1, 2006 through October 4, 2006, Gruss was a person associated with an 

investment adviser under Section 202(a)(17) of the Advisers Act [15 U.S.c. §§ 80b-2(a)(17)]. 

51. As a result of the transfers authorized by Gruss herein described, DBZCO 

directly or indirectly through the use of the mails or any means or instrumentality of interstate 

commerce: (a) employed devices, schemes, and artifices to defraud any client or prospective 

client; or (b) engaged in transactions, practices or courses of business which operated as a fraud 

or deceit upon any client or prospective client in violation of Sections 206(1) and 206(2) ofthe 

Advisers Act [15 U.S.C. §§ 80b-6(1), (2)]. 

52. Gruss, while associated with DBZCO, an investment adviser, knowingly provided 

substantial assistance to DBZCO's violations. 

53. By reason of the foregoing, Gruss aided and abetted, and unless enjoined, will 

continue to aid and abet violations of Sections 206(1) and 206(2) of the Advisers Act [15 U.S.C. 

§§ 80b-6(1), (2)]. 

PRAYER FOR RELIEF 

WHEREFORE, the Commission respectfully requests that this Court enter a Final 

Judgment: 

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1. Permanently enjoining Defendant, from, directly or indirectly, aiding and abetting 

violations of Sections 206(1) and 206(2) ofthe Advisers Act [15 U.S.C. §§ 80b-6(1), (2)]; and 

2. Ordering Defendant to disgorge any ill-gotten gains, plus prejudgment interest; 

3. Ordering Defendant to pay a civil money penalty pursuant to Section 209(e) of 

the Advisers Act [15 U.S.C. §80b-9]; and 

4. Granting such other and further relief as the Court deems appropriate. 

Dated: April 8,2011 
New York, New York 

eo S. Canellos 
ATTORNEY FORPLAlNTWF 
SECURITIES AND EXCHANGE COMMISSION 
Regional Director 
New York Regional Office 
Three World Financial Center, Suite 400 
New York, NY 10281-1022 
Tel. (212) 336-0149 

Of Counsel: 

Andrew M. Calamari 
Steven G. Rawlings 
Todd Brody 
Peter Altenbach III 

14