FILED: NEW YORK COUNTY CLERK 07/07/2010

NYSCEF DOC. NO. 1

INDEX NO. 650835/2010 RECEIVED NYSCEF: 07/07/2010

SUPREME COURT OF THE STATE OF NEW YORK -------------------------------------------------------------------X CARLYLE CAPITAL CORPORATION LIMITED (IN LIQUIDATION), a Guernsey limited company and ALAN JOHN ROBERTS, NEIL MATHER, CHRISTOPHER MORRIS, ADRIAN JOHN DENIS RABET, solely in their capacity as Joint Liquidators of Carlyle Capital Corporation (In Liquidation), a Guernsey limited company Plaintiffs -againstWILLIAM ELIAS CONWAY JR, JAMES H. HANCE JR, JOHN CRUMPTON STOMBER, MICHAEL J. ZUPON, ROBERT BARCLAY ALLARDICE III, HARVEY JAY SARLES, JOHN LEONARD LOVERIDGE and CARLYLE INVESTMENT MANAGEMENT LLC and TC GROUP LLC and TCG HOLDINGS LLC, Defendants -------------------------------------------------------------------X COMPLAINT Index No.

TABLE OF CONTENTS Page A. B. INTRODUCTION ....................................................................................................................................6 PARTIES..............................................................................................................................................13 B.1 B.2 The Plaintiffs ............................................................................................................................13 The Defendants........................................................................................................................14 The Directors of CCC .................................................................................................................14 CIM ...........................................................................................................................................16 Carlyle.......................................................................................................................................17 Conflicts of Interest ....................................................................................................................18 C. THE DEFENDANTS DUTIES TO CCC.................................................................................................19 C.1 C.2 D. E. The Defendant Directors..........................................................................................................19 Carlyle and CIM ........................................................................................................................20

JURISDICTION AND VENUE ...............................................................................................................22 FACTS RELEVANT TO ALL CLAIMS FOR RELIEF.............................................................................22 E.1 Business Model........................................................................................................................22 Investment Objective and Strategy .............................................................................................22 The Investment Guidelines.........................................................................................................23 Investment in RMBS ..................................................................................................................24 Financing Investments in RMBS Through Repos.........................................................................24 Risk of Increased Haircuts .......................................................................................................26 Margin Calls...............................................................................................................................27 Events of Default........................................................................................................................28 Extensive Utilization of Leverage................................................................................................28 Mitigation of the Risks Arising from Leverage Minimum Liquidity Cushion Requirement.............30 Definitions of Liquidity Cushion and Adjusted Capital ..................................................................32 Minimum Borrowing Capacity .....................................................................................................33 Requirement Limiting RMBS to 85% of Total Capital...................................................................34 RMBS Average Price Volatility....................................................................................................35 E.2 E.3 Preparation of CCCs Financial Statements Under IFRS.........................................................36 Developing Market Instability ..................................................................................................36 September 2006 - Carlyle Investor Conference...........................................................................36 October 4, 2006 - First Board Meeting ........................................................................................37 November 2006 - Carlyle Investor Conference............................................................................38 2

December 20, 2006 Board Meeting ............................................................................................38 Conway Warns of the Need for Caution ......................................................................................39 Annual Report for the Period Ended December 31, 2006.............................................................39 February 15, 2007 Board Meeting...............................................................................................39 February 2007 - Completion of Private Placement.......................................................................40 Carlyles March 2007 Presentation to the Netherlands Regulator.................................................40 March 5, 2007 Board Meeting.....................................................................................................40 The Impact of the Subprime Crisis..............................................................................................41 The Inaugural ALCO Meeting on March 30, 2007........................................................................42 Minimum Liquidity Cushion Requirement Reduced to 15%..........................................................42 Financial Statements for the Quarter Ended March 31, 2007.......................................................42 April 26, 2007 Board Meeting .....................................................................................................43 IPO Bridge Loan ........................................................................................................................44 E.4 Market Volatility During June 2007..........................................................................................44 Risks to CCC Begin to Emerge...................................................................................................44 Crisis Spreads Beyond Subprime ...............................................................................................48 The Underwriters Recommend Delaying the IPO ........................................................................48 Carlyle and CIM Elect to Proceed with the IPO............................................................................50 E.5 The Need for Substantial Additional Liquidity and Reduction of Leverage............................51 July 2007 - Increased Volatility in the Financial Markets ..............................................................53 Financial Statements for the Quarter Ended June 30, 2007 .........................................................54 July 26, 2007 ALCO Meeting......................................................................................................55 July 26, 2007 Board Meeting ......................................................................................................55 E.6 E.7 As Early as July 2007 the Defendants Were Breaching Their Fiduciary Duties .....................57 August 2007 - Ramifications of Failure to Reduce Leverage ..................................................58 Continued Decline of the Financial Markets ................................................................................58 August 9, 2007 ALCO Meeting ...................................................................................................59 Analyst Reports Emphasize Importance of Liquidity Cushion.......................................................60 CCCs Rapidly Declining Liquidity...............................................................................................62 August 23, 2007 Emergency Board Meeting Liquidity Cushion below zero..............................64 Something seems to have gone badly awry at Carlyle Capital ...................................................66 E.8 E.9 The Defendants Continued Breaching Their Fiduciary Duties Through August 2007............68 September 2007 - Carlyle and CIM Admit They Have Mismanaged CCC and Formulate New Business Model ..............................................................................................69 September 2007 - Carlyle Investor Conference...........................................................................72 E.10 The Defendants Breaches of Duties Continued in September 2007 ......................................75 E.11 Ongoing Failure to Implement New Business Model ..............................................................76 3

Financial Statements for the Quarter Ended September 30, 2007................................................76 November 13, 2007 Board Meeting ............................................................................................79 E.12 The Defendants Breaches of Duties Continued in October and November 2007 ..................80 E.13 Annual Report Discloses Failure to Reduce Leverage............................................................81 February 2008 Carlyle Investor Conference .............................................................................81 Annual Report for the Year Ended December 31, 2007 ...............................................................81 February 27, 2008 Board Meeting...............................................................................................83 E.14 The Defendants Breaches of Duties Continued in December 2007 to February 2008...........84 E.15 Collapse of CCC.......................................................................................................................85 E.16 Winding Up...............................................................................................................................86 E.17 Management and Incentive Fees Paid to Carlyle.....................................................................87 E.18 The Aftermath and Cover-Up ...................................................................................................87 F. THE DEFENDANTS BREACHES OF DUTIES.....................................................................................89 F.1 F.2 F.3 F.4 The Defendants Conflicts Were Pervasive .............................................................................89 CCCs Directors Wrongful Conduct........................................................................................89 CIMs Wrongful Conduct..........................................................................................................92 Carlyles Wrongful Conduct.....................................................................................................95

FIRST CLAIM FOR RELIEF: Against CCCs Directors for Breach of Fiduciary and Other Duties ....................................................................97 SECOND CLAIM FOR RELIEF: Against CIM for Breach of Fiduciary and Other Duties ......................................................................................98 THIRD CLAIM FOR RELIEF: Against Carlyle for Breach of Fiduciary and Other Duties..................................................................................98 FOURTH CLAIM FOR RELIEF: Alternative Claim Against CIM for Breach of Fiduciary Duty as a De Facto and/or Shadow Director of CCC .......99 FIFTH CLAIM FOR RELIEF: Alternative Claim Against Carlyle for Breach of Fiduciary Duty as a De Facto and/or Shadow Director of CCC.100 SIXTH CLAIM FOR RELIEF: Alternative Claim Against CIM for Aiding and Abetting CCCs Directors Breaches of Fiduciary Duty ................100 SEVENTH CLAIM FOR RELIEF: Alternative Claim Against Carlyle for Aiding and Abetting CCCs Directors Breaches of Fiduciary Duty............101 EIGHTH CLAIM FOR RELIEF: Alternative Claim Against Carlyle for Aiding and Abetting CIMs Breaches of Fiduciary Duty ............................102 4

NINTH CLAIM FOR RELIEF: Against CIM for Declaration to Set Aside the IMA ...........................................................................................103 TENTH CLAIM FOR RELIEF: Against CIM for Breach of Contract ................................................................................................................106 ELEVENTH CLAIM FOR RELIEF: Against CCCs Directors for Gross Negligence or Negligence .........................................................................107 TWELFTH CLAIM FOR RELIEF: Against CIM for Gross Negligence or Negligence ...........................................................................................107 THIRTEENTH CLAIM FOR RELIEF: Against Carlyle for Gross Negligence or Negligence .......................................................................................108 FOURTEENTH CLAIM FOR RELIEF: Against CCCs Directors pursuant to s 106 of the Companies (Guernsey) Law 1994 or s 422 of the Companies (Guernsey) Law 2008 ...............................................................................................108 FIFTEENTH CLAIM FOR RELIEF: Against CIM pursuant to s 106 of the Companies (Guernsey) Law 1994 or s 422 of the Companies (Guernsey) Law 2008 ...............................................................................................110 SIXTEENTH CLAIM FOR RELIEF: Against Carlyle pursuant to s 106 of the Companies (Guernsey) Law 1994 or s 422 of the Companies (Guernsey) Law 2008 ...............................................................................................110 SEVENTEENTH CLAIM FOR RELIEF: Against Carlyle and CIM for Return of CCCs Books and Records and Other Property.....................................111 EIGHTEENTH CLAIM FOR RELIEF: Alternative Claim Against Carlyle and CIM for Unjust Enrichment....................................................................112 CONCLUSION ..............................................................................................................................................113

Plaintiffs Carlyle Capital Corporation Limited (In Liquidation) (CCC) and Alan John Roberts, Neil Mather, Christopher Morris and Adrian John Rabet, Joint Liquidators of CCC, by and through their attorneys Scott M. Berman and Andrew S. Pak of Friedman Kaplan Seiler & Adelman LLP allege for their Complaint against defendants William Conway Jr, James Hance Jr, John Stomber, Michael Zupon, Robert Allardice, H. Jay Sarles, John Loveridge, Carlyle Investment Management LLC, TC Group LLC, and TCG Holdings LLC as follows: A. 1. INTRODUCTION The Plaintiff CCC was a publicly owned company incorporated and domiciled in Guernsey from August 2006 and operated from The Carlyle Groups offices in New York and Washington D.C. CCCs shares were listed on the Euronext exchange in Amsterdam. Having raised $945,000,000 of equity capital by July 11, 2007, in the short space of eight months, the entirety of CCCs capital was spectacularly lost under the reckless and grossly negligent direction, supervision, management and advice of the Defendants. On March 17, 2008 CCC was ordered to be wound up by the Royal Court of Guernsey, with its Liquidators announcing days later that CCCs assets were insufficient to meet its liabilities. The Plaintiffs bring this action to recover CCCs losses, which exceed $1,000,000,000, from the Defendants. 2. CCC was at all times controlled, directed, managed and advised by The Carlyle Group, one of the worlds largest private equity firms and its affiliate Carlyle Investment Management LLC (CIM), an investment adviser registered with the US Securities and Exchange Commission. 3. CCC was the first Carlyle branded investment to go public and The Carlyle Group touted CCC as a safe investment to be managed by The Carlyle Group, with the benefit of its special expertise, global resources and conservative investment approach. 4. Through affiliates, The Carlyle Group held all of the voting shares in CCC and thereby had control over the composition of the Board of CCC. The Board of Directors of CCC consisted of four officers of The Carlyle Group (Messrs Conway, Hance, Zupon and Stomber) and three directors who were purportedly independent (Messrs Loveridge, Allardice and Sarles) but acted in accordance with the wishes and instructions of The Carlyle Group and its officers and affiliated entities. 5. CCCs objective was to achieve superior annual profits and a dividend yield of at least 12%, by investing in a diversified portfolio comprising residential mortgage backed securities (RMBS) and leveraged finance assets, seeking to generate returns principally from the difference between the interest earned on its assets and the cost of financing those assets through short term repurchase (repo) agreements and other forms of financing.

6.

The Defendants were aware that the financing of CCCs investments in RMBS through repos utilizing extensive levels of leverage exposed CCC to various market risks and that any increases in CCCs leverage only served to magnify those risks, particularly in times of market turbulence. CCCs business model initially identified high targeted leverage of 19 times capital, but by early 2007 targeted leverage had been increased by the Defendants to 29 times capital. Actual leverage employed exceeded 30 times its capital.

7.

Implementing appropriate risk management measures was therefore of the utmost importance to the protection of CCCs capital and its ongoing viability. As such, the Defendants established Investment Guidelines for CCC that required certain critical ratios to be maintained to limit risk. These included the requirement to maintain a minimum Liquidity Cushion (ratio of liquidity to equity) of 20% (initially 24%), a minimum level of borrowing capacity of 125% (initially 150%) and a limit of RMBS to 85% of CCCs total capital. Moreover, the Defendants were required to manage CCCs portfolio to adjust to changing market conditions.

8.

In particular, the maintenance of an unencumbered minimum Liquidity Cushion was fundamental to the management of a leveraged investment portfolio such as that of CCC. The purpose of the minimum Liquidity Cushion was to protect CCCs capital by ensuring that cash, cash equivalents and unencumbered assets would be readily available to meet the requirements imposed by CCCs repo counterparties and other financiers. These requirements included margin calls on its financed securities resulting from decreases in market value of financed assets and increases in collateral requirements (or haircuts, as they are referred to in repo financing, being the percentage discount from the market value of the RMBS asset that lenders demanded when CCC sought to borrow against the RMBS asset). Given the high level of leverage employed by CCC, prudent and conservative liquidity management was crucial to the viability of its business. It was essential for CCC to be prepared for increases in effective borrowing costs in the event of a downturn in the markets, and to be able to readily access cash or cash equivalents to meet higher margin or security requirements. Further, it was essential for CCC to have available to it sufficient lines of credit from diverse sources. The Defendants recognized this essential requirement, but as set forth below, failed to implement it and instead dissipated CCCs liquidity rather than increase it as market conditions dictated.

9.

In the second quarter of 2007, the global credit markets deteriorated significantly. The increase in subprime mortgage defaults, first noted in February 2007, began to have an impact in the market for RMBS and other assets owned by CCC. An era of relaxed lending standards combined with falling house prices in the United States resulted in widespread defaults on mortgages, which in turn significantly eroded the value of certain RMBS and other financial assets. As financial institutions capital eroded, lending standards and margins tightened as lenders sought to minimize their risk and preserve their own liquidity by retaining funds. In an environment of tighter credit, lenders began to demand more onerous 7

terms from borrowers, insisting on significant additional margin and collateral requirements including larger haircuts on repo financing. 10. The Defendants were plainly aware of the escalating risks CCC would face as a consequence. By June 2007, CCC had already suffered unrealized losses on its portfolio and further significant losses of up to $50 million were anticipated. Moreover, margin calls for another $70 million were expected which would reduce the Liquidity Cushion below 20% and a number of CCCs lenders started to request haircuts of 3%, representing an increase in collateral required of 50%. By this time average price volatility on RMBS securities as measured by the Defendants had increased by 58% from late 2006. On July 10, 2007, rating agencies downgraded numerous RMBS securities, leading to a significant market downturn. The next day, CCC completed an initial public offering (IPO) that raised an additional $345 million in capital. 11. Given these events, to protect CCC from the risk of substantial losses to its highly leveraged portfolio due to increasing and sustained market volatility, the Defendants needed immediately to identify and implement necessary changes, including reducing leverage, increasing liquidity and securing reliable sources of financing on acceptable terms. 12. However, when the Defendants met in Guernsey on July 26, 2007, the question of CCC selling RMBS assets, conserving the newly raised cash, raising additional equity capital and taking other urgent steps in order to reduce leverage and enhance liquidity was not even raised. Instead, the Defendants recklessly purchased a further $1.5 billion of RMBS assets through repo financing and continued to focus on CCCs net income and on their desire to meet dividend targets. 13. On any objective view given the sustained market volatility and strong warning signs of a pending liquidity crisis, by no later than mid July 2007 the urgent reduction of leverage was in CCCs best interests and essential to CCCs survival and future prospects. For example, sales of RMBS assets, conserving newly raised cash or raising additional equity capital by CCC would have enabled CCC to reduce leverage, enhance liquidity and thereby safeguard CCCs capital and long term viability. The Defendants took no such steps. From no later than mid July 2007, the conduct of the Defendants was reckless, grossly negligent, negligent and constituted wilful misconduct and breaches of the fiduciary and other duties owed by the Defendants to CCC. 14. As at July 31, 2007, CCC had net asset value exceeding $843 million, all of which was subsequently lost. Had the Defendants taken the steps which they themselves recognized as essential to proper risk management in volatile markets but deliberately failed to implement, they could have preserved CCCs equity capital rather than recklessly losing it. The Defendants conduct was not attributable to any rational business purpose for CCC nor did they exercise any business judgement.

15.

The Defendants operated CCC in reckless disregard of the overt and manifest risks that had arisen from the well publicised changes in the market and economic conditions in the first half of 2007, maintaining leverage exceeding 30 times CCCs capital throughout the second half of 2007. This grossly excessive use of leverage in the prevailing market conditions was coupled with a grossly inadequate Liquidity Cushion and inadequate borrowing capacity, such that CCC was inevitably unable to meet margin calls and the increased collateral required by its providers of short term repo financing.

16.

It was patently obvious that by mid 2007 a minimum Liquidity Cushion of substantially more than 20% was essential for CCC. Yet, inexplicably, the Defendants reduced CCCs minimum Liquidity Cushion requirement, rather than increasing it in response to market conditions. This further exposed CCC to the very risks which the Defendants were required to prevent.

17.

The Defendants conflicts of interest caused them deliberately to fail to address factors that would inevitably drive CCC to its demise. In the face of sustained market volatility and indeed dramatically increasing risk through the second half of 2007, in priority over the best interests of CCC, the Defendants preferred the corporate interests of The Carlyle Group, including the taking of excessive and unjustified fees of more than $20 million and other benefits of over $50 million, despite CCC incurring huge unrealized losses of more than $270 million. Moreover, the Defendants gave priority to preserving and enhancing The Carlyle Groups reputation as a successful and sophisticated investment manager and adviser and to protect the Carlyle brand. While CCC urgently needed to sell RMBS assets or raise additional equity capital, The Carlyle Groups corporate interests dictated that no such steps be taken, so as to avoid the recognition of losses by a Carlyle branded investment, to maintain the illusory prospect of impressive dividends and to pay themselves fees. The Carlyle Groups conflict was particularly acute in light of the proximity of the closing of the recent IPO of CCC on July 11, 2007.

18.

In complete disregard of the interests of CCC, and in complete abdication of their fiduciary duties to CCC, the Defendants caused CCC to actually purchase more RMBS assets (instead of selling RMBS assets and/or raising more equity capital) in the vain hope that the market value of CCCs RMBS assets would increase in value and collateral required by repo counterparties would decrease in amount. The Carlyle Group had a predetermined strategy that in the event of CCCs collapse, they would blame adverse market conditions and the actions of others to avoid scrutiny of their own misconduct.

19.

In August 2007, CCC had more than $21 billion of outstanding repo borrowings, employing leverage of 32 times capital. Having recklessly failed in July 2007 to adapt to changing market conditions and preserve CCCs capital, the Defendants made the situation even worse. Stomber conceded that the current credit market meltdown is worse than 98 and that a recession appears to be on the cards as CCC has said for 9 months. Regardless, the Defendants permitted CCCs Liquidity Cushion to be decimated, falling

below zero, as a result of margin calls and continually increasing haircuts demanded by CCCs repo counterparties, which required CCC to provide tens of millions of dollars of additional collateral. 20. This represented an abandonment of one of CCCs fundamental Investment Guidelines, which necessitated that CCC maintain a minimum 20% Liquidity Cushion. The Defendants had permitted CCC to run out of cash, such that it had zero liquidity available from which to meet future margin calls and haircut increases. By the time the Defendants held an emergency Board meeting of CCC on August 23, 2007, they were faced with a crisis which would have been significantly mitigated had the Defendants fulfilled their obligations to CCC during July 2007. Again, the Defendants conduct was not attributable to any rational business purpose for CCC nor did they exercise any business judgement. 21. To meet the margin calls and increased haircuts imposed by CCCs repo counterparties during August 2007, the Defendants propped up CCC with ineffectual, self-interested short-term measures and continued to generate high fees for CIM rather than implement a long term solution for CCC. They did not sell any of CCCs RMBS assets, which would have resulted in the recognition of losses, a loss of incentive fees and in turn would have been damaging to the reputation of The Carlyle Group. Moreover, the Defendants arranged a $100 million loan from The Carlyle Group to meet CCCs short term liquidity requirements at a high interest rate of 10%. This was a grossly inadequate sum to address CCCs liquidity crisis in view of more than $22 billion in borrowings. By the end of August 2007, the Defendants finally conceded that CCC was over-leveraged and its minimum 20% Liquidity Cushion had been insufficient to protect CCC from market volatility. 22. From August 2007, it was obvious from the Defendants dealings with CCCs repo counterparties and potential repo lenders that CCC's capital was insufficient to support the level of repo borrowing necessitated by CCC's large RMBS portfolio. No new sources of repo financing were available. On September 5, 2007 in an article titled In a Too-Close Tango, Carlyle Trips Over Age-Old Missteps the Washington Post asked rhetorically about CCC And when was it decided that it was prudent business practice to have only $175 million in cash in the bank in case the value of those $22.7 billion in securities falls and the lenders decide they are only willing to finance 97 percent of the fair-market value rather than 98 percent?. 23. The Defendants announced on September 11, 2007 that fundamental revisions to CCCs business model were required and would be implemented, acknowledging that CCCs business model needed to be restructured to reduce leverage and increase the minimum Liquidity Cushion to at least 40%. They committed to employ less leverage, have more diversified asset classes and concentrate on improving and stabilizing funding sources for CCC.

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24.

However, the Defendants took no steps to implement these fundamental changes because they were at odds with The Carlyle Groups corporate interests and objectives in respect of CCC, which required CCC to (a) outperform its competition with high yields and dividends which could be trumpeted to the public; (b) avoid realizing any significant losses; and (c) continue to generate high fees. Consequently, the Defendants failed to take any steps to reduce CCCs leverage and deliberately chose to operate CCC outside even its original Investment Guidelines.

25.

In fact, the Defendants did precisely the opposite of what they had identified was required. The Defendants approved, without question, the suspension of CCCs key Investment Guidelines. These included (a) the suspension of the requirements that CCC maintain a minimum 20% Liquidity Cushion (let alone the materially higher Liquidity Cushion which was desperately needed for CCC to survive and remain viable); (b) that CCC maintain repo lines of a minimum equal to 125% of all outstanding borrowings; and (c) that a maximum of 85% of CCCs capital be allocated to RMBS. There was no deliberation as to how, without an adequate Liquidity Cushion, CCC would be able to meet margin calls, pay increased haircuts on its leveraged RMBS portfolio or address its reduced borrowing capacity. These guidelines were never reinstated.

26.

Although the Defendants themselves recognized in the summer of 2007 that CCCs business model was no longer sustainable, they failed to act to implement those necessary changes. The conduct of the Defendants through the second half of 2007 demonstrated that they were determined to continue generating fees and avoid recognizing losses (which exceeded $270 million by August 31, 2007) in the vain hope of out-performing CCCs competitors, who had adopted more conservative investment strategies in the face of market instability, focused on the preservation of capital and reduced leverage.

27.

The Defendants finally met on November 13, 2007, for the first time since the emergency meeting of CCCs Board convened on August 23, 2007. But remarkably, they approved management fees to CIM of $3.9 million for the period July 1 to September 30, 2007 and focused their attention on whether CCC could pay a fourth quarter dividend and when CCC could again start investing. Once again, short term measures continued to take priority over safeguarding the capital and long term viability of CCC. CCCs Directors, on the recommendation of The Carlyle Group, resolved without scrutiny to repay the $100 million loan outstanding to The Carlyle Group with interest and to borrow a further $100 million from The Carlyle Group, at 10% interest, together with a $1 million commitment fee payable to The Carlyle Group. Again, these loan funds from The Carlyle Group were grossly inadequate to materially benefit CCC and did not address the longer term viability of CCC.

28.

The Defendants also amended the definition of the Liquidity Cushion to include undrawn debt from The Carlyle Group, so as to report a higher Liquidity Cushion than would have been available under previous definitions. It was entirely illogical and highly inappropriate to include undrawn debt in the definition of 11

Liquidity Cushion because, if drawn, the amount would have been repayable to The Carlyle Group. In other words, rather than following the measures that they had concluded were necessary to save CCC, the Defendants decided to manipulate the definition to give the illusion of prudence without reality. 29. In the second half of 2007 when CCC was spiralling towards its collapse, CCCs Board met on only two occasions, on August 23, 2007 and November 13, 2007, for three hours, in total. The Board failed to develop or implement any strategy to avoid losses and blindly and recklessly followed the wishes of The Carlyle Group without question. Again, the Defendants conduct was not attributable to any rational business purpose for CCC nor did they exercise any business judgement. 30. In summary, the Defendants were obligated to prudently and conservatively manage CCC to reduce risk through taking steps that they had identified as essential for CCCs survival. Their primary focus should have been to sell RMBS assets, increase borrowing capacity and/or raise needed equity capital to enable CCC to reduce leverage, enhance liquidity and thereby preserve its capital. Instead, the Defendants deliberately and recklessly chose to ignore and then vitiate CCCs Investment Guidelines, collect high fees, avoid realizing losses and attempt to preserve The Carlyle Groups reputation as a sophisticated investment manager and adviser. 31. On February 27, 2008, CCCs annual report for the year ended December 31, 2007 was published. It disclosed that CCCs leverage at December 31, 2007 remained at 31.4 times capital and that the suspension of CCCs Investment Guidelines had been extended until September 30, 2008. As at December 31, 2007 the Liquidity Cushion available to meet margin calls on its $21 billion of debt consisted of only $12 million in cash, $15 million in unencumbered RMBS, and undrawn loan funds of $40 million. Under accounting principles generally accepted in the USA (US GAAP), CCCs losses for the year were a staggering $266 million. 32. It was no surprise that by March 2008, CCC was no longer able to meet margin calls and the increased haircut requirements of the repo banks, which triggered default notices leading to the winding-up order of the Royal Court of Guernsey on March 17, 2008. 33. When CCC collapsed, in furtherance of their predetermined strategy, the Defendants sought to distance themselves from the failure, blaming market conditions. However, this outcome was not the result of market forces. CCCs losses were the direct result of a determinedly reckless bet the farm approach, brazenly pursued by the Defendants in the self-serving interests of The Carlyle Group and in derogation of the interests of CCC. 34. At every juncture, the Defendants breached their fiduciary duties and acted recklessly and/or grossly negligently, by giving priority to The Carlyle Groups interests over those of CCC. What is more, the Defendants well understood and publicly declared their intention to undertake the steps that needed to be 12

taken to maintain CCC as a viable entity, while simultaneously and secretly deciding to do precisely the opposite of what they knew and believed was necessary to save CCC. But The Carlyle Groups relationship with CCC did not reward prudent management and reduction of risk; rather it encouraged the Defendants to continue to increase risk in volatile markets, rather than preserve CCCs capital. In a desire to reap the rewards of outsize returns, the Defendants maintained excessive leverage and low liquidity, and recklessly sent CCC into its inevitable demise. CCC was so unprotected from the known and sustained volatility of the financial markets that by mid 2007 the loss of CCCs entire capital and its collapse became the inevitable consequence. 35. The Defendants are each jointly and severally liable to compensate CCC for the massive losses occasioned and additional liabilities incurred by their conduct during CCCs short life. The Plaintiffs bring this action to recover CCCs losses plus interest. Additionally, the Plaintiffs seek return from The Carlyle Group and CIM of the original books, records and other property of CCC, which are chattels of CCC. By declining the Plaintiffs reasonable requests to return these chattels, The Carlyle Group has sought to obstruct the proper pursuit of this action by the Plaintiffs. B. B.1 36. PARTIES The Plaintiffs CCC is a limited company that was formed and registered in Guernsey, Channel Islands on August 29, 2006 under the Companies (Guernsey) Law 1994 (as amended) (Companies Law), with registration number 45403. 37. CCC was and is domiciled in Guernsey and its affairs and internal management were at all times governed by the Laws of Guernsey and CCC was regulated by the Guernsey Financial Services Commission (GFSC). 38. Until ordered to be wound up, the registered address of CCC was First Floor, Dorey Court, Admiral Park, St Peter Port, Guernsey GY1 6HJ, Channel Islands. As was required by the GFSC, Mourant Guernsey Limited (Mourant) administered or procured the administration of the business and property of CCC from that address and served as the share registrar, transfer agent and as paying agent of CCC. 39. CCC commenced business on September 12, 2006, with the objective of achieving superior risk-adjusted returns for its shareholders through capital appreciation and current income, by investing in a diversified portfolio of fixed income assets consisting of mortgage products and leveraged finance assets. 40. By February 27, 2007, CCC had raised capital of $600 million from the issue of 30,000,000 Class B nonvoting shares through multiple private placements. The majority of CCCs capital was invested in a 13

portfolio of RMBS and by March 31, 2007, CCC had acquired investment assets of $17.3 billion through the use of short term repos and other forms of financing. 41. On July 11, 2007, CCC raised a further $345.5 million from the issue of 18,183,873 Class B non-voting shares by way of IPO. From that day, CCCs Class B non-voting shares were listed on Euronext, the regulated market of Euronext Amsterdam NV (Euronext). 42. In the space of just eight months between July 2007 and March 2008, CCC lost the entirety of its $945 million of capital and its Liquidators have received claims from its lenders exceeding $400 million. 43. On March 17, 2008, the Royal Court of Guernsey ordered CCC to be wound up pursuant to section 94(a) of the Companies Law and appointed Alan John Roberts and Neil Mather of Begbies Traynor as Joint Liquidators of CCC and on March 18, 2008 Christopher Morris and Adrian John Denis Rabet also of Begbies Traynor were appointed Additional Joint Liquidators. Since March 17, 2008, the registered address of CCC has been La Plaiderie House, La Plaiderie, St Peter Port, Guernsey GY1 1WG and thereafter Third floor, NatWest House, Le Truchot, St Peter Port, Guernsey GY1 1WD. B.2 The Defendants

The Directors of CCC 44. The directors of CCC were William Elias Conway Jr (appointed August 29, 2006) a resident of Virginia USA, John Leonard Loveridge (appointed August 29, 2006) a resident of Guernsey, James H Hance Jr (appointed September 14, 2006) a resident of Florida USA, Harvey Jay Sarles (appointed September 19, 2006) a resident of Massachusetts USA, Robert Barclay Allardice III (appointed September 14, 2006) a resident of New York USA, John Crumpton Stomber (appointed September 14, 2006) a resident of Connecticut USA and Michael J Zupon (appointed September 14, 2006) a resident of New York USA. 45. In addition to being directors of CCC, Hance was elected non-executive Chairman of the Board of CCC and Stomber was appointed Chief Executive Officer, Chief Investment Officer and President of CCC. Although each of Stomber and Zupon were appointed as non-voting advisory directors of CCC, they were each subject to all duties, obligations and responsibilities placed upon directors of a company under Guernsey Law. Loveridge, Allardice and Sarles were supposedly the independent members of the Board of Directors. 46. Each of Conway, Stomber and Zupon was an officer and/or employee of TC Group LLC (TCG), carrying on business with its affiliates as The Carlyle Group (refer paragraph 65 below), and was an officer and/or employee of its affiliate CIM. Hance was a Senior Advisor to CIM focused on the financial services sector.

14

CIM, TCG and TCG Holdings LLC were CCCs investment managers and advisers and are also Defendants in these proceedings (refer paragraphs 55 to 64 below and 65 to 72 below respectively). 47. In addition to his position as a director of CCC, Conway is a founding partner and Managing Director of TCG, together with David Rubenstein and Daniel DAniello, and is the Chief Investment Officer of TCG. Conway is also an Executive Managing Director and part-owner of TCG and CIM, together with Rubenstein and DAniello. 48. In addition to his position as a director of CCC, Stomber was also a Managing Director of TCG and a Managing Director of CIM. 49. In addition to his position as a director of CCC, Zupon was a founding member, Chief Investment Officer and Managing Director and Head of The Carlyle Groups US Leveraged Finance Group and was a Partner and Managing Director of The Carlyle Group. 50. In addition to his position as director of CCC, Loveridge was a Board member for certain of The Carlyle Groups private equity funds. 51. The Board of CCC was therefore comprised of four directors who were officers or directors of TCG and/or CIM and/or other TCG affiliates and three directors who were described as independent directors (including Loveridge). 52. By reason of their holding office as directors of CCC concurrently with their other roles as officers or directors of TCG and/or CIM and/or other TCG affiliates, Conway, Stomber, Zupon and Hance were in a position where the interests of CCC and their duties to CCC as directors could and did conflict with the interests of TCG and/or CIM and/or other affiliates of TCG and their duties as directors of those entities. 53. Each of Conway, Hance, Stomber and Zupon were also members of an Investment Committee which was established for CCC and was chaired by Conway. As such, the Investment Committee was constituted exclusively by the CCC directors who were also directors, officers and/or employees of TCG and/or CIM and/or other TCG affiliates. 54. The duties of the Investment Committee, and thereby of each of Conway, Hance, Stomber and Zupon, included responsibility for setting parameters for the composition of CCCs investment portfolio and monitoring its performance and composition on a continuing basis. In particular, the Investment Committee was required to review CCCs compliance with its Investment Guidelines. In other words, directors, officers and/or employees of TCG and/or CIM and/or other TCG affiliates were responsible for monitoring their own performance as the investment professionals appointed to provide investment advice to and manage CCC. 15

CIM 55. CIM was incorporated in Delaware on July 8, 1996 and is an affiliate of TCG carrying on business primarily from the offices of The Carlyle Group in New York and Washington D.C. CIM is registered with the United States Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940. 56. Conway, Rubenstein and DAniello are the Managing Directors of CIM. Each of Conway, Hance, Stomber and Zupon were officers of both CIM and CCC. 57. CIM was the investment manager and adviser of CCC, with full discretionary investment management authority to implement the Investment Guidelines of CCC and to perform the day to day management and operations of CCCs business, subject to the oversight of CCCs Board of Directors. An investment management agreement dated September 20, 2006 between CCC and CIM was signed by Loveridge for CCC and Jeffrey Ferguson, Managing Director and General Counsel for CIM. 58. 59. CIM and TCG developed the business model for CCC which is described in Section E.1 below. In addition to its role as investment manager and adviser of CCC, CIM also provided investment management services to other affiliates within The Carlyle Group (including The Carlyle Groups Leveraged Finance Team) with similar or overlapping investment strategies. 60. Consequently, CIM was in a position where its obligations to TCG and/or other TCG affiliates could conflict with the interests of CCC. 61. CIM received management fees payable quarterly out of the assets of CCC. The management fee was calculated quarterly as an amount equal to the product of: 61.1 61.2 0.4375% (1.75% per annum); and CCCs Equity in respect of each quarter. Equity meant for any quarter the sum of the net proceeds from any issuance of shares (after deductions for costs of issuance of the shares) and CCCs retained earnings at the end of each quarter. 62. CIM also received incentive fees payable quarterly out of the assets of CCC. The incentive fee was calculated each quarter as an amount equal to the product of: 62.1 25% of the dollar amount by which CCCs net income per weighted average Class B non-voting share for each quarter, exceed an amount equal to the product of:

16

62.1.1

the weighted average of the price per share for all issuances of Class B nonvoting shares (after deductions for costs of issuance of the shares); and

62.1.2

the greater of (1) 2.00% or (2) 0.50% plus one fourth of the Ten Year Treasury Rate for such quarter; and

62.2

The weighted average number of Class B non-voting shares outstanding during such calendar quarter.

63.

CIMs interest in earning management and incentive fees payable from the assets of CCC could and did conflict with CIMs duties to CCC and with the interests of CCC.

64.

In addition to the management and incentive fees which totalled over $19 million, The Carlyle Group and CIM were reimbursed by CCC for all non-investment advisory related fees and overhead expenses that they incurred on CCCs behalf, including office rent, furniture and supplies. Further, The Carlyle Group and CIM were also reimbursed for the actual cost of personnel fully dedicated to CCC.

Carlyle 65. TCG was incorporated in Delaware on November 10, 1993 and together with its affiliated companies (including CIM and TCG Holdings LLC referred to in paragraph 66 below) operates and conducts business as a private partnership under the name The Carlyle Group. TCG is the direct owner of 75% of CIM, with the power and authority to direct and control management of CIM. Conway, Rubenstein and DAniello together are indirect owners of 75% of CIM. 66. TCG Holdings LLC was incorporated in Delaware on November 1, 1993 and is the sole managing member of TCG, with the power and authority to direct and control TCG. The managing committee of TCG Holdings LLC is comprised of Conway, Rubenstein and DAniello, who are the founding partners and Managing Directors of The Carlyle Group and Managing Directors of TCG Holdings LLC, TCG and CIM. TCG Holdings LLC and TCG are collectively referred to as Carlyle in this Complaint, except where otherwise stated. 67. The Carlyle Group was established in 1987 and is today a global asset manager and investment adviser with 27 offices in 19 countries. It invests in private equity, real estate and credit alternatives in North America, Europe, Asia, the Middle East, Africa and South America. The Carlyle Group employs approximately 880 people, including more than 420 investment professionals. It currently operates 67 funds with more than $90 billion under management. It is one of the world's largest private equity firms. 68. Through six individuals who were officers or employees of The Carlyle Group in Europe and thereby affiliates of Carlyle, namely Jean-Pierre Millet, Wolfgang Hanreider, David Fitzgerald, Robert Edward 17

Hodges, Gregory Andreas Philip Bohm and Eric Sasson, Carlyle controlled all of the issued Class A shares in CCC. The Class A shares issued by CCC were the only shares which entitled the holder to receive notice of, attend and vote at any meetings of CCC and to appoint CCCs board of directors. Carlyle thereby controlled CCC through its control of the Class A shares issued by CCC. 69. Meetings of the Board of Directors of CCC were regularly attended by employees and officers of Carlyle and CIM, including William Greenwood, Patrick Trozzo, Vincent Rella, Randolph Green, John Harris, Jeffrey Ferguson, Catherine Ziobro, Thomas Mayerhofer, Curt Buser, Peter Nachtwey and Robert Brown. Joanne Cosiol, Associate Vice President and Counsel of Carlyle, was CCCs general secretary. 70. Carlyle was, together with CIM, the investment manager and adviser of CCC. Carlyle had full

discretionary investment management authority and responsibility for the management and operations of CCCs business. Carlyle undertook to provide CCC with access to its resources, established infrastructure as well as its mortgage product and leveraged finance expertise in order to create an investment portfolio designed to achieve CCCs investment objective, which was to generate cash available for distribution, facilitate capital appreciation, increase diversification and provide attractive returns to CCCs shareholders. Carlyle purportedly undertook to apply its conservative investment approach to achieve CCCs investment objective. 71. CCC was entirely dependent upon the judgment and experience of Carlyle and CIMs personnel. These responsibilities included responsibility for selecting, evaluating, conducting due diligence, negotiating and structuring, executing, monitoring and exiting investments and managing uninvested capital. Carlyle carried on its investment management and advisory activities in respect of CCC primarily from New York. CCC itself had no employees and its operations were conducted exclusively by Carlyle, formally through CIM. 72. Carlyle caused CCC to be incorporated in order to grow and enhance its leveraged finance business and to establish CCC as the first Carlyle branded fund to be listed and traded on a public exchange and to generate substantial fee income. CCCs launch was strategically timed by Carlyle to test and develop market interest in a contemplated public offering of equity interests in Carlyle itself and other Carlyle branded funds. Conflicts of Interest 73. The manner in which CCC was established, structured and operated meant that there were conflicts of interest between (a) the corporate interests and objectives of Carlyle and the stand alone interests of CCC; and (b) the duties of Conway, Stomber, Zupon, Hance and Loveridge to CCC as directors and their duties as directors of TCG and/or CIM and/or other TCG affiliates. The circumstances which, both individually and collectively, gave rise to these conflicts of interests were: 18

73.1

Conway, Stomber, Zupon and Hance held office as directors of CCC concurrently with their other roles as officers or directors of TCG and/or CIM and/or other TCG affiliates.

73.2

In addition to his position as director of CCC, Loveridge was a Board member for certain of The Carlyle Groups private equity funds.

73.3

CCCs Investment Committee consisted of Conway, Hance, Stomber and Zupon, who were also directors, officers and/or employees of TCG and/or CIM and/or other TCG affiliates. In their role as CCCs Investment Committee, these defendants were responsible for monitoring their own performance as Carlyle and CIMs investment professionals appointed to provide investment advice to and manage CCC.

73.4

In addition to its role as investment manager of CCC, CIM also provided investment management services to other affiliates within The Carlyle Group (including The Carlyle Groups Leveraged Finance Team) with similar or overlapping investment strategies.

73.5

CIM charged management and incentive fees payable from the assets of CCC which were calculated on the basis of CCCs capital raised and net income.

73.6

CCCs auditors, PricewaterhouseCoopers (PwC), had a long-standing relationship with Carlyle, and provided various audit and non-audit related services to Carlyle and affiliates of Carlyle.

74.

Carlyles corporate interests and objectives required CCC to outperform its competition with high yields and dividends which could be trumpeted to the public and for CCC to avoid realizing any significant losses. The stand alone interests of CCC were in conflict with these corporate interests and objectives. The Defendants were obliged to give priority to safeguarding CCCs capital and its long term viability over generating high yields and dividends and to avoid realizing any significant losses.

C. C.1 75.

THE DEFENDANTS DUTIES TO CCC The Defendant Directors As a result of their position as directors of CCC, each of Conway and Loveridge (from August 29, 2006) and Hance, Stomber, Zupon, Allardice and Sarles (from September 14, 2006) owed the following duties to CCC, which arise under Guernsey Law, Guernsey being the place of CCCs incorporation and domicile: 75.1 a fiduciary duty to act bona fide in the best interests of CCC at all times, without regard to the interests of Carlyle;

19

75.2

a fiduciary duty not to act for any collateral or improper purpose in the exercise of their powers and discharge of their duties as a director of CCC;

75.3

a fiduciary duty not to act in relation to the affairs of CCC in circumstances where there existed a conflict between their duties to CCC as director and their other duties or interests, including duties owed to Carlyle, CIM or any other affiliate of Carlyle;

75.4 75.5

a fiduciary duty to act fairly between the different shareholders of CCC; a duty to act with the care, skill and diligence that would reasonably be expected of a reasonably diligent person with the general knowledge, skill and experience of the defendant directors;

75.6

a duty to make decisions on an informed basis, upon all material information reasonably available to the Board in accordance with rational decision making processes; and

75.7 C.2 76.

a duty to properly oversee the management and business activities of CCC.

Carlyle and CIM At all times: 76.1 76.2 Carlyle and CIM were the investment advisers and managers of CCC. Carlyle, through the ownership by its affiliates and employees of all of the voting shares in CCC, had power to appoint and remove directors from the Board of CCC, and thereby controlled the composition of the Board of CCC. 76.3 Carlyle and CIMs investment professionals, including Conway, Hance, Stomber and Zupon were appointed to the Board of CCC and exercised control over decision-making by the Board of CCC. 76.4 76.5 Carlyle and CIMs investment professionals controlled the day-to-day operations of CCC. Carlyle and CIM had authority as the agent of CCC to enter into transactions on behalf of CCC as principal. 76.6 Carlyle and CIM undertook to provide to CCC what they described as their unique knowledge, understanding, operational capabilities and superior expertise within the investment management industry.

77.

At all times, CCC: 20

77.1

was dependent upon the judgment and experience of Carlyle and CIMs investment professionals, including Conway, Hance, Stomber and Zupon;

77.2

relied upon the superior expertise and experience of Carlyle and CIM as its investment managers and advisers;

77.3 77.4 78.

reposed special trust and confidence in the integrity and fidelity of Carlyle and CIM; and was subject to the control and influence of Carlyle and CIM.

Those facts, taken both individually and together, meant that Carlyle and CIM owed duties (including fiduciary duties) to CCC to act for and to give advice for the benefit of CCC and to protect and advance the interests of CCC.

79.

Therefore, Carlyle and CIM had the obligation to act in the best interests of CCC and to exercise reasonable care and diligence to ensure that the assets of CCC were not exposed to unacceptable risks and to ensure that decisions taken by the Board of CCC were in the best interests of CCC. Carlyles obligations were all the more acute because Carlyle and CIM effectively controlled CCC and its assets.

80.

Further, Carlyle and CIM each controlled the affairs of CCC and performed functions properly discharged by a director of CCC, such that each of Carlyle and CIM was a de facto director under Guernsey Law. Alternatively, the majority of the directors of CCC took direction from and were accustomed to act in accordance with the directions of Carlyle and CIM, such that each of Carlyle and CIM was a shadow director of CCC under Guernsey Law. Consequently, each of Carlyle and CIM owed the same duties to CCC as described at paragraph 75 above, either by virtue of their role as de facto or alternatively shadow directors of CCC or as a result of such duties being imposed upon each of them under Guernsey Law in light of the facts set out at paragraphs 76 and 77 above.

81.

From early 2007, Carlyle and CIM anticipated that CCC would face more challenging economic conditions in the course of 2007 and were required to apply their knowledge and expertise to their investment management of CCC accordingly. Consequently, in the performance of their duties, Carlyle and CIM were required to, amongst other things: 81.1 81.2 adopt a cautious, disciplined and managed risk approach as investment manager and adviser; be ready to adapt to more turbulent market conditions including by being prepared to take a more cautious and prudent approach than that which they had previously identified as appropriate; and

21

81.3

adapt to more challenging economic conditions in 2007, and in particular, to the likely reduction in availability and the likely higher cost of obtaining funding (liquidity).

D. 82.

JURISDICTION AND VENUE This Court has personal jurisdiction over the Defendants pursuant to NY CPLR 301 and 302 because each of the Defendants either resides in New York or transacts business in New York and because many of the events giving rise to the causes of action alleged herein occurred in New York State. Venue is proper in New York County pursuant to NY CPLR 503(a) and 503(c) because Defendant TC Group LLC and Defendant TCG Holdings LLC reside in New York County.

83.

As there is potentially more than one forum where this action could be litigated at least against some of the Defendants, concurrent with this Cause, protective proceedings have also been filed by the Plaintiffs against the Defendants in Guernsey, Delaware and Washington D.C. In furtherance of the proper and efficient administration of justice, it is the Plaintiffs objective to seek to reach agreement with the Defendants as to a single forum for the determination of all of the Plaintiffs claims and thereafter to stay the actions filed in all other jurisdictions.

E. E.1

FACTS RELEVANT TO ALL CLAIMS FOR RELIEF Business Model

Investment Objective and Strategy 84. CCC was established by Carlyle and CIM with the objective of achieving superior risk-adjusted returns for its shareholders, through capital appreciation and current income, by investing in a diversified portfolio of fixed income assets consisting of mortgage products and leveraged finance assets. 85. Carlyle and CIM developed and formulated the business model for CCC (CCCs Business Model) and considered the investment highlights arising from CCCs Business Model to be: 85.1 An experienced management team, and in particular the experience of Hance, Stomber and Zupon. 85.2 A flexible and cost efficient business model which built upon the core competencies of Carlyle while maintaining capital flexibility across asset classes and business cycles. 85.3 Full access to Carlyles resources, established infrastructure and mortgage product and leveraged finance expertise including drawing on Carlyles deep and broad industry experience and relying upon Carlyles conservative investment approach. 22

85.4

The ability to identify and source the majority of its assets through access to Carlyles extensive relationships and deal flow.

85.5 86.

The established track record of Carlyles leveraged finance team.

CCCs Business Model anticipated raising capital initially by way of private placement of CCC Class B non-voting shares, followed by an IPO to be completed by September 2007. By February 27, 2007, CCC had raised capital of $600 million through multiple private placements. CCC raised a further $345.5 million by way of its IPO completed in July 2007 in difficult market circumstances.

87.

Under the Business Model developed by Carlyle and CIM, CCC was to invest capital among eight fixed income asset classes, namely (a) RMBS, principally in high investment grade-rated risk classes; (b) asset backed securities in a variety of asset classes; (c) high yield bonds; (d) bank loans; (e) mezzanine debt; (f) distressed debt; (g) debtor-in-possession and non-performing loan opportunities; and (h) derivatives of these asset classes; and other types of investments including private equity opportunities (but not exceeding 10% of CCCs net asset value). This proposed asset diversification was never achieved and CCCs investment portfolio was dominated by RMBS.

88.

CCCs earnings were to be generated from the difference between the interest income earned on its assets and the cost of financing those assets, as well as from capital gains generated on the disposal of those assets. However, the preparation of CCCs financial statements and quarterly reports on the basis of International Financial Reporting Standards (IFRS) allowed CCC to avoid recognising the substantial decline in the fair value of its investment assets as losses (see paragraphs 148 to 150 below).

89.

At the first meeting of CCCs Board of Directors, held in Washington D.C. on October 4, 2006, Stomber presented CCCs Business Model to the Board. Stomber presented CCCs risk/return profile based on target returns on the prevailing market conditions of October 2006 and static equity of $500 million for 2007 and 2008. Targeted gross return on equity was approximately 17 to 18%, targeted net return on equity was approximately 13 to 14% and targeted dividend yield was approximately 11 to 13%.

The Investment Guidelines 90. Investment Guidelines for the allocation of capital and selection of investments among the classes of assets contemplated by CCCs investment strategy were established by Carlyle and CIM and approved at the meeting of the Board of Directors of CCC held on October 4, 2006. In particular, the Investment Guidelines addressed asset classes, allocation and concentration, leverage and liquidity and cash management.

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91.

In addition to guidelines for the allocation of capital and selection of investments, CCCs Investment Guidelines also contained risk management parameters which included: 91.1 the requirement to maintain a minimum Liquidity Cushion of 20% of adjusted capital (refer to paragraphs 119 to 134 below); 91.2 the requirement to maintain a minimum level of borrowing capacity of 150%, by reference to total investment assets (refer to paragraphs 135 to 141 below); and 91.3 the requirement that limited RMBS to 85% of CCCs total capital (refer to paragraphs 142 to 145 below).

Investment in RMBS 92. RMBS are a form of security collateralized by pools of residential mortgages. Mortgage loans were purchased from loan originators and assembled into pools by various entities, including governmental agencies. The pools of loans were then funded by the issue of RMBS to investors. The RMBS issued by governmental agencies represented an entire ownership interest in pools of mortgage loans secured by residential real property and were usually guaranteed as to principal and interest by the agencies. These agencies included USA federally chartered entities such as the Federal National Mortgage Association (better known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (better known as Freddie Mac). Financing Investments in RMBS Through Repos 93. CCC utilized repos to finance its investments in RMBS. Under these agreements, CCC sold RMBS to its repo counterparties and agreed to repurchase the same RMBS at a price equal to the original sale price plus accrued interest. The original sale price to the repo counterparty would be at a discount to the fair value of the security, being an initial margin known as a haircut. The repos were accounted for as debt by CCC, secured by the underlying RMBS. During the term of a repo, CCC received any principal repayments and earned interest on the underlying securities and paid a separately negotiated rate of interest to the repo counterparty. 94. Not all of CCCs RMBS were the subject of repos. CCC did retain a small portion of its RMBS as unencumbered securities for the purpose of its minimum Liquidity Cushion requirement (refer to paragraphs 119 to 134 below). 95. CCC established relationships with a number of financial institutions as repo counterparties. These included Bear Stearns & Co. Inc, Bank of America LLC, BNP Paribas Securities Corp, Calyon Securities (USA) Inc, Cantor Fitzgerald & Co, Citibank Global Markets Inc, Credit Suisse, Deutsche Bank Securities 24

Inc, Goldman Sachs & Co, ING Financial Markets LLC, JP Morgan Securities Inc, Lehman Brothers Inc, Man Securities Inc, Merrill Lynch & Company Inc, Morgan Stanley and UBS Securities LLC. 96. The maturity of the repos entered into by CCC was usually very short. For example, as at March 31, 2007, the weighted average maturity remaining on CCCs total repos was 22 days, and ranged from 18 to 25 days for CCCs major financiers. The short duration of the repo financing is to be contrasted with the legal maturity date of CCCs RMBS, which as at March 31, 2007, had a weighted average legal maturity date of the year 2037. 97. The financing provided by these repos was usually rolled over or settled and reissued, on a monthly basis so that it corresponded with interest payment reset dates on the underlying RMBS securities. However, at various times shorter roll periods were utilized. 98. Upon the conclusion of a repo, either party had complete discretion to enter into a new repo, or extend, renew or roll over the existing repo agreement. This discretion was absolute, notwithstanding past or standard market practice. Consequently, CCCs repo counterparties were in a particularly strong negotiating position and were generally able to dictate the terms upon which they would continue to provide repo financing to CCC, including the basis on which the fair value of the RMBS held as collateral was to be determined, and the amount of haircut. Whenever a repo facility was being rolled over, the repo financier was at liberty to change the haircut required from CCC. 99. Therefore, it was necessary for Carlyle, CIM and the directors of CCC to ensure that CCC had a sufficient number of counterparties to provide sufficient repo financing to it on terms acceptable to CCC. There was no guarantee that repo financing would remain available to CCC, or that repo financing would be available on terms and conditions acceptable to CCC (particularly as CCCs repo counterparties could change the haircut on rollover as discussed in paragraphs 102 to 107 below). These risks to CCC were compounded by the very short duration of the repos entered into by it. These risks became evident during July 2007, when CCC experienced difficulties maintaining sufficient repo financing to enable it to continue to fund its RMBS assets. 100. CCCs repo counterparties were able to mitigate their risk under the repos with CCC through, inter alia, any one or more of the following mechanisms: 100.1 Holding legal title. Under the repos, legal title of the RMBS passed to CCCs repo

counterparties for the duration of the transactions. This enabled CCCs repo counterparties to liquidate RMBS on short notice where an event of default occurred (see paragraph 100.5 below).

25

100.2

Increasing the haircut. CCCs repo counterparties were able to limit the amount they lent CCC as a percentage of the fair value of the underlying RMBS; that is, by increasing the haircut (refer paragraphs 102 to 107 below).

100.3

Making margin calls. CCCs repo counterparties were able, on a daily basis, to require that CCC provide additional collateral to them in the event that the fair value of CCCs securities subject to a repo declined (known as margin calls) (refer to paragraphs 108 to 109 below).

100.4

Demanding repayment. CCCs repo counterparties were able to elect to demand repayment at maturity, usually every 30 days or less.

100.5

Events of default. Each master repurchase agreement contained extensive events of default provisions which enabled CCCs repo counterparties to deal with the RMBS which were the subject of the repos (refer to paragraphs 110 to 112 below).

101. It was necessary for Carlyle, CIM and the directors of CCC to ensure that CCCs Business Model took account of the ability of CCCs repo counterparties to take any or all of the steps set out above. Risk of Increased Haircuts 102. The amount that CCCs repo counterparties were prepared to lend CCC on the underlying fair value of its RMBS could be varied by the repo counterparties in response to their changing assessment of risk. In particular, repo counterparties could and would decrease the amount they were willing to lend CCC on the fair value of the underlying securities, where they assessed greater risk. The decrease in the amount the repo counterparties were willing to lend CCC on the fair value of the underlying securities corresponded to an increase in the haircut. An increased haircut would provide CCCs repo counterparties with comfort in the event that prices of the underlying RMBS held as collateral either fell or became volatile before they had the opportunity to make a margin call on CCC or, in case of default, liquidate the RMBS securities. 103. In the development, formulation and implementation of CCCs Business Model, CIM, Carlyle and the Board of Directors operated upon an expectation that CCCs repo counterparties would continue indefinitely to provide financing to CCC at a rate of 98% of the fair value of CCCs RMBS; that is, a haircut of 2%. The 20% minimum Liquidity Cushion was based on the assumption that liquidity would never be needed to fund an increase in haircut above 2%. 104. However, there was a significant risk that haircuts would be increased beyond 2%. CCCs repo counterparties had control over the haircut rate and could increase the haircut at their absolute discretion, particularly in response to more volatile economic conditions in the course of 2007 or if their risk

26

assessment of CCC increased. Carlyle, CIM and the directors of CCC knew that in times of market volatility or instability, its repo counterparties would increase the haircut. 105. Carlyle and CIM were aware of the risk that haircuts would be increased beyond 2%; for example, in a presentation made by Lehman Brothers to Carlyle in November 2006 Lehman Brothers estimated haircuts on financing the acquisition of Freddie Mac and Fannie Mae securities of the type that CCC acquired to be in the range of 3% to 3.25%. Further, the business models of competitor investment funds such as Annaly Capital Management and Prodesse were based upon haircut levels in the range of 2 to 3%. 106. The consequences of an increase in the haircut were significant. By way of example, an increase in the haircut from 2% to 3% on an investment portfolio of $20 billion would require CCC to find available liquidity of $200 million urgently to pay to its repo counterparties. By contrast, a 20% Liquidity Cushion on capital of $900 million would only provide liquidity of $180 million. 107. Therefore, it was necessary for Carlyle, CIM and the directors of CCC to ensure that CCCs Business Model took account of the significant risk that CCCs repo counterparties would increase their haircuts beyond 2% in financing CCCs investments. The failure of CIM, Carlyle and the Board of Directors to take any, or any adequate, account of this risk seriously compromised CCCs ability to maintain its Liquidity Cushion, as set out at paragraphs 119 to 134 below. Margin Calls 108. CCC borrowed under repos based on the estimated fair value of its pledged RMBS. As such, CCCs ongoing ability to borrow under its repo facilities could be limited and its repo counterparties could initiate margin calls in the event that market conditions changed or the value of its pledged RMBS declined. The effect of a margin call was to require CCC to provide the repo counterparty with sufficient cash or securities to ensure that the repo counterparty held collateral the value of which would be sufficient to give the counterparty confidence that it could recover its loan in the event that CCC defaulted under the repo agreement. 109. Therefore, it was necessary for CCCs Business Model to account of the risk that CCCs repo counterparties would make margin calls. The primary measure to address this risk was through the Liquidity Cushion, as set out at paragraphs 119 to 134 below.

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Events of Default 110. The events of default set out in CCCs repo agreements included CCCs failure to meet a margin call, becoming insolvent or otherwise communicating to its repo counterparty its inability to, or its intention not to, perform any of its obligations under the repo agreement. 111. If an event of default occurred, CCCs repo counterparties were entitled, without further notice, to sell immediately any or all of the RMBS held as collateral or to give CCC credit for its RMBS held as collateral in an amount equal to the price obtained from a generally recognized source or the most recent closing bid quotation from such a source. 112. Certain of the agreements between CCC and its repo counterparties included provisions which provided that an event of default would occur where CCCs net asset value declined by a certain percentage, or a certain dollar amount, within a set period of time. Extensive Utilization of Leverage 113. Leverage is a commonly used term referring to the use of debt to acquire assets. The extent of leverage undertaken by an entity is frequently referred to in terms of its debt to equity ratio. For example, at March 31, 2007, CCCs debt ($16.53 billion) to equity ($626.1 million) ratio was 26.6, and therefore its leverage would be expressed as being 26.6 times. 114. Under CCCs Business Model, Carlyle and CIM were to determine the actual amount of leverage employed by CCC, which would depend on a variety of factors, including type and maturity of assets, cost of financing, credit profile of the underlying assets and general economic and market conditions. 115. At all times CCCs actual leverage significantly exceeded the targeted leverage of 8 to 12 times employed by its competitors such as Annaly Capital Management, KKR Financial Corp, MFA Mortgage Investments and Prodesse. CCCs leverage was approximately 30 times by June 2007 and remained at approximately 30 to 32 times through to the end of 2007. 116. The financing of CCCs investments in RMBS through repos utilizing extensive levels of leverage exposed CCC to various risks, including the following: 116.1 Market price risk. A decline in the market values of CCCs investments could occur for a number of reasons such as changes in prevailing market and interest rates, increases in mortgage defaults, increases in voluntary prepayments on underlying residential mortgage loans, and widening of credit spreads. A decline in market value of CCCs investments in RMBS would have adverse consequences as CCC had borrowed from its repo counterparties based on the market value of the RMBS. A decrease in the market value of the RMBS could 28

result in the repo counterparty requiring CCC to post additional collateral or otherwise sell assets at a time when it was not in CCCs best interests to do so. 116.2 Interest rate risk. Increases in interest rates could negatively affect the market value of CCCs investments in capped floating RMBS issued by Fannie Mae and Freddie Mac, which could result in margin calls and reduced earnings or losses. 116.3 Liquidity risk. Some of CCCs investments could become illiquid and CCC would not be readily able to vary its portfolio in response to changes in economic and other conditions. If CCC was required to liquidate all or a portion of its portfolio quickly, it could realize significantly less than the value of those assets marked to market in an orderly market without pressure to sell at fire sale prices to raise cash. 116.4 Financing risk. The expiration and termination of CCCs available repo financing could rapidly result in adverse effects to its access to liquidity and its ability to maintain its leveraged positions. There was no guarantee that repo financing would continue to be available to CCC, or if available, there was no guarantee that repo financing would be available on terms and conditions acceptable to CCC. 116.5 Asset concentration risk. It was necessary to avoid concentration of investment in any one asset type. The greater the relative risk associated with a particular asset, the more important it was that the concentration was lower. 117. The use by CCC of extensive levels of leverage magnified the risks identified above. In particular: 117.1 any event which adversely affected the value of CCCs investments would be magnified to the extent leverage was employed; 117.2 increased leverage increased the risk that CCC would not be able to meet its debt service obligations, and consequently the risk that CCC would lose some or all of its assets to foreclosure or sale; and 117.3 leverage increased risk as it magnified the effect of market price volatility on capital. Any failure by CCC to fulfil a collateral requirement (or, margin call) could result in a disposition of its assets at times and prices which could be disadvantageous and could result in material losses. 118. Implementing appropriate risk management measures to mitigate the risks identified above was therefore of the utmost importance to CCCs continued viability.

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Mitigation of the Risks Arising from Leverage Minimum Liquidity Cushion Requirement 119. A critical feature of CCCs Business Model was the requirement for CCC to maintain a minimum Liquidity Cushion in order to mitigate the serious risks arising from the extensive and increased leverage utilized by CCC. At the Board meeting held on October 4, 2006, Stomber explained that CCCs targeted Liquidity Cushion was 24% of capital. Stomber further described CCCs use of leverage and, in that context, explained that CCC was operating at that time with a 38% Liquidity Cushion which was on the conservative end of the spectrum. 120. The maintenance of an unencumbered minimum Liquidity Cushion was fundamental to the management of a leveraged investment portfolio such as that of CCC. The purpose of the minimum Liquidity Cushion was to protect CCCs capital by ensuring that cash, cash equivalents and unencumbered assets would be readily available to meet the requirements imposed by CCCs repo counterparties and other financiers, including margin calls on its financed securities resulting from decreases in RMBS market value and increases in haircuts. Given the high level of leverage employed by CCC, prudent and conservative liquidity management was crucial to the viability of its business. 121. CCCs Investment Guidelines required a Liquidity Cushion equal to no less than 20% of its Adjusted Capital. The assets that could be included within the Liquidity Cushion and the calculation of Adjusted Capital were defined in the Investment Guidelines and were progressively amended by CIM, Carlyle and the Board of Directors over the course of 2007, as explained in paragraphs 127 to 134 below. 122. CCCs minimum Liquidity Cushion requirement was to be implemented, maintained and monitored by Carlyle and CIM, and reviewed by the directors of CCC. 123. The minimum level of CCCs Liquidity Cushion of 20% of its Adjusted Capital was determined by Carlyle and CIM and was said to have been calculated based on statistical testing carried out on CCCs expected portfolio. 124. To address the risk of increased haircuts and margin calls occurring at the same time, and particularly given the more challenging economic conditions anticipated for 2007, Carlyle, CIM and the directors of CCC were required to establish a minimum Liquidity Cushion requirement far greater than 20%. 125. Instead the Defendants moved in the opposite direction between April 2007 and February 2008. 125.1 In April 2007, Stomber sought on a one-time basis and obtained approval from the directors of CCC to use the Liquidity Cushion to buy attractively priced RMBS prior to the IPO, which entailed a reduction in the minimum Liquidation Cushion requirement to 15%.

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125.2

In the period June through to August 2007, at a time when CCCs financial viability was initially at risk, CIM, Carlyle and the directors of CCC did not increase or even maintain CCCs minimum 20% Liquidity Cushion. This was despite the fact that it became clear that the minimum 20% Liquidity Cushion was not sufficient to meet margin calls attributable to the changes in the fair value of CCCs securities subject to repos as well as meeting increased haircuts from certain of CCCs repo counterparties.

125.3

In fact, as proposed by Carlyle and CIM in June 2007, the directors of CCC, including Conway, approved the halving of CCCs minimum Liquidity Cushion to 10%.

125.4

In July 2007, Carlyle, CIM, and the directors of CCC, including Conway, failed to utilize the surplus funds obtained from CCCs IPO in order to maintain and increase CCCs Liquidity Cushion but in fact used those funds to buy more RMBS. This was despite the fact that CCC had unrealized losses on its RMBS portfolio of approximately $63 million (to June 30, 2007) and that market conditions had clearly become much more volatile.

125.5

By August 2007, CCC had little or no Liquidity Cushion available to it and drastically needed to reduce leverage and restructure its Business Model.

125.6

By late August 2007, Carlyle and CIM acknowledged the flaws in CCCs Business Model and formulated a revised business model with a minimum Liquidity Cushion of 40% and substantially reduced leverage (from 37 times to 25 times). However, these steps were not taken. Instead, the directors of CCC, Carlyle and CIM continued to operate CCC well under the minimum 20% Liquidity Cushion and without a material reduction in leverage.

125.7

In October 2007, the Board of CCC, adopting a proposal by Carlyle and CIM, resolved to suspend the minimum Liquidity Cushion requirement of CCCs Investment Guidelines until December 31, 2007.

125.8

At the meeting of the Board of CCC on November 13, 2007, as proposed by Carlyle and CIM, the directors of CCC resolved to suspend the requirement that CCC maintain a minimum Liquidity Cushion until March 31, 2008.

125.9

At the meeting of the Board of CCC on February 27, 2008, as proposed by Carlyle and CIM, the directors of CCC resolved to suspend CCCs minimum 20% Liquidity Cushion requirement until September 30, 2008.

126. As is evident from the above, the approach of Carlyle, CIM and the directors of CCC to CCC falling under the minimum Liquidity Cushion requirement was to suspend the requirement, which they recognized as 31

critical, rather than urgently addressing and changing the fundamental aspects of CCCs Business Model which led to CCCs inability to meet the requirement. Definitions of Liquidity Cushion and Adjusted Capital 127. The assets that could be included within the Liquidity Cushion and the calculation of Adjusted Capital were defined in the Investment Guidelines and were progressively amended by CIM, Carlyle and the Board of Directors over the course of 2007. The Liquidity Cushion was initially defined as unrestricted cash and cash equivalents, plus unencumbered securities 128. The Investment Guidelines approved by the Board on October 4, 2006 required Minimum Liquidity of 20% of Capital as a limit on total portfolio leverage. 129. In the period to April 2007, CCCs Liquidity Cushion and the related measure of Adjusted Capital were defined in CCCs Investment Guidelines and were subject to ongoing amendment. The amendments: 129.1 129.2 129.3 expanded the categories of assets which could be included in the definition of Liquidity Cushion; defined the minimum Liquidity Cushion requirement as 20% of Adjusted Capital; and defined Adjusted Capital in terms of total equity determined in accordance with IFRS, less assets whose financing was not subject to margin call requirements. 130. The use of Adjusted Capital in the determination of the level of the minimum Liquidity Cushion, by itself, was insufficient as a risk management tool. In circumstances where there was a decline in the fair value of CCCs investments, the minimum Liquidity Cushion did not always protect CCCs assets and capital. This can be illustrated by way of the following example: 130.1 if CCC had raised $1 billion in capital and used repos to purchase $20 billion of RMBS, the 20% minimum Liquidity Cushion requirement would result in a total Liquidity Cushion of at least $200 million; and 130.2 if there was then a decline in the fair value of CCCs total assets of $300 million (from $20 billion to $19.7 billion), the resulting Adjusted Capital would be $700 million (that is, $1 billion less $300 million). On that basis, the 20% minimum Liquidity Cushion requirement would allow a significantly reduced total Liquidity Cushion of at least $140 million (from $200 million as above). In this scenario, the Liquidity Cushion requirement has declined by 30%, despite the value of the total assets falling by only 1.5%, such that CCC had a much reduced buffer with which to mitigate the risks identified in paragraph 116 above.

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131. As such, in circumstances where there was a significant decline in the fair value of CCCs investments (such as occurred from June 30, 2007 to December 31, 2007 when the fair value of CCCs portfolio reported in its financial statements declined by over $200 million), the necessary and appropriate response by CIM, Carlyle and the Board of CCC would have been to increase the minimum Liquidity Cushion requirement to materially in excess of 20%, such that sufficient liquidity was maintained. In the example provided above, an increased minimum Liquidity Cushion requirement of 28% would have been necessary to maintain CCCs total liquid funds at $200 million. 132. Subsequent to the amendments referred to in paragraph 129 above, as described further at paragraph 355 below, at a meeting held on November 13, 2007, CCCs Board approved an amendment to the definition of Liquidity Cushion in CCCs Investment Guidelines to include any or all borrowings available to CCC that were (a) not secured by CCC assets; (b) subordinate to all other borrowings of CCC; (c) not due and payable within the next 30 days; and (d) available pursuant to an agreement between CCC and Carlyle or any of its affiliates. 133. This amendment to include undrawn debt in the definition of Liquidity Cushion allowed CCC to report a higher Liquidity Cushion than would have been available under previous definitions. For example, the annual report of CCC for the year ended December 31, 2007 reported a Liquidity Cushion of 10% as at December 31, 2007, whereas under previous definitions the Liquidity Cushion would have been reported as approximately 4%. 134. Further, it was inappropriate to include undrawn debt in the definition of Liquidity Cushion as, if drawn, the amount would have been repayable to Carlyle. The inclusion of additional debt as a component of the Liquidity Cushion calculation was inconsistent with the nature and purpose of the Liquidity Cushion. Minimum Borrowing Capacity 135. A further critical feature of CCCs Business Model was the requirement to maintain a Minimum Borrowing Capacity in order to mitigate the risk of the expiration and termination of the financing available to CCC as set out in paragraph 116.4 above. The maintenance of a Minimum Borrowing Capacity requirement was even more vital to CCC in the market environment of 2007 which contained (a) falling market prices for RMBS, (b) increased price volatility of RMBS which led to increased haircuts and (c) an economic downturn which increased the likelihood of repo counterparties terminating or reducing lending. 136. Therefore, it was necessary for Carlyle, CIM and the directors of CCC to ensure that CCC had a sufficient number of counterparties and sufficient repo line availability relative to its portfolio size to provide sufficient repo financing to it on terms acceptable to CCC.

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137. The Minimum Borrowing Capacity requirement of the Investment Guidelines was also particularly critical as a consequence of the short term and discretionary nature of the funding of CCCs investment in RMBS through repos. As set out in paragraph 96 above, the maturity of the repos entered into by CCC was very short (for example, as at March 31, 2007, the weighted average maturity remaining on CCCs total repos was 22 days), and at maturity no repo counterparty was required to roll over a repo transaction with CCC. 138. The Investment Guidelines approved by the Board on October 4, 2006 required CCC to maintain minimum borrowing and liquidity capacity of 150% (with a target of 200%) of total investment assets. 139. On February 2, 2007, the Investment Guidelines for CCC were amended by Carlyle and CIM such that the minimum borrowing and liquidity capacity was reduced to 125% (with a target of 150%) of total investment assets. The amendment was approved by CCCs Board at a meeting held on February 15, 2007. Stomber explained that the amendment was prudent and advisable to give management flexibility to respond to changing market conditions. In fact, the amendment was not prudent in any sense as it was a significant reduction of a crucial risk management tool. Further, the challenging economic conditions of 2007 dictated at least the maintenance of the previous requirement and not a reduction. 140. Notwithstanding its critical nature, Carlyle, CIM and the directors of CCC did not monitor compliance with the Minimum Borrowing Capacity requirement established by the Investment Guidelines and were never once provided with a calculation of this key risk metric. In August 2007, CCCs available repo financing decreased to such an extent that CCC was in breach of the Minimum Borrowing Capacity requirement and significantly exposed CCC to the risks identified in paragraphs 135 to 137 above. 141. As was the case for CCCs minimum 20% Liquidity Cushion requirement, in October 2007 and at the Board meetings held on November 13, 2007 and February 27, 2008, the Board of CCC, as proposed by Carlyle and CIM, resolved to progressively suspend the Minimum Borrowing Capacity requirement of CCCs Investment Guidelines until December 31, 2007, March 31, 2008 and September 30, 2008 respectively, without any consideration of the protection from risk that the Minimum Borrowing Capacity requirement entailed. This was done instead of addressing and changing the fundamental aspects of CCCs Business Model which led to CCCs inability to meet this requirement. Requirement Limiting RMBS to 85% of Total Capital 142. The requirement that limited the capital allocated to investments in RMBS to a maximum of 85% of CCCs total capital was a further key risk management measure under CCCs Business Model.

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143. On a date between August 17, 2007 and September 17, 2007, CCCs capital allocated to RMBS exceeded 85% as a consequence of sales of CCCs assets other than RMBS assets. CCCs capital allocated to RMBS exceeded 85% at all times thereafter. 144. Carlyle, CIM and the directors of CCC took no steps to (a) reduce RMBS assets; and (b) acquire assets with lower risk, such as AAA rated G7 government securities with a maturity of less than three years, in order to restore CCCs capital allocated to RMBS to at most 85%. CCCs capital allocated to RMBS as calculated by CIM increased to 94% by September 30, 2007 and continued to increase to 98% by December 31, 2007 and to 99.8% by January 15, 2007. 145. As was the case for CCCs minimum 20% Liquidity Cushion requirement, in October 2007 and at the Board meetings held on November 13, 2007 and February 27, 2008, the Board of CCC, as proposed by Carlyle and CIM, resolved to progressively suspend the requirement that CCCs capital could be allocated to RMBS to a maximum of 85% until December 31, 2007, March 31, 2008 and September 30, 2008 respectively, without any consideration of the protection from risk that the requirement entailed. This was done instead of addressing CCCs inability to meet this requirement. RMBS Average Price Volatility 146. RMBS Average Price Volatility (APV) was measured by Carlyle and CIM and indicated the increasing risk in each RMBS security owned by CCC. 147. Between November 2006 and June 11, 2007, the risk as measured by APV for each RMBS security increased 58% and by September 17, 2007 the risk was an astounding 140% higher than in November 2006. This change demonstrated a fundamental shift in the risk characteristics of the RMBS owned by CCC and dictated that urgent and decisive action was required to effectively manage the increased risk, including the sale of RMBS. The APV for CCC is set out as follows: RMBS Average Price Volatility (APV) 0.50% 0.79% 0.79% 1.07% 1.20% 1.35% 1.29% 1.30% 1.30% 1.90% % Change Since November 2006 58% 58% 114% 140% 170% 158% 160% 160% 280%

November 30, 2006 June 11, 2007 July 13, 2007 August 3, 2007 September 17, 2007 October 15, 2007 November 27, 2007 December 31, 2007 January 29, 2008 February 27, 2008

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E.2

Preparation of CCCs Financial Statements Under IFRS

148. CCCs financial statements and quarterly reports were prepared on the basis of IFRS and the requirements of the Companies Law. IFRS issued by the International Accounting Standards Board varied in certain significant respects from US GAAP. In particular, significant differences arose between CCCs net income (loss) determined according to IFRS and its net income (loss) determined according to US GAAP on the basis of the different accounting treatment applied to investments. The different accounting treatments were as follows: 148.1 Under IFRS, CCC primarily classified its investments (including RMBS) as available for sale and gains and losses arising from changes in the fair value of those investments were recognised directly in equity as fair value reserve (deficit), unless the investments were sold or impaired. That is, the gains and losses from changes in fair value were generally not recorded as part of CCCs net income or loss. 148.2 Under US GAAP, gains and losses arising from changes in the fair value of available for sale investments were recorded as part of CCCs net income or loss on the basis of accounting rules applicable to investment companies. 149. CIMs management and incentive fees were calculated on the basis of CCCs net income (loss) determined in accordance with IFRS. In circumstances where there was a decline in the fair value of CCCs available for sale investments, CIM derived significantly higher fees than would have been the case if the fees were calculated on the basis of CCCs net income (loss) determined in accordance with US GAAP. 150. CCC reported net income of $16,790,000 for the year ended December 31, 2007. However, as at December 31, 2007, CCC also reported a change in the fair value reserve deficit of $285,623,000 as part of its equity under IFRS and share-based compensation expense of $1,853,000. Under US GAAP, CCC would have reported a loss of $266,987,000. E.3 Developing Market Instability

151. Carlyle and CIM expressly anticipated that CCC would face more challenging economic conditions in the course of 2007 and were required to apply their knowledge and expertise to their investment management of CCC accordingly, but did not do so. September 2006 - Carlyle Investor Conference 152. At the Carlyle Investor Conference held in Washington D.C. in September 2006, Rubenstein presented an overview of Carlyles performance, operations and plans to investors. Rubenstein identified CCC among 36

Carlyles Major New Initiatives and Stomber, Trozzo and Greenwood among the Major New Personnel recruited by Carlyle. Rubenstein told Carlyles investors that the future economic outlook was less attractive and that economic downturns could be expected, but emphasized that Carlyle had a proven track record and capability to adapt to the changing market. 153. At the same conference, DAniello gave a presentation entitled Firm and Funds Overview. DAniello highlighted Carlyles prudent debt policy whereby acquisitions were not over-leveraged and borrowings were customised to particular assets in order to accommodate volatility and event-based cash flow characteristics. This was referred to as a low beta investing style and was identified as one of Carlyles primary visions. 154. Conway gave a presentation on Carlyles investment performance during which Conway stated that overall Carlyles portfolio investments are sound and returns to investors attractive, PARTICULARLY GIVEN OUR RISK PROFILE. Conway predicted that returns were likely to be lower in light of increased competition, U.S. economic cycle, global credit/liquidity. October 4, 2006 - First Board Meeting 155. CCCs first board meeting was held on October 4, 2006 in Washington, D.C. The meeting was attended by all of CCCs Directors, as well as by Harris, Ferguson, Ziobro, Cosiol, Mayerhofer and Buser from Carlyle, Greenwood, Trozzo and Rella from CIM, Reville from PwC, Gary Mauger from Mourant and Kimberly Davis-Riffe from Protiviti. During the meeting Stomber and Zupon, who had agreed to act as non-voting advisory directors, confirmed that notwithstanding their appointment in this capacity, they would remain subject to all duties, obligations and responsibilities placed upon directors of a company under Guernsey law. 156. Stomber informed the Board that Carlyle and CIM had already caused CCC to commit to purchase $2 billion in securities. Stomber then described CCCs Business Model and the use of leverage. Stomber explained that [CCC] is operating with a 38% liquidity cushion which was on the conservative end of the spectrum.. Hance and Stomber informed the Board that the most frequent questions received to-date in their fundraising activities related to the use of leverage. 157. The Board approved the appointment of PwC as the independent public accountant of CCC. PwC and in particular its partner John Reville, of PwC New York, had been retained by Carlyle for CCC since at least July 2006. PwC also provided various audit and non-audit related services to Carlyle and affiliates of Carlyle.

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November 2006 - Carlyle Investor Conference 158. At the Carlyle Investor Conference held in Paris from November 19 to 21, 2006, Rubenstein presented an overview of Carlyles performance, operations and plans. Rubenstein once again warned of a pending economic downturn but emphasised that Carlyle had a proven track record, a capability to adapt to the changing market and applied a fiduciary mindset. 159. DAniello gave a presentation at the same conference in which he indicated that Carlyle would adapt investment strategies to the challenging market, invest in a disciplined, price-sensitive manner in accordance with Carlyles strengths, utilize prudent capital structures and seek to de-risk transactions through rapid debt pay-down. Conway made a presentation on Carlyles investment performance to the same effect as his presentation at the September 2006 Carlyle Investor Conference (see paragraph 154 above). December 20, 2006 Board Meeting 160. CCCs Board meeting on December 20, 2006 was held via telephone. All Board members attended, together with Cosiol from Carlyle, Greenwood, Trozzo and Rella from CIM, Thomas Mayerhofer and Curt Buser from Carlyle, Reville from PwC and Kimberley Davis-Riffe from Protiviti. 161. The Board received an update from Carlyle and CIM concerning CCCs year-to-date financial performance and the investments that had been made on CCCs behalf to that point. 162. In discussing the financial statements, Stomber informed the Board that management had not, and did not intend, to utilize the maximum amount of leverage available under the leverage [sic] cushion. 163. The Board also discussed the planned IPO of CCC. Hance and Stomber informed the Board that Carlyle and CIM wanted to accelerate the IPO of CCC in part due to pressure from CCCs competitors. 164. The Board approved the retention of the Guernsey division of PwC as the Guernsey public accountant of CCC and received confirmation and assurance from Reville that PwC was independent. Reville, together with Allardice, described the processes and procedures that PwC would undertake during the year-end audit of CCCs financial statements, including the valuation and testing of investments and transactions and the reconciliation between IFRS and US GAAP. 165. As contemplated in CCCs Business Model, by December 31, 2006, the first round of external investment in CCC was completed by way of a private placement of 13,154,000 shares at an issue price of $20 per Class B share, raising $263,080,000.

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Conway Warns of the Need for Caution 166. In a January 31, 2007 memorandum entitled Conways Views, Conway counselled Carlyles investment professionals to be more cautious than ever. Conway concluded his memorandum under the heading SO WHAT DO I WANT YOU TO DO? as follows: First of all, I have asked myself what I would do if the excess liquidity ended tomorrow. Certainly I would want as much flexibility as possible are our covenants loose enough? . Secondly, the global liquidity has led to a significant reduction in risk premia most investors in most asset classes are not being paid for the risk being taken. OUR STRATEGY SHOULD EVOLVE TO TAKE LOWER RISK DEALS AND EARN LOWER RETURNS, RATHER THAN HIGHER RISK DEALS AT ONLY SMALL INCREMENTALLY HIGHER RETURNS. .Last year, I asked you to be humble, ethical and optimistic. This year I am asking you to be careful as well. Annual Report for the Period Ended December 31, 2006 167. CCCs annual report for the period from the commencement of operations on September 12, 2006 until December 31, 2006 disclosed that CCC had acquired RMBS with a total fair value of $6,905,896,000, representing 94% of CCCs total assets. CCCs Liquidity Cushion was $94,236,000 at December 31, 2006 (36.3% of Adjusted Capital) comprised of cash and cash equivalents of $39,535,000 and unencumbered assets of $54,701,000. 168. CCC had employed extensive leverage in acquiring its RMBS to December 31, 2006. CCC had $6,745,918,000 outstanding as borrowings under repo agreements with six different repo counterparties, with a weighted average remaining maturity of 12 days. The collateral for these borrowings was comprised of securities with a fair value of $6,851,195,000. CCCs leverage as at December 31, 2006 was 25.6 times. 169. The management fee paid to CIM for the period to December 31, 2006 was $635,000. Other fees paid to Carlyle and CIM for the period as reimbursement for overhead expenses relating to office rent, furniture and supplies were $55,000, and personnel salaries were $343,800, totalling $398,800. In addition, CCC reimbursed Carlyle and CIM $3,235,000 for internal use software and other property. February 15, 2007 Board Meeting 170. The Board of CCC met on February 15, 2007 once again by telephone. All Board members attended, together with Cosiol and Buser from Carlyle, Reville and Aaron Bellish from PwC. 171. Among other things, the Board considered amendments to CCCs Investment Guidelines proposed by Carlyle and CCC. Stomber explained the changes, which included (a) the addition of a definition of 39

Liquidity Cushion (see paragraphs 127 to 134 above); and (b) a reduction of the target on repo agreements to 125% (see paragraphs 135 to 141 above). Stomber explained that these changes were advisable to give management flexibility to respond to changing market conditions. The changes to the Investment Guidelines recommended by Carlyle and CIM were approved by the CCC Directors without question. 172. Allardice, Sarles and Loveridge approved Carlyle and CIMs proposal that CCC would reimburse CIM for overhead expenses incurred in connection with the management of CCC in the amount of $900,000 plus an additional $270,000 for office rent, furniture and supplies. February 2007 - Completion of Private Placement 173. CCC issued a further 16,846,000 shares by way of its private placement on February 28, 2007, raising $336,920,000. The total amount raised by CCCs private placements by that time was $600 million. 174. Among the investors who purchased Class B shares in CCCs private placement were the Central Bank of Angola ($100 million), California Public Employees Retirement System ($25 million), Texas Childrens Hospital ($20 million), West Virginia University Foundation, Inc. ($5 million) and West Virginia University Hospitals, Inc ($5 million). Carlyles March 2007 Presentation to the Netherlands Regulator 175. On March 2, 2007, Carlyle gave a presentation to the Netherlands Authority for Financial Markets. The presentation provided an overview of CCCs investment strategy and in particular its focus on acquiring primarily RMBS assets funded through repos. It included a slide headed Carlyle The Investment Manager which noted Carlyles experience in managing other Guernsey-based investment vehicles. 176. The presentation described CCCs senior management and board of directors and their respective positions within Carlyle. It listed Stomber, together with Thomas Mayerhofer (Vice President of Carlyle) and Cosiol (Associate Vice President/Legal Counsel of Carlyle) as the contacts for the Netherlands Authority for Financial Markets. Carlyle informed the regulator that CCC would maintain a Liquidity Cushion of 22% consisting of unrestricted cash and cash equivalents and unencumbered AAA U.S. agency or U.S. government securities. March 5, 2007 Board Meeting 177. CCCs Board met on March 5, 2007 at Carlyles offices in Washington D.C. All Board members, together with Cosiol, Buser, John Harris, Jeffrey Ferguson and Robert Brown from Carlyle, Greenwood, Trozzo and Rella from CIM, and Reville from PwC were in attendance. 40

178. Stomber informed the Board that CIM would likely be entitled to an incentive fee on CCCs portfolio for the quarter ended March 31, 2007 and would be fully profitable for The Carlyle Group. 179. Trozzo and Stomber announced that it was managements goal to create stable returns for investors. Stomber said that [t]he key to achieving this goal is to develop a cash model which allows [CCC] to pay a dividend yield while taking account of volatility in the market and changes in interest rate spreads. 180. Greenwood gave the Board an update on the status of the subprime mortgage market and the related deterioration in the credit market. The Board did not discuss what steps needed to be taken to ensure that CCC was prepared for further deterioration in financial markets. 181. The Board then reviewed the revised Business Model proposed by Carlyle and CIM for CCC, dated February 16, 2007 and the model was presented to the Board by Trozzo. Stomber noted that the projections are based on recent spreads and that management did not attempt to predict market conditions in the future. The Board discussed default rates on the credit products used in CCCs Business Model and the impact of such defaults on CCCs portfolio and its ability to pay dividends. Conway pointed out that even if CCC experienced volatility as a result of defaults on credit products, there would also be a reduction to management and incentive fees that would help buffer the impact to shareholders. 182. The Board reviewed the latest draft of the Offering Memorandum for the IPO prepared by Carlyle and CIM and focussed in particular on the section entitled, Managements Discussion and Analysis (MD&A). Stomber told the Board that the primary goal of the MD&A section was to inform a prospective shareholder that the overall investment strategy of [CCC] was to allocate capital and use leverage in a manner to maximize shareholder value and generate a steady dividend. Stomber explained that therefore the disclosure in the MD&A focused on the liquidity cushion, the diversification of the portfolio and [CCCs] affiliation with Carlyle. The Impact of the Subprime Crisis 183. By early 2007, the rate of mortgage defaults among subprime borrowers was rising rapidly. At the same time, house price growth in the hottest US housing markets such as California and Florida slowed and then began to fall. Property prices in US cities peaked in about August 2006 and had fallen by about 5 per cent from this peak by year-end. 184. Since December 28, 2006, the subprime lenders Ownit Mortgage Solutions, American Freedom Mortgage Inc., Mortgage Lenders Network USA and ResMae Mortgage Corp had filed for bankruptcy protection. On March 12, 2007, New Century Financial, the second largest subprime lender in 2006, stopped making loans and ceased trading amid fears of bankruptcy. 41

185. On March 15, 2007, Stomber sent an email to CCCs investors reassuring them that CCCs portfolio contained no assets that were exposed to subprime and that all of CCCs mortgage portfolio comprised US Government Agency RMBS that were AAA-rated and guaranteed by either Freddie Mac or Fannie Mae. Stombers email omitted any mention of the likely potential impact of the subprime crisis on the economy as a whole and the broader housing market. By mid 2007, the impact of the subprime crisis started to have an effect on the wider economy, resulting in increased volatility and a liquidity crisis that would have a significant impact on the fair value of CCCs securities. The Inaugural ALCO Meeting on March 30, 2007 186. On March 30, 2007, CCCs Asset and Liability Committee (ALCO) met for the first time. ALCO was established by Carlyle and CIM to be responsible for overseeing all areas of asset and liability management for CCC including the day-to-day monitoring of CCCs compliance with its Investment Guidelines and maintenance of the minimum Liquidity Cushion requirement. From its inception and at all times thereafter, ALCO consisted exclusively of Carlyle and CIM officers and/or employees, including Trozzo, Stomber, Greenwood, Dean Melchior and later Buser and Green. 187. By the time of ALCOs first meeting on March 30, 2007 (a little over a month after CCC had raised $600 million through the private placements), CCC had already acquired $17.3 billion of financial assets (including $16.5 billion of RMBS) and had incurred debt of $16.1 billion through repos. Minimum Liquidity Cushion Requirement Reduced to 15% 188. On April 3, 2007, Stomber sent an email to CCCs Directors seeking approval from the full Board to bring the liquidity cushion down to 15 percent on a one time basis to enable CCC to buy attractively priced mortgages prior to our IPO which is expected by the first week in June. Stomber said that although he expected to have access to the necessary funding in two weeks, the market is there now and we need to buy now. Each of Conway, Loveridge and Hance approved this request by email without any question. Hances email stated: John: This makes sense to cushion the ramp issues. It coincides with the current higher gross leverage which is also probably temporary. Jim. Financial Statements for the Quarter Ended March 31, 2007 189. CCCs quarterly report for the period ended March 31, 2007 disclosed that CCC had continued to acquire significant amounts of RMBS. As at March 31, 2007 CCCs RMBS had a total fair value of $16,483,841,000, representing 95% of CCCs total assets. CCCs Liquidity Cushion was $159,445,000 at March 31, 2007 (28% of Adjusted Capital) comprised of cash and cash equivalents of $41,081,000 and unencumbered assets of $118,364,000.

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190. CCC continued to employ extensive leverage in acquiring its RMBS to March 31, 2007. CCC had $16,054,494,000 outstanding as borrowings under repo agreements with ten different repo counterparties, with a weighted average remaining maturity of 22 days. The collateral for these borrowings was comprised of securities with a fair value of $16,365,477,000. CCCs leverage as at March 31, 2007 was 26.6 times. 191. The management and incentive fees paid to CIM for the three months ended March 31, 2007 were $1,686,000 and $1,330,000 respectively. Other fees paid to The Carlyle Group and CIM for the quarter as reimbursement for overhead expenses relating to office rent, furniture, supplies and personnel salaries totalled $536,000. April 26, 2007 Board Meeting 192. CCCs Board met on April 26, 2007, via telephone. All Board members, together with Cosiol from Carlyle, Greenwood, Trozzo and Rella from CIM, and Reville and Bellish from PwC, were in attendance. The principal topic of discussion during the meeting was preparation for the IPO. 193. The Board resolved to adopt the Guidance on Corporate Governance in the Finance Sector in Guernsey published by the Guernsey Financial Services Commission in its entirety and comply with the standards for corporate governance set forth therein. Under the headings, General Responsibilities of the Board of Directors and Risk Management, the Governance Guidance document stated: General Responsibilities of the Board of Directors The Board of Directors (the Board) is responsible for the corporate governance of the organisation. Members of the Board should be proactive in recognising and understanding the risks the organisation faces in achieving its business objectives and should demonstrate effective and prudent management of those risks. The Board should ensure that the organisations operations are conducted reasonably and within the framework of any applicable laws, regulations, rules, guidelines and codes as well as established policies and procedures. Risk Management The Board and management should analyse existing and prospective business, products and services to identify and measure the types and significance of the current and potential risks to be managed and controlled, both individually and in the aggregate. The Board and management should develop and implement appropriate and prudent risk management policies and procedures and monitor their effectiveness through timely, accurate and complete information systems. 194. Finally, payment to CIM of the management fee in the amount of $1,685,843 for the period since December 31, 2006 through March 31, 2007 and the accrual of the incentive fee in the amount of $1,330,199 were approved.

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195. In addition, the Board resolved that, as an equity incentive, a free grant of restricted stock in the amount of 6% of the total issued and outstanding shares of CCC would be made and allocated upon the IPO as follows: (a) $50,000 to each of Allardice, Sarles and Loveridge; and (b) the remaining shares to CIM, which, at the issue price of $19 per share, amounted to a free grant with a market value of $54,479,593 (see paragraph 232 below). IPO Bridge Loan 196. By May 2007 Carlyle and CIM had used the majority of the capital available to CCC for the purchase of RMBS and sought to obtain further capital to increase the size of CCCs investment portfolio and with it, CCCs leverage. Carlyle and CIM did not want to wait to receive the proceeds of the planned IPO in order to purchase more RMBS. 197. On May 10, 2007, CCC entered into a term loan agreement with CitiGroup Global Markets Inc., as sole lead arranger and syndication agent which allowed CCC to borrow up to $191 million (clause 2.01). The loan was obtained in contemplation of the IPO and was required to be repaid from the proceeds of the IPO (clause 3.01) (Bridge Loan). 198. By May 30, 2007, Carlyle and CIM had caused CCC to borrow the entire amount available under the Bridge Loan and used the proceeds to finance the acquisition of further RMBS in conjunction with further repo financing. 199. The Bridge Loan included terms which required CCC, while the loan remained outstanding, to maintain a Liquidity Cushion to be no less than 20% of the Value of the Investment Assets held by CCC or its subsidiaries (clause 8.10 (b)) and to comply at all times...with its Investment Guidelines (clause 8.15). 200. In other words, Carlyle and CIM caused CCC to borrow money so that CCC could purchase even more RMBS funded through even more repos. They did so at a time when Carlyle and CIM did not know and could not have known what funds would be raised through the IPO and how those funds should properly be deployed once the IPO proceeded. The decision to enter into the Bridge Loan ultimately meant that over half of the funds raised through CCCs subsequent IPO were not available to meet CCCs urgent liquidity needs during the second half of 2007. E.4 Market Volatility During June 2007

Risks to CCC Begin to Emerge 201. In about mid 2007, Carlyle published its annual report for 2006. Conway, DAniello and Rubenstein in their letter to investors warned of risk, urged caution and stated: 44

As we pursue investments in 2007, we remain cautious about the global economy and our ability to continue to produce top-quartile returns. This caution stems from a view that the era of extraordinary private equity returns, in developed and emerging markets, may have reached a peak. These types of returns, for us and others in the private equity world, will be more difficult to achieve without undue and for us, inappropriate risk taking. To be sure, we have held a similar view for at least the last four years, and our caution probably prevented us from pursuing or completing some transactions that would have been rewarding for our investors. But we have a relatively low tolerance for risk, for private equity investors, and that low tolerance is reflected in our low loss ratio. We have lost less than 4% of capital invested over the last 20 years a percentage that we believe is unrivalled in our industry over such a period. In reviewing and consummating investments in 2007, we will strive to make investments that achieve top-quartile returns without top-quartile risks. While concern about risk has not been overly rewarded in the private equity industry during the last several years, we believe it is the most prudent way to invest in this industry and in these times. In other words, if in 2007 economies begin to grow more slowly, stock markets decline a bit, and debt becomes more expensive and harder to secure, we will be ready. Our investors should benefit from both our readiness and caution in the market. (emphasis added) 202. Conditions in global credit markets deteriorated significantly. The increase in subprime mortgage defaults, first noted in February 2007, began to have an impact in the market for RMBS. An era of relaxed lending standards combined with falling house prices in the United States resulted in widespread defaults on mortgages, which in turn eroded the value of certain types of RMBS. As financial institutions capital eroded, lending standards and margins tightened as lenders and investors sought to preserve their own liquidity by retaining funds. During May 2007, CCCs portfolio suffered an unrealized loss of $41.6 million or 7% of CCCs net asset value. 203. Carlyle and CIM were plainly aware of the risks facing CCC by June 2007. On June 7, 2007 Stomber sent a lengthy email from his Blackberry to the Board of CCC, informing the Board of substantial losses that CCC had sustained as a result of recent market events. 204. Stomber told the Board that as a consequence of a change in the 5 years swap rate, a $25 million unrealized gain had become an $8 million unrealized loss on CCCs mortgage-backed securities and that CCCs Net Asset Value had declined as a result. Stomber stated that [t]oday was a wild day in the market where rates went up materially and that CCC could sustain further significant losses of up to $50 million. Stomber warned the Board that the level of CCCs unrealized losses raised disclosure issues for the IPO. Most importantly, Stomber was aware and informed the Board that those events had negatively impacted CCCs Liquidity Cushion: Bad news is the price change has eroded the liquidity cushion as we make margin calls based on spread changes. The Liq Cushion stands at 23 percent but could be called down close to 20 percent that is why we have it.

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205. While Stomber maintained that CCCs Business Model was defensive and robust because of the 20% minimum Liquidity Cushion requirement, he warned the Board that the Liquidity Cushion could drop below 20 percent. 206. Stomber told the Board that he was in the process of arranging with the founders of Carlyle for CCC to borrow $100 million from Carlyle to buy product at these favourable spreads. Stomber acknowledged the possibility that CCC could be defensive and use part of those funds to bolster the liquidity cushion, but was clearly focussed upon acquiring further assets to generate earnings for future dividends. 207. Dividends and that CCC should outperform its competitors were clearly Stombers primary concerns. He told the Board that if we do not invest all the cash (to be obtained from Carlyle), CCCs dividend yield could be 10 per cent affected. But, Stomber said, compared to what must be happening to our fixed rate competition I fully expect that we will still have best in class performance. 208. None of CCCs Directors, including those representatives of Carlyle and CIM on the Board, questioned that course of action, nor did they suggest that CCC should reduce leverage and increase its Liquidity Cushion in order to safeguard its assets. 209. In fact, despite the obvious importance of the matters raised in Stombers email and the challenges faced by CCC at that time, the Board did not meet to consider any of those issues and did not consider the potential ramifications of the decline in CCCs Liquidity Cushion foreshadowed by Stomber. The Board did not meet until its meeting in Guernsey on July 26, 2007. 210. Six days later, on June 13, 2007, Stomber sent a further email to CCCs Directors, entitled Status of CCC. The email was copied to Trozzo, Greenwood and Green. Stomber informed CCCs Directors that [l]ast night we made the decision to postpone the IPO of CCC as a result of volatile market conditions, an uncertain MTM [marked-to-market] of our balance sheet and comps in the equity market trading down 1025%. Stomber said that as of June 11, 2007, CCCs IFRS net income was on target for a 14.5% 2nd quarter but he also noted that CCCs Fair Value Reserve was down $63.9MM from inception and $76.2MM for the year, meaning that CCC had suffered unrealized losses in those amounts under IFRS. Stomber then outlined Our next steps for the immediate future. He stated: We are having a major liquidity event so I invoked emergency powers on the balance sheet. The liquidity cushion is currently at $148MM, which is technically above 20% of our current MTM equity position. But please take no comfort in that, we could be margin called for up to another $70MM and therefore bring the cushion down to about 11%. Therefore, we need independent Board Member approval to go under 20% - that is the purpose of the liquidity cushion to be there so we don [sic] not have to sell securities at depressed prices during a margin call. Therefore, I ask you for your formal approval.

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211. Stomber then referred to possible asset sales to free up capital and then referred to the $200MM bank loan that was to be repaid with proceeds from the IPO and said that there would be internal discussion as to how to manage it. Stomber identified the possibility of asking the banks to convert at least 100MM to equity to mirror the original deal they had once committed to. 212. On June 14, 2007, Stomber sent a further email to CCCs Directors, copied to John Harris and Cosiol, announcing that, notwithstanding the decision the previous day to postpone the IPO, that, assuming all went well the following day, they intended to file on Monday with the AFM and proceed with the IPO. Stomber sought Conways specific consent to proceed with the IPO. Conway confirmed that he was ok with a filing monday and a go if things remain as they are. Stombers email also stated that CCC had a repo roll with certain of its lenders that day, that CCC had received no margin calls and that [o]ur projected dividend yield of mid 10 percent for Q3 and Q4 remains intact. 213. Also on June 14, 2007, the Board resolved to reduce CCCs minimum Liquidity Cushion requirement from 20% to no less than 10% of Adjusted Capital. 214. That resolution was not the result of any meeting or deliberation by the Board of CCC. Rather, Cosiol (CCC secretary and Associate Vice President and Counsel of Carlyle) sent an e-mail to all of the directors of CCC sent on June 14, 2007, stating: Also, due to recent volatility in the market, the Independent Directors are being asked to approve a reduction in the size of the liquidity cushion to provide management with more flexibility to address changing market conditions. Also, the Independent Directors are being asked to approve a reduction in the liquidity cushion to no less than 10% for the next three months as markets stabilize. If you have specific questions about the need for this temporary change, please contact John Stomber. 215. Loveridge approved the change on the same day and Allardice and Sarles did so on June 18, 2007, without any question. 216. Conway was also provided with the resolution. Conway provided his approval by e-mail while in Japan on June 18, 2007, stating [t]o the extent that my approval is needed pls consider this email as my approval. Conway added: I am in Tokyo and lost in translation. 217. Consequently, at the request of Carlyle and CIM, the Board of CCC resolved to halve CCCs 20% minimum Liquidity Cushion requirement without any deliberation or discussion as to whether it was in CCCs best interests to do so. Most importantly, the Board did not consider the potential consequences of CCC operating with a Liquidity Cushion of 10%, in terms of CCCs ability to meet the increased

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requirements of its repo counterparties which were likely given the prevailing unprecedented market conditions. 218. The events taking place in the market during mid June 2007 were at least comparable to and potentially worse than those of 1998 against which CCCs Business Model, in particular the minimum Liquidity Cushion requirement, had been tested. During June 2007, CCCs portfolio suffered an unrealized loss of $52 million or 9.4% of CCCs net asset value. When combined with the unrealized loss in May 2007 of 7% of net asset value (see paragraph 202 above), CCC suffered a 16% loss to net asset value, equivalent to the 16% worst case scenario loss modelled by Carlyle and CIM when they established the minimum 20% Liquidity Cushion Investment Guideline. This highlighted the need to not only preserve minimum liquidity, but to increase and maintain a materially higher level of liquidity than the minimum of 20%. Crisis Spreads Beyond Subprime 219. During his presentation at the Carlyle Investor Conference in Tokyo on June 18, 2007, Carlyle co-founder, Rubenstein foreshadowed a market downturn which would lead to some losses, lower returns, less liquidity and tougher lending, but stated that worst case scenarios were constant points of review for Carlyle. 220. At the same Conference, Conway told investors that going forward returns were likely to be lower due to increased competition, US economic cycle, global credit/liquidity. 221. Conditions in financial markets at that time required many investment banks, hedge funds and lending institutions to take significant steps to avoid substantial losses. For example, on June 21, 2007, Bear Stearns cancelled the IPO of Everquest Financial. The following day, Bear Stearns pledged $3.2 billion of the firms capital to bail out two of its hedge funds which were in difficulties because of failures to meet margin calls under repo facilities. It was the biggest bailout since a dozen lenders provided $3.6 billion to save LTCM in 1998. That in turn prompted creditors providing repo finance to the funds, including Merrill Lynch, to seize and liquidate the assets of the funds. The Underwriters Recommend Delaying the IPO 222. At this time, CCCs underwriter banks advised Carlyle that because of ongoing market volatility, CCCs IPO should be delayed. Various internal Carlyle and CIM communications indicate that Carlyle and CIM remained uncertain throughout June 2007 whether the IPO should or would proceed in light of instability in the fixed income and equity markets and their impact on CCC. Those documents included: 222.1 An undated market script which stated:

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Carlyle, at the suggestion of the underwriters, has decided to delay the initial public offering of Carlyle Capital Corp. The decision to delay the IPO was driven by volatility in both the fixed income and equity markets coupled with the significant declines in the valuations of CCCs publicly traded peers After having met with numerous institutional and high net worth investors in the US, Europe, Middle East and Asia, CCC has already generated significant indications of interest from potential investors Our decision to delay the IPO with 2weeks remaining to the pricing date is based solely on our belief that these volatile market conditions would not provide the optimal environment for pricing and aftermarket performance for CCC CCC has built a high quality portfolio and expects to deliver a stable and attractive dividend yield to investors Carlyle has continued confidence in the structure and strategy of Carlyle Capital Corp given its strong performance to date CCC continues to have access to capital to ensure efficient operation as a private entity As market conditions stabilize, Carlyle will communicate its next steps

222.2

An undated Underwriter/Banker script which indicated that Carlyle and CIM contemplated postponing the IPO indefinitely: After discussions with Carlyle we have decided to postpone the IPO of Carlyle Capital Corp. The decision to delay the IPO was driven by volatile market performance of the sector and the closest peers as the market digests continued uncertainty in the bond market This volatility is likely to last at least through the summer We are cancelling the marketing process at this point We will plan to have a call in 1 week to give you a full status update At that time we will discuss capital plans Carlyle has continued confidence in the structure and strategy of Carlyle Capital Corp given its strong performance to date CCC has built a high quality portfolio and expects to deliver a stable and attractive dividend yield to investors

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222.3

An e-mail sent by Cosiol to the Board on June 14, 2007 stating in the event that CCC decides to proceed with the initial public offering of shares, there are certain matters that the Board will need to approve.

223. On June 15, 2007, CCCs Guernsey counsel told the GFSC that the state of the US markets over the past week or so has presented a certain uncertainty in relation to the timetable and that a decision would be made as to whether to proceed with the IPO the following Monday. Carlyle and CIM Elect to Proceed with the IPO 224. Carlyle and CIM ultimately determined to proceed with the IPO (there was no Board meeting at which it was discussed) and on June 19, 2007, CCC published an Offering Memorandum announcing CCCs global offering of 19,047,620 Class B shares of CCC which consisted of 18,874,420 newly issued Class B shares together with 173,200 existing Class B shares for sale (Offering Memorandum). CCC also announced it was offering restricted depositary shares (RDS), each representing one Class B share. The Offering Memorandum stated the initial offering price would be between $20 and $22 per Class B share or RDS. 225. On the issue of CCCs Liquidity Cushion, the Offering Memorandum stated: Our investment guidelines require us to hold unrestricted cash and cash equivalents and unencumbered U.S. agency or U.S. government securities (together, the Liquidity Cushion) equal to no less than 20% of our Adjusted Capital. The Liquidity Cushion is intended to be sufficient to meet reasonably foreseeable margin calls on our financed securities. The maintenance of an unencumbered Liquidity Cushion is fundamental to the management of a leveraged investment portfolio. Our current investment guidelines require a Liquidity Cushion equal to no less than 20% of our Adjusted Capital. The Liquidity Cushion is intended to be sufficient to meet reasonably foreseeable margin calls on our financed securities. We have performed extensive statistical testing of our expected portfolio, including testing during periods of significant financial market volatility and stress, to determine the level of this Liquidity Cushion, balancing the need for sufficient reserves with the desire to efficiently deploy capital. Our liquidity position is monitored by Carlyle and reviewed by our board of directors. 226. At that stage, CCCs minimum Liquidity Cushion requirement remained at 10%, in accordance with the Boards June 14, 2007 resolution. 227. On June 28, 2007, Carlyle and CIM caused CCC to issue an announcement that CCC had postponed the pricing date for the IPO and that it would issue a supplemental offering memorandum containing a revised timetable for the global offering, as well as changes to the terms of the offering. On the same day, 50

Stomber issued a letter to investors on behalf of CCC, stating that CCC was reducing the size of its offering to $300 million (from $415 million) at a price of $19 per share (from $22 per share) and stating: Notwithstanding recently unsettled market conditions, the CCC Board of Directors is confident that proceeding with the floatation on the revised terms is firmly in the best interests of our shareholders. 228. On June 29, 2007, Carlyle and CIM caused CCC to issue a Supplemental Offering Memorandum, announcing a decrease in the number of Class B shares being offered from 19,047,620 to 15,962,673 and that the initial global offering price would be $19 per Class B share. 229. In the course of June 2007, Deutsche Bank Securities Inc, JP Morgan Securities Inc, Man Securities Inc and Bear Stearns & Co. Inc all requested haircuts of 3% to roll existing repos with CCC. 230. On July 4, 2007, the shares in CCC were listed on Euronext. The IPO was completed on July 11, 2007, with a further 18,183,873 Class B shares issued at $19 per share, raising gross proceeds of $345,494,000. On the same day, Carlyle and CIM arranged for the $191 million bridge loan to be repaid using the funds raised through the IPO, together with $1,798,000 in interest on the two month loan. 231. The total funds therefore raised by CCC through the private placements in December 2006 and February 2007 and the IPO in July 2007 exceeded $945 million. 232. Carlyle and CIMs decision to proceed with CCCs IPO resulted in the allotment of 2,867,347 Class B Shares to CIM pursuant to the resolution adopted by CCCs Directors on April 26, 2007 (described at paragraph 195 above). The fair value of CCCs Class B shares as at July 11, 2007, when the allotment was made to CIM, was $19 per share. Accordingly, the fair value of the share allotment received by CIM on the date of its receipt was $54,479,593. E.5 The Need for Substantial Additional Liquidity and Reduction of Leverage

233. By the end of June 2007, Carlyle, CIM and CCCs Directors knew that: 233.1 The manner in which CCC was established, structured and operated meant that there were conflicts of interest between (a) the corporate interests and objectives of Carlyle and the stand alone interests of CCC; and (b) the duties of Conway, Stomber, Zupon, Hance and Loveridge to CCC as directors and their duties as directors of TCG and/or CIM and/or other TCG affiliates (refer paragraph 73 above). 233.2 Global financial markets were experiencing a significant downturn and it was obvious that Carlyle, CIM and the directors of CCC needed to identify and implement necessary changes to

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CCCs approach to protect CCC from potentially adverse consequences as a result of that downturn. This was all the more necessary for CCC, which employed extensive leverage. 233.3 The situation in the global financial markets was uncertain and likely to worsen before it improved and that the market volatility was likely to last at least through the summer. 233.4 In light of the challenging economic conditions which arose in the course of 2007 and CCCs extensive leverage, Carlyle and CIM were required to: 233.4.1 adopt a cautious, disciplined and risk averse approach as investment managers and advisers; 233.4.2 be ready to adapt to more turbulent market conditions including by being prepared to take a more cautious and prudent approach than that which it had previously identified as appropriate; and 233.4.3 adapt to more challenging economic conditions in 2007, and in particular, to the likely reduction in availability and the likely higher cost of obtaining funding (liquidity). 233.5 In just nine months, CCC had acquired $21.8 billion of RMBS, representing 95% of CCCs total assets, financed by short term borrowings under repo agreements of $21.2 billion, employing extensive leverage of 30 times. 233.6 Meeting and exceeding the fundamental risk management requirements that had been adopted by CCC in its Investment Guidelines was absolutely critical, in particular the 20% minimum Liquidity Cushion, the 125% Minimum Borrowing Capacity requirement and the requirement that limited capital allocated to RMBS to 85% of CCCs total capital. 233.7 It was necessary to ensure that CCC had a sufficient number of counterparties to provide sufficient repo financing to it on terms acceptable to CCC. 233.8 It was necessary to ensure that CCC took account of the significant risk that CCCs repo counterparties would increase their haircuts beyond 2% in financing CCCs investments in RMBS and that CCCs repo counterparties would continue to make margin calls. 233.9 In May 2007, CCC had entered into the Bridge Loan to finance the acquisition of further RMBS in conjunction with further borrowings under repo agreements. The amount of almost $200 million owing under the Bridge Loan was to be repaid from the proceeds of the IPO.

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233.10

The net proceeds to be received from CCCs IPO provided an opportunity (after repayment of the Bridge Loan) to sustain and enhance CCCs Liquidity Cushion.

233.11

In May and June 2007, CCC had sustained significant unrealized losses on its investments in RMBS and the price decline on those investments had put the 20% minimum Liquidity Cushion requirement at significant risk.

233.12

In June 2007, Stomber and Cosiol had sought and obtained approval to reduce the minimum Liquidity Cushion requirement to 10% (after resolving in April to make a one time reduction to 15%). The Board had not considered the potential consequences of CCC operating with a Liquidity Cushion of 10% in terms of CCCs ability to meet the requirements of its repo counterparties (margin calls and increases in the haircut) which were likely given the prevailing economic conditions.

233.13

CCCs IPO had been delayed and the amount of capital proposed to be raised was reduced in light of instability in the fixed income and equity markets.

233.14

Further purchases of additional RMBS following CCCs IPO through increasing leverage was contrary to CCCs best interests.

234. As a consequence, moving into July 2007, Carlyle, CIM and the directors of CCC were on heightened alert and caution as to the need to identify and implement necessary changes to CCCs approach to protect CCC from potentially adverse consequences. Given the expected continuation of sustained market volatility through the second half of 2007 CCC needed to sell RMBS assets and/or raise additional equity capital. Carlyle, CIM and the directors of CCC failed to take any such steps. July 2007 - Increased Volatility in the Financial Markets 235. On July 10, 2007, the ratings agencies Moodys and Standard & Poors announced that they were reviewing and lowering ratings on many RMBS. 236. In mid July 2007, US Federal Reserve Chairman, Ben Bernanke reported to Congress that the problems in the mortgage markets likely will get worse before they get better. 237. In late July 2007, Countrywide Financial, Americas largest mortgage lender, announced that an increasing number of borrowers with good credit ratings were falling behind on their mortgage repayments, an indication that trouble was spreading beyond the subprime sector. At around the same time, Federal Reserve Chairman Bernanke told Congress that investors and lenders losses flowing from subprime credit problems were estimated to be between $50 billion and $100 billion so far and that this 53

could affect other credit markets. (Washington Post, Easy Money, Lifeblood of Economy, Is Drying Up, July 26, 2007) 238. On July 18, 2007, equity prices around the world fell sharply by about 1 percent in one day. Credit markets began to soar and plunge depending on developments each day. 239. On July 25, 2007, the Chairman and Chief Executive of Freddie Mac, Richard F. Syron said that he anticipated that circumstances in the housing market will get materially more severe. (Washington Post, Freddie Mac Chief Sees Tough Times Ahead, July 25, 2007) Financial Statements for the Quarter Ended June 30, 2007 240. CCCs quarterly report for the period ended June 30, 2007 disclosed that CCC had continued to acquire significant amounts of RMBS ahead of CCCs IPO. As at June 30, 2007 CCCs RMBS had a total fair value of $21,780,620,000 (an increase of 32% from $16,483,841,000 as at March 31, 2007) representing 95% of CCCs total assets. CCCs Liquidity Cushion was $186,100,000 at June 30, 2007 comprised of cash and cash equivalents of $35,400,000 and unencumbered assets of $150,700,000. CCCs Liquidity Cushion represented 27% of adjusted capital, with the inclusion of the Bridge Loan. However, without the Bridge Loan of $191 million, CCCs Liquidity Cushion was less than zero on June 30, 2007. 241. CCC continued to employ extensive leverage in acquiring its RMBS to June 30, 2007. CCC had $21,218,547,000 outstanding as borrowings under repo agreements (an increase of 32% from $16,054,494,000 from March 31, 2007) with twelve different repo counterparties, with a weighted average remaining maturity of 21 days. The collateral for these borrowings was comprised of securities with a fair value of $21,629,886,000. CCCs leverage as at June 30, 2007 was 40.2 times, or 29.8 times by treating the Bridge Loan of $191 million as equity. 242. As at June 30, 2007, CCCs equity/net asset value was $552,629,000 and had fallen below the $600,000,000 in capital raised by way of private placement. 243. CCCs net income for the six months to June 30, 2007 according to IFRS was $33,416,000 and according to US GAAP its loss was $41,011,000. Under IFRS, CCC reported a change in the deficit in fair value reserve of $75,148,000. 244. The management and incentive fees paid to CIM for the six months ended June 30, 2007 were $4,421,000 and $4,681,000 respectively. Other fees paid to The Carlyle Group and CIM for the quarter as reimbursement for overhead expenses relating to office rent, furniture, supplies and personnel salaries totalled $660,000. In addition, CCC reimbursed Carlyle and CIM $2,545,000 for internal use software and

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other property. In other words, despite having lost in the range of $50 million of the capital of CCC, Carlyle and CIM were paying themselves nearly $10 million for their services. 245. In his July 26, 2007 letter to shareholders announcing CCCs results for the quarter ended June 30, 2007, Stomber recognized the need for CCC to reduce its use of leverage in order to offset the increase in risk associated with higher spreads and market volatility, and indicated that CCC would do so: We use leverage with each asset class to amplify returns, but we limit the amount of leverage we use by allocating a portion of our capital to a liquidity cushion. The liquidity cushion is comprised of cash, cash equivalents and unencumbered government securities. Under our current investment guidelines, we are required to maintain a liquidity cushion of at least 20 percent of our adjusted equity We are proud to say that the model worked as we planned during the recent interest rate rise and we maintained our liquidity cushion in accordance with our investment guidelines. We will likely reduce our use of leverage and focus on maintaining targeted performance rather than increase returns. Higher credit spreads and increased volatility in the financial markets increases the risks of our portfolio. By reducing leverage, we believe we can offset the increase in risk associated with higher spreads and volatility while maintaining targeted returns. July 26, 2007 ALCO Meeting 246. ALCO met at 8.30am for 30 minutes before the Board meeting on July 26, 2007 in Guernsey. During that meeting, ALCO discussed the current markets and the diminishing liquidity being seen. Stomber said that as a public company, it was one of CCCs paramount objectives not to jeopardize the companys liquidity. Allardice told the meeting that given the unpredictability of market conditions and the Feds policy, a worst case scenario approach to portfolio management could probably be a prudent option. Again, other than making general statements about the importance of liquidity, ALCO failed to consider, devise, recommend or implement any strategy to reduce CCCs leverage or to increase CCCs minimum Liquidity Cushion requirement. July 26, 2007 Board Meeting 247. CCCs Board held a meeting in Guernsey on July 26, 2007. All Board members were present in person, together with Cosiol from Carlyle, Greenwood, Trozzo, Rella and Green from CIM, Buser from Carlyle, Simon Perry and Libby ONeill from PwC and Daniel LeBlancq and Haley Camp from Mourant. 248. Hance reminded the Board that the IPO had been reduced in size from $400 million to a capital raise of $300 million at $19 per share. Given the difficult market conditions, it was not an easy offering. Hance said that he was glad that CCC proceeded with the IPO for three reasons: (a) it was critical to let the market value CCCs securities; (b) it was critical to move the market away from the discussion of net asset

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value and have investors focus on the projected dividends; and (c) it was critical to obtain more capital to invest. 249. The Board was informed that Citigroup, the lead arranger for CCCs IPO, Carlyle and CIM had decided to let the stock fall below the initial offering price and find its natural base. The Board discussed the low trading volume of CCCs shares and plans for making the Class B shares more liquid. The Board was concerned at the prospect of raising additional capital in the future if the CCC stock continued to trade at current levels. Stomber provided a comparison of CCCs post-offering trading activity with its competitors, Annaly, Prodesse and KFN. 250. Allardice and Green presented CCCs consolidated financial statements for the quarter ended on June 30, 2007 to the Board. Stomber said that [a]lthough one would have expected the portfolio losses to have narrowed in this market the volatility in the market and the general widening of bid-offers had played an offsetting role. Trozzo reviewed the fair market reserve as of July 20, 2007 and noted that it was a deficit of approximately $65 million. 251. Stomber reminded the Board that CCC had borrowed approximately $191 million from affiliates of the placement agents to begin purchasing securities with the expected proceeds of the IPO and that certain of the calculations in the financial statements included these borrowings. 252. Sarles asked whether Carlyle and CIM were comfortable maintaining the dividend projections outlined in the footnotes to the financial statements. Stomber affirmed that management was comfortable with the projections and explained that the increase in the projected fourth quarter dividend was greater than the projected third quarter dividend because CCC would be fully invested by that time. 253. With regard to the press release for the results for the period ended June 30, 2007, Hance and Stomber explained that they had consciously excluded any discussion of net asset value because they wanted investors to focus on the dividend potential. Furthermore, they explained: net asset value was not the focus of [CCCs] management and was not how [CCC] was managed. 254. Stomber, Trozzo and Greenwood then presented an update of CCCs Business Model to the Board. Stomber informed the Board that CCC was very close to its projected budget, with some changes primarily due to the amount of capital raised in the global offering. The Board discussed implications of paying a dividend in excess of 90% of adjusted net income for the third quarter of 2007 and beyond. 255. The Board then discussed the role of ALCO. Stomber explained that [d]ue to the recent volatility in the market CCCs ALCO had taken a more prominent role in the management of [CCCs] portfolio. Stomber invited each member of the Board to attend ALCO meetings at their discretion. Trozzo noted that the

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volatility in the markets in May and June 2007 was within the range of shock built into CCCs Business Model, and he believed that therefore CCCs Liquidity Cushion had worked as planned. 256. Instead of preserving cash, the Board approved the proposal of Carlyle and CIM that CCC invest an amount not exceeding $25 million in a Carlyle-related entity, Carlyle Global CLO Partners. 257. Finally, the Board approved payment to CIM of the management fee in the amount of $2,735,814.61 for the period since March 31, 2007 through June 30, 2007 and the accrual of the incentive fee in the amount of $3,379,333.77. Again, despite CCC having incurred losses in this quarter, the Board approved paying CIM nearly $6 million for their services. 258. It was or ought to have been obvious to all in attendance at that Board meeting that CCC had been substantially affected by the global liquidity crisis that had begun in June 2007 and was continuing to worsen. Nevertheless, there was no discussion at all at that meeting about the need to sell RMBS to reduce leverage, raise additional equity capital and increase liquidity. Instead the Boards discussions focussed upon, among other things, CCCs plans to pay a dividend in Q3 and beyond. This was the only forward-looking discussion entertained during the meeting and was the only future consideration that received any attention from the Board. 259. On July 30, 2007 and August 3, 2007, Carlyle and CIM caused CCC to purchase $1,429,089,180 and $73,550,172 of RMBS respectively, thereby continuing to deplete liquidity at a time when it desperately needed to be increased. 260. Certain of CCCs repo counterparties were requesting haircuts in the range of 3 to 5% during July 2007 for RMBS repos with CCC. In particular, Bank of America LLC indicated to CCC that it was considering obtaining higher haircuts from CCC. E.6 As Early as July 2007 the Defendants Were Breaching Their Fiduciary Duties

261. By July 2007, Carlyle and CIM had caused CCC to acquire $21.8 billion of RMBS, financed by short term borrowings under repo agreements of $21.2 billion, employing extensive leverage of 30 times. CCC had a Liquidity Cushion of just $186 million to meet any margin calls or increased collateral requirements made by CCCs repo counterparties on the repo agreements that financed CCCs investment portfolio. 262. From July 2007, on any objective and informed view given the sustained market volatility and indications of a significant liquidity crisis in the coming months, the best interests of CCC required the sale of RMBS assets and raising of additional equity capital by CCC to reduce leverage, enhance liquidity and thereby safeguard CCCs capital and long term viability.

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263. However, CCCs Directors, Carlyle, and CIM instead focused on CCCs ability to generate net income under IFRS and pay dividends. Carlyle, CIM and the directors of CCC were not prepared to sell RMBS because it would have forced them to disclose significant realized losses, thus diminishing the fees payable and success of Carlyle in the eyes of the market and exposing Carlyle to negative publicity, reputational damage, and loss of fees from CCC. In addition, raising more equity for CCC would highlight CCCs diminished net asset value and reduced share price. This would have been particularly unpalatable to Carlyle in light of the recent completion of the IPO of CCC on July 11, 2007. 264. In short, the conduct of Carlyle, CIM and CCCs Directors as early as July of 2007 was reckless, grossly negligent, or in the alternative, negligent and constituted wilful misconduct and breaches of fiduciary and other obligations owed by Carlyle, CIM and CCCs Directors to CCC. The Defendants conduct was not attributable to any rational business purpose for CCC nor did they exercise any business judgement. 265. The losses incurred in or after July 2007 by CCC would have been avoided if the breaches by Carlyle, CIM and CCCs Directors had not taken place or if the action required had been taken. E.7 August 2007 - Ramifications of Failure to Reduce Leverage

Continued Decline of the Financial Markets 266. In the period following the July 26, 2007 Board meeting of CCC in Guernsey, conditions in the financial markets continued to decline. On August 1, 2007, the two hedge funds managed by Bear Stearns referred to at paragraph 221 above which had invested $20 billion, predominantly in mortgage backed securities, declared bankruptcy. On August 6, 2007, American Home Mortgage Investment Corporation also declared bankruptcy. 267. On August 7, 2007, Stomber emailed Conway and Hance, copied to Zupon, Trozzo and Greenwood. Stomber informed Conway and Hance that FT [pricing] marked us down 30MM today and that Cantor made a margin call that we would not accept and we moved the RMBS. Stomber also said that he suspected we may go below 20 percent on our liquidity cushion and will ask the independent directors for prior approval tonight or tomorrow to do so. Will ask at the next Board meeting for unilateral approval to go to 15 percent for 90 days so we get away from fire drills. Stomber concluded his email by stating: I do not see this problem getting better in the short run I expect it to get worse. As a public company, we need to stick to our mandate of being a safe investment and not chase the last 50-100 bps of dividend yield. Our dividend as it is remains superior to the competition. 268. From August 7, 2007, Cantor Fitzgerald ceased being a repo counterparty of CCC. Also on August 7, 2007, both Bank of America and JP Morgan refused to provide repo funding to CCC despite previously having open repo lines of over $5 billion. Indeed, on August 7, 2007, Stomber forwarded this email to 58

Allardice, Sarles and Loveridge, requesting their approval to reduce CCCs minimum Liquidity Cushion requirement to 15%. The reason that Stomber gave for necessitating this amendment to one of the fundamental elements of CCCs Business Model was that CCC was facing markets that put our expected dividend yield in question but our dividend yield of 9 percentish [sic] if we do not buy any additional securities appears to keep us best in class by a wide margin. Please look at Annaly ticker symbol US NLY to see they trade at 1.4 book, yield of 6.8 percent and they raised 600MM during the period we raised 345MM. Every comp shows we out perform. Stomber concluded his email by stating: A recession appear [sic] to be in the cards as CCC has said for 9 months, the mortgage meltdown is a slowly realized event that affects the economy with a material lag. Even if the Fed cuts tomorrow (which it will not do) the damage is done and can not be reversed quickly. 269. Stombers proposal to reduce the minimum Liquidity Cushion requirement to 15% was approved by Allardice, Sarles and Loveridge, without any question. By email sent on August 8, 2007 in response to Stombers email, Conway said: I support the ability to take the liquidity cushion to 15%. August 9, 2007 ALCO Meeting 270. A meeting of ALCO took place on August 9, 2007, attended by Stomber, Allardice, Sarles, Zupon, Trozzo, Greenwood, Melchior, Buser, Green, Rella and Hunt. Stomber stated at that meeting that it was unlikely that CCCs dividend targets for Q3 2007 would be met. Allardice told ALCO that the developing and unprecedented market conditions we are seeing now are precisely the type of market conditions where the argument of preserving liquidity over sacrificing dividend is vital to consider. The minutes of that meeting note ALCOs agreement that liquidity was paramount. 271. Stomber told ALCO that repo lines are under pressure. To underscore this point, Greenwood informed ALCO that CCC had severed its repo counterparty relations with Cantor after receiving a margin call for $73MM. Cantors margin call had been made based on Cantors internal pricing and not on traditional pricing methods or a recognized third-party pricing source. Stomber concluded the discussion by remarking that without question, all counterparties are feeling pressure to look after their own liquidity needs. 272. On August 9, 2007, news agencies around the world, including The New York Times and the Financial Times reported the announcement by French bank, BNP Paribas that it had suspended three investment funds due to complete evaporation of liquidity. There was a major increase in interbank borrowing rates, with the LIBOR overnight dollar rate increasing from 5.3 to 6% and the LIBOR three-month rate increasing from 5.30 to 5.50%. On the same day, the European Central Bank and the US Federal Reserve announced injections of extra emergency funding into money markets.

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Analyst Reports Emphasize Importance of Liquidity Cushion 273. Between August 13 and 17, 2007, each of Deutsche Bank Securities Inc (Deutsche Bank), Citigroup Global Markets (Citigroup) and Bear Stearns International Ltd (Bear Stearns) published detailed analyst reports on CCC. Each emphasized the substantial risks of CCCs extensive leverage and the critical significance of the maintenance of CCCs minimum 20% Liquidity Cushion to the risk management strategy for CCC. 274. For example, in an August 13, 2007 report, Deutsche Bank noted: The value of Carlyle Capitals investment portfolio is sensitive to changes in interest rates and credit spreads. Fluctuations and changes in interest rates and credit spreads could cause capital losses and negatively affect results. Should interest rates, credit spreads, or other factors decrease the value of Carlyle Capitals investments, the company may be subject to margin calls. To reduce the negative impact of a margin call, Carlyle Capitals investment guidelines require the company to maintain at least a 20% liquidity cushion consisting of cash, cash equivalents, and U.S. agency or U.S. government securities to provide additional capital if the company receives a margin call. The liquidity cushion may not be sufficient to satisfy margin calls. (emphasis added) 275. In an August 14, 2007 report, Citigroup stated what it considered to be the key risks to CCCs shares: In our view, the key risks to CCCs shares are 1) sharp increase in short-term interest rates, 2) reliance on short-term funding sources (i.e. margin calls and refinancing risk), 3) potential lack of liquidity in the stock as it is a new IPO and trades on Euronext and 4) spread widening on their credit related assets. Companies with a similar business model have been forced to cut dividends in the past during disruptive periods in the market. 276. Citigroups report also noted the importance of CCCs reliance upon Value-at-Risk (VaR) testing as its primary risk-management tool: CCC manages the risk in the portfolio through Value-at-Risk (VaR) testing, which measures the maximum loss in a single trading day with a 99% confidence. This risk management tool is common among major financial institutions. While VaR has been shown to be a useful risk management tool, it has been criticized for not fully taking into account risks at the fat end of the tail. Meaning that while VaR risk management is accurate most times, it may not properly show the risk of a large market moving event such as the sub-prime meltdown in February 2007. CCC has attempted to mitigate these fat tail risks by testing the portfolio against the month when Long Term Capital Management collapsed in late summer 1998. Testing against the negative scenario, CCC calculated that a portfolio similar to the current portfolio would have taken a hit of approximately 16% to book value. Based on this analysis, CCC has set a minimum liquidity cushion of 20% of equity. CCC has also designed its portfolio to reduce volatility due to the relatively low correlation between agency RMBS and its credit product investments.

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277. The risk imposed by CCCs extreme use of leverage, and the importance of the Liquidity Cushion in offsetting that risk, was again considered in the Citigroup report as follows: Leverage / Financing Risk CCC funds its portfolio investments with a mixture of shortterm repo, a revolving loan, and a CP program and expects to run the portfolio at about 28.5x leverage. While the combination provide [sic] a relative low-cost source of funding, a major liquidity disruption in the markets could cause the company to seek other, potentially more costly, sources of financing. Moreover, CCC could potentially be subject to margin calls on its repos. These risks are offset by CCCs liquidity cushion. (emphasis added) 278. In an August 17, 2007 report, Bear Stearns stated: The fund makes extensive use of leverage to achieve the required level of returns. While the bulk of assets invested in carry high credit ratings, the high degree of leverage requires reliable funding (the bulk of which comes from the repo market) but at the same time exposes Carlyle Capital to unforseen market movements. 279. The Bear Stearns report noted that CCC employed leverage of 30 times equity whereas peer group companies KKR Financial were leveraged 9 times equity, Prodesse was leveraged at between 5 and 10 times equity, Eurocastle was leveraged at 3 times equity and Queens Walk employed only a low level of leverage. 280. Like Deutsche Bank, Bear Stearns also observed the obvious fact that maintenance of the Liquidity Cushion was critical to the management of the risks of high leverage. Under the heading Liquidity Risks, the report stated: Carlyle Capital is required by its business model and target returns to employ substantial leverage, both absolutely and in relation to comparable funds. This might strike investors as unwarranted and excessively risky, and leverage may well be the most contentious issue for investors in assessing Carlyle Capital. Leverage multiplies returns on capital, assuming that the yield spread on assets over funding costs is positive, but the reverse also can also [sic] apply. At 50x leverage, a 2% loss wipes out capital completely. Hence high levels of leverage do not work well with more volatile asset classes. Leverage should not be viewed in isolation, however. It should be understood in the wider context of liquidity and volatility. High levels of leverage in liquid/low volatility instruments can be less risky than lower leveraged investments in illiquid and volatile instruments.... However, extreme market conditions such as those experienced in 1998 could recur and might result in losses. In order to cope with unexpected market conditions, Carlyle Capital will maintain a roughly $200 million liquidity cushion to meet margin calls without the need for involuntary liquidations and write-downs. 281. Bear Stearns compared CCCs Business Model favourably with LTCM, in significant part because CCC reportedly maintained a minimum 20% Liquidity Cushion: Perhaps the starkest lesson of LTCM, beyond that of avoiding placing religious trust in what may be incomplete statistical models, is the need to provide for sufficient liquidity, including 61

avoiding taking overlarge market positions in order to ride out falling markets. On this score, the prognosis appears to be reassuring as Carlyle Capital believes that through its focus on liquid, short-duration assets, the framework of the stable VAR and not least the availability of the liquidity cushion, it would have survived 1998.... Just as the extreme market conditions of 1998 effectively invalidated those which preceded it, the risk that in the future even more extreme circumstances might occur cannot be ruled out, representing another leap in the dark. In those circumstances, the question of the adequacy of the liquidity cushion is paramount. (emphasis added) CCCs Rapidly Declining Liquidity 282. At the time of publication of those reports, CCC was experiencing the very consequences that Bear Stearns and Deutsche Bank had warned came from high leverage. On August 15, 2007, Stomber emailed Sarles, informing him that it has been rough. Liquidity cushion is at 14.6 percent repo dealers are being tough. 283. On August 16, 2007, Green, as Managing Director of The Carlyle Group, sent an email to Allardice, Sarles and Loveridge, copied to Stomber and Cosiol, which stated: we are soliciting your approval of a promissory note with [TCG] The final terms are pending final approval by Bill C. The terms of the promissory note as detailed in that email provided that TCG would lend CCC a maximum of $100 million at an interest rate of 10% per annum plus an additional 3% per annum in the event of default. This sum was grossly inadequate to deal with the scope of the liquidity crisis facing CCC. Each of Allardice, Sarles and Loveridge confirmed their assent to the $100 million loan from TCG to CCC, again without question. 284. On August 17, 2007, Stomber sent the following email from his Blackberry, entitled Update for the Week to CCCs Directors, copied to DAniello, Rubenstein, Nachtwey, Ferguson, Buser, Greenwood, Trozzo, Green, Cosiol and Melchior: Joanne said I should give the Board an update for the week I have spoken to you or you have received emails so I will quickly cover earlier events and focus on where we are currently at 1. The current credit market meltdown is worse than 98 on a stat basis pure fact 2. The liquidity cushion was designed to cover a 98 meltdown and then some. In 98, no repo dealer questioned a 2 percent haircut on floaters and prices were transparent 3. The subprime meltdown and the word mortgage has affected even the price of AAA US govt floating rate cap securities because of lack of buyers beyond what model prices suggest not hiding behind a model, simply put for the first time in my career plain vanilla agency debt traded from a historic price of Libor minus 16 to Libor minus 11 now back at minus 16. We buy plain vanilla securities overlaid with a cap that is very transparent in the market. This is not about exotic option model where it is difficult to price. The price of 5 year caps (a benchmark for our portfolio) is plain vanilla and quoted on Bloomberg. 62

4. Repo dealers have abandoned our FT third party pricing service and are marking securities to distressed prices. We have over 100MM of cash posted to repo dealers as margin over the MTM of the portfolio. 5. We have LH asking for 70MM of margin in the past 4 days and agreeing they have changed their MTM on repo to be more conservative and at levels to sell securities in size. They readily admitted today that prices in the market for 50MM blocks were significantly below their mark. 6. Our most pressing risk is to dealers suddenly saying all haircuts are at 3 percent a 50 percent increase in margin or 1 percent on 23 bil of securities is 230MM. Facing this risk, I asked Carlyle to put in an additional 100MM of cash in unsecured note form after our 6 underwriting banks agree that 1. They will maintain a 2 percent haircut going forward 2. They will honor their amount of line committed on a reasonable basis Bill C and I are meeting with the 6 IBs Monday to present our proposal. Early indications are the IBs want to work with us and solve the problem. After all, they just affirmed their DD on us and took us public they should not be the very same banks that are not living up to agreements, especially on pricing of repos. The paradox the market meltdown means the Fed can not raise rates so our capped securities will not be at risk for rates going above the cap. Our FT pricing service showed a gain of 13MM last night. Our IFRS income and dividend target is on target. Meanwhile we were margin called today to the extent where we have about 5MM of cash left Lehman was the worse example of a repo dealer where repo marks were 20 to 50 bps away from where new securities were being offered in the cash market. JPM went to a 3 percent haircut and we moved securities to Citi at 2 percent Citi has been a total pro. On the other hand, JPM made the comment a couple of days ago that all counterparties are at 3 percent haircut which implies all counterparties are the same and the securities they buy are the same. So much for sophisticated risk/credit models that new BIS standards must approve. Our plan that you approved is to meet with the 6 underwriters Monday and tell them they must honor 2 percent haircuts and reasonable prices and if so, Carlyle will put 100MM of cash into CCC in unsecured note form. Now is not the time to tell you how we expect to finance repo in the future to remove this problem. It deals with a term repo market, guaranteed repo lines and not having securities bought on a ramped basis so we have concentrated risk to one general price level of RMBS securities. This all will be vetted at a future Board meeting. Bill has asked if I can still digest solid foods? wish that was my problem, but not an issue. I will likely have to listen to my taped speeches of Churchill during WWII for inspiration. Available all weekend for any question from anyone addressed. (emphasis added) 285. At the time of Stombers email, it was patently obvious that CCC was facing a crisis. Yet no meeting of CCCs Board was held, either in person or via telephone, and CCCs Directors did not seek one. The Directors were not presented with, and did not seek, any information in order to urgently address and change the fundamental aspects of CCCs approach which had led to the crisis and to enable the 63

Directors to make informed decisions regarding the longer term viability of CCC. There was no analysis of undertaking the sale of RMBS assets by CCC or the raising of additional equity capital. 286. The liquidity position of CCC set out in Stombers email further heightened the need for such information and analysis. As Stomber reported, CCC had only $5 million cash remaining with which to meet the requirements of its repo financiers (who were owed in excess of $20 billion) and CCC was faced with the real prospect of increased haircuts which could require CCC to source up to $230 million of liquid funds on an urgent basis. Stombers suggestion that CCCs repo counterparties would not increase the haircut on repos on the basis that those counterparties had just underwritten CCCs IPO was made without any objective foundation and was fanciful. 287. On August 20, 2007, pursuant to the resolution of the Board adopted on August 17, 2007 and described at paragraph 283 above, CCC entered into a Credit Agreement with Carlyle, which allowed CCC to borrow on an unsecured and subordinated basis, up to $100 million under a credit facility provided by a Carlyle subsidiary, TC Group Cayman Investment Holdings LP. The Credit Agreement was structured through a Promissory Note entered into by CCC and TC Group Cayman Investment Holdings LP on August 20, 2007. The terms of the promissory note provided that CCC was to repay the loan together with all accrued interest by August 20, 2008. Entry into the Promissory Note was approved on August 17, 2007, without any meeting, discussion or deliberation by the Board of CCC. The Promissory Note was executed on CCCs behalf by Green, CCCs Chief Financial Officer and a Managing Director of Carlyle. 288. On August 21, 2007, Stomber announced that CCC had received a $100 million loan from Carlyle to enhance CCCs ability to meet margin calls and positioned CCC to take advantage of the new opportunities as they present themselves. August 23, 2007 Emergency Board Meeting Liquidity Cushion below zero 289. On August 23, 2007 an emergency meeting of the Board of CCC was convened urgently via telephone to discuss the crisis facing CCC as a result of margin calls. The meeting was attended by Hance, Stomber, Loveridge, Allardice, Sarles, Conway and Zupon. Various Carlyle personnel, including Cosiol, Harris, Nachtwey, Greenwood, Trozzo, Rella, Green and Reville also attended. The meeting commenced at 9am and finished at 10.30am. During the meeting Hance explained to the Board that: 289.1 in the last four weeks since the Board met in Guernsey, the mortgage markets in the US had gotten decidedly worse; 289.2 CCC had faced substantial margin calls;

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289.3

some of CCCs lenders had decreased the amount they were willing to lend CCC to 97% of the value of the underlying securities (that is, they increased the haircut to 3%);

289.4 289.5

CCC had gone through $200 million of liquidity; and it was likely that CCC would draw down the full $100 million of the Carlyle loan.

290. According to Hance [t]he overall effect of these events on [CCC] has been to diminish [CCCs] liquidity cushion below zero. As a result, CCC would need more cash if it was to be able to make the repurchase roll on Monday. 291. The minutes of that meeting record that Stomber told the Board that: management is under no illusions of the impact of recent events on the portfolio and realizes that it needs to preserve capital where it can. Management believes it would be prudent to wind down the Company to its core level at this time. 292. Stomber and Conway reported to the Board that they had met with each of CCCs repo counterparties on Monday, August 20, 2007 and had asked each repo counterparty to be reasonable with respect to lending levels. Stomber was concerned that if he pushed lenders too far, they would threaten to increase the haircut. He told the Board that CCC had already paid $54 million in margin calls and if all of [CCCs] counterparties moved to 3% haircuts, it would cost [CCC] approximately $215 million, together with a further $30 million margin call as a result of price changes. 293. The Board, on the advice of Carlyle and CIM, resolved to sell CCCs interest in four collateral loan obligations to Carlyle at cost together with all of CCCs interests in mezzanine debt securities. Those assets were sold to Carlyle for a total of $60 million. Collectively, the Board resolved to sell assets of approximately $900 million, including to Carlyle, releasing approximately $140 to $150 million (after the discharge of associated debt). 294. Stomber explained that going forward, CCCs Business Model would need to be readjusted to account for recent events because the market had established a new precedent which was worse than the events of 1998. Conway also told the Board that management and the Board needed to review [CCCs] business model and determine how to adjust it given the new realities seen in the market and that the Board needed to focus on preserving investor capital. In fact, CCCs Business Model was not readjusted and in particular, leverage was not reduced and the minimum Liquidity Cushion was not maintained, let alone increased. 295. On August 27, 2007, Stomber issued a letter to CCCs shareholders in response to several of its shareholders requests for information about the current status of CCCs investment portfolio. The letter described the effects of recent market volatility upon CCC: 65

This environment produced two adverse consequences for CCC: (i) a modest decline in the fair value of AAA rated US Government agency issued mortgage-backed securities, and (ii) an increase in collateral (margin) required by our lenders. As the fair value of our MBS portfolio declined, our lenders made margin calls to ensure that the amount of CCCs indebtedness did not exceed the fair value of the underlying collateral. In addition, some of our lenders have recently decreased the amount they were willing to lend CCC to 97% of the fair value of the underlying securities, from the historical lending rate of 98% of fair value. Consequently, CCCs liquidity cushion has not been sufficient to meet recent margin calls. Management and the board have acted swiftly and definitively to address the dramatic change in our business environment. 296. A media release published by CCC on the same day included a description of the steps taken by CCC in order to meet its margin calls, which were described as having been taken to create additional liquidity in the event of continued market volatility and to help us better weather the market conditions we are facing. They included: 296.1 the unsecured subordinated loan from The Carlyle Group on August 20, 2007 of $100 million at an interest rate of 10% per annum due on August 20, 2008, which had been fully drawn down (see paragraphs 283 and 288 above); 296.2 sale of non-RMBS assets of approximately $900 million, releasing approximately $140 to $150 million after meeting all obligations for the associated debt (see paragraph 293 above); and 296.3 the restructure of CCCs investment portfolio, such that the proportion of its assets comprised of RMBS issued by Freddie Mac and Fannie Mae increased to 95%. 297. The measures taken by Carlyle, CIM and CCCs Directors were attempts to put in place short-term solutions to avoid the sale by CCC of RMBS assets, which would have required CCC to realize and record the accompanying losses or raise additional equity capital at market prices significantly below the IPO price, which would have been detrimental to Carlyles reputation but would have been beneficial to CCC. The funds provided by Carlyle were grossly inadequate to ensure CCCs long-term survival let alone prosperity. Carlyle, CIM and CCCs Directors should have immediately (a) sold down CCCs RMBS assets, thereby reducing its leverage; and/or (b) raised additional equity capital; and/or (c) conducted a restructure or an orderly winding down of CCC. No such process was engaged in by Carlyle, CIM or CCCs Directors. Something seems to have gone badly awry at Carlyle Capital 298. The following day, on August 28, 2007, the Financial Times web-based service, FT.com, included a post by financial commentator Sam Jones observing that Something seems to have gone badly awry at Carlyle Capital. The article stated that CCC had needed emergency financing from Carlyle to stay afloat, that CCCs shares had lost 47% of their value since listing and that the Company would fall into the red in 66

the third quarter. It stated what should have been apparent to Carlyle, CIM and the Board of CCC, namely that [CCC] should focus on preserving capital and rebuild its liquidity cushion. 299. On August 30, 2007, Stomber sent an email update to CCCs Directors, copied to DAniello, Rubenstein, Harris, Nachtwey, Ferguson, Buser, Cosiol, Greenwood, Trozzo, Green and Melchior in which he stated: I had to decide to sell all bank loans today of the 125 left, we sold 25 today. We are selling because the remaining 125MM of loans did not have sufficient diversification to be financed effectively with regards to capital required to support the 125. So today we have 146MM of liquidity of which 66MM is without any draw on the second loan from Carlyle. Today we have net out of 4MM in margin but we received about 10MM from the settlement of bank loans. Our NAV for the month will be down more than 20 percent which affects certain agreements with monthly NAV loss limits. LEH has the option to terminate their clearing arrangement we have already asked them to waive the option for the month and pointed out the 100 unsecured loan from TCG is effectively capital. It also provides an option to declare default on two repo agreements Credit Suisse and DB. We contacted CS, pointing out the above 100MM and we have meet [sic] all their margin changes and I am meeting with DB tomorrow at 840 am. I expect we will be fine. We are asking them to waive their option for one month. 300. In an email from Stomber to CCCs Directors, copied to DAniello, Rubenstein, Harris, Nachtwey, Ferguson, Buser, Cosiol, Greenwood, Trozzo, Green and Melchior, dated August 31, 2007, Stomber stated: No such thing as a day without a challenge. When we met with DB, we think we solved our technical issue on factors but were surprised to learn that NY now maintains they have heard nothing from Ackermann and we are now frozen at our existing 1.8 bil outstanding. Worse, they suggested they needed to go to a 4 percent haircut next roll in September. I have sent David R a memo on this with a request to speak again to Ackermann, their CEO, who said a week ago we were good at 3bil and a 2 percent haircut. I suspect they expect something from TCG in return for a repo line of 3 bil at 2 percent. I also suspect Mike Hill, our relationship manager, is behind this. So I think 3 bil at 2 percent is there but a TCG promise of something to get there. 301. In a further email sent by Stomber on August 31, 2007 to CCCs Directors and copied to the same Carlyle personnel, Stomber informed the Board that he would work on a new business model for CCC that weekend, whereby CCC can drop leverage way down to get our targeted returns. Same for RMBS, spreads go from 38 to 55, or 45 percent increase, I can lever the 55 at about 25.5 and get the same return as leveraging 38 at 37 times. This is all before we improve ways of funding CCC for RMBS. Hance responded to Stombers email stating: Good approach. We need to see what liquidity is needed other than 40%, which is what we needed this time, ie, CCC $200, and the Carlyle $200 plus purchases. 67

302. Stomber then responded to Hances email, stating: Agreed just trying to point out at 50000 feet that there are alternatives. I believe the asset back CP/MTN market is not dead, especially for AAA US agency floating rate securities. Like we did for bank loans, we can term out our funding under a MTN program. We have other funding ideas too. Just trying to suggest that markets will adjust and our model can adjust to a new reality and an 07 higher bar of required liquidity. 303. In the month of August 2007, CCCs net asset value had declined by approximately 24% from $843,483,058 at the end of July 2007 to $642,104,242 at the end of August 2007, a loss of some $200 million in one month. 304. During August 2007, the repo financing relationship between Cantor Fitzgerald (which had previously provided $3 billion of repo financing) and CCC ceased following a $73 million margin call, which Carlyle and CIM refused to meet. Bank of America and JP Morgan refused to provide repo funding to CCC despite previously having open repo line availability of over $5 billion. Other repo counterparties such as Lehman Brothers, Bear Stearns, UBS and Deutsche Bank continued to seek and require haircuts of 3 to 4%. E.8 The Defendants Continued Breaching Their Fiduciary Duties Through August 2007

305. By August 2007, CCC had more than $21 billion of outstanding repo borrowings, employing leverage of 32 times. Further, Carlyle, CIM and CCCs Directors permitted CCCs Liquidity Cushion to be decimated, falling below zero, through margin calls and increased haircuts from CCCs repo counterparties. This represented an abandonment of one of CCCs fundamental Investment Guidelines, which required that CCC maintain a minimum 20% Liquidity Cushion. Further, CCCs net asset value had fallen by over 20% in August 2007, triggering events of default in CCCs agreements with its repo counterparties. 306. By the time of the August 23, 2007 emergency meeting of CCCs Board, Carlyle, CIM and CCCs Directors were faced with a crisis which would have been significantly alleviated or avoided had Carlyle, CIM and CCCs Directors fulfilled their obligations to CCC during July 2007. 307. Carlyle described itself as having taken extraordinary measures to help CCC manage through its liquidity crisis by providing $100 million to CCC. On the contrary, these funds were provided at high interest rates, were grossly inadequate to materially benefit CCC, and did not address the longer term viability of CCC. 308. In contrast to the inadequate steps taken, Carlyle, CIM and CCCs Directors should have immediately (a) sold down CCCs RMBS assets, thereby reducing its leverage and enhancing liquidity; and/or (b) raised additional equity capital, thereby reducing its leverage; and/or (c) conduct a restructure or an orderly winding down of CCC.

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309. The conduct of Carlyle, CIM and CCCs Directors was reckless, grossly negligent, or in the alternative, negligent and constituted wilful misconduct and breaches of the fiduciary and other obligations owed by Carlyle, CIM and CCCs Directors to CCC. The Defendants conduct was not attributable to any rational business purpose for CCC nor did they exercise any business judgement. 310. The losses incurred after August 2007 by CCC would have been avoided if the breaches by Carlyle, CIM and CCCs Directors had not taken place or if the action required had been taken. E.9 September 2007 - Carlyle and CIM Admit They Have Mismanaged CCC and Formulate New Business Model 311. In an email sent on September 3, 2007 to Nachtwey, Allardice, Conway, Hance, Loveridge, Sarles and Zupon and copied to DAniello, Rubenstein, Harris, Ferguson, Buser, Cosiol, Greenwood, Trozzo, Green and Melchior, Stomber acknowledged that CCC and others have reached for too high a return given where the risk free rate has been. 312. The following day, on September 4, 2007, Stomber sent a further email to CCCs Directors, copied to numerous Carlyle personnel, including DAniello and Rubenstein, in which Stomber put forward a proposal developed by CIM for the restructure of CCCs Business Model, which he described as a 10,000 foot analysis to show the company still has legs. Stomber stated: Using the existing business model and assuming we re-started the business, if we lower the target Net ROE from 13 to 11%, we could have run with a 38% liquidity cushion. If we restarted the business at todays spreads, we could reach an 11% Net ROE with a 63% liquidity cushion. Clearly, the future of CCC lies between the Historic Model at 11% Net ROE and the Model at Todays Spreads with a target 11% Net ROE. This, of course, would be accompanied by accessing more stable funding for RMBS such as term repo. Again, I still do not write off the possibility of a AAA MTN program given the transparency of our collateral. 313. Stombers email attached the first draft of a presentation which described the new CCC Business Model. The final version of that presentation was delivered to investors during the Carlyle Investor Conference held in Washington D.C. on September 11, 2007 (see paragraphs 323 to 330 below). 314. Stomber also conceded that, in their management of CCC, Carlyle and CIM had made a number of mistakes: CCC and others that targeted a 13-14% Net ROE reached too far for yield we were targeting 3x the risk free rate (5-year treasury). No one survived intact that tried to do so. Caliber and Queenswalk went out of business. KFN and Thornburg are on the ropes. Annaly was able to raise $600MM in equity in the second quarter which covered $400MM of unrealized losses.

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CCC has to reduce its target Net ROE to a level of about 2.5x the risk free rate on average or about 11%. There were other mistakes - too fast a ramp and therefore securities were purchased during only on[e] set of economic conditions; we should have had a tie in with BofA between securities purchased and securities they financed, etc. 315. Stomber also said that Rubenstein had spoken with representatives of Deutsche Bank who had told Rubenstein that Deutsche Bank was moving to 4% at the roll and freezing their amount to $1.8 billion. Stomber concluded: [w]e are not out of the woods. Finally, Stomber indicated that CIM were in negotiations with Bank of America regarding the provision of a repo line to CCC of $2 billion, with a haircut of 3%. 316. On September 5, 2007, Stomber sent an email to CCCs Directors, copied to numerous Carlyle personnel, including DAniello and Rubenstein, which stated: To paraphrase Gen Lee CCC is surrounded and out numbered, the only option is to attack. 1. Bill C was able to get DB back to a 3% haircut and frozen at $1.8 bil outstanding. 2. We have the executed waiver from Lehman. 3. Cash/securities at $73.6 total liquidity at $143.6MM 4. We are going straight at BofA and suspect I will have to send a note to a senior manager copied to TCGs founders asking how they can treat a client that bought $3bil of CMOs from them this way and have they thought about the broader TCG relationship. 5. Vol out, treasuries lower in yield, swap spreads moved out slightly net net should be positive for the valuation of our securities. 6. UBS called and asked if we would like to sell securities to them they have a client on the other side. We are trying to see where we could sell $1bil. We expect at or inside our marks resulting in a realized loss of $15MM and freeing up capital of $25-30MM. Also, we free up $1 bil in repo lines. Another $1 bil of repo lines will free up between now at year end as a result of the natural amortization of the portfolio. Natural amortization has no loss so the haircut of 2.5% - 3% or $25MM - $30MM comes back. 7. Calyon called this afternoon for a $25MM margin call tomorrow. They have no[t] caught up to the FT change. As I said a few days ago, we think the number is $11MM and therefore we are challenging their prices. 317. On September 5, 2007, in an article headed In a Too-Close Tango, Carlyle Trips Over Age-Old Missteps Steve Pearlstein of the Washington Post reported on the crisis facing CCC, as well as the cause: Carlyle Capital was going to be a sure bet because of how conservatively it was managed. The money was to be invested mostly in triple-A securities, many of them with an implicit government guarantee. Leverage would be aggressive but not excessive, with a generous 70

equity cushion to provide that margin of safety in case of market turmoil. And the bets would be hedged to withstand the financial equivalent of a 50-year storm. Only, of course, it didnt. Somehow, with all the fancy models, it never occurred that maybe the housing market would crash and the price of mortgage-backed securities might move in a different direction than the price of U.S. Treasury bonds. Or that investment banks might get so nervous that they might actually demand an increase in collateral for buying derivatives contracts. And then, of course, there was the leverage. Id really like to know when it became a conservative investment strategy to buy $22.7 billion worth of long-term securities with $21.2 billion in short-term loans, as Carlyle Capital did. And when was it decided that it was prudent business practice to have only $175 million in cash in the bank in case the value of those $22.7 billion in securities falls and the lenders decide they are only willing to finance 97 percent of the fair-market value rather than 98 percent? And then there are the fees -- oh, the fees. First, theres the annual management fee of 1.75 percent of equity paid by the investors of Carlyle Capital to the Carlyle Group. Thats a guarantee of $15 million. Add to that the incentive fee if the fund earns more than an 8 percent return on equity, which is not much of a stretch when youre working with 96 percent leverage. The incentive fee for the first half of 2007 came to $4.7 million. And lets not forget the 6 percent of Carlyle Capital stock that was awarded to Carlyle Group and its employees upon successful completion of the IPO. By my calculation, that works out to another $55 million. It comes to about $80 million in the first year alone, or nearly 9 percent of all the money provided by investors, net of investment banking fees. And for what? Borrowing $21.2 billion from Wall Street broker-dealers at 5.3 percent and using it to buy asset-backed securities that yield 6.5 percent. How hard can that be? Measured against any objective criteria -- the number of people and hours worked, the uniqueness of the skills, the creativity, the risk -- these fees are excessive. 318. On September 6, 2007, Stomber provided an Early Update to CCCs Directors, copied to numerous Carlyle personnel including DAniello and Rubenstein. Stomber reported that CCC had to pay $11.5 million to Calyon pursuant to the margin call arising from a change in FT pricing of CCCs securities on August 30, 2007. Stomber said that he thought that CCCs portfolio was no longer materially subject to price change and therefore margin calls on price and that [a]ll indications in the market suggest stability in price and a drift over time inward on spread. Stomber said that the risk facing CCC now was increasing haircuts and repo availability. The two are tied. Increasing haircuts is a way to force delevering and therefore free balance sheet. Stomber also noted that banks around the world were cutting repo lines where possible in order to protect their own balance sheets and sought guidance from Conway and Rubenstein on these matters. 319. Later on September 6, 2007, Stomber sent a further update by email to CCCs Directors and to numerous Carlyle personnel, including Rubenstein and DAniello. Stomber reported the outcome of discussions that had been held with numerous of CCCs repo counterparties regarding increasing the amount of the repo 71

lines available to CCC. Stomber said that Green was starting to work on what we would have to do if we decided to raise new capital just the start so we can answer questions with intelligence. 320. On September 7, 2007, Stomber sent an email to CCCs Directors, copied to numerous Carlyle personnel, including DAniello and Rubenstein, which stated: FT was up $58MM today. We expected $5MM margin in Credit Suisse re-priced and kept the $3MM they owed us. This is an example of how this market is broken, no rules are followed it is absolutely not allowed to re-price the previous nights prices provided to us by CS during the late morning after we have called them for margin but they can do what they want because we need them. Again, we called them for margin based on their prices (not ours) provided from the close of the night before. In a normal market, they can not challenge their own price. We should have get [sic] back a material amount of margin on Monday morning based on todays market movements. Attached is a new version of the presentation that was vetted with our new investor relations service this afternoon. 321. Later that day, Stomber sent a further email to CCCs Directors, copied to numerous Carlyle personnel including DAniello and Rubenstein, in which he said Pat Trozzo had a conversation today with the US head of credit risk at UBS and he freely admitted a 2 percent HC covered their risk, but they went to 3 percent because they can. Their mandate is no losses, full stop no losses. This is our world right now. September 2007 - Carlyle Investor Conference 322. The inadequacies of CCCs Business Model were publicly acknowledged by Carlyle, CIM and Conway, Hance and Stomber in September 2007. Moreover, the solution to the problem facing CCC at that time, namely reduced leverage and an increased Liquidity Cushion, was also recognized by Carlyle and CIM as necessary to ensure CCCs ongoing viability. 323. At the annual Carlyle Investor Conference in Washington D.C. on September 10, 2007, Carlyles representatives faced a number of questions from investors about what had happened to CCC over the preceding months. Conway admitted that Carlyle had mismanaged CCC and that CCCs Business Model needed to change. 324. Conways presentation included the following: What about CCC? We thought we were ready for a tightening but we werent. We thought our model and the liquidity cushion could withstand the illiquidity, but it couldnt. 72

 We thought our leverage, given our asset quality, was conservative, but it wasnt. We thought we could pay a reasonably certain 10% plus dividend, but we cant. We have to change our model to be successful, and we will. 325. Conway promised that moving forward CCC will employ less leverage. Conway also promised that CCC would have more diversified asset classes and would try to meet the original expectations of its investors. 326. The following day, on September 11, 2007, Hance and Stomber gave a presentation outlining what they considered had gone wrong with CCC as well as Carlyles near term strategy to preserve investor capital and bolster liquidity cushion for CCC. Hance and Stombers presentation stated: Liquidity Cushion: What Went Right? What Went Wrong? What Went Right? The price movements of the AAA-rated US Agency floating rate capped securities issued by Fannie Mae and Freddie Mac portfolio were within a 20% liquidity cushion safety factor. The selection of securities in our portfolio allowed us to preserve investors capital during this volatile time.

What Went Wrong? Liquidity Cushion wasnt large enough CCCs required repo margin (haircut) of 2% with daily margin call covers a 48 bps overnight movement in spreads. The largest overnight movement during this crisis was 9.2 bps. A 2% haircut was the market standard for AAA-rated US floating rate capped securities issued by Fannie Mae and Freddie Mac. Dealers raised their margin requirement (haircut) towards 3%. An 1% increase in margin on $22.5 bil is $225 mil of extra margin. 3% covers a 72 bps overnight movement of spreads for AAA-rated U.S. floating rate capped securities issued by Fannie Mae and Freddie Mac. Dealers became ultra-conservative and marked our AAA-rated U.S. floating rate capped securities issued by Fannie Mae and Freddie Mac 10-15 bps higher than where new trades were being done.

327. Both Stomber and Hance expressly acknowledged that CCCs Liquidity Cushion at a minimum of 20% was not sufficient coverage for the recent credit market crisis and described Carlyles proposed changes to CCCs Business Model to protect investor capital. 328. First, they emphasized that CCC would operate with a Liquidity Cushion of 40%. Their presentation stated: 73

This revised model still provides an attractive and stable return at a 40% Liquidity Cushion. There will be additional changes to broaden diversification & reduce funding risk. The future of CCC lies between a 40% Liquidity Cushion and a 9.2% dividend yield in a low spread environment and a higher dividend yield in an environment like today where spreads are at extremely high levels. 329. Second, Hance and Stomber told investors that moving forward we will employ less leverage and indicated that CCC would reduce leverage on mortgage backed securities from 37 times to 25 times capital. 330. Third, Hance and Stomber stated that CCC would have more diversified asset classes and concentrate on improving and stabilizing funding sources. 331. On September 24 and 25, 2007, Stomber provided a further email update to CCCs Directors and Carlyle. Stomber reported that CCC gained $9 million during the repo roll that occurred earlier that day and that CCC had $88 million of liquidity (which included $33 million of the Carlyle backup). Demonstrating that, notwithstanding the dire position of CCC and the ongoing turmoil in the markets, the principal focus of Carlyle, CIM and CCCs Directors was the payment of dividends, Stomber then went on to say: All is not as bad as you may think. In the fourth quarter, based on just owning the AAA floaters, if CCC paid out 100 percent of its earnings, the dividend would be between 7 8% based on a $19 share price. Annaly announced a dividend of less than 6% for Q3 and is the darling of the investment community. 332. Stomber sent a further email to CCCs Directors and numerous Carlyle personnel on September 26, 2007 in which Stomber continued to emphasise CCCs prospects of paying a dividend in the fourth quarter of 2007, notwithstanding that he also reported that CCC had liquidity of just $87 million ($33 million of which comprised funds from Carlyle). Stombers email stated: We are meeting with two investors tomorrow Citadel and Angola our message is strong, given we could pay a 7-8% dividend if we paid out all earnings in Q4 based on a $19 stock price not saying we will but in our space, that would still be best in class. That says a lot about our space. 333. The significant impact that the volatility in the market during the third quarter of 2007 had on CCC is recognised in Stombers apparent relief that the quarter had ended and CCC had survived. This was expressed in Stombers email sent on September 28, 2007 to CCCs Directors and to numerous Carlyle personnel, including DAniello and Rubenstein: [t]his quarter is over and the mgt team of CCC is moving on, NOT stunned into no action by what happened, but hopefully wiser. However, quarter-end figures provided by Stomber in his email suggest that CCCs troubles were far from over. Stomber said that CCCs liquidity was $86 million and that the net asset value was about $690 million. Stomber then said:

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I am very negative on the US economy and if right, this will be good for our portfolio. A liquidity event is very different from my expectation of the US economy moving into a credit event. In a credit event, the market sells credit and moves to quality. Yes, your mgt team made mistakes pre Q3 that compounded problems but we are a team that steps up when faced with bad times. Pat Trozzo was MVP this quarter. 334. By September 30, 2007, virtually all of CCC's existing repo counterparties had terminated new repo line availability with CCC including BNP Paribas Securities Corp, Calyon Securities (USA) Inc, Deutsche Bank Securities Inc, UBS Securities LLC, Morgan Stanley, Merrill Lynch & Company Inc, Citibank Global Markets Inc, ING Financial Markets LLC, Man Securities Inc and Goldman Sachs & Co. Of the 12 repo counterparties with outstanding repo amounts of $21.6 billion as of September 30, 2007, only Lehman Brothers Inc had an available repo amount of $1 billion. Moreover, Carlyle and CIM had been unsuccessful in their attempts to obtain further repo borrowing availability from new repo lenders. 335. On October 1, 2007, Stomber sent an email to CCCs Directors, copied to Trozzo, Green, Melchior and Cosiol, which stated: As a clean-up for corporate governance, I would like the full Board (guidelines require independent director approval) to approve: 1. 2. 3. Suspension of 20% minimum liquidity cushion until Dec 31, 2007. Suspend requirement that repo lines are at minimum equal to 125% of repo outstandings until Dec 31, 2007 Suspend the requirement that limits RMBS investments to 85% of the portfolio until Dec 31, 2007.

336. CCCs Directors responded to Stombers email without any questions as follows: Ok with me (Conway), Im in fully [sic] support (Allardice), I am in full agreement (Loveridge), and I am comfortable approving all three requests (Sarles). E.10 The Defendants Breaches of Duties Continued in September 2007 337. During September 2007, Carlyle, CIM and CCCs Directors knew and acknowledged that CCCs Business Model needed to be restructured to significantly increase CCCs minimum Liquidity Cushion and to significantly reduce the leverage that it employed. Indeed, Carlyle and CIM announced that these measures would be implemented. 338. Instead of taking these measures, at the beginning of October 2007, CCCs Directors approved Carlyle and CIMs proposal to suspend certain of CCCs Investment Guidelines, including the requirements that CCC maintain a minimum 20% Liquidity Cushion, that CCC maintained repo lines of a minimum equal to 75

125% of its total investments and that a maximum of 85% of CCCs capital be allocated to RMBS until December 31, 2007. In doing so, CCCs Directors abandoned Investment Guidelines that Carlyle, CIM and CCCs Directors had recognized were fundamental and critical to CCC. These Investment Guidelines had also been recognized by market analysts as essential to CCCs ability to withstand adverse market conditions. CCCs Directors acquiesced to Carlyle and CIMs proposals to suspend these critical risk management measures without so much as a meeting to discuss the implications of this decision. 339. Carlyle and CIMs conduct through the second half of 2007 demonstrated that they were unwilling to adapt to market conditions in the vain hope of out-performing competitors such as Annaly, which had adopted a more conservative investment strategy in the face of market instability, focused on the preservation of capital and had reduced leverage accordingly. By doing so, Carlyle continued to generate high fees and advance Carlyles corporate interests ahead of the best interests of CCC. 340. The conduct of Carlyle, CIM and CCCs Directors was reckless, grossly negligent, or in the alternative, negligent and constituted wilful misconduct and breaches of the fiduciary and other obligations owed by Carlyle, CIM and CCCs Directors to CCC. The Defendants conduct was not attributable to any rational business purpose for CCC nor did they exercise any business judgement. 341. The losses incurred after September 2007 by CCC would have been avoided if the breaches by Carlyle, CIM and CCCs Directors had not taken place or if the action required had been taken. E.11 Ongoing Failure to Implement New Business Model Financial Statements for the Quarter Ended September 30, 2007 342. CCCs quarterly report for the period ended September 30, 2007 was completed on November 13, 2007 (the September 2007 quarterly report). In his letter to shareholders included at the beginning of the September 2007 quarterly report, Stomber acknowledged that CCCs Liquidity Cushion had not been sufficient to meet margin calls over the preceding months. His letter stated: In my second quarter CEO Letter to Shareholders, I explained that CCC allocated a minimum of 20% of its capital to a liquidity cushion. CCCs liquidity cushion is comprised of cash, cash equivalents and unencumbered U.S. government securities and was designed to timely meet margin calls on our levered AAA-rated Agency securities to protect against forced sales in potentially uncertain market conditions. We established a 20% minimum requirement by back testing our portfolio for potential margin calls during the worst liquidity event in recent history, which occurred in October 1998 when the demise of Long Term Capital Management disrupted the markets. And indeed, our 20% liquidity cushion was adequate for the price changes on our AAA-rated Agency portfolio during this quarter. However, the liquidity cushion was not sufficient and CCC was not prepared to meet higher initial margin requirements (haircuts) from our counterparties who finance our securities in the repo market. When several of our dealers raised their initial margin requirement, some 76

by as much as 50%, CCCs Board and management team acted swiftly and implemented the measures previously described to free capital. Looking forward over the next quarter and into early 2008, CCC expects continued recovery in the value of our AAA-rated Agency securities that may allow us to rebalance the portfolio. It is clear, however, that CCC must carry a larger liquidity cushion as well as diversify its asset classes. In the short run, CCCs AAA-rated Agency portfolio generates an income flow significantly above Libor, but not at a level sufficient to meet CCCs stated dividend targets of 10-11% based on a $19 share price. We are cautious on the US economy and believe there is material risk of a significant slowdown in the U.S. economy. Historically, AAA-rated U.S. Agency securities outperform during a weak economy because of a flight to quality. A weak economy may also provide the potential for CCC to buy credit products at attractive spreads. These and other actions, we believe, will enable CCC to move towards its stated targeted returns during 2008. (emphasis added) 343. During the quarter ended September 30, 2007, CCC made margin call payments totalling $284 million based on changes in market prices used by CCCs repo counterparties to value CCCs RMBS portfolio. These margin call payments represented 34% of the net asset value of $843 million reported by CCC for July 31, 2007. Contrary to Stombers statement in the September 2007 quarterly report that our 20% liquidity cushion was adequate for the price changes on our AAArated Agency portfolio during this quarter, it was clear that the 20% Liquidity Cushion fell far short of the funding needed to meet margin calls based on market price changes alone. In addition, CCC made margin call payments of $134 million, being 16% of CCCs net asset value to July 31, 2007, based on increases in repo haircuts. 344. The September 2007 quarterly report disclosed that CCC had continued to hold significant investments in RMBS. As at September 30, 2007 CCCs RMBS had a total fair value of $22,388,685,000 representing 99% of CCCs total assets. 345. CCCs Liquidity Cushion had declined substantially to $90.8 million at September 30, 2007 (being 13% of Adjusted Capital) comprised of cash and cash equivalents of $38.4 million and unencumbered RMBS of $52.4 million. With respect to the Liquidity Cushion, the section of the September 2007 quarterly report prepared by Carlyle and CIM entitled Managements Discussion and Analysis of Financial Condition and Results of Operations set out that [a]s a result of the collateral demands made by our counterparties during the three months ended September 30, 2007, our independent directors suspended this requirement until March 31, 2008. We believe that the Liquidity Cushion was sufficient to meet margin calls attributable to the changes in the fair value of our securities subject to repurchase agreements during the three months ended September 30, 2007. It was not, however, sufficient to meet additional collateral demands attributable to changes in the terms and conditions of our repurchase agreements. As a result of our experience in the third quarter of 2007, we and our board of directors are evaluating the appropriateness of the minimum level of our Liquidity Cushion.

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346. By November 13, 2007, however, CCCs Liquidity Cushion had further reduced to $19.9 million, which was 3% of Adjusted Capital. Carlyle, CIM and the directors of CCC had not taken the steps necessary to maintain let alone increase CCCs Liquidity Cushion. 347. CCC also remained highly leveraged at September 30, 2007. CCC had $21,648,779,000 outstanding as borrowings under repo agreements with 11 different repo counterparties, with a weighted average remaining maturity of 17 days. The collateral for these borrowings was comprised of securities with a fair value of $22,336,264,000. CCCs leverage as at September 30, 2007 was 31.5 times. Carlyle, CIM and the directors of CCC had not taken the steps necessary to reduce CCCs leverage, even though they had identified at the end of August 2007 that it was essential that they do so. 348. Having raised approximately $945 million in capital by way of private placement and the IPO, CCCs equity/net asset value had declined significantly to $691,843,000 as at September 30, 2007. 349. CCCs net loss for the nine months to September 30, 2007 according to IFRS was $798,000, which included a loss for the three months ended September 30, 2007 of $34,214,000. Under IFRS, CCC reported a deficit in fair value reserves of $227,984,000. According to US GAAP, CCCs loss for the nine months to September 30, 2007 was $241,107,000. 350. The management and incentive fees paid to CIM for the nine months ended September 30, 2007 were $8,339,000 and $4,681,000 respectively. Other fees paid to The Carlyle Group and CIM for the quarter as reimbursement for overhead expenses relating to office rent, furniture, supplies and personnel salaries totalled $614,000. In addition, CCC reimbursed Carlyle and CIM $2,545,000 for internal use software and other property. 351. In various public statements made around that time, Carlyle, CIM and the directors of CCC admitted that they had failed to anticipate that in a time of market volatility, CCCs repo counterparties might actually change the haircuts applicable to repo financing. In addition to Stombers letter to shareholders dated November 13, 2007 (see paragraph 342 above), in a conference call two days later, Hance told investors In our business model, we actually had plenty of liquidity cushion to withstand the price changes in our securities. What we didnt have was the liquidity cushion to withstand the funding changes. 352. Despite acknowledging that they had failed to anticipate changes in the haircuts on repo transactions, neither Stomber, Hance, nor any of Carlyle, CIM or CCCs other directors considered, let alone addressed, the risk that CCCs repo counterparties would increase haircuts again. Carlyle, CIM and the Board of CCC continued to fail to take any steps to reduce CCCs leverage and increase its liquidity.

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November 13, 2007 Board Meeting 353. Following the emergency Board meeting held on August 23, 2007, the next meeting of CCCs Board was held almost three months later on November 13, 2007. The meeting was attended by Hance, Stomber, Loveridge, Allardice, Sarles, Conway and Zupon. Davis-Riffe of Protiviti. 354. At the meeting held on November 13, 2007, the Board of CCC, on the recommendation of Carlyle and CIM, resolved to repay the $100 million outstanding to Carlyle under the Credit Agreement and borrow a further $100 million from Carlyle, at 10% interest, together with a $1 million commitment fee payable to Carlyle. That arrangement, described as The Revolving Agreement expired on January 2, 2009 and amounts outstanding under the Revolving Agreement accrued interest at 10% per annum. 355. The Board then resolved to amend the definition of the Liquidity Cushion in CCCs Investment Guidelines to include any or all borrowings available to CCC that were (a) not secured by CCC assets (b) subordinate to all other borrowings of CCC (c) not due and payable within the next 30 days and (d) available pursuant to an agreement between CCC and TCG or any of its affiliates. 356. Those amendments to the definition of the Liquidity Cushion enabled Carlyle, CIM and the Board to include within the new definition of CCCs Liquidity Cushion the $100 million line of credit [from Carlyle] that the board had just approved. It was not, however, a prudent or appropriate substitute for what really was required, namely the reduction of leverage and the substantial increase of CCCs Liquidity Cushion through the sale of RMBS and/or the raising of additional equity capital. 357. At the same Board meeting, Hance informed the Board that management was recommending several changes to [CCCs] investment guidelines based on its experiences during recent weeks and Stomber stated that management recommended the suspension of certain requirements of CCCs Investment Guidelines until March 31, 2008 to give management increased flexibility to manage CCC through the liquidity crisis. Stomber stated that he believed the additional time would enable his team to better manage the fund in the best interest of the shareholders while they continue to review and revise [CCCs] business model. The Board approved amendments to CCCs Investment Guidelines, including: 1. Suspension of 20% minimum liquidity cushion until March 31, 2008; 2. Suspension of the requirement that the Companys repurchase lines of credit are at minimum equal to 125% of all repurchase agreements outstanding until March 31, 2008; 3. Suspension of the requirement that limited residential mortgage-backed securities investments to 85% of the portfolio until March 31, 2008. 79 Various Carlyle personnel, including Cosiol, Greenwood, Trozzo, Rella and Green attended the meeting as well as Cowley and Abraham of PwC and

358. Remarkably, Stomber and other members of the Board advocated at the November 13, 2007 Board meeting that CCC should still plan to pay a dividend based on fourth quarter and year-end earnings. 359. The minutes record the Boards discussion regarding CCCs new Business Model as follows: The Board noted that the business model presented by management did not identify when the Company would begin investing again. This acknowledgement sparked an energetic discussion between the Board and management as to whether the proposed business model made sense and when (and if) the Company would start investing again and what market conditions and the liquidity position of the Company should be before making such investments. The Board questioned whether repurchase lines would be available to the Company to fund any acquisitions and the terms of any such borrowings. When all was said and done, both the Board and management agreed that it was too soon to make any decisions given current market conditions and that they would have to revisit these issues at the next meeting. Mr Hance, however, asked management to be open to making new investments if and when the right opportunity presented itself, even if such opportunity was earlier than the model might otherwise provide. 360. In addition, the Board approved and ratified the payment to CIM of management fees of $3,900,000 for the period, June 30, 2007 to September 30, 2007. 361. At the end of November 2007, CCCs net asset value was $677,058,796. E.12 The Defendants Breaches of Duties Continued in October and November 2007 362. During September 2007, Carlyle had advised that reduced leverage and an increased Liquidity Cushion of 40% were required and announced that these fundamental changes to CCCs Investment Guidelines would be implemented. However, throughout October and November 2007, Carlyle, CIM and CCCs Directors took no steps to make those fundamental changes. 363. Remarkably, when CCCs Directors met on November 13, 2007, Carlyle, CIM and CCCs Directors focused their attention on whether CCC could pay a fourth quarter dividend and when CCC could start making further investments. Notwithstanding the best interests of CCC, Carlyle and CIM remained determined to out-perform competitors such as Annaly, who had adopted a more conservative investment strategy in the face of market instability, focused on the preservation of capital and had reduced leverage accordingly. By doing so, Carlyle continued to generate management fees and advance Carlyles corporate interests ahead of the best interests of CCC. 364. Indeed, on November 13, 2007, CCCs Directors approved, without question, Carlyle and CIMs proposal to further suspend CCCs fundamental and critical Investment Guidelines until March 31, 2008, including the requirements that CCC maintain a minimum 20% Liquidity Cushion, that CCC maintained repo lines of a minimum equal to 125% of all outstanding borrowings and that a maximum of 85% of CCCs capital be allocated to RMBS. 80

365. CCCs Directors continued to acquiesce in Carlyle and CIMs proposals to suspend these critical risk management measures, despite the acknowledged need to urgently change fundamental aspects of CCCs approach which led to CCCs inability to meet those risk management requirements. 366. CCCs Directors also approved, without question, Carlyle and CIMs proposal to amend the definition of the Liquidity Cushion to include undrawn debt from Carlyle, which allowed CCC to report a higher Liquidity Cushion than would have been available under previous definitions. It was illogical and highly inappropriate to include undrawn debt in the definition of Liquidity Cushion as, if drawn, the amount would have been repayable to Carlyle. The inclusion of additional debt as a component of the Liquidity Cushion calculation was also inconsistent with the nature and purpose of the Liquidity Cushion. 367. In furtherance of Carlyles corporate interests and objectives but to the detriment of CCC, the directors of CCC, on the recommendation of Carlyle and CIM, resolved without scrutiny to repay the $100 million outstanding to Carlyle plus interest and borrow a further $100 million from Carlyle, at 10% interest, together with a $1 million commitment fee payable to Carlyle. Again, these loan funds from Carlyle were grossly inadequate to materially benefit CCC and did not address the longer term viability of CCC. The best interests of CCC required sales of RMBS assets by CCC and/or the raising of equity capital. 368. The conduct of Carlyle, CIM and CCCs Directors was reckless, grossly negligent, or in the alternative, negligent and constituted wilful misconduct and breaches of the fiduciary and other obligations owed by Carlyle, CIM and CCCs Directors to CCC. The Defendants conduct was not attributable to any rational business purpose for CCC nor did they exercise any business judgement. 369. The losses incurred after October and November 2007 by CCC would have been avoided if the breaches by Carlyle, CIM and CCCs Directors had not taken place or if the action required had been taken. E.13 Annual Report Discloses Failure to Reduce Leverage February 2008 Carlyle Investor Conference 370. At the Carlyle Investor Conference in Dubai on February 6, 2008, Conway advised that he believed that the worst of the economic downturn had not yet happened, that the financial impact of the credit crisis had spread to the wider economy and that money was a commodity in very short supply. Conway concluded with the statement that If you have not panicked as of yet ... it is too late. Annual Report for the Year Ended December 31, 2007 371. CCCs annual report for the year ended December 31, 2007 (the 2007 annual report) was published on February 28, 2008. 81

372. The 2007 annual report disclosed that CCC had continued to hold significant investments in RMBS. As at December 31, 2007 CCCs RMBS had a total fair value of $21,707,621,000 representing approximately 100% of CCCs total assets. 373. CCCs Liquidity Cushion, as originally defined, was $27,181,000 as at December 31, 2007 (4.1% of Adjusted Capital) comprised of cash and cash equivalents of $11,751,000 and unencumbered RMBS of $15,430,000. According to the definition amended on November 13, 2007, CCCs Liquidity Cushion was $67,181,000 (10% of Adjusted Capital), comprised of cash and cash equivalents of $11,751,000, unencumbered RMBS of $15,430,000 and undrawn loan funds from Carlyle of $40,000,000. Again, Carlyle, CIM and the directors of CCC had not taken the steps necessary to maintain and increase CCCs Liquidity Cushion. 374. Once again, it was acknowledged in the 2007 annual report that CCCs Liquidity Cushion had been insufficient to meet additional collateral demands attributable to changes in the terms and conditions of our repurchase agreements during the second half of 2007. 375. CCC remained highly leveraged at December 31, 2007. CCC had $20,976,047,000 outstanding as borrowings under repo agreements with twelve different repo counterparties, with a weighted average remaining maturity of 20 days. The collateral for these borrowings was comprised of securities with a fair value of $21,692,191,000. CCCs leverage as December 31, 2007 was 31.4 times. Carlyle, CIM and the directors of CCC had not taken the steps necessary to reduce CCCs leverage. 376. The 2007 annual report disclosed that the key risk management parameters adopted by CCC had been suspended until September 30, 2008, being (a) the 20% minimum Liquidity Cushion, (b) the requirement that CCC maintain a Minimum Borrowing Capacity of 125% of total investment assets and (c) the requirement that limited RMBS to 85% of total capital. 377. Having raised approximately $945,000,000 in capital by way of private placement and the IPO, CCCs equity/net asset value had declined significantly to $669,467,000 as at December 31, 2007. 378. CCCs net loss for the year ended December 31, 2007 according to IFRS was $16,790,000. Under IFRS, CCC reported a change in the deficit in fair value reserves of $285,623,000. According to US GAAP CCCs loss for the year ended December 31, 2007 was $266,987,000. 379. The management and incentive fees paid or payable to CIM for the year ended December 31, 2007 were $12,517,000 and $4,682,000 respectively. Other fees paid to The Carlyle Group and CIM for the quarter as reimbursement for overhead expenses relating to office rent, furniture, supplies and personnel salaries totalled $946,400. In addition, CCC reimbursed Carlyle and CIM $2,545,000 for internal use software and other property. 82

380. The 2007 annual report disclosed in the section prepared by Carlyle and CIM entitled Managements Discussion and Analysis of Financial Condition and Results of Operations that during the second half of 2007, CCCs repo counterparties had required that it post approximately $482 million of additional collateral as a result of the decline in the fair value of CCCs RMBS and as a result of changes in the terms and conditions of CCCs repo agreements (that is, increases in the haircut). Further, that section disclosed that those demands were met by CCC selling all of its non-RMBS investment assets, borrowings from Carlyle and retained net cash from operations. February 27, 2008 Board Meeting 381. The meeting of CCCs Board held on February 27, 2008 at Carlyles offices in New York was attended by all of CCCs Directors as well as Cosiol, Greenwood, Trozzo, Rella, Buser, Martin Scott and Cowley and Reville from PwC. The key item on the agenda was the annual report for the year ended December 31, 2007. 382. Stomber discussed the state of the market and volatility since the beginning of February 2008. He noted that around February 14, 2008 the market started to fall apart. Incredibly, the primary concern of the Board in terms of CCCs future was how it would spend its earnings. Stomber indicated that management were reluctant to make a market forecast until the markets had settled. All acknowledged that it was [CCCs] primary goal to be in diversified fixed income, but if it could not get comfortable with any future operating strategy, [CCC] would have to figure out how to gracefully exit. 383. Hance informed the Board that [b]ecause the volatility in the market had not subdued, CIM recommended extending the suspension of the following Investment Guideline until September 30, 2008: 383.1 383.2 CCCs 20% minimum Liquidity Cushion requirement; the requirement that CCCs repo lines of credit are at minimum equal to 125% of all repo agreements outstanding; and 383.3 the requirement that limits RMBS investments to 85% of CCCs portfolio.

384. The Board then approved payment of a management fee to CIM for the fourth quarter of 2007 in the amount of $4,176,673. The Board also approved the cost sharing arrangement between CIM and CCC for 2008 proposed by Carlyle and CIM, in similar terms to the previous year and pursuant to which CCC would pay approximately $1,170,000 to CIM for reimbursement of overhead expenses.

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E.14 The Defendants Breaches of Duties Continued in December 2007 to February 2008 385. CCCs Directors did not meet at any time between December 2007 through January 2008, either by telephone or in person. Following the meeting on November 13, 2007, CCCs Directors did not meet again until February 27, 2008. 386. In September 2007, Carlyle, CIM and CCCs Directors knew and acknowledged that CCC needed to urgently reduce leverage and significantly increase its minimum Liquidity Cushion. However, throughout December 2007 and January and February 2008, Carlyle, CIM and CCCs Directors took no steps to make those fundamental revisions and engaged in no process to ensure that those fundamental revisions were implemented. 387. Rather, Carlyle, CIM and CCCs Directors deliberately chose to operate CCC outside even its original stress tested Business Model which required a minimum 20% Liquidity Cushion. This was a result of Carlyle and CIMs steadfast determination to out-perform its competitors, generate high fees and advance Carlyles corporate interests ahead of the best interests of CCC. 388. Not surprisingly, on February 27, 2008, CCCs Directors approved, without question, Carlyle and CIMs proposal to further extend the suspension of CCCs fundamental and critical Investment Guidelines until September 30, 2008, including the requirements that CCC maintain a minimum 20% Liquidity Cushion, that CCC maintained repo lines of a minimum equal to 125% of all outstanding borrowings and that a maximum of 85% of CCCs capital be allocated to RMBS. 389. CCCs Directors continued to acquiesce in Carlyle and CIMs proposals to suspend these critical risk management measures, despite the acknowledged need to urgently change fundamental aspects of CCCs approach, which led to CCCs inability to meet those risk management requirements. 390. In furtherance of Carlyles corporate interests and objectives, the directors of CCC, on the recommendation of Carlyle and CIM, resolved without scrutiny to increase the line of credit from Carlyle to CCC from $100 million to $150 million, at 10% interest. Again, these loan funds from Carlyle were grossly inadequate to materially benefit CCC and did not address the longer term viability of CCC. The best interests of CCC required sales of RMBS assets by CCC and/or raising additional equity capital. 391. The conduct of Carlyle, CIM and CCCs Directors was reckless, grossly negligent, or in the alternative, negligent and constituted wilful misconduct and breaches of the fiduciary and other obligations owed by Carlyle, CIM and CCCs Directors to CCC. The Defendants conduct was not attributable to any rational business purpose for CCC nor did they exercise any business judgement.

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392. The losses incurred after December 2007 through February 2008 by CCC would have been avoided if the breaches by Carlyle, CIM and CCCs Directors had not taken place or if the action required had been taken. E.15 Collapse of CCC 393. The 2007 annual report made it clear that in the period from June 2007 until February 2008, Carlyle, CIM and the Board of CCC had failed to take any meaningful steps to reduce CCCs leverage and restore and increase its Liquidity Cushion, notwithstanding: 393.1 that the need to reduce leverage and increase liquidity should have been obvious to Carlyle, CIM and the Board of CCC, having regard to their frequently touted expertise, skill and experience in the management of leveraged investments; 393.2 393.3 adverse media commentary targeted at CCCs high leverage and lack of liquidity; analyst reports identifying CCCs minimum 20% Liquidity Cushion as critical to its Business Model; and 393.4 Carlyle and CIMs promise to reduce leverage and double the Liquidity Cushion made at the Carlyle Investor Conference. 394. Two days after publication of the 2007 annual report, CCCs repo counterparties began to make further margin calls which CCC ultimately could not meet. 395. During an investors conference call on March 3, 2008, Hance reported that CCC had received margin calls of sizeable numbers on almost a daily basis and was worried about further margin calls. He also reported that CCC was in a daily cash fight which needed to be preserved for potential even worse margin calls, although Stomber intervened, stating that the position was not quite as negative as outlined by Hance. 396. On March 5, 2008, CCC announced in a media release that since filing the 2007 annual report on February 28, 2008, it had been subject to margin calls and additional collateral requirements totalling more than $60 million. The media release stated: Until March 5, the Company had met all of the margin requirements imposed by its repo counterparties. However, on March 5, the Company received additional margin calls from seven of its 13 repo counterparties totalling more than $37 million. The Company has met margin calls from three of these financing counterparties that have indicated a willingness to work with the Company during these tumultuous times, but did not meet the margin requirements of the four other repo financing counterparties. From this group of four counterparties, one notice of default has been received by the Company and management expects to receive at least one additional default notice. 85

397. On March 7, 2008, CCC announced through a further media release that it was in continuing discussions with its lenders regarding its financial situation, that some of CCCs repo counterparties had liquidated CCCs RMBS and that further securities may be liquidated. The release also stated: Although the Company believed last week that it had sufficient liquidity, it was informed by its lenders this week that additional margin calls and increased collateral requirements would be significant and well in excess of the margin calls it received Wednesday. The Company believes these additional margin calls and increased collateral requirements could quickly deplete its liquidity and impair its capital. Management is closely monitoring the situation and considering all available options for the Company. 398. According to media releases published by CCC on March 9 and 10, 2008, Carlyle and CCC continued discussions with CCCs lenders regarding CCCs situation. On March 10, 2008, CCC announced that over $5.7 billion of CCCs securities had been sold. By March 12, 2008, CCC announced that it expected its lenders would promptly take possession of substantially all of CCCs remaining assets. 399. On March 12, 2008, the Board of CCC met via telephone at 7.30pm New York time. The directors were informed that CCC had failed. The Board discussed events of the previous few days. Stomber then reminded the Board that when Carlyle and CIM organized CCC, they did extensive back testing for the RMBS securities to be in a position to weather the events of the worst time period in recent history (1998). For years, there had been low market volatility and stable 2% haircuts on the financing arrangements. There was no way the Company could have anticipated these changes, no data points in history that would have spurred management to increase the size of the liquidity cushion and still have an economic model against its competitors. Later, the minutes record that Stomber said that he had never seen a market like this and would never have believed it was possible. The minutes then conclude: In closing, Mr Hance noted that in about 18 months, a safe, pleasant, simple investment with reasonable return to investors had dramatically shifted in the market. 400. An article published in the Financial Times on March 14, 2008 referred to CCCs high level of leverage (31 times capital) which had proved unsustainable in the turmoil of the mortgage markets. The article posed the obvious question: why was CCC so late in cutting use of borrowed money? E.16 Winding Up 401. On March 16, 2008, CCC announced that its Class A shareholders (being affiliates of Carlyle which held all of the voting shares in CCC) had voted unanimously in favour of a compulsory winding up proceeding under the Companies Law in Guernsey. 402. On March 17, 2008, the Royal Court of Guernsey ordered that CCC be placed into compulsory liquidation under section 94(a) of the Companies (Guernsey) Law 1994. Mr Alan Roberts and Mr Neil Mather were 86

appointed Joint Liquidators of CCC and duly sworn into office on that day. On March 18, 2008, the Court approved the appointment of Mr Christopher Morris and Mr Adrian Rabet as Additional Joint Liquidators. 403. Two days later, the Liquidators of CCC announced that CCCs assets were insufficient to meet its liabilities and that shareholders were unlikely to receive any distribution in the winding up of CCC. The Liquidators have since received substantial claims against CCC in the liquidation. E.17 Management and Incentive Fees Paid to Carlyle 404. In 2006 Carlyle and CIM charged CCC $635,000 in management fees. For the year ended December 31, 2007, Carlyle and CIM charged CCC management fees of $12,517,000 and incentive fees of $5,861,000, giving a total of $18,378,000 for 2007 alone and $19,013,000 in total. 405. CCCs September 2007 quarterly report disclosed that [o]n July 11, 2007 we made grants of restricted stock to our independent directors and Carlyle Investment Management LLC totalling 2,891,032 Class B shares (or RDSs representing Class B Shares) which is the maximum permitted under our equity incentive plans. At their listing price of $19 each, 2,891,032 of shares amounted to $54,929,608, of which a market value of $54,479,593 was allotted to CIM (see paragraph 232 above). 406. In addition to those fees, the sum of $2,271,000 was paid by CCC to Carlyle as interest in loans for the year ended December 31, 2007. In addition, CCC reimbursed Carlyle and CIM $5,780,000 for internal use software and other property. E.18 The Aftermath and Cover-Up 407. Following the collapse of CCC, Carlyle falsely attempted to attribute its demise to market conditions and to distance itself from CCC. In a press release regarding CCC issued by Carlyle on March 13, 2008, Carlyle stated: CCC is a separate legal and business entity, and we believe it will not have a measurable impact on any of our other funds, investments and portfolio companies. CCCs defaults under its repurchase agreements with its lenders do not trigger cross-defaults for any borrowings by The Carlyle Group, any of its other investment funds or any of The Carlyle Groups portfolio companies. When The Carlyle Group created CCC in 2006, it was designed to provide attractive riskadjusted returns for shareholders by investing in a diversified portfolio of fixed income assets consisting of U.S. government agency AAA-rated RMBS securities and leveraged finance assets. Due to the low-risk, low-return nature of the U.S. government agencybacked securities, a large position (and thus a correspondingly large amount of leverage) was required to realize gains substantial enough to warrant the investment. At the time, this approach was time tested in the market for these types of assets. Unfortunately, extreme 87

volatility and market movement during this liquidity crisis created a hostile environment for CCC and similar types of vehicles. 408. Similarly, in the letter to Carlyle investors from Rubenstein, DAniello and Conway in Carlyles 2007 annual report, Carlyle sought to explain the collapse of CCC by reference to the impairment in value of CCCs assets by the unprecedented meltdown in the mortgage market. 409. Carlyles attempts to explain or justify the collapse of CCC by reference to unprecedented market volatility were and are demonstrably false. Under these same market conditions, comparable products marketed by Carlyles peers, such as Prodesse, Annaly Capital Management and MFA Mortgage Investments Inc., which had not engaged in such extreme leveraging, survived and even prospered during the same period of volatility. 410. Notably, at the time CCC was left by Carlyle and CIM to collapse, a number of market analysts (including UBS Securities LLC on March 6, 2008 and Daniel Stewart & Company on March 7 and March 19, 2008) highlighted CCCs excessive leverage of between 28 and 32 times capital as being the fundamental distinguishing feature between CCC on the one hand, which had been unable to meet margin calls, and CCCs peers such as Prodesse, Annaly Capital Management and MFA Mortgage Investments Inc, on the other. Those entities typically employed more prudent leverage levels of no more than 10 times capital. During the quarter ended September 30, 2007, Annaly deleveraged by selling $1.8 billion of mortgage backed securities. In the period June 30, 2007 to December 31, 2007 it reduced its leverage ratio from 11.2 to 1 to 8.7 to 1. A year later it had been further reduced to 6.4 to 1. In August 2007, KKR Financial Holdings LLC sold $5.1 billion of RMBS resulting in a net loss of approximately $40 million. Each of those companies survived the market instability of 2007 and 2008. 411. In contrast, Carlyle and CIMs use of excessively high leverage for CCC, coupled with CCCs lack of a substantial Liquidity Cushion in the volatile market environment which existed from mid 2007 exposed CCC to an explosive, unnecessary and highly inappropriate risk of failure. Carlyle and CIM, blinded by Carlyles own corporate objectives to showcase its prowess in leveraged financing investment and to extract fees, allowed CCCs Liquidity Cushion to fall to and remain at a disastrously low level, leading to the ultimate demise of CCC. 412. Had Carlyle and CIM adhered to and enhanced the Investment Guidelines they had developed for CCC, they would have taken steps, from July 2007 onwards, to sell RMBS and/or raise additional equity capital and thereby reduce CCCs leverage and substantially increase its Liquidity Cushion beyond the minimum of 20%, and secure additional sources of repo financing on acceptable terms. By that time it was patently clear that failure to do so would jeopardize CCCs capital.

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F. F.1

THE DEFENDANTS BREACHES OF DUTIES The Defendants Conflicts Were Pervasive

413. In the face of sustained market volatility through the second half of 2007 and early 2008, Carlyle, CIM and the directors of CCC ignored their obligations to CCC in order to preserve Carlyles reputation as a sophisticated investment manager and adviser, to protect the Carlyle brand and continue generating fees from CCC. 414. Instead of ensuring that CCCs leverage was reduced, from July 2007, Carlyle, CIM and CCCs directors acted in breach of their duties and in complete disregard of the interests of CCC, and consciously abdicated their fiduciary responsibilities to CCC, causing CCC to bet the farm on an all or nothing outcome. This was done in the hope that a market miracle would vindicate them, but with a predetermined strategy that in the event of CCCs collapse, Carlyle, CIM and the directors would blame adverse market conditions in an attempt to avoid scrutiny of their own misconduct. 415. The Defendants conflicts of interest were so pervasive that they deliberately chose not to adopt the course of action that was required in the best interests of CCC, being to urgently address and change fundamental aspects of CCCs approach. In particular, sales of RMBS assets and/or raising of additional equity capital by CCC were required from at least July 2007. 416. The course of action required to be taken by Carlyle, CIM and the directors of CCC in the best interests of CCC would have resulted in short term realized losses, which would have significantly prejudiced CCCs ability to pay dividends and fees to CIM and resulted in negative publicity for Carlyle given the recent IPO of CCC, with consequential reputational and financial detriment to Carlyle and CIM. This included damage to the prospects of Carlyle succeeding in the IPO contemplated for Carlyle itself, which was one of Carlyles primary and longstanding corporate objectives. F.2 CCCs Directors Wrongful Conduct

417. The conduct of CCCs Directors was reckless, grossly negligent (or in the alternative, negligent) and constituted wilful misconduct and breaches of the fiduciary and other obligations owed by CCCs Directors to CCC by: 417.1 Failing to exercise supervisory authority over Carlyle and CIM and/or to monitor and oversee the investment activities undertaken by Carlyle and CIM on behalf of CCC; 417.2 Failing to consider, question, discuss or analyse whether Carlyle and CIM were managing and advising CCC in a manner consistent with CCCs best interests;

89

417.3

Failing to meet in the absence of representatives from Carlyle and CIM to consider or discuss the performance of Carlyle and CIM as CCCs investment managers and advisers;

417.4

Failing, from July 2007 until CCCs collapse in March 2008, to consider and give priority to the best interests of CCC and instead acting with the objective of furthering Carlyles corporate interests and objectives;

417.5

Failing, from July 2007 until CCCs collapse in March 2008, to adopt the course of action which was required in the best interests of CCC, namely to (a) sell down CCCs RMBS assets, thereby reducing its leverage and enhancing liquidity; and/or (b) raise additional equity capital; and/or (c) conduct a restructure or an orderly winding down of CCC;

417.6

Failing, from July 2007 until CCCs collapse in March 2008, to engage in any process to consider and/or analyse, taking into account all material information reasonably available to the Board, and/or obtain any independent advice regarding any of the options that were available to CCC to reduce leverage and enhance liquidity in order to safeguard CCCs capital and ensure CCCs long term viability, and/or to undertake any or any sufficient worst case scenario analysis;

417.7

Failing, in July 2007, to ensure that all of the net proceeds from CCCs IPO were utilized to enhance CCCs Liquidity Cushion;

417.8

Permitting and/or approving CCCs purchase of $1,429,089,180 of RMBS on July 30, 2007 and $73,550,172 of RMBS on August 3, 2007 using proceeds from CCCs IPO;

417.9

Failing, in July 2007, to identify that using proceeds from CCCs IPO to purchase additional RMBS assets at existing high levels of leverage was not in the best interests of CCC;

417.10

Failing, in July 2007, to consider, question, analyse or discuss whether it was in CCCs best interests to use the net proceeds from the IPO to purchase additional RMBS rather than to enhance CCCs Liquidity Cushion;

417.11

Deliberately choosing, in August 2007, to accept a $100 million loan by Carlyle to CCC to meet a short term liquidity requirement at 10% interest, in circumstances where those funds were grossly inadequate to materially benefit CCC and did not address the longer term viability of CCC;

417.12

Failing, in August 2007, to consider and/or analyse and/or to obtain any independent advice as to whether the $100 million loan from Carlyle to CCC at 10% interest was objectively 90

reasonable, appropriate and in CCCs best interests to safeguard its capital and ensure CCCs long term viability; 417.13 Failing, from September 2007 until CCCs collapse in March 2008, to implement the new business model for CCC that had been announced during the Carlyle Investor Conference on September 11, 2007; 417.14 Failing to increase but instead progressively suspending the 20% minimum Liquidity Cushion requirement until December 31, 2007, March 31, 2008 and then September 30, 2008; 417.15 Failing to increase but instead progressively suspending the 125% Minimum Borrowing Capacity requirement until December 31, 2007, March 31, 2008 and then September 30, 2008; 417.16 Progressively suspending the requirement that a maximum of 85% of CCCs capital be allocated to RMBS until December 31, 2007, March 31, 2008 and then September 30, 2008; 417.17 417.18 Failing to manage and adjust CCCs portfolio in response to changing market conditions; Resolving without scrutiny, in November 2007, to repay the $100 million outstanding to Carlyle and borrow a further $100 million from Carlyle, at 10% interest, together with a $1 million commitment fee payable to Carlyle, in circumstances where those funds were grossly inadequate to materially benefit CCC and did not address the longer term viability of CCC; 417.19 Failing, in November 2007, to consider and/or analyse and/or to obtain any independent advice as to whether the re-payment and re-borrowing of the $100 million loan from Carlyle to CCC at 10% interest, with a $1 million commitment fee was objectively reasonable, appropriate and in CCCs best interests to safeguard its capital and ensure CCCs long term viability; 417.20 In November 2007, amending the definition of the Liquidity Cushion to include undrawn debt from Carlyle, without considering the impact of that decision upon CCCs long term viability; 417.21 Resolving, without scrutiny, in February 2008, to extend the loan from Carlyle to CCC to $150 million, at 10% interest, in circumstances where those funds were grossly inadequate to materially benefit CCC and did not address the longer term viability of CCC; 417.22 Failing to consider and/or analyse and/or to obtain any independent advice as to whether extending the loan from Carlyle to CCC to $150 million, at 10% interest, was objectively reasonable, appropriate and in CCCs best interests to safeguard its capital and ensure CCCs long term viability;

91

417.23

Only holding two board meetings between August 2007 and February 2008 which were each only of 90 minutes duration;

417.24 417.25

Failing to ensure that the assets of CCC were not exposed to unacceptable risks; and Trying to limit Carlyle and CIMs liability to CCC through the IMA without any consideration of whether that was in the best interests of CCC.

418. CCCs Directors focused upon CCCs ability to generate net income under IFRS, pay fees to Carlyle and CIM, pay dividends and avoid negative publicity in priority over protecting CCCs capital and maintaining long term net asset value. Sales of RMBS assets by CCC and/or raising of additional equity capital would have enabled CCC to reduce leverage, enhance liquidity and thereby safeguard CCCs capital and long term viability. However, in furtherance of Carlyles corporate interests and objectives but to the detriment of CCC, CCCs Directors refused to contemplate such sales. To have done so would have caused CCC to recognize significant realized losses, thus diminishing the success of Carlyle in the eyes of the market and exposing Carlyle to negative publicity, reputational damage, and loss of fees from CCC. Carlyle was also concerned that such action would damage its longstanding corporate objective to take Carlyle itself public. F.3 CIMs Wrongful Conduct

419. The conduct of CIM was reckless, grossly negligent (or in the alternative, negligent) and constituted wilful misconduct and breaches of the fiduciary and other obligations owed by CIM to CCC by: 419.1 Failing, from July 2007 until CCCs collapse in March 2008, to consider and give priority to the best interests of CCC and instead acting with the objective of furthering Carlyles corporate interests and objectives; 419.2 Failing to adopt a cautious, disciplined and managed risk approach as investment managers and advisers; 419.3 Failing to be ready to adapt to more turbulent market conditions including by being prepared to take a more cautious and prudent approach than that which it had previously identified as appropriate; 419.4 Failing to adapt to more challenging economic conditions in 2007, and in particular, to the likely reduction in availability and the likely higher cost of obtaining funding (liquidity); 419.5 Failing, from July 2007 until CCCs collapse in March 2008, to provide advice regarding any of the options that were available to CCC to reduce leverage and enhance liquidity in order to

92

safeguard CCCs capital and ensure CCCs long term viability, and/or to undertake any or any sufficient worst case scenario analysis; 419.6 Failing, from July 2007 until CCCs collapse in March 2008, to adopt the course of action which was required in the best interests of CCC, namely to (a) sell down CCCs RMBS assets, thereby reducing its leverage and enhancing liquidity; and/or (b) raise additional equity capital; and/or (c) conduct a restructure or an orderly winding down of CCC; 419.7 Failing, in July 2007, to use all of the net proceeds from CCCs IPO to enhance CCCs Liquidity Cushion; 419.8 Causing CCC to purchase $1,429,089,180 of RMBS on July 30, 2007 and $73,550,172 of RMBS on August 3, 2007 using proceeds from CCCs IPO; 419.9 Failing, in July 2007, to identify that using proceeds from CCCs IPO to purchase additional RMBS assets at existing high levels of leverage was not in the best interests of CCC; 419.10 Deliberately choosing, in August 2007, to advise and recommend the making of a $100 million loan by Carlyle to CCC to meet a short term liquidity requirement at 10% interest, in circumstances where those funds were grossly inadequate to materially benefit CCC and did not address the longer term viability of CCC and the interest rate was in excess of a proper commercial rate; 419.11 Failing, in August 2007, to provide advice as to whether the $100 million loan from Carlyle to CCC at 10% interest was objectively reasonable, appropriate and in CCCs best interests to safeguard its capital and ensure CCCs long term viability; 419.12 Failing, from September 2007 until CCCs collapse in March 2008, to implement the new business model for CCC that had been announced during the Carlyle Investor Conference on September 11, 2007; 419.13 Failing to recommend the increase but instead recommending the progressive suspension of the 20% minimum Liquidity Cushion requirement until December 31, 2007, March 31, 2008 and then September 30, 2008; 419.14 Failing to recommend the increase but instead recommending the progressive suspension of the 125% Minimum Borrowing Capacity requirement until December 31, 2007, March 31, 2008 and then September 30, 2008;

93

419.15

Recommending the progressive suspension of the requirement that a maximum of 85% of CCCs capital be allocated until December 31, 2007, March 31, 2008 and then September 30, 2008;

419.16

Deliberately choosing, in November 2007, to advise and recommend that CCC repay the $100 million outstanding to Carlyle and borrow a further $100 million from Carlyle, at 10% interest, together with a $1 million commitment fee payable to Carlyle in circumstances where those funds were grossly inadequate to materially benefit CCC and did not address the longer term viability of CCC;

419.17

Failing, in November 2007, to provide advice as to whether the $100 million loan from Carlyle to CCC at 10% interest, with a $1 million commitment fee was objectively reasonable, appropriate and in CCCs best interests to safeguard its capital and ensure CCCs long term viability;

419.18

In November 2007, recommending and advising that the definition of Liquidity Cushion be amended to include undrawn debt from Carlyle, which allowed CCC to report a higher Liquidity Cushion than would have been available under previous definitions;

419.19

Deliberately choosing, in February 2008, to advise and recommend that CCC extend the loan from Carlyle to $150 million, at 10% interest, in circumstances where those funds were grossly inadequate to materially benefit CCC and did not address the longer term viability of CCC;

419.20

Failing, in February 2008, to provide advice as to whether the $150 million loan from Carlyle to CCC at 10% interest was objectively reasonable, appropriate and in CCCs best interests to safeguard its capital and ensure CCCs long term viability;

419.21 419.22

Failing to ensure that the assets of CCC were not exposed to unacceptable risks; and Trying to limit Carlyle and CIMs liability to CCC through the IMA without any consideration of whether that was in the best interests of CCC.

420. As a shadow and/or de facto director of CCC under Guernsey Law, CIM owed the same fiduciary duties to CCC that the CCC Directors owed and violated those duties through the same conduct described in paragraphs 417.4 through 417.25 above. 421. CIM focused upon CCCs ability to generate net income under IFRS, pay fees to Carlyle and CIM, pay dividends and avoid negative publicity in priority over protecting CCCs capital and maintaining long term net asset value. Sales of RMBS assets by CCC and/or raising of additional equity capital would have enabled CCC to reduce leverage, enhance liquidity and thereby safeguard CCCs capital and long term 94

viability. However, in furtherance of Carlyles corporate interests and objectives but to the detriment of CCC, CIM refused to contemplate such sales. To have done so would have caused CCC to recognize significant realized losses, thus diminishing the success of Carlyle in the eyes of the market and exposing Carlyle to negative publicity, reputational damage, and loss of fees from CCC. Carlyle was also concerned that such action would damage its longstanding corporate objective to take Carlyle itself public. F.4 Carlyles Wrongful Conduct

422. The conduct of Carlyle was reckless, grossly negligent (or in the alternative, negligent) and constituted wilful misconduct and breaches of the fiduciary and other obligations owed by Carlyle to CCC by: 422.1 Failing, from July 2007 until CCCs collapse in March 2008, to consider and give priority to the best interests of CCC and instead acting with the objective of furthering Carlyles corporate interests and objectives; 422.2 Failing to adopt a cautious, disciplined and managed risk approach as investment managers and advisers; 422.3 Failing to be ready to adapt to more turbulent market conditions including by being prepared to take a more cautious and prudent approach than that which it had previously identified as appropriate; 422.4 Failing to adapt to more challenging economic conditions in 2007, and in particular, to the likely reduction in availability and the likely higher cost of obtaining funding (liquidity); 422.5 Failing, from July 2007 until CCCs collapse in March 2008, to provide advice regarding any of the options that were available to CCC to reduce leverage and enhance liquidity in order to safeguard CCCs capital and ensure CCCs long term viability, and/or to undertake any or any sufficient worst case scenario analysis; 422.6 Failing, from July 2007 until CCCs collapse in March 2008, to adopt the course of action which was required in the best interests of CCC, namely to (a) sell down CCCs RMBS assets, thereby reducing its leverage and enhancing liquidity; and/or (b) raise additional equity capital; and/or (c) conduct a restructure or an orderly winding down of CCC; 422.7 Failing, in July 2007, to use all of the net proceeds from CCCs IPO to enhance CCCs Liquidity Cushion; 422.8 Causing CCC to purchase $1,429,089,180 of RMBS on July 30, 2007 and $73,550,172 of RMBS on August 3, 2007 using proceeds from CCCs IPO; 95

422.9

Failing, in July 2007, to identify that using proceeds from CCCs IPO to purchase additional RMBS assets at existing high levels of leverage was not in the best interests of CCC;

422.10

Deliberately choosing, in August 2007, to advise and recommend the making of a $100 million loan by Carlyle to CCC to meet a short term liquidity requirement at 10% interest, in circumstances where those funds were grossly inadequate to materially benefit CCC and did not address the longer term viability of CCC;

422.11

Failing, in August 2007, to provide advice as to whether the $100 million loan from Carlyle to CCC at 10% interest was objectively reasonable, appropriate and in CCCs best interests to safeguard its capital and ensure CCCs long term viability;

422.12

Failing, from September 2007 until CCCs collapse in March 2008, to implement the new business model for CCC that had been announced during the Carlyle Investor Conference on September 11, 2007;

422.13

Failing to recommend the increase but instead recommending the progressive suspension of the 20% minimum Liquidity Cushion requirement until December 31, 2007, March 31, 2008 and then September 30, 2008;

422.14

Failing to recommend the increase but instead recommending the progressive suspension of the 125% Minimum Borrowing Capacity requirement until December 31, 2007, March 31, 2008 and then September 30, 2008;

422.15

Recommending the progressive suspension of the requirement that a maximum of 85% of CCCs capital be allocated until December 31, 2007, March 31, 2008 and then September 30, 2008;

422.16

Deliberately choosing, in November 2007, to advise and recommend that CCC repay the $100 million outstanding to Carlyle and borrow a further $100 million from Carlyle, at 10% interest, together with a $1 million commitment fee payable to Carlyle in circumstances where those funds were grossly inadequate to materially benefit CCC and did not address the longer term viability of CCC;

422.17

Failing, in November 2007, to provide advice as to whether the $100 million loan from Carlyle to CCC at 10% interest, with a $1 million commitment fee was objectively reasonable, appropriate and in CCCs best interests to safeguard its capital and ensure CCCs long term viability;

96

422.18

In November 2007, recommending and advising that the definition of Liquidity Cushion be amended to include undrawn debt from Carlyle, which allowed CCC to report a higher Liquidity Cushion than would have been available under previous definitions;

422.19

Deliberately choosing, in February 2008, to advise and recommend that CCC extend the loan from Carlyle to $150 million, at 10% interest, in circumstances where those funds were grossly inadequate to materially benefit CCC and did not address the longer term viability of CCC;

422.20

Failing, in February 2008, to provide advice as to whether the $150 million loan from Carlyle to CCC at 10% interest was objectively reasonable, appropriate and in CCCs best interests to safeguard its capital and ensure CCCs long term viability;

422.21 422.22

Failing to ensure that the assets of CCC were not exposed to unacceptable risks; and Trying to limit Carlyle and CIMs liability to CCC through the IMA without any consideration of whether that was in the best interests of CCC.

423. As a shadow and/or de facto director of CCC under Guernsey Law, Carlyle owed the same fiduciary duties to CCC that the CCC Directors owed and violated those duties through the same conduct described in paragraphs 417.4 through 417.25 above. 424. Carlyle focused upon CCCs ability to generate net income under IFRS, pay fees to Carlyle and CIM, pay dividends and avoid negative publicity in priority over protecting CCCs capital and maintaining long term net asset value. Sales of RMBS assets by CCC and/or raising of additional equity capital would have enabled CCC to reduce leverage, enhance liquidity and thereby safeguard CCCs capital and long term viability. However, in furtherance of Carlyles corporate interests and objectives but to the detriment of CCC, Carlyle refused to contemplate such sales. To have done so would have caused CCC to recognize significant realized losses, thus diminishing the success of Carlyle in the eyes of the market and exposing Carlyle to negative publicity, reputational damage, and loss of fees from CCC. Carlyle was also concerned that such action would damage its longstanding corporate objective to take Carlyle itself public. FIRST CLAIM FOR RELIEF (Against CCCs Directors for Breach of Fiduciary and Other Duties) 425. The Plaintiffs repeat and reallege, as if set forth in full herein, the allegations of all of the preceding paragraphs of this Complaint. 426. CCCs Directors owed fiduciary and other duties to CCC under Guernsey Law as detailed in Section C above. 97

427. In engaging in the conduct alleged herein and in failing to act when they were required to do so, CCCs Directors breached those duties to CCC. The relevant conduct, each of which constituted a breach of duty, included, among other things, the conduct alleged in paragraphs 417.1 through 418 above. 428. As a result of those breaches, CCC suffered loss and damage. 429. By reason of the foregoing, the Plaintiffs are entitled to a judgment against CCCs Directors, jointly and severally, awarding the Plaintiffs compensatory damages in an amount to be determined at the trial of this action, together with interest at the maximum allowable rate. SECOND CLAIM FOR RELIEF (Against CIM for Breach of Fiduciary and Other Duties) 430. The Plaintiffs repeat and reallege, as if set forth in full herein, the allegations of all of the preceding paragraphs of this Complaint. 431. CIM owed fiduciary and other duties to CCC to act for and give advice for the benefit of CCC and to protect the interests of CCC as detailed in Section C above. 432. Those duties included the obligation to exercise reasonable care and diligence to ensure that the assets of CCC were not exposed to unacceptable risks and to assist the Board of CCC in ensuring that decisions taken by the Board of CCC were in the best interests of CCC. 433. Through its conduct as alleged herein, CIM breached those duties to CCC. The relevant conduct, each of which constituted a breach of duty, included, among other things, the conduct alleged in paragraphs 419.1 through 421 above. 434. As a result of those breaches, CCC suffered loss and damage. 435. By reason of the foregoing, the Plaintiffs are entitled to a judgment against CIM awarding the Plaintiffs compensatory damages in an amount to be determined at the trial of this action, together with interest at the maximum allowable rate. THIRD CLAIM FOR RELIEF (Against Carlyle for Breach of Fiduciary and Other Duties) 436. The Plaintiffs repeat and reallege, as if set forth in full herein, the allegations of all of the preceding paragraphs of this Complaint.

98

437. Carlyle owed fiduciary and other duties to CCC to act for and give advice for the benefit of CCC and to protect the interests of CCC as detailed in Section C above. 438. Those duties included the obligation to exercise reasonable care and diligence to ensure that the assets of CCC were not exposed to unacceptable risks and to assist the Board of CCC in ensuring that decisions taken by the Board of CCC were in the best interests of CCC. 439. Through its conduct as alleged herein, Carlyle breached those duties to CCC. The relevant conduct, each of which constituted a breach of duty, included, among other things, the conduct alleged in paragraphs 422.1 through 424 above. 440. As a result of those breaches, CCC suffered loss and damage. 441. By reason of the foregoing, the Plaintiffs are entitled to a judgment against Carlyle awarding the Plaintiffs compensatory damages in an amount to be determined at the trial of this action, together with interest at the maximum allowable rate. FOURTH CLAIM FOR RELIEF (Alternative Claim Against CIM for Breach of Fiduciary Duty as a De Facto and/or Shadow Director of CCC) 442. The Plaintiffs repeat and reallege, as if set forth in full herein, the allegations of all of the preceding paragraphs of this Complaint and allege the following as an alternative to the Plaintiffs second claim for relief. 443. CIM controlled the affairs of CCC and performed functions properly discharged by a director of CCC, such that CIM was a de facto director under Guernsey Law. Alternatively, the majority of the directors of CCC took direction from and were accustomed to act in accordance with the directions of CIM, such that CIM was a shadow director of CCC under Guernsey Law. Consequently, CIM owed the same duties to CCC as described at paragraph 75 above, either by virtue of its role as a de facto or, alternatively, a shadow director of CCC or as a result of such duties being imposed upon it under Guernsey Law in light of the facts set out at paragraphs 76 and 77 above. 444. Through its conduct, CIM breached those duties to CCC. The relevant conduct, each of which constituted a breach of duty, included, among other things, the conduct described in paragraphs 417.4 through 417.25 and 420 above. 445. As a result of those breaches, CCC suffered loss and damage.

99

446. By reason of the foregoing, the Plaintiffs are entitled to a judgment against CIM awarding the Plaintiffs compensatory damages in an amount to be determined at the trial of this action, together with interest at the maximum allowable rate. FIFTH CLAIM FOR RELIEF (Alternative Claim Against Carlyle for Breach of Fiduciary Duty as a De Facto and/or Shadow Director of CCC) 447. The Plaintiffs repeat and reallege, as if set forth in full herein, the allegations of all of the preceding paragraphs of this Complaint and allege the following as an alternative to the Plaintiffs third claim for relief. 448. Carlyle controlled the affairs of CCC and performed functions properly discharged by a director of CCC, such that Carlyle was a de facto director under Guernsey Law. Alternatively, the majority of the directors of CCC took direction from and were accustomed to act in accordance with the directions of Carlyle, such that Carlyle was a shadow director of CCC under Guernsey Law. Consequently Carlyle owed the same duties to CCC as described at paragraph 75 above, either by virtue of its role as a de facto or, alternatively, a shadow director of CCC or as a result of such duties being imposed upon it under Guernsey Law in light of the facts set out at paragraphs 76 and 77 above. 449. Through its conduct, Carlyle breached those duties to CCC. The relevant conduct, each of which constituted a breach of duty, included, among other things, the conduct described in paragraphs 417.4 through 417.25 and 423 above. 450. As a result of those breaches, CCC suffered loss and damage. 451. By reason of the foregoing, the Plaintiffs are entitled to a judgment against Carlyle awarding the Plaintiffs compensatory damages in an amount to be determined at the trial of this action, together with interest at the maximum allowable rate. SIXTH CLAIM FOR RELIEF (Alternative Claim Against CIM for Aiding and Abetting CCCs Directors Breaches of Fiduciary Duty) 452. The Plaintiffs repeat and reallege, as if set forth in full herein, the allegations of all of the preceding paragraphs of this Complaint and allege the following as an alternative to the Plaintiffs second and fourth claims for relief. 453. CCCs Directors owed fiduciary duties to CCC. 454. CCCs Directors breached their fiduciary duties to CCC. 100

455. CCC suffered loss and damage as a result of those breaches. 456. CIM had actual knowledge of CCCs Directors breaches of their fiduciary duties to CCC because: 456.1 CIM investment professionals, including Conway, Hance, Stomber and Zupon were among CCCs Directors who breached their duties to CCC; 456.2 CIM investment professionals including Greenwood, Trozzo, Rella and Green were not on the Board of CCC but nevertheless attended all or nearly all of the meetings of the Board of CCC; 456.3 456.4 CIM investment professionals controlled the day-to-day activities of CCC; and CCC operated out of CIMs office in New York and Washington D.C.

457. CIM knowingly participated in the breaches of duty by CCCs Directors through, among other things: 457.1 The conduct described herein of CIMs investment professionals appointed to the Board of CCC and otherwise engaged in the management of CCC; and 457.2 CIMs control and domination over the affairs of CCC.

458. CIMs conduct caused CCC to suffer loss and damage as a result of CCCs Directors breaches of duty. 459. By reason of the foregoing, the Plaintiffs are entitled to a judgment against CIM awarding the Plaintiffs compensatory damages in an amount to be determined at the trial of this action, together with interest at the maximum allowable rate. SEVENTH CLAIM FOR RELIEF (Alternative Claim Against Carlyle for Aiding and Abetting CCCs Directors Breaches of Fiduciary Duty) 460. The Plaintiffs repeat and reallege, as if set forth in full herein, the allegations of all of the preceding paragraphs of this Complaint and allege the following as an alternative to the Plaintiffs third and fifth claims for relief. 461. CCCs Directors owed fiduciary duties to CCC. 462. CCCs Directors breached their fiduciary duties to CCC. 463. CCC suffered loss and damage as a result of those breaches. 464. Carlyle had actual knowledge of CCCs Directors breaches of their fiduciary duties to CCC because:

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464.1

Carlyles investment professionals, including Conway, Hance, Stomber and Zupon were among CCCs Directors who breached their duties to CCC;

464.2

Numerous Carlyle investment professionals who were not Board members nevertheless attended all meetings of the Board of CCC, including Greenwood, Trozzo, Rella, Harris, Ferguson, Nachtwey, Mayerhofer, Cosiol, Buser, Scott and Ziobro;

464.3 464.4

Carlyles investment professionals controlled the day-to-day activities of CCC; and CCC operated out of Carlyles office in New York and Washington D.C.

465. Carlyle knowingly participated in the breaches of duty by CCCs Directors through, among other things through: 465.1 465.2 the participation of Carlyles representatives on the Board of CCC; the advice and direction provided by Carlyles investment professionals to the Board of CCC; and 465.3 Carlyles control and domination over the affairs of CCC.

466. Carlyles conduct caused CCC to suffer loss and damage as a result of CCCs Directors breaches of duty. 467. By reason of the foregoing, the Plaintiffs are entitled to a judgment against Carlyle, awarding the Plaintiffs compensatory damages in an amount to be determined at the trial of this action, together with interest at the maximum allowable rate. EIGHTH CLAIM FOR RELIEF (Alternative Claim Against Carlyle for Aiding and Abetting CIMs Breaches of Fiduciary Duty) 468. The Plaintiffs repeat and reallege, as if set forth in full herein, the allegations of all of the preceding paragraphs of this Complaint and allege the following as an alternative to the Plaintiffs third and fifth claims for relief. 469. CIM owed fiduciary duties to CCC. 470. CIM breached its fiduciary duties to CCC. 471. CCC suffered loss and damage as a result of those breaches. 472. Carlyle had actual knowledge of CIMs breaches of its fiduciary duties to CCC because: 102

472.1 472.2

CIM was a wholly owned subsidiary of Carlyle; Carlyle investment professionals, including Greenwood, Trozzo, Rella and Green were also employed by CIM and participated in the provision of investment management advice to CCC;

472.3 472.4

CIM operated out of Carlyles offices in New York and Washington D.C.; Carlyles investment professionals were on the Board of CCC and were privy to the advice and direction provided by CIM to CCC; and

472.5

Carlyles investment professionals were aware of the control and domination exercised by CIM over CCC.

473. Carlyle knowingly participated in the breaches of duty by CIM through, among other things: 473.1 473.2 Carlyles control over CIM, its wholly owned subsidiary; and The participation by Carlyles representatives in the decision-making processes of CIM in the exercise of CIMs discretionary investment authority over CCC and control of the management and operations of CCC. 474. Carlyles conduct caused CCC to suffer loss and damage as a result of CIMs breaches of duty. 475. By reason of the foregoing, the Plaintiffs are entitled to a judgment against Carlyle, awarding the Plaintiffs compensatory damages in an amount to be determined at the trial of this action, together with interest at the maximum allowable rate. NINTH CLAIM FOR RELIEF (Against CIM for Declaration to Set Aside the IMA) 476. On September 20, 2006, Conway and/or other representatives of Carlyle and CIM arranged for CCC to enter into an investment management agreement with CIM (IMA) (see paragraph 57 above). The IMA: 476.1 purported to exclude CIMs liability to CCC in the conduct of its duties under the IMA except for loss resulting from wilful misconduct or gross negligence (Clause 2(b)); 476.2 purported to require CCC to indemnify and hold harmless (out of the funds of CCC) Carlyle and CIM against any loss suffered arising out of any act or failure to act when it was the result of wilful misfeasance, gross negligence, bad faith or reckless disregard (Clause 6); and

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476.3

purported to confer exclusive jurisdiction on the courts of Delaware over actions, suits or proceedings with respect to the IMA, purported to stipulate Delaware law as the law governing the IMA and purported to exclude the award of punitive or consequential damages (Clause 9).

477. The IMA was signed by Loveridge for CCC at the direction of Carlyle and CIM and by Ferguson for CIM. At its meeting on October 4, 2006 the full Board of CCC purported to ratify entry into the IMA. 478. Clauses 2(b), 6 and 9 of the IMA were, self-evidentially, substantially disadvantageous to CCC and conferred benefits to CIM for which CIM provided no consideration to CCC and for which CCC received no corporate benefit. It was not in CCCs best interests to limit Carlyle and CIMs potential liability arising out of their performance as CCCs investment managers and advisers or for CCC to provide any indemnity for Carlyle and CIMs negligent acts and omissions. Further, CCC was incorporated and domiciled in Guernsey and was managed from New York and Washington D.C. It was not in CCCs best interests to require CCC to bring claims in respect of the IMA in Delaware or to stipulate Delaware law as governing the IMA in circumstances where Delaware was a distant forum with which CCC had no connection. 479. CCC never sought or obtained any independent legal advice about the terms of the IMA, which was drafted by Carlyle and CIM, together with their lawyers and executed by Loveridge on September 20, 2006 at the direction of Carlyle and CIM. Loveridge did not consider whether entry into the IMA was in the best interests of CCC or whether it was otherwise a proper exercise of his power as a director of CCC to execute the document. Likewise, none of the members of the Board of CCC gave those matters any independent consideration on October 4, 2006, when they resolved to ratify entry into the IMA. 480. Accordingly, the IMA was not the product of an arms-length negotiation between CCC and CIM. Rather, it was the result of overreaching and the exercise of Carlyle and CIMs control, undue influence and unequal bargaining power over CCC (in circumstances where CCC effectively had no bargaining power at all). For those reasons, CCC is entitled to a declaration in these proceedings that clauses 2(b), 6 and 9 of the IMA are invalid and unenforceable. 481. Further, and in the alternative, the conduct of Carlyle, CIM and CCCs Directors in causing and/or permitting CCC to enter into the IMA with the inclusion of clauses 2(b), 6 and 9 was reckless, grossly negligent, or in the alternative, negligent and constituted wilful misconduct and a breach of the following fiduciary and other obligations owed by Carlyle, CIM and CCCs Directors to CCC: 481.1 the fiduciary duty to act in the best interests of CCC at all times, without regard to the interests of Carlyle; 481.2 the fiduciary duty in the exercise of their powers and discharge of their duties as a director of CCC, not to act for any collateral or improper purpose; 104

481.3

the fiduciary duty not to act in relation to the affairs of CCC in circumstances where there existed a conflict between their duties to CCC as director and their other duties or interests, including duties owed to Carlyle, CIM and any other affiliate of Carlyle;

481.4

the duty to act with care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience of Carlyle, CIM and CCCs Directors, and the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by each of Carlyle, CIM and CCCs Directors in relation to CCC;

481.5

the duty to make decisions on an informed basis, upon all material information reasonably available to CCCs Directors in accordance with rational decision making processes; and

481.6

the duty to properly oversee the management and business activities of CCC.

482. Carlyle and CIM cannot rely upon the IMA because they knew that it was entered into by CCC through its officers or agents in breach of their duties to CCC. 483. In addition to breaching the duties Carlyle and CIM each owed CCC directly, Carlyle and CIM were aware of and knowingly participated in CCCs Directors breaches of duty in causing and/or permitting CCC to enter into the IMA. In particular: 483.1 483.2 Carlyle and CIM prepared the IMA including clauses 2(b), 6 and 9; Carlyle and CIM were aware that clauses 2(b), 6 and 9 of the IMA were substantially advantageous for Carlyle and CIM and substantially disadvantageous for CCC; 483.3 Carlyle and CIM caused Loveridge to execute the IMA on September 20, 2006, knowing that Loveridge had not and would not consider whether entry into the IMA was in the best interests of CCC; 483.4 Carlyle and CIMs representatives on CCCs Board, namely Conway, Hance, Zupon and Stomber, purported to participate in the decision to enter into and/or ratify entry into the IMA notwithstanding their obvious position of conflict; and 483.5 Carlyle and CIM were aware that none of Allardice, Loveridge and Sarles had considered or would consider whether entry into the IMA was in the best interests of CCC. 484. The IMA is the product of an agreement reached between parties with unequal bargaining power and was not the product of an arms-length negotiation between CCC and CIM. Rather, it was drafted by Carlyle and/or CIM and executed by Loveridge for CCC at the direction of Carlyle and CIM in breach of fiduciary 105

duty. No consideration was given as to whether entry into the IMA was in CCCs best interests and CCC did not receive any independent legal advice about the terms of the IMA. 485. CCC received no consideration from CIM in exchange for the benefits which CIM purported to procure from CCC under clauses 2(b), 6 and 9 of the IMA. 486. Carlyle and CIM are not entitled to benefit from their own breach of duty to CCC and from their participation in CCCs Directors breach of duty in causing and/or permitting CCC to enter into the IMA and in particular clauses 2(b), 6 and 9. 487. By reason of the foregoing, the Plaintiffs are entitled to a declaratory judgment that the IMA is void and/or unenforceable or, in the alternative, that clauses 2(b), 6 and 9 of the IMA are void and/or unenforceable by CIM and/or Carlyle and/or any of their respective affiliates as against the Plaintiffs. TENTH CLAIM FOR RELIEF (Against CIM for Breach of Contract) 488. The Plaintiffs repeat and reallege, as if set forth in full herein, the allegations of all of the preceding paragraphs of this Complaint. 489. CIM had discretionary investment management authority and responsibility for the management and operation of CCCs business. 490. To the extent it ever was and now is binding and enforceable against CCC, CIM had a contractual obligation under the IMA to exercise reasonable care, skill and diligence in providing investment advice and investment management services to CCC. 491. Through its conduct as alleged herein, CIM breached those contractual obligations to CCC. The relevant conduct, which was reckless, grossly negligent, or in the alternative, negligent and constituted wilful misconduct and breaches of the duties CIM owed CCC, included, among other things, the conduct described in paragraphs 419.1 through 419.21 above. 492. As a result of those breaches, CCC suffered loss and damage. 493. By reason of the foregoing, the Plaintiffs are entitled to a judgment against CIM awarding the Plaintiffs compensatory damages in an amount to be determined at the trial of this action, together with interest at the maximum allowable rate.

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ELEVENTH CLAIM FOR RELIEF (Against CCCs Directors for Gross Negligence or Negligence) 494. The Plaintiffs repeat and reallege, as if set forth in full herein, the allegations of all of the preceding paragraphs of this Complaint. 495. CCCs Directors, in their capacity as directors, owed CCC a duty of care to exercise reasonable care, skill and judgment in managing CCC. 496. Through its conduct as alleged herein, CCCs Directors breached those obligations to CCC. The relevant conduct, each of which constituted a breach of duty, included, among other things, the conduct described in paragraphs 417.1 through 417.25 above. 497. CCCs Directors conduct was negligent because it represented a departure from the relevant standard of care. 498. CCCs Directors conduct was also grossly negligent because it represented an extreme departure from the relevant standard of care. 499. As a result of those breaches, CCC suffered loss and damage. 500. By reason of the foregoing, the Plaintiffs are entitled to a judgment against CCCs Directors awarding the Plaintiffs compensatory damages in an amount to be determined at the trial of this action, together with interest at the maximum allowable rate. TWELFTH CLAIM FOR RELIEF (Against CIM for Gross Negligence or Negligence) 501. The Plaintiffs repeat and reallege, as if set forth in full herein, the allegations of all of the preceding paragraphs of this Complaint. 502. CIM, in its capacity as the investment adviser to CCC and through its control and domination of CCC, owed CCC a duty of care arising under common law independently of its contractual obligations CCC, to exercise reasonable care, skill and judgment in the provision of investment advice and investment management services to CCC and in the exercise of its control over CCC. 503. Through its conduct as alleged herein, CIM breached those obligations to CCC. The relevant conduct, each of which constituted a breach of duty, included, among other things, the conduct described in paragraphs 419.1 through 419.22 above. 504. CIMs conduct was negligent because it represented a departure from the relevant standard of care. 107

505. CIMs conduct was also grossly negligent because it represented an extreme departure from the relevant standard of care. 506. As a result of those breaches, CCC suffered loss and damage. 507. By reason of the foregoing, the Plaintiffs are entitled to a judgment against CIM awarding the Plaintiffs compensatory damages in an amount to be determined at the trial of this action, together with interest at the maximum allowable rate. THIRTEENTH CLAIM FOR RELIEF (Against Carlyle for Gross Negligence or Negligence) 508. The Plaintiffs repeat and reallege, as if set forth in full herein, the allegations of all of the preceding paragraphs of this Complaint. 509. Carlyle undertook to and did provide investment advice to CCC and owed CCC a duty of care to exercise reasonable care, skill and judgment in the provision of that advice to CCC. 510. Through its conduct as alleged herein, Carlyle breached those obligations to CCC. The relevant conduct, each of which constituted a breach of duty, included, among other things, the conduct described in paragraphs 422.1 through 422.22 above. 511. Carlyles conduct was negligent because it represented a departure from the relevant standard of care. 512. Carlyles conduct was also grossly negligent because it represented an extreme departure from the relevant standard of care. 513. As a result of those breaches, CCC suffered loss and damage. 514. By reason of the foregoing, the Plaintiffs are entitled to a judgment against Carlyle awarding the Plaintiffs compensatory damages in an amount to be determined at the trial of this action, together with interest at the maximum allowable rate. FOURTEENTH CLAIM FOR RELIEF (Against CCCs Directors pursuant to s 106 of the Companies (Guernsey) Law 1994 or s 422 of the Companies (Guernsey) Law 2008) 515. The Plaintiffs repeat and reallege, as if set forth in full herein, the allegations of all of the preceding paragraphs of this Complaint. 516. Each of CCCs Directors was an officer of CCC: 108

516.1 516.2

In the case of Conway, from August 29, 2006 until March 17, 2008; In the case of Hance, from September 14, 2006, when Hance formally accepted to act as director of CCC with immediate effect (his appointment was ratified by the Board on October 4, 2006) until March 17, 2008;

516.3

In the case of Zupon, from September 14, 2006, when Zupon formally accepted to act as director of CCC with immediate effect (his appointment was ratified by the Board on October 4, 2006) until March 17, 2008;

516.4

In the case of Stomber, from September 14, 2006, when Stomber formally accepted to act as director of CCC with immediate effect (his appointment was ratified by the Board on October 4, 2006) until March 17, 2008;

516.5

In the case of Allardice, from September 14, 2006, when Allardice formally accepted to act as director of CCC with immediate effect (his appointment was ratified by the Board on October 4, 2006) until March 17, 2008;

516.6 516.7

In the case of Loveridge from August 29, 2006 until March 17, 2008; and In the case of Sarles, from September 19, 2006, when Sarles formally accepted to act as director of CCC with immediate effect (his appointment was ratified by the Board on October 4, 2006) until March 17, 2008.

517. Each of CCCs Directors: 517.1 was directly and/or indirectly concerned and/or participated in the promotion, formation and management of CCC; 517.2 is by virtue of the conduct alleged herein guilty of misfeasance and/or breach of fiduciary duty in relation to CCC; and 517.3 is liable to indemnify and/or compensate CCC for losses sustained by CCC in respect of each of CCCs Directors misfeasance and/or breach of fiduciary duty. 518. By reason of the foregoing, the Plaintiffs are entitled to a judgment against CCCs Directors awarding the Plaintiffs compensatory damages in an amount to be determined at the trial of this action, together with interest at the maximum allowable rate.

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FIFTEENTH CLAIM FOR RELIEF (Against CIM pursuant to s 106 of the Companies (Guernsey) Law 1994 or s 422 of the Companies (Guernsey) Law 2008) 519. The Plaintiffs repeat and reallege, as if set forth in full herein, the allegations of all of the preceding paragraphs of this Complaint. 520. CIM was an officer of CCC within the meaning of s 106 of the Companies (Guernsey) Law 1994 or s 422(2) of the Companies (Guernsey) Law 2008 because CIM was directly and/or indirectly concerned and/or participated in the promotion, formation and management of CCC. 521. CIM is by virtue of the conduct alleged herein guilty of misfeasance and/or breach of fiduciary duty in relation to CCC. 522. CIM is liable to indemnify and/or compensate CCC for losses sustained by CCC in respect of CIMs misfeasance and/or breach of fiduciary duty. 523. By reason of the foregoing, the Plaintiffs are entitled to a judgment against CIM awarding the Plaintiffs compensatory damages in an amount to be determined at the trial of this action, together with interest at the maximum allowable rate. SIXTEENTH CLAIM FOR RELIEF (Against Carlyle pursuant to s 106 of the Companies (Guernsey) Law 1994 or s 422 of the Companies (Guernsey) Law 2008) 524. The Plaintiffs repeat and reallege, as if set forth in full herein, the allegations of all of the preceding paragraphs of this Complaint. 525. Carlyle was an officer of CCC within the meaning of s 106 of the Companies (Guernsey) Law 1994 or s 422(2) of the Companies (Guernsey) Law 2008 because Carlyle was directly and/or indirectly concerned and/or participated in the promotion, formation and management of CCC. 526. Carlyle is by virtue of the conduct alleged herein guilty of misfeasance and/or breach of fiduciary duty in relation to CCC. 527. Carlyle is liable to indemnify and/or compensate CCC for losses sustained by CCC in respect of Carlyles misfeasance and/or breach of fiduciary duty. 528. By reason of the foregoing, the Plaintiffs are entitled to a judgment against Carlyle awarding the Plaintiffs compensatory damages in an amount to be determined at the trial of this action, together with interest at the maximum allowable rate. 110

SEVENTEENTH CLAIM FOR RELIEF (Against Carlyle and CIM for Return of CCCs Books and Records and Other Property) 529. From the time of the winding up order made on March 17, 2008, the books and records of CCC have been held by Carlyle and CIM subject to the Liquidators immediate right to take possession of those books and records as their property. 530. In the months immediately after CCC was ordered to be wound up, certain books and records of CCC were made available by Carlyle and CIM for inspection by the Liquidators. 531. The books and records made available for inspection and copying did not represent the complete books and records of CCC. In particular, the sources of the records did not include the directors and key personnel of CCC, email records were generally confined to the first three months of 2008 and the books and records inspected did not include a number of categories which would reasonably be expected to exist. 532. In light of these deficiencies, by letter dated March 11, 2010, the Liquidators requested the return of the complete set of the books and records of CCC (including electronic documents and emails). The Liquidators proposed a collaborative and co-operative process of document production with a view to minimizing the costs and inconvenience to the parties. 533. Since March 11, 2010, despite extensive and repeated requests from the Liquidators, Carlyle and CIM have refused to produce the books and records of CCC to the Liquidators. The only documents that Carlyle and CIM have produced are copies of 52 randomly selected documents produced on May 4, 2010 which Carlyle and CIMs counsel described as being the CCC documents that we have been able to access at a reasonable expense. 534. The 52 copy documents produced by Carlyle and CIM were of no assistance to the Liquidators and did not address any of the deficiencies identified in paragraph 531 above. 535. By declining the Liquidators reasonable requests to deliver up the books and records, Carlyle and CIM have sought to obstruct the proper investigation by the Liquidators of the affairs of CCC and thereby sought to obstruct the proper pursuit of this action by the Plaintiffs. 536. Further, despite reasonable requests for assistance by the Liquidators, Carlyle and CIM have not produced any of their records to the Liquidators which relate to the affairs of CCC. In refusing to produce any such records, Carlyle and CIM have resorted to relying upon technical and untested objections to the Courts jurisdiction under Section 1782 of Title 28 of the United States Code.

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537. In response to the Liquidators request by letter dated March 22, 2010, Sarles produced over 200 documents on May 21, 2010, albeit in heavily redacted form in many instances. Those documents include emails between Stomber and the Board throughout August to October 2007, which were not included in the books and records of CCC made available for inspection by the Liquidators referred to in paragraph 530 above and have not been produced to the Liquidators by Carlyle or CIM subsequently. 538. Further, the 2007 annual report disclosed an asset of CCC described as Investment in internal use software and other property, comprising computer software and hardware, with a book value exceeding $4 million. 539. This computer software and hardware was retained by Carlyle and CIM and has never been returned to CCC or its Liquidators by Carlyle. 540. Carlyle and CIM are currently in possession of all of the original books, records and other property belonging to CCC. 541. The Plaintiffs are entitled to immediate possession of those books, records and other property. 542. The Plaintiffs seek immediate return of the original books, records and other property of CCC as they are the property of CCC and have a pecuniary value to CCC. 543. By reason of the foregoing, the Plaintiffs request an order directing Carlyle and CIM to immediately return to the Plaintiffs the original books, records and other property of CCC. EIGHTEENTH CLAIM FOR RELIEF (Alternative Claim Against Carlyle and CIM for Unjust Enrichment) 544. The Plaintiffs repeat and reallege, as if set forth in full herein, the allegations of all of the preceding paragraphs of this Complaint and allege the following as an alternative to the Plaintiffs second through eighth, and tenth, twelfth, thirteenth, fifteenth and sixteenth claims for relief. 545. Carlyle and CIM have received fees, interest payments, expenses and share-based compensation exceeding $75 million. 546. Carlyle and CIM have been unjustly enriched thereby and CCC has been impoverished, without justification. 547. Carlyle and CIM, in equity and good conscience, should be required to return or disgorge these sums.

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