21. Marchant learned from Dilley the mechanism by which The Harris Organization commingled the funds and assets in clients' trust accounts. Furds in client accounts were held in a common "pool account" called the Third World Trust Company ("Trusica"), along with funds from entities and persons affiliated with The Harris Organization, including Harris, the founder and majority shareholder of Marc M. Harris et Cie, S.A., and Larry Abraham (''Abraham”), a minority shareholder,. It appeared to Marchant from an examination of the documents and discussions with Dilley that entities and persons affiliated with The Harris Organization were arbitrarily crediting amounts to their accounts within Trustco without disclosing these credits or transactions to clients. In sum, persons and entities affiliated with The Harris Organization were "borrowing" client funds that should have been kept in segregated accounts, using those funds without paying interest to the clients, and exposing those clients to the risk of illiquidity.

22. Marchant learned from Dilley that entities and persons affiliated with The Harris Organization were billing each other, and ultimately clients, so-called administrative and management fees that were not in fact correlated in any meaningful way with actual services rendered.

23. Marchant learned from. Dilley that approximately $500,000 in clients' money bad been transferred to accounts in Chile belonging to Harris and Abraham. This was done by simply crediting Harris's and Abrahara's accounts within Trustco, and then transferring the funds to bank accounts in Chile that were purportedly for investment in the "Infra-fit" project. The Infra-ât project was supposed to develop and produce exercise bicycles in Chile, out apparently failed without ever having produced a single bicycle. The funds were never recovered.

24. Marchant learned from Dilley that principals in The Harris Organization, including Harris and Abraham, purchased land ir. Argentina, and ther. promptly turned around and sold the land at an arbitrarily inflated prise to the Lann American Real Estate ('L.A.R.E.”) fund, an

73-7

Organization-affiliated entity, in an interested transaction without disclosing their prior interest

to investors.

25. Marchant also learned from Dilley that the value of the land owned by L.A.R.E. was subsequently marked up on its Enancial statements, even though no substantial improvements had been made on the land, there were squatters or the properties who needed to be removed and otherwise presented a threat of possible claims on the property, and the lard-essentially arid scrubland—bad little apparent potential for generating positive returns.

26. Marchant learned from Dilley that The Harris Orgaruzation had issued $20 million in preferred shares that were not supported by corresponding contributions of capital. Dilley's information was supported by internal memoranda which showed that managers within The Harris Organization had refused to cooperate in the issuance of these preferred shares because Organization-affiliated assets that were being transferred in exchange for the shares were over

valued.'

27. Marchant learned from Dilley that Messrs. Waliace Stull, James Sommerville, Joseph Vigna, 2nd Bill Amos were either clients, shareholders, and/or directors of The Harris Organization. Marchant had previously leamed from other sources that these individuals bad been convicted of various criminal offenses, including drug trafficking.

23. Marchant learned from independent research that The Harris Organization maintained substantial links, either directly or indirectly, with persons and entities known. variously as "PT Shamrock," "Peter Trevellian," and "Adam Starchild," that advocated in prin: and on the Internet offshore mechanisms fo: evading the payment of taxes, judgments. and otter debts in the United States. That is, Marchant had reason to believe that The Hamis Organization

was both directly and indirectly advertising its services for. in essence, tax evasion and fraudulent conveyance of funds to offshore locations.

29. Marchant also learned from internal atenals provided by Dilley that The Harris Organization offered products and services that could reasonably be interpreted as mechanisms for tax evasion and fraudulent conveyances. Specifically, the so-called "Harris Matrix," an internal document discussing the products offered by The Harris Organization, included numerous references to “black holes" in the context of strategies for avoiding payment of taxes to the IRS, or to judgments and other debts in the United States. Dilley told Marchant that a “black hole" was a term used within the Harris Organization to describe dummy offshore corporations that were set up to go out of business, permitting the shareholders to claim bogus capital losses to o:Iset capital gains.

30. In March 1998, Marchant decided to write an article in Offshore Alent discussing the financial and fiduciary irregularities at The Harris Organization.

31. Before publishing the article, however, Marchant extended an opportunity for The Harris Organization to present its version of the situation. On March 22, 1998, Marchant delivered to Chris Davy, a member of the management within The Hanis Organization, a detailed and specific list of the improprieties at issue.' He further arranged to meet Harris and other senior officers of The Harris Organization in Nassau, the Bahamas, on March 25, 1998, to discuss these issues.

32. At the Bahamas meeting, the representatives of The Harris Organization denied the various allegations. They did not provide any evidence to support their denials. For an

1 Defs.' Ex. 9.

· See Defs.' Ex. 31.

organization that claimed to administer over $1 billion in assets, they provided no documentation or financial information to address the issues raised by Marchant.

33. On March 31, 1998, Marchant published an article in Offshore Alert titled "We Expose The Harris Organization's Multi-Million Dollar Ponzi Scheme."

34. This article made a number of factual allegations, which substantively accused The Harris Organization of defrauding its clients and misappropriating clients' funds. Those allegations specifically at issue are:

a That The Harris Organization operates as a “Ponzi” scheme.

b. That The Harris Organization was insolvent by $25 million.

c. That Harris used client funds to invest in the Infra-fit venture.

d. That The Harris Organization inflated the land value of the LARE investment in their financial statements.

e. That the properties held by the LARE investment were worthless.

f. That LARE might not have proper and enforceable title to the land in question due to the presence of squattors.

g. That The Harris Organization might be laundering the proceeds of crime.

10 Pis.' Ex. 1.

h. That The Harris Organization had issued $20 million of worthless preference shares.

35. Marchant subsequently published additional articles regarding The Harris Organization, essentially repeating the allegations of the original March 1998 article."'

36 The Harris Organization has denizaded, and continues to demand, either a correction or retraction of the alleged inaccuracies printed in the articles. Defendants have to date refused the demand.

37. The Harris Organization did not provide any materials to reɔut the allegations to Marchant until the institution of the present action and in the course of discovery.

38. Of the rebuttal materials generated to date, Plainuffs have relied to a great extent on a letter of solvency and financial statements produced by Panamarian auditors for Tac Harris Organization for 1997 and 1998. Plaintiffs argue that in light of such evidence, Marchant should have corrected or retracted the alleged inaccuracies.

39. Luís Ovidio Rodriguez Brandao ("Rodriguez”), the head of this firm of auditors, Servicios Profesionaies Asociades. S.A. ("Servicios"), gave testimony to the effect that Servicios first began providing accounting services, including internal audits, to The Harris Organization in the early 1990s.

40. Na record of suck audits was ever produced by Plaintiffs to Marchant. Furthermore, if such accounting services were provided to The Harris Organization, they occurred at the same time that financial record-keeping at The Harris Organization was in a state of extreme disorganization..

!! Pls. Ex. 2.