Document:

Exhibit 10.1

 

FEDERAL DEPOSIT INSURANCE
CORPORATION

 

WASHINGTON, D.C.

 

	
   

  	
  )

  	
   

  
	
   

  	
  )

  	
  CONSENT ORDER,

  
	
  In the Matter of

  	
  )

  	
  ORDER FOR RESTITUTION,

  
	
   

  	
  )

  	
  AND ORDER TO PAY

  
	
  MONTEREY COUNTY BANK

  	
  )

  	
  CIVIL MONEY PENALTY

  
	
  MONTEREY, CALIFORNIA

  	
  )

  	
   

  
	
   

  	
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  Docket FDIC-09-081b

  
	
  (INSURED STATE NONMEMBER BANK)

  	
  )

  	
  & FDIC-10-221k

  
	
   

  	
  )

  	
   

  
	
   

  	
  )

  	
   

  

 

The Federal Deposit Insurance Corporation (“FDIC”) is the appropriate
Federal banking agency for Monterey County Bank, Monterey, California (“Bank”)
under Section 3(q) of the Federal Deposit Insurance Act (“FDI Act”), 12 U.S.C.
§ 1813(q)(3).

 

The FDIC has reason to
believe that the Bank has engaged in unsafe or unsound banking practices, and
engaged in deceptive practices in violation of Section 5 of the Federal Trade
Commission Act (“Section 5”), 15 U.S.C. § 45(a)(1), and the Fair Debt
Collection Practices Act (“FDCPA”), 15 U.S.C. § 1601 et seq., as amended, in
connection with the Bank’s credit card relationship with Tighorn Financial
Services, LLC (“Tighorn”) and the Bank’s stored value debit card relationship
with EDebit Pay, LLC aka EDP Technologies Corporation (“EDP”).

 

The Bank, by and through its duly elected and acting Board of Directors
(“Board”), has executed a Stipulation to the Issuance of a Consent Order, Order
for Restitution and Order to Pay (“Stipulation”) dated August 27, 2010, that is
accepted by the FDIC.  With the
Stipulation, the Bank has consented, without admitting or denying any charges
of unsafe or unsound banking practices or other violations of law or regulation
to the issuance of this Consent Order, Order for 

 

 

Restitution and Order to Pay Civil Money Penalty (collectively referred
to as “Order”) by the FDIC.

 

Having determined that the
requirements for issuance of an order under Sections 8(b) and 8(i) if the FDI
Act, 12 U.S.C. § 1818(b) & (i) have been satisfied, the FDIC hereby orders
the Bank and its institution-affiliated parties, as
that term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), to take
the following actions.

 

I.                                         CONSENT
ORDER

 

A.           The FDIC hereby
orders that the Bank, its institution-affiliated parties and its successors and
assigns:

 

1.                                       Refrain from
offering credit cards which are intended for the transfer and payment of
charged-off consumer debt (“Balance Transfer Credit Cards”) without disclosing
the age of the debt and the fact that the transferred debt is time-barred
and/or no longer reportable by credit reporting agencies;

 

2.                                       Refrain from
offering Balance Transfer Credit Cards to consumers when the Bank does not have
sufficient substantiation that the debtor is obligated for the amount of
indebtedness subject to the Balance Transfer;

 

3.                                       Refrain from
misleading consumers about the utility of Balance Transfer Credit Cards
advertised as credit cards when, in fact, the consumers have no available credit
at the time the credit card is issued;

 

4                                          Refrain from
misrepresenting debt collection programs as a credit card offer;

 

5.                                       Refrain from
misleading consumers regarding the interest charged on debt transferred to
Balance Transfer Credit Cards; and

 

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6.                                       Refrain from
misleading consumers concerning the fees associated with stored value debit
cards through website solicitations for the cards.

 

B.             It is further ordered that the Bank, its institution-affiliated parties,
and its successors and assigns, take affirmative action as follows:

 

1.                                       BOARD OF DIRECTORS

 

(a)                                  From the effective date of this Order, the Board shall participate fully
in the oversight of the Bank’s compliance management system, to include
assuming full responsibility for the approval of sound compliance policies and
objectives and for the supervision of all the Bank’s compliance-related
activities, consistent with the role and expertise commonly expected for
directors of banks of comparable size and complexity.

 

(b)                                 Within 30 days from the effective date of this Order, the Bank’s Board
shall establish a compliance committee comprised of at least three directors
who are not officers of the Bank (“Compliance Committee”).

 

(i)                                     The Compliance Committee shall meet at least monthly and, at a minimum,
the following areas shall be reviewed and approved:  minutes of the Compliance Committee,
Compliance Officer reports, Compliance Management Program audit reports,
compliance program policies, and compliance with this Order.

 

(ii)                                  The Compliance Committee shall report its monthly discussions to the
Board and the Board minutes shall document the review and approval of all items
before the Board, including the names of any dissenting directors.

 

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(iii)                               The Board, in conjunction with the Compliance Committee, shall allocate
resources that are:

 

(A)                              Commensurate with the level of complexity of the Bank’s operations to
ensure the establishment and implementation of an adequate Compliance
Management System, including procedures ensuring the Bank’s compliance with
consumer protection laws, regulatory guidance, regulations, and policies (“Consumer
Laws”); and

 

(B)                                Sufficient to ensure the Bank’s compliance with this Order.

 

(iv)                              The Board, in conjunction with the Compliance Committee, shall:

 

(A)                              Ensure that the duties and responsibilities of the Compliance Officer are
clearly defined and provide for accessibility to both the Board and the
Compliance Committee;

 

(B)                                Require the Compliance Officer to provide to the Compliance Committee
monthly written reports, including but not limited to the enactment and/or
promulgation of new Consumer Laws and changes to existing Consumer Laws,
training performed, monitoring and audits performed, corrective action taken,
and compliance with this Order;

 

(C)                                Ensure that the Compliance Officer has and retains sufficient authority
and independence to implement policies related to Consumer Laws and to
institute corrective action as needed. 
This authority shall include the ability to cross departmental lines,
have access to all areas of the Bank’s operations, and effectuate corrective
action upon discovering deficiencies; and

 

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(D)                               Ensure that the Compliance Officer receives ongoing training, sufficient
time, and adequate resources to effectively oversee, coordinate, and implement
the Bank’s Compliance Management System.

 

(c)                                  Within 90 days from the effective date of this Order, the Board shall
develop and adopt a comprehensive educational program for periodic training for
each member of the Board.  The
educational program shall specifically address Consumer Laws.

 

2.                                       OVERSIGHT OF THIRD-PARTY AGREEMENTS AND SERVICES

 

(a)                                  Within 60 days from the effective date of this Order, the Bank shall
develop and maintain effective monitoring, training, and audit procedures to
review each aspect of the Bank’s agreements with third parties and the services
performed for the Bank pursuant to these agreements (“Third-Party Agreements
and Services”).  The policies and
procedures shall, at a minimum, provide for:

 

(i)                                     Bank review and approval of copies of (A) all marketing and solicitation
materials, including direct mail or internet solicitations, promotional
materials, advertising, telemarketing scripts (“Marketing and Solicitation
Materials”), and (B) other materials provided to consumers generated in
connection with the administration and servicing of the Third-Party Agreements
and Services;

 

(ii)                                  Maintenance of records of all service provider agreements and approved
marketing and solicitation materials, 
including any changes or amendments with respect to such materials;

 

(iii)                               Monitoring of the performance of marketing and solicitation programs for
new accounts;

 

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(iv)                              Prompt notification to the Bank by any third-party provider of all
regulatory agencies’ inquiries, customer complaint correspondence, and/or legal
action received from any third party with respect to third-party debit and
credit card programs (other than routine requests such as requests to cease and
desist collection contact), and maintenance by the Bank of all such documents;

 

(v)                                 Procedures for promptly addressing and resolving consumer complaints
regarding third-party debit and credit card programs, regardless of the source;

 

(vi)                              Bank review of all third-party debit and credit card program partners’
credit, fraud, and risk management materials, including policy manuals and
practices, to determine compliance with all Consumer Laws, and

 

(vii)                           An effective training program that includes comprehensive training in all
Consumer Laws, including Section 5, the FDCPA, and all implementing rules and
regulations, regulatory guidance, and statements of policy for appropriate Bank
personnel.

 

(b)                                 During the life of this Order, the Bank shall perform due diligence on a
semi-annual basis to ensure that third parties have in place an adequate
training program to ensure that their employees act in compliance with consumer
protection laws and regulations, including, but not limited to the FTC Act, the
FDCPA, the Equal Credit Opportunity Act, and all implementing rules and
regulations, regulatory guidance, and statements of policy.

 

(c)                                  During the life of this Order, the Bank’s Compliance Committee
established pursuant to paragraph 1(b) of section I(B) of this Order shall, on
a semi-annual basis, submit a written report to the Board and senior management
as to whether the third parties are in compliance with federal consumer
protection laws and implementing rules and regulations, 

 

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regulatory guidance and statements of
policy.  The written report shall include
potential violations, deficiencies or other concerns.  The Board shall be responsible for ensuring
that corrective actions are taken to address the findings of the written
report.

 

3.                                       COMPLIANCE MANAGEMENT SYSTEM

 

(a)                                  Within 60 days from the effective date of this Order, the Bank shall
develop and implement a Compliance Management System that is commensurate with
the level of complexity of the Bank’s operations.

 

(b)                                 The Compliance Management System shall include the development and
implementation of a comprehensive written compliance program (“Compliance Program”)
which shall include all of the Consumer Laws to which the Bank is subject.  At a minimum, the Compliance Program shall
provide for and include:

 

(i)                                     Development and implementation of operating procedures for each
compliance and fair lending law and regulation to which the Bank is
subject.  Operating procedures shall be
distributed to all employees having responsibilities that relate to applicable
Consumer Laws.

 

(ii)                                  Development and implementation of a formal training program for all
personnel who have compliance responsibilities to ensure that all such
personnel are thoroughly knowledgeable of applicable compliance requirements.

 

(iii)                               Development and implementation of a program to monitor the Bank’s
compliance with Consumer Laws.

 

(iv)                              Development and implementation of procedures to ensure follow-up actions
and corrective attention are provided to exceptions identified during
monitoring.

 

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(c)                                  The Board shall review the Compliance Program on an annual basis.  Any subsequent modifications to the
Compliance Program shall be approved by the Board, in which approval shall be
recorded in the minutes of the Board. 
Thereafter, the Bank shall follow the written compliance program and/or
any subsequent modification thereto.

 

4.                                       COMPLIANCE OFFICER

 

(a)                                  During the life of this Order, the Bank shall have and retain a qualified
Compliance Officer who possesses the requisite knowledge and experience to
administer an effective Compliance Management System, including experience with
third-party debit and credit card agreements. 
The Compliance Officer shall be independent of the Bank’s debit and
credit card operations.  The Compliance
Officer shall be given stated written authority by the Bank’s Board to
implement and supervise the Bank’s Compliance Program, including but not
limited to providing training for the Bank’s employees in all Consumer Laws,
establishing internal controls and procedures reasonably designed to prevent
violations of Consumer Laws, and performing or supervising periodic internal
audits, including audits of third-parties, to ascertain compliance with
Consumer Laws and the Bank’s Compliance Program.

 

(b)                                 The Compliance Management System shall provide sufficient staff personnel
to assist the Compliance Officer.

 

5.                                       INDEPENDENT AUDIT PROGRAM

 

(a)                                  Within 90 days from the effective date of this Order, the Bank shall have
an independent audit to ensure compliance with Consumer Laws.  The audit shall be conducted by qualified
personnel with experience in conducting independent audits of compliance
programs of banks of a comparable size and complexity.  The audit will assess the Bank’s 

 

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Compliance Program, and at a minimum, shall:

 

(i)                                     Define a comprehensive scope for the audit;

 

(ii)                                  Identify the number of transactions sampled by category or product type;

 

(iii)                               Identify deficiencies;

 

(iv)                              Provide descriptions of or suggestions for corrective actions and time
frames for correction; and

 

(v)                                 Establish follow-up procedures to verify that corrective actions were
implemented and effective.

 

(b)                                 Audit findings, deficiencies, and recommendations must be documented in a
written report and provided to the Audit Committee within 10 days after receipt
of the independent audit report.  In
addition, the audit reports should be thoroughly reviewed by the Board and be
fully documented in the Board’s minutes. 
The Bank shall forward a copy of the independent audit report to the
Regional Director of the FDIC’s San Francisco Regional Office (“Regional
Director”) within 10 days of receipt of the independent audit report.

 

(c)                                  Within 60 days of receipt of the independent auditor’s written report,
the Compliance Committee and the Board shall take action to address the audit’s
findings, correct any deficiencies noted, and implement any recommendations or
explain in writing, in a document signed by all Board members, why a particular
recommendation has not been implemented.

 

(d)                                 After receipt of the independent audit report, the Bank shall on an
annual basis conduct subsequent independent audits.  The subsequent audits shall comply with all
of the 

 

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provisions of this paragraph.

 

6.                                       CORRECTION OF VIOLATIONS OF LAW AND/OR REGULATIONS

 

(a)                                  Within 30 days of the effective date of this Order, the Bank shall, to
the extent possible, correct all violations of Consumer Laws.  In addition, the Bank shall ensure its future
compliance with all applicable Consumer Laws. 
The Bank’s actions as required by this paragraph shall be satisfactory
to the Regional Director as determined at subsequent examinations and/or
visitations.

 

(b)                                 During the life of this Order, the Bank shall not make, directly or
indirectly, any false, deceptive, or misleading representations with respect to
any extension of credit or other Bank product or service, including the
advertising, marketing, offering, soliciting, extending or servicing of any
extension of credit or other Bank product or service.

 

(c)                                  During the life of this Order, the Bank shall not, directly or
indirectly, engage in any unfair practices to collect any debt.

 

7.                                       FINANCIAL EDUCATION

 

Within 90 days from the effective date of this
Order, the Bank shall contribute an aggregate amount of $300,000 to established
local or national non-profit organizations for the specific purpose of consumer
financial education and counseling, in both English and Spanish, covering
topics including, but not limited to, credit cards, prepaid debit cards,
mortgages, overdraft programs, and other consumer financial products; credit
repair and restoration; budget creation and management.  The Bank must obtain the Regional Director’s
approval prior to the disbursement of funds to any specific organization.

 

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II.                                     ORDER FOR RESTITUTION AND OTHER RELIEF

 

It is further ordered that:

 

1.                                       RESERVE ACCOUNT

 

(a)                                  Within 10 days from the effective date of this Order, the Bank shall
reserve or deposit into a segregated deposit account (“Reserve Account”) an
amount not less than $1,500,000.

 

(b)                                 The Bank shall make all restitution payments required by paragraphs 3 and
4 of section II of this Order, regardless of whether the total of such payments
exceeds the initial funding of the Reserve Account.  The total cash restitution payments made by
the Bank as required by paragraphs 3 and 4 of section II of this Order shall
not exceed $2,500,000.

 

(c)                                  Funds remaining in the Reserve Account shall revert to the Bank after all
restitution payments required by paragraphs 3 and 4 of section II of this Order
have been satisfied.

 

2.                                       INDEPENDENT CERTIFIED ACCOUNTING FIRM

 

(a)                                  Within 30 days
from the issuance of this Order, the Bank shall retain, at its expense, an
independent certified accounting firm (“Firm”) acceptable to the Regional Director
to determine compliance with the restitution plans set forth in paragraphs 3
and 4 of section II of this Order.  The
Firm shall determine compliance in accordance with the attestation standards
established by the American Institute of Certified Public Accountants for
agreed-upon procedures for engagements and provide the reports called for in
paragraphs 3 and 4 of section II of this Order.

 

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(b)                                 Prior to the
engagement of the Firm, and no later than 15 days from the issuance of this
Order, the Bank shall submit the name and qualifications of the Firm, together
with the proposed engagement letter with the Firm and the proposed agreed-upon
procedures, to the Regional Director for non-objection.

 

(c)                                  The engagement
letter between the Bank and the Firm shall grant the FDIC access to the Firm’s
staff, work-papers, and materials prepared in the course of the Firm’s
engagement and preparation of the reports required by this Order.

 

(d)                                 To be
acceptable to the Regional Director, the Firm must be independent and, at a
minimum, comply with the Code of Conduct of the appropriate State Board of
Accountancy and meet the auditor independence requirements of the Securities
and Exchange Commission.

 

(e)                                  Within 15 days
after submission of the Firm’s name, the Regional Director shall notify the
Bank in writing of the FDIC’s objection or non-objection thereto.

 

3.                                       RESTITUTION PLAN FOR TIGHORN FINANCIAL SERVICES (“TIGHORN”) CREDIT CARD
PROGRAM

 

(a)                                  Within 60 days from the effective date of this Order, the Bank shall
prepare a comprehensive restitution plan (“Tighorn Restitution Plan”) for all
consumers who had or currently have a New Horizons credit card issued by the
Bank through an agreement with Tighorn (“Tighorn Eligible Consumers”).  The Bank shall submit the Tighorn Restitution
Plan to the Regional Director for his review, comment, and non-objection prior
to implementation.  The Tighorn
Restitution Plan shall require the following:

 

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(i)                                                 For all Tighorn Eligible Consumers who were issued New Horizons credit
cards before June 2008 and whose accounts are not in default, the Bank
shall make the following restitution and take the following equitable action:

 

(A)                         Reimbursement in cash for all interest charged and paid in cash by the
consumer on the amount of debt transferred to such accounts;

 

(B)                           Reimbursement in cash for the annual fee charged and paid in cash by the
consumer for the first year of such accounts; and

 

(C)                           Refrain from reporting any subsequent default on the account to any
Credit Reporting Agency (“CRA”), except as relates to purchases made by the
consumer on the New Horizons credit card;

 

(ii)                                              For all Tighorn Eligible Consumers who were issued New Horizons credit
cards before June 2008, made payments on their accounts, and whose
accounts are currently in default, the Bank shall make the following
restitution and take the following equitable action:

 

(A)                         Reimbursement in cash for all interest charged and paid in cash by the
consumer on the amount of debt transferred to such accounts;

 

(B)                           Reimbursement in cash for the annual fee charged and paid in cash by the
consumer for the first year of such accounts; and

 

(C)                           Pursue the reversal of any known reporting of default on such accounts to
any CRA and refrain from subsequently reporting any default on such accounts to
any CRA, except as relates to purchases made by the consumer on the New
Horizons credit card;

 

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(iii)                                           For all Tighorn Eligible Consumers who were issued New Horizons credit
cards before June 2008, made no payments on their accounts, and whose
accounts are currently in default, the Bank shall make the following
restitution and take the following equitable action:

 

(A)                         Pursue the reversal of all interest charged on the amount of debt
transferred to such accounts;

 

(B)                           Pursue the reversal of the annual fee charged to such accounts; and

 

(C)                           Pursue the reversal of any known reporting of default on such accounts to
any CRA and refrain from subsequently reporting any default on such accounts,
except as relates to purchases made by the consumer on the New Horizons credit
card;

 

(iv)                                          For all Tighorn Eligible Consumers who were issued New Horizons credit
cards from June 2008 through September 2008 and whose accounts are
not in default, the Bank shall make the following restitution and take the
following equitable action:

 

(A)                         Reimbursement in cash for the annual fee charged and paid in cash by the
consumer for the first year of such accounts; and

 

(B)                           Refrain from reporting any subsequent default on such accounts to any
CRA, except as relates to purchases made by the consumer on the New Horizons
credit card;

 

(v)                                             For all Tighorn Eligible Consumers who were issued New Horizons credit
cards from June 2008 through September 2008, made payments on their 

 

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accounts, and whose accounts are currently in
default, the Bank shall make the following restitution and take the following
equitable action:

 

(A)                         Reimbursement in cash for the annual fee charged and paid in cash by the
consumer for the first year of such accounts; and

 

(B)                           Pursue the reversal of any known reporting of default on such accounts to
any CRA and refrain from subsequently reporting any default on such accounts to
any CRA, except as relates to purchases made by the consumer on the New
Horizons credit card;

 

(vi)                                          For all Tighorn Eligible Consumers who were issued New Horizons credit
cards from June 2008 through September 2008, made no payments on
their accounts, and whose accounts are currently in default, the Bank shall
make the following restitution and take the following equitable action:

 

(A)                         Pursue the reversal of all interest charged on the amount of debt
transferred to such accounts;

 

(B)                           Pursue the reversal of the annual fee charged to such accounts; and

 

(C)                           Pursue the reversal of any known reporting of default on such accounts to
any CRA and refrain from subsequently reporting any default on such accounts to
any CRA, except as relates to purchases made by the consumer on the New
Horizons credit card;

 

(vii)                                       For all Tighorn Eligible Consumers who were issued New Horizons credit
cards after September 2008, the Bank shall pursue the reversal of any known

 

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reporting of default on such accounts to any CRA
and shall refrain from subsequently reporting any default on such accounts to
any CRA, except as relates to purchases made by the consumer on the New Horizons
credit card.

 

(b)                                 Within 30 days of receipt of non-objection from the Regional Director,
the Bank shall implement the Tighorn Restitution Plan.  Any required cash restitution amount shall be
provided to each of the Tighorn Eligible Consumers in the form of a cashier’s
check as such consumers are identified. 
The cashier’s checks issued by the Bank shall not limit consumers’
rights in any way.

 

(c)                                  The Firm hired by the Bank pursuant to paragraph 2 of section II of this
Order shall review and verify that the Bank accurately identified the Tighorn
Eligible Consumers and correctly credited the accounts of, and made cash
refunds, as appropriate, to Tighorn Eligible Consumers.

 

(d)                                 The Firm shall prepare a detailed written report of the processes and
procedures by which the Bank determined the restitution amounts described in
paragraph 3(a) of section II of this Order.  The report shall also include the
following:  (i) total number of
Tighorn Eligible Consumers, (ii) total amount of restitution made under the
Tighorn Restitution Plan.

 

(e)                                  The report described in paragraph 3(d) of section II of this Order
shall be submitted to the Regional Director for his review, comment, and
non-objection within 60 days after the Bank has completed implementation of the
Tighorn Restitution Plan.

 

(f)                                    The Bank shall retain all records pertaining to the Tighorn Restitution
Plan, including but not limited to: 
documentation of the processes and procedures used to determine the
Tighorn Eligible Consumers; the names, contact, and account information of the 

 

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Tighorn Eligible Consumers; any mailing records;
and documentation that the appropriate restitution and equitable relief were
made.

 

4.                                       RESTITUTION PLAN FOR EDEBIT PAY, L.L.C. (“EDP”) DEBIT CARD PROGRAM

 

(a)                                  Within 60 days from the effective date of this Order, the Bank shall
prepare a comprehensive restitution plan (“EDP Restitution Plan”) for all
consumers who had or currently have a prepaid debit card issued by the Bank through
an agreement with EDP (“EDP Eligible Consumers”).  The EDP Restitution Plan shall require that
all EDP Eligible Consumers be reimbursed for all fees and/or charges incurred
in connection with the EDP prepaid debit card other than the initial application
and processing fees and monthly maintenance fees during the six years preceding
the effective date of this Order.  The
Bank shall submit the EDP Restitution Plan to the Regional Director for his
review, comment, and non-objection prior to implementation.

 

(b)                                 Within 30 days of receipt of non-objection from the Regional Director,
the Bank shall implement the EDP Restitution Plan.  Any required cash restitution amount shall be
provided to each of the EDP Eligible Consumers in the form of a cashier’s check
as such consumers are identified.  The
cashier’s checks issued by the Bank shall not limit consumers’ rights in any
way.

 

(c)                                  The Firm hired by the Bank pursuant to paragraph 2 of section II of this
Order shall review and verify that the Bank accurately identified the EDP
Eligible Consumers and correctly credited the accounts of, and made cash
refunds, as appropriate, to EDP Eligible Consumers.

 

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(d)                                 The Firm shall prepare a detailed written report of the processes and
procedures by which the Bank determined the restitution amounts described in
paragraph 4(a) of section II of this Order.  The report shall also include the
following:  (i) total number of EDP
Eligible Consumers, (ii) total amount of restitution made under the EDP
Restitution Plan.

 

(e)                                  The report described in paragraph 4(d) of section II of this Order
shall be submitted to the Regional Director for his review, comment, and
non-objection within 60 days after the Bank has completed implementation of the
EDP Restitution Plan.

 

(f)                                    The Bank shall retain all records pertaining to the EDP Restitution Plan,
including but not limited to: 
documentation of the processes and procedures used to determine the EDP
Eligible Consumers; the names, contact, and account information of the EDP
Eligible Consumers; any mailing records; and documentation that appropriate
restitution was made.

 

5.                                       MAILING REFUNDS

 

When the Bank makes cash
refunds to Tighorn Eligible Consumers and EDP Eligible Consumers by cashier’s check
made payable to that eligible consumer, it shall send the cashier’s check by
United States Postal Service first-class mail, address correction service
requested, to the consumer’s last address as maintained in the Bank’s
records.  The Bank shall make reasonable
attempts to obtain a current address for any eligible consumer whose
notification letter and/or restitution check is returned for any reason, using
standard address search methodologies, and shall promptly re-mail all returned
letters and/or restitution checks to current addresses, if any.  If the cashier’s check for any eligible
consumer is returned to the Bank after such second mailing by the Bank, or if a
current mailing address cannot be identified using standard address search
methodologies, the Bank shall retain the restitution amount of such eligible
consumer for a

 

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period of three-hundred
sixty (360) days from the date the restitution check was originally mailed,
during which period such amount may be claimed by such eligible consumer upon
appropriate proof of identity.  After
such time these monies will be disposed of in accordance with the Tighorn and
EDP Restitution Plans.

 

III.                                 ORDER TO PAY

 

It
is further ordered, that by reason of the alleged violations of law and/or
regulations, and after taking into account the Consent Order and Order for
Restitution, the appropriateness of the penalty with respect to the financial
resources and good faith of the Bank, the gravity of the conduct by the Bank,
the history of previous conduct by the Bank, and such other matters as justice
may require, pursuant to Section 8(i)(2) of the FDI Act, 12 U.S.C. §
1818(i)(2), a civil money penalty of $500,000 is assessed against the
Bank.  The Bank shall pay the civil money
penalty to the Treasury of the United States.

 

IV.                                NOTIFICATION AND REPORTING REQUIREMENTS

 

1.                                       SHAREHOLDER NOTIFICATION

 

Following the effective date of this Order, the
Bank shall send to its shareholder(s) or otherwise furnish a description of
this Order in conjunction with the Bank’s next shareholder communication and
also in conjunction with its notice or proxy statement preceding the Bank’s
next shareholder meeting.  The
description shall fully describe the Order in all material respects.  The description and any accompanying
communication, statement, or notice shall be sent to the FDIC, Accounting and
Securities Section, Washington, D.C. 20429, at least 15 days prior to
dissemination to shareholders.  Any
changes requested to be made by the FDIC shall be made prior to dissemination
of the description, communication, notice, or statement.

 

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2.                                       PROGRESS REPORTS

 

On or before the 30th day after the end of the first calendar
quarter following the effective date of this Order, and on or before the 30th day after the end of every
calendar quarter thereafter, the Bank shall furnish written progress reports to
the Regional Director, which detail the form and manner of any actions taken to
secure compliance with this Order and the results thereof.  The Bank may discontinue submitting such
reports when the corrections required by this Order have been accomplished and
the Regional Director has expressly released the Bank in writing from making
any further reports.

 

V.                                    SAVINGS CLAUSE AND EFFECTIVE DATE OF ORDER

 

The provisions of this Order shall not bar, estop
or otherwise prevent the FDIC or any other federal or state agency or
department from taking any action against the Bank, any of the Bank’s current
or former institution-affiliated parties, including third-parties and/or
agents, for violations of any laws, for engaging in unsafe or unsound banking
practices, for engaging in unfair or deceptive practices, or for making false
or misleading representations.

 

This Order will become effective upon its issuance by the FDIC.  The provisions of this Order shall be binding
on the Bank, its institution-affiliated parties, and their successors and
assigns. The provisions of this Order shall remain effective and enforceable
except to the extent that, and until such time as, any provisions of this Order
shall have been modified, terminated, suspended, or set aside by the FDIC.

 

20

 

Pursuant to delegated authority.

 

Dated at Washington, D.C., this 29th day of September, 2010.

 

 

	
   

  	
  /s/
  Sandra L. Thompson

  
	
   

  	
  Sandra
  L. Thompson

  
	
   

  	
  Director

  
	
   

  	
  Division
  of Supervision and Consumer Protection

  
	
   

  	
  Federal
  Deposit Insurance Corporation

  

 

21Exhibit
4.1

 

COMMON
STOCK PURCHASE WARRANT

 

SYNERGY
PHARMACEUTICALS, INC.

 

	
  Warrant Shares:
                       

  	
   

  	
  Initial Exercise Date:
                ,
  2010

  

 

THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”)
certifies that, for value received,
                          
or its assigns (the “Holder”) is entitled, upon the terms and subject to
the limitations on exercise and the conditions hereinafter set forth, at any
time on or after
                    
(the “Initial Exercise Date”) and on or prior to the close of business
on the five year anniversary of the Initial Exercise Date (the “Termination
Date”) but not thereafter, to subscribe for and purchase from Synergy
Pharmaceuticals, Inc., a Florida corporation (the “Company”), up to
             shares
(as subject to adjustment hereunder, the “Warrant Shares”) of Common
Stock. The purchase price of one share of Common Stock under this Warrant shall
be equal to the Exercise Price, as defined in Section 2(b).

 

Section 1.                                            Definitions.  Capitalized
terms used and not otherwise defined herein shall have the meanings set forth
in that certain Securities Purchase Agreement (the “Purchase Agreement”),
dated October     , 2010, among the Company and the purchasers signatory thereto.

 

Section 2.                                            Exercise.

 

a)                                      Exercise of the
purchase rights represented by this Warrant may be made, in whole or in part,
at any time or times on or after the Initial Exercise Date and on or before the
Termination Date by delivery to the Company (or such other office or agency of
the Company as it may designate by notice in writing to the registered Holder
at the address of the Holder appearing on the books of the Company) of a duly
executed facsimile copy of the Notice of Exercise Form annexed hereto.
Within three (3) Trading Days following the date of exercise as aforesaid,
the Holder shall deliver the aggregate Exercise Price for the shares specified
in the applicable Notice of Exercise by wire transfer or cashier’s check drawn
on a United States bank. Notwithstanding anything herein to the contrary, the
Holder shall not be required to physically surrender this Warrant to the
Company until the Holder has purchased all of the Warrant Shares available
hereunder and the Warrant has been exercised in full, in which case, the Holder
shall surrender this Warrant to the Company for cancellation within three (3) Trading
Days of the date the final Notice of Exercise is delivered to the Company.
Partial exercises of this Warrant resulting in purchases of a portion of the
total number of Warrant Shares available hereunder shall have the effect of
lowering the outstanding number of Warrant Shares purchasable hereunder in an
amount equal to the applicable number of Warrant Shares purchased.  The Holder and the Company shall maintain
records showing the number of Warrant Shares purchased and the date of such
purchases. The Company shall deliver any objection to any Notice of Exercise Form within
one (1) Business Day of receipt of such notice. 
The Holder and any assignee, by acceptance

 

1

 

of this Warrant, acknowledge and
agree that, by reason of the provisions of this paragraph, following the
purchase of a portion of the Warrant Shares hereunder, the number of Warrant
Shares available for purchase hereunder at any given time may be less than the
amount stated on the face hereof.

 

b)                                     Exercise Price.  The
exercise price per share of the Common Stock under this Warrant shall be $2.75, subject to adjustment hereunder (the “Exercise
Price”).

 

“VWAP”
means, for any date, the price determined by the first of the following clauses
that applies: (a) if the Common Stock is then listed or quoted on a
Trading Market, the daily volume weighted average price of the Common Stock for
such date (or the nearest preceding date) on the Trading Market on which the
Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a
Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New
York City time)), (b)  if the Common Stock is not then listed or quoted for
trading on the OTC Bulletin Board and if prices for the Common Stock are then
reported in the “Pink Sheets” published by Pink OTC Markets, Inc. (or a
similar organization or agency succeeding to its functions of reporting
prices), the most recent bid price per share of the Common Stock so reported,
or (c) in all other cases, the fair market value of a share of Common
Stock as determined by an independent appraiser selected in good faith by the
Holders of a majority in interest of the Securities then outstanding and
reasonably acceptable to the Company, the fees and expenses of which shall be
paid by the Company.

 

c)                                      Mechanics of
Exercise.

 

i.                  Delivery of Certificates
Upon Exercise. 
Certificates for shares purchased hereunder shall be transmitted by the Transfer
Agent to the Holder by crediting the account of the Holder’s prime broker with
The Depository Trust Company through its Deposit or Withdrawal at Custodian
system (“DWAC”) if the Company is then a participant in such system and
there is an effective registration statement permitting the issuance of the
Warrant Shares to or resale of the Warrant Shares by Holder, and otherwise by
physical delivery to the address specified by the Holder in the Notice of
Exercise by the date that is three (3) Trading Days after the latest of (A) the
delivery to the Company of the Notice of Exercise, (B) surrender of this
Warrant (if required) and (C) payment of the aggregate Exercise Price as
set forth above (such date, the “Warrant Share Delivery Date”).   The Warrant Shares shall be deemed to have
been issued, and Holder or any other person so designated to be named therein
shall be deemed to have become a holder of record of such shares for all
purposes, as of the date the Warrant has been exercised, with payment to the
Company of the Exercise Price and all taxes required to be paid by the Holder,
if any, pursuant to Section 2(c)(v) prior to the issuance of such
shares, having been paid.

 

ii.               Delivery of New Warrants
Upon Exercise.  If this
Warrant shall have been exercised in part, the Company shall, at the request of
a Holder and upon surrender of this Warrant certificate, at the time of

 

2

 

delivery of the certificate
or certificates representing Warrant Shares, deliver to the Holder a new
Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant
Shares called for by this Warrant, which new Warrant shall in all other
respects be identical with this Warrant.

 

iii.            Rescission Rights.  If the Company fails to cause the Transfer
Agent to transmit to the Holder a certificate or the certificates representing
the Warrant Shares pursuant to Section 2(c)(i) by the Warrant Share
Delivery Date, then the Holder will have the right to rescind such exercise.

 

iv.           No Fractional Shares or
Scrip.  No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant.  As to any fraction of a share
which the Holder would otherwise be entitled to purchase upon such exercise,
the Company shall, at its election, either pay a cash adjustment in respect of
such final fraction in an amount equal to such fraction multiplied by the
Exercise Price or round up to the next whole share.

 

v.              Charges, Taxes and Expenses.  Issuance of certificates for Warrant Shares
shall be made without charge to the Holder for any issue or transfer tax or
other incidental expense in respect of the issuance of such certificate, all of
which taxes and expenses shall be paid by the Company, and such certificates shall
be issued in the name of the Holder or in such name or names as may be directed
by the Holder; provided, however, that in the event certificates
for Warrant Shares are to be issued in a name other than the name of the
Holder, this Warrant when surrendered for exercise shall be accompanied by the
Assignment Form attached hereto duly executed by the Holder and the
Company may require, as a condition thereto, the payment of a sum sufficient to
reimburse it for any transfer tax incidental thereto.

 

vi.           Closing of Books.  The Company will not close its stockholder
books or records in any manner which prevents the timely exercise of this
Warrant, pursuant to the terms hereof.

 

d)                                     Holder’s
Exercise Limitations.  The Company
shall not effect any exercise of this Warrant, and a Holder shall not have the
right to exercise any portion of this Warrant, pursuant to Section 2 or
otherwise, to the extent that after giving effect to such issuance after
exercise as set forth on the applicable Notice of Exercise, the Holder
(together with the Holder’s Affiliates, and any other Persons acting as a group
together with the Holder or any of the Holder’s Affiliates), would beneficially
own in excess of the Beneficial Ownership Limitation (as defined below). 
For purposes of the foregoing sentence, the number of shares of Common Stock
beneficially owned by the Holder and its Affiliates shall include the number of
shares of Common Stock issuable upon exercise of this Warrant with respect to
which such determination is being made, but shall exclude the number of shares
of Common Stock which would be issuable upon (i) exercise of the

 

3

 

remaining, nonexercised
portion of this Warrant beneficially owned by the Holder or any of its Affiliates
and (ii) exercise or conversion of the unexercised or nonconverted portion
of any other securities of the Company (including, without limitation, any
other  Common Stock Equivalents) subject
to a limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its Affiliates.  Except
as set forth in the preceding sentence, for purposes of this Section 2(e),
beneficial ownership shall be calculated in accordance with Section 13(d) of
the Exchange Act and the rules and regulations promulgated thereunder, it
being acknowledged by the Holder that the Company is not representing to the
Holder that such calculation is in compliance with Section 13(d) of
the Exchange Act and the Holder is solely responsible for any schedules
required to be filed in accordance therewith.  
To the extent that the limitation contained in this Section 2(d) applies,
the determination of whether this Warrant is exercisable (in relation to other
securities owned by the Holder together with any Affiliates) and of which
portion of this Warrant is exercisable shall be in the sole discretion of the
Holder, and the submission of a Notice of Exercise shall be deemed to be the
Holder’s determination of whether this Warrant is exercisable (in relation to
other securities owned by the Holder together with any Affiliates) and of which
portion of this Warrant is exercisable, in each case subject to the Beneficial
Ownership Limitation, and the Company shall have no obligation to verify or
confirm the accuracy of such determination.  
In addition, a determination as to any group status as contemplated
above shall be determined in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder.  For purposes of this Section 2(d), in
determining the number of outstanding shares of Common Stock, a Holder may rely
on the number of outstanding shares of Common Stock as reflected in (A) the
Company’s most recent periodic or annual report filed with the Commission, as
the case may be, (B) a more recent public announcement by the Company or (C) a
more recent written notice by the Company or the Transfer Agent setting forth
the number of shares of Common Stock outstanding.  Upon the written or
oral request of a Holder, the Company shall within two Trading Days confirm
orally and in writing to the Holder the number of shares of Common Stock then
outstanding.  In any case, the number of outstanding shares of Common
Stock shall be determined after giving effect to the conversion or exercise of
securities of the Company, including this Warrant, by the Holder or its
Affiliates since the date as of which such number of outstanding shares of
Common Stock was reported.  The “Beneficial
Ownership Limitation” shall be 4.99% of the number of shares of the Common
Stock outstanding immediately after giving effect to the issuance of shares of
Common Stock issuable upon exercise of this Warrant.  The Holder, upon not less than 61 days’ prior
notice to the Company, may increase or decrease the Beneficial Ownership
Limitation provisions of this Section 2(d), provided that the Beneficial
Ownership Limitation in no event exceeds 9.99% of the number of shares of the
Common Stock outstanding immediately after giving effect to the issuance of
shares of Common Stock upon exercise of this Warrant held by the Holder and the
provisions of this Section 2(d) shall continue to apply.  Any such increase or decrease will not be
effective until the 61st day after such notice is delivered to the Company.  The provisions of this paragraph shall be
construed and implemented in a manner otherwise than in strict conformity with
the terms of this Section 2(d) to correct this paragraph (or any
portion hereof) which may be defective or inconsistent with the intended
Beneficial

 

4

 

Ownership Limitation herein
contained or to make changes or supplements necessary or desirable to properly
give effect to such limitation. The limitations contained in this paragraph shall
apply to a successor holder of this Warrant.

 

Section 3.                                            Certain Adjustments.

 

a)                                      Stock Dividends
and Splits. If the Company, at any time while this Warrant is
outstanding: (i) pays a stock dividend or otherwise makes a distribution
or distributions on shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of Common Stock (which, for avoidance
of doubt, shall not include any shares of Common Stock issued by the Company
upon exercise of this Warrant), (ii) subdivides outstanding shares of
Common Stock into a larger number of shares, (iii) combines (including by
way of reverse stock split) outstanding shares of Common Stock into a smaller
number of shares, or (iv) issues by reclassification of shares of the
Common Stock any shares of capital stock of the Company, then in each case the
Exercise Price shall be multiplied by a fraction of which the numerator shall
be the number of shares of Common Stock (excluding treasury shares, if any)
outstanding immediately before such event and of which the denominator shall be
the number of shares of Common Stock outstanding immediately after such event,
and the number of shares issuable upon exercise of this Warrant shall be
proportionately adjusted such that the aggregate Exercise Price of this Warrant
shall remain unchanged.  Any adjustment
made pursuant to this Section 3(a) shall become effective immediately
after the record date for the determination of stockholders entitled to receive
such dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or re-classification.

 

b)                                     Pro Rata
Distributions.  If the
Company, at any time while this Warrant is outstanding, shall distribute to all
holders of Common Stock (and not to the Holder) evidences of its indebtedness
or assets (including cash and cash dividends) or rights or warrants to
subscribe for or purchase any security, then in each such case the Exercise
Price shall be adjusted by multiplying the Exercise Price in effect immediately
prior to the record date fixed for determination of stockholders entitled to
receive such distribution by a fraction of which the denominator shall be the
VWAP determined as of the record date mentioned above, and of which the numerator
shall be such VWAP on such record date less the then per share fair market
value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of the Common
Stock as determined by the Board of Directors in good faith.  In either case the adjustments shall be
described in a statement provided to the Holder of the portion of assets or
evidences of indebtedness so distributed or such subscription rights applicable
to one share of Common Stock.  Such
adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.

 

c)                                      Fundamental
Transaction. If, at any time while this Warrant is outstanding,
(i) the Company, directly or
indirectly, in one or more related transactions effects any merger or
consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer,

 

5

 

conveyance
or other disposition of all or substantially all of its assets in one or
a series of related transactions, (iii) any, direct or indirect, purchase
offer, tender offer or exchange offer (whether by the Company or another
Person) is completed pursuant to which holders of Common Stock are permitted to
sell, tender or exchange their shares for other securities, cash or property
and has been accepted by the holders of 50% or more of the outstanding Common
Stock, (iv) the Company,
directly or indirectly, in one or more related transactions effects any
reclassification, reorganization or recapitalization of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is effectively
converted into or exchanged for other securities, cash or property, (v) the
Company, directly or indirectly, in one or
more related transactions  consummates
a stock or share purchase agreement or other business
combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with another
Person or group of Persons whereby such other Person or group acquires more than 50%
of the outstanding shares of Common Stock
(not including any shares of Common Stock held by the other Person or other
Persons making or party to, or associated or affiliated with the other Persons
making or party to, such stock or share purchase agreement or other
business combination) (each a “Fundamental
Transaction”), then, upon any
subsequent exercise of this Warrant, the Holder
shall have the right to receive, for each Warrant Share that would have
been issuable upon such exercise immediately prior to the occurrence of such
Fundamental Transaction, at the option of the Holder (without regard to any
limitation in Section 2(d) on the exercise of this Warrant), the number of shares of Common Stock of the successor
or acquiring corporation or of the Company, if it is the surviving corporation,
and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction
by a holder of the number of shares of Common Stock for which this Warrant is
exercisable immediately prior to such Fundamental Transaction (without
regard to any limitation in Section 2(d) on the exercise of this
Warrant). 
For purposes of any such exercise, the determination of the
Exercise Price shall be appropriately adjusted to apply to such Alternate
Consideration based on the amount of Alternate Consideration issuable in
respect of one share of Common Stock in such Fundamental Transaction, and the
Company shall apportion the Exercise Price among the Alternate Consideration in
a reasonable manner reflecting the relative value of any different components
of the Alternate Consideration.  If
holders of Common Stock are given any choice as to the securities, cash or
property to be received in a Fundamental Transaction, then the Holder shall be
given the same choice as to the Alternate Consideration it receives upon any
exercise of this Warrant following such Fundamental Transaction.  Notwithstanding anything to the contrary, in
the event of a Fundamental Transaction that is (1) an all cash
transaction, (2) a “Rule 13e-3 transaction” as defined in Rule 13e-3
under the Exchange Act, or (3) a Fundamental Transaction involving a
person or entity not traded on a national securities exchange, including, but
not limited to, the Nasdaq Global Select Market, the Nasdaq Global Market, or
the Nasdaq Capital Market, the Company or any Successor Entity (as defined below)
shall, at the Holder’s option, exercisable at any time concurrently with, or
within 30 days after, the consummation of the Fundamental Transaction, purchase
this Warrant from the Holder by paying to the Holder an amount of cash equal to
the Black Scholes Value of the remaining unexercised portion of this Warrant on
the date of the consummation of such Fundamental Transaction.  “Black
Scholes Value” means the value of this Warrant based on the Black

 

6

 

and Scholes Option Pricing
Model obtained from the “OV” function on Bloomberg, L.P. (“Bloomberg”)
determined as of the day of consummation of the applicable Fundamental
Transaction for pricing purposes and reflecting (A) a risk-free interest
rate corresponding to the U.S. Treasury rate for a period equal to the time
between the date of the public announcement of the applicable Fundamental
Transaction and the Termination Date, (B) an expected volatility equal to
the greater of 100% and the 100 day volatility obtained from the HVT function
on Bloomberg as of the Trading Day immediately following the public
announcement of the applicable Fundamental Transaction, (C) the underlying
price per share used in such calculation shall be the sum of the price per
share being offered in cash, if any, plus the value of any non-cash
consideration, if any, being offered in such Fundamental Transaction and (D) a
remaining option time equal to the time between the date of the public
announcement of the applicable Fundamental Transaction and the Termination
Date.  The Company shall cause any
successor entity in a Fundamental Transaction in which the Company is not the
survivor (the “Successor Entity”) to assume in writing all of the
obligations of the Company under this Warrant and the other Transaction
Documents in accordance with the provisions of this Section 3(c) pursuant
to written agreements in form and substance reasonably satisfactory to the
Holder and approved by the Holder (without unreasonable delay) prior to such
Fundamental Transaction and shall, at the option of the Holder, deliver to the
Holder in exchange for this Warrant a security of the Successor Entity
evidenced by a written instrument substantially similar in form and substance
to this Warrant which is exercisable for a corresponding number of shares of
capital stock of such Successor Entity (or its parent entity) equivalent to the
shares of Common Stock acquirable and receivable upon exercise of this Warrant
(without regard to any limitations on the exercise of this Warrant) prior to
such Fundamental Transaction, and with an exercise price which applies the
exercise price hereunder to such shares of capital stock (but taking into
account the relative value of the shares of Common Stock pursuant to such
Fundamental Transaction and the value of such shares of capital stock, such
number of shares of capital stock and such exercise price being for the purpose
of protecting the economic value of this Warrant immediately prior to the
consummation of such Fundamental Transaction), and which is reasonably
satisfactory in form and substance to the Holder. Upon the occurrence of any
such Fundamental Transaction, the Successor Entity shall succeed to, and be
substituted for (so that from and after the date of such Fundamental Transaction,
the provisions of this Warrant and the other Transaction Documents referring to
the “Company” shall refer instead to the Successor Entity), and may exercise
every right and power of the Company and shall assume all of the obligations of
the Company under this Warrant and the other Transaction Documents with the
same effect as if such Successor Entity had been named as the Company herein.

 

d)                                     Calculations. All
calculations under this Section 3 shall be made to the nearest cent or the
nearest 1/100th of a share, as the case may be. For purposes of this Section 3,
the number of shares of Common Stock deemed to be issued and outstanding as of
a given date shall be the sum of the number of shares of Common Stock
(excluding treasury shares, if any) issued and outstanding.

 

7

 

e)                                      Notice to
Holder.

 

i.                  Adjustment to Exercise Price. Whenever the
Exercise Price is adjusted pursuant to any provision of this Section 3,
the Company shall promptly mail to the Holder a notice setting forth the
Exercise Price after such adjustment and any resulting adjustment to the number
of Warrant Shares and setting forth a brief statement of the facts requiring
such adjustment.

 

ii.               Notice to Allow Exercise by
Holder. If (A) the Company shall declare a dividend (or any other
distribution in whatever form) on the Common Stock, (B) the Company shall
declare a special nonrecurring cash dividend on or a redemption of the Common
Stock, (C) the Company shall authorize the granting to all holders of the
Common Stock rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights, (D) the approval of any
stockholders of the Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, or any compulsory share exchange whereby the Common
Stock is converted into other securities, cash or property, or (E) the
Company shall authorize the voluntary or involuntary dissolution, liquidation
or winding up of the affairs of the Company, then, in each case, the Company
shall cause to be mailed to the Holder at its last address as it shall appear
upon the Warrant Register of the Company, at least 20 calendar days prior to
the applicable record or effective date hereinafter specified, a notice stating
(x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not
to be taken, the date as of which the holders of the Common Stock of record to
be entitled to such dividend, distributions, redemption, rights or warrants are
to be determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is expected to become
effective or close, and the date as of which it is expected that holders of the
Common Stock of record shall be entitled to exchange their shares of the Common
Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or share exchange;
provided that the failure to mail such notice or any defect therein or in the
mailing thereof shall not affect the validity of the corporate action required
to be specified in such notice.  To the
extent that any notice provided hereunder constitutes, or contains, material,
non-public information regarding the Company or any of the Subsidiaries, the
Company shall simultaneously file such notice with the Commission pursuant to a
Current Report on Form 8-K.  The
Holder shall remain entitled to exercise this Warrant during the period
commencing on the date of such notice to the effective date of the event
triggering such notice except as may otherwise be expressly set forth herein.

 

8

 

Section 4.                                            Transfer of Warrant.

 

a)                                      Transferability.  This Warrant and all rights hereunder
(including, without limitation, any registration rights) are transferable, in
whole or in part, upon surrender of this Warrant at the principal office of the
Company or its designated agent, together with a written assignment of this
Warrant substantially in the form attached hereto duly executed by the Holder
or its agent or attorney and funds sufficient to pay any transfer taxes payable
upon the making of such transfer.  Upon
such surrender and, if required, such payment, the Company shall execute and
deliver a new Warrant or Warrants in the name of the assignee or assignees, as
applicable, and in the denomination or denominations specified in such
instrument of assignment, and shall issue to the assignor a new Warrant
evidencing the portion of this Warrant not so assigned, and this Warrant shall
promptly be cancelled.  The Warrant, if
properly assigned in accordance herewith, may be exercised by a new holder for
the purchase of Warrant Shares without having a new Warrant issued.

 

b)                                     New Warrants. This Warrant
may be divided or combined with other Warrants upon presentation hereof at the
aforesaid office of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued, signed by the
Holder or its agent or attorney.  Subject
to compliance with Section 4(a), as to any transfer which may be involved
in such division or combination, the Company shall execute and deliver a new
Warrant or Warrants in exchange for the Warrant or Warrants to be divided or
combined in accordance with such notice. All Warrants issued on transfers or
exchanges shall be dated the initial issuance date of this Warrant and shall be
identical with this Warrant except as to the number of Warrant Shares issuable
pursuant thereto.

 

c)                                      Warrant
Register. The Company shall register this Warrant, upon
records to be maintained by the Company for that purpose (the “Warrant
Register”), in the name of the record Holder hereof from time to time.  The Company may deem and treat the registered
Holder of this Warrant as the absolute owner hereof for the purpose of any
exercise hereof or any distribution to the Holder, and for all other purposes,
absent actual notice to the contrary.

 

Section 5.                                            Miscellaneous.

 

a)                                      No Rights as
Stockholder Until Exercise.  This Warrant does not entitle the Holder to
any voting rights, dividends or other rights as a stockholder of the Company
prior to the exercise hereof as set forth in Section 2(c)(i).

 

b)                                     Loss, Theft,
Destruction or Mutilation of Warrant. The Company covenants that
upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant or any stock certificate
relating to the Warrant Shares, and in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to it (which, in the case of the
Warrant, shall not include the posting of any bond), and upon surrender and
cancellation of such Warrant or stock certificate, if mutilated, the Company
will make and deliver a new Warrant or stock certificate of like tenor and
dated as of such cancellation, in lieu of such Warrant or stock certificate.

 

9

 

c)                                      Saturdays,
Sundays, Holidays, etc.  If the last or appointed day for the taking
of any action or the expiration of any right required or granted herein shall
not be a Business Day, then, such action may be taken or such right may be
exercised on the next succeeding Business Day.

 

d)                                     Authorized
Shares.

 

The Company covenants that,
during the period the Warrant is outstanding, it will reserve from its
authorized and unissued Common Stock a sufficient number of shares to provide
for the issuance of the Warrant Shares upon the exercise of any purchase rights
under this Warrant.  The Company further
covenants that its issuance of this Warrant shall constitute full authority to
its officers who are charged with the duty of executing stock certificates to
execute and issue the necessary certificates for the Warrant Shares upon the
exercise of the purchase rights under this Warrant.  The Company will take all such reasonable
action as may be necessary to assure that such Warrant Shares may be issued as
provided herein without violation of any applicable law or regulation, or of
any requirements of the Trading Market upon which the Common Stock may be
listed.  The Company covenants that all
Warrant Shares which may be issued upon the exercise of the purchase rights
represented by this Warrant will, upon exercise of the purchase rights
represented by this Warrant and payment for such Warrant Shares in accordance
herewith, be duly authorized, validly issued, fully paid and nonassessable and
free from all taxes, liens and charges created by the Company in respect of the
issue thereof (other than taxes in respect of any transfer occurring
contemporaneously with such issue).

 

Except and to the extent as
waived or consented to by the Holder, the Company shall not by any action,
including, without limitation, amending its certificate of incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such actions as may be necessary or
appropriate to protect the rights of Holder as set forth in this Warrant
against impairment.  Without limiting the
generality of the foregoing, the Company will (i) not increase the par
value of any Warrant Shares above the amount payable therefor upon such
exercise immediately prior to such increase in par value, (ii) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable Warrant Shares upon the
exercise of this Warrant and (iii) use commercially reasonable efforts to
obtain all such authorizations, exemptions or consents from any public
regulatory body having jurisdiction thereof, as may be, necessary to enable the
Company to perform its obligations under this Warrant.

 

Before taking any action
which would result in an adjustment in the number of Warrant Shares for which
this Warrant is exercisable or in the Exercise Price, the Company shall obtain
all such authorizations or exemptions thereof, or 

 

10

 

consents thereto, as may be necessary from any
public regulatory body or bodies having jurisdiction thereof.

 

e)                                      Jurisdiction. All questions
concerning the construction, validity, enforcement and interpretation of this
Warrant shall be determined in accordance with the provisions of the Purchase
Agreement.

 

f)                                        Restrictions.  The Holder acknowledges that the Warrant
Shares acquired upon the exercise of this Warrant, if not registered, will have
restrictions upon resale imposed by state and federal securities laws.

 

g)                                     Nonwaiver and
Expenses.  No course
of dealing or any delay or failure to exercise any right hereunder on the part
of Holder shall operate as a waiver of such right or otherwise prejudice the
Holder’s rights, powers or remedies. 
Without limiting any other provision of this Warrant or the Purchase
Agreement, if the Company willfully and knowingly fails to comply with any
provision of this Warrant, which results in any material damages to the Holder,
the Company shall pay to the Holder such amounts as shall be sufficient to
cover any costs and expenses including, but not limited to, reasonable
attorneys’ fees, including those of appellate proceedings, incurred by the
Holder in collecting any amounts due pursuant hereto or in otherwise enforcing
any of its rights, powers or remedies hereunder.

 

h)                                     Notices.  Any notice, request or other document
required or permitted to be given or delivered to the Holder by the Company
shall be delivered in accordance with the notice provisions of the Purchase
Agreement.

 

i)                                         Limitation of Liability.  No provision hereof, in the absence of any
affirmative action by the Holder to exercise this Warrant to purchase Warrant
Shares, and no enumeration herein of the rights or privileges of the Holder,
shall give rise to any liability of the Holder for the purchase price of any
Common Stock or as a stockholder of the Company, whether such liability is
asserted by the Company or by creditors of the Company.

 

j)                                         Remedies.  The Holder, in addition to being entitled to
exercise all rights granted by law, including recovery of damages, will be
entitled to specific performance of its rights under this Warrant.  The Company agrees that monetary damages
would not be adequate compensation for any loss incurred by reason of a breach
by it of the provisions of this Warrant and hereby agrees to waive and not to
assert the defense in any action for specific performance that a remedy at law
would be adequate.

 

k)                                      Successors and
Assigns.  Subject to applicable
securities laws, this Warrant and the rights and obligations evidenced hereby
shall inure to the benefit of and be binding upon the successors and permitted
assigns of the Company and the successors and permitted assigns of Holder.  The provisions of this Warrant are intended
to be for the benefit of any Holder from time to time of this Warrant and shall
be enforceable by the Holder or holder of Warrant Shares.

 

11

 

l)                                         Amendment.  This Warrant may be modified or amended or
the provisions hereof waived with the written consent of the Company and the Holder.

 

m)                                   Severability.  Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provisions of this Warrant.

 

n)                                     Headings.  The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.

 

********************

 

(Signature Page Follows)

 

12

 

IN WITNESS WHEREOF, the Company has caused this
Warrant to be executed by its officer thereunto duly authorized as of the date
first above indicated.

 

 

	
   

  	
  SYNERGY PHARMACEUTICALS, INC.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name: Gary Jacob

  
	
   

  	
   

  	
  Title:   CEO

  

 

13

 

NOTICE
OF EXERCISE

 

TO:                            SYNERGY PHARMACEUTICALS, INC.

 

(1)          The undersigned
hereby elects to purchase
                
Warrant Shares of the Company pursuant to the terms of the attached Warrant
(only if exercised in full), and tenders herewith payment of the exercise price
in full, together with all applicable transfer taxes, if any.

 

(2)          Please issue a
certificate or certificates representing said Warrant Shares in the name of the
undersigned or in such other name as is specified below:

 

                                                                        

 

The Warrant Shares shall be delivered to the
following DWAC Account Number or by physical delivery of a certificate to:

 

                                                                        

                                                                        

                                                                        

 

[SIGNATURE
OF HOLDER]

 

	
  Name of Investing Entity:

  	
   

  
	
  Signature of Authorized Signatory of Investing
  Entity:

  	
   

  
	
  Name of Authorized Signatory:

  	
   

  
	
  Title of Authorized Signatory:

  	
   

  
	
  Date:

  	
   

  
						

 

 

ASSIGNMENT
FORM

 

(To assign the foregoing
warrant, execute

this form and supply required information. 

Do not use this form to exercise the warrant.)

 

FOR VALUE RECEIVED,
[        ] all of or
[              ]
shares of the foregoing Warrant and all rights evidenced thereby are hereby
assigned to

 

                                                                                                   
whose address is

                                                                                                                                       .

 

                                                                                                                                       

 

Dated:                              ,                  

 

	
   

  	
  Holder’s Signature:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Holder’s Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  

 

 

Signature Guaranteed:
________________________________________________

 

 

NOTE:  The
signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company.  Officers of corporations and those acting in
a fiduciary or other representative capacity should file proper evidence of
authority to assign the foregoing Warrant.

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