Document:

Exhibit 10.7

 

FORM OF
INSIDER LETTER

 

                   
    , 2007

 

Prospect Acquisition Corp.

695 East Main Street

Stamford, Connecticut  06901

 

Re:                               Initial
Public Offering

 

Gentlemen:

 

This letter is
being delivered to you in accordance with the Underwriting Agreement (the “Underwriting Agreement”) entered
into by and between Prospect Acquisition Corp., a Delaware corporation (the “Company”), and Citigroup Global
Markets Inc., as Representative (the “Representative”)
of the several Underwriters named in Schedule I thereto (the “Underwriters”), relating to an
underwritten initial public offering (the “IPO”) of
the Company’s units (the “Units”),
each Unit consisting of one share of the Company’s common stock, par value
$0.0001 per share (the “Common Stock”),
and one warrant to purchase one share of Common Stock (each, a “Warrant”). Certain capitalized
terms used herein are defined in paragraph 19 hereof.

 

In order to
induce the Company and the Underwriters to enter into the Underwriting
Agreement and to proceed with the IPO, and in recognition of the benefit that
such IPO will confer upon the undersigned as a stockholder of the Company, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the undersigned hereby agrees with the Company as
follows:

 

1.                                       If
the Company solicits approval of its stockholders of an Initial Business
Combination, the undersigned will vote all shares of Founders’ Common Stock
owned by him, her or it in accordance with the majority of the votes cast by
the holders of the IPO Shares and will vote all shares of Common Stock owned by
him, her or it in favor of an amendment to the Company’s certificate of
incorporation to provide for the Company’s perpetual existence.

 

2.                                       [In
the event that the Company fails to consummate an Initial Business Combination
within twenty-four (24) months from the date (“Effective
Date”) of the final prospectus relating to the IPO, the
undersigned will, as promptly as possible, take all reasonable actions within
his power to (a) cause the Trust Fund to be liquidated and distributed to
the holders of IPO Shares and (b) cause the Company to liquidate as soon
as reasonably practicable. ](1) The undersigned hereby waives any and all
right, title, interest or claim of any kind in or to any distribution of the
Trust Account and any remaining net assets of the Company as a result of such
liquidation with respect to the undersigned’s shares of Founders’ Common Stock
(“Claim”) and hereby waives any Claim
the undersigned may have in the future as a result of, or arising out of, any
contracts or agreements with the Company and will not seek recourse against the
Trust 

 

(1) Applies only to
officers and directors.

 

 

Account for any reason
whatsoever; provided that the foregoing shall not apply to any IPO Shares
acquired by the undersigned. [In the event of the liquidation of the Trust Account,
the undersigned, together with [David A. Minella/LLM Structured Equity Fund
L.P./LLM Investors L.P.], agrees to indemnify and hold harmless the Company, by
means of direct payment to the Trust Account against any and all loss,
liability, claims, damage and expense whatsoever (including, but not limited
to, any and all legal or other expenses reasonably incurred in investigating,
preparing or defending against any litigation, whether pending or threatened,
or any claim whatsoever) which the Company may become subject as a result of
any claim by any vendor or other person who is owed money by the Company for
services rendered or products sold or contracted for, or by any target
business, but only to the extent necessary to ensure that such loss, liability,
claim, damage or expense does not reduce the amount of funds in the Trust
Account and only if such a vendor or prospective target business does not
execute an agreement waiving any claims against the Trust Fund.  The undersigned hereby represents and
warrants that [he/it] is an “accredited investor” (as defined in Regulation D
of the Securities Act of 1933, and that [he/it] has sufficient funds available
to [him/it] to satisfy [his/its] indemnification obligations set forth in this
paragraph 2.](2) The undersigned acknowledges and agrees that there will
be no distribution from the Trust Account with respect to any warrants, all
rights of which will terminate on the Company’s liquidation.

 

3.                                       The
undersigned acknowledges and agrees that the Company will not consummate any
Initial Business Combination which involves a company which is affiliated with
any of the Insiders, including any businesses that are either portfolio
companies of, or have otherwise received a material financial investment from
any Insider or any entity affiliated with any Insider.

 

4.                                       Neither
the undersigned, any member of the family of the undersigned, nor any affiliate
of the undersigned will be entitled to receive and will not accept any
compensation for services rendered to the Company prior to or in connection
with the consummation of an Initial Business Combination; provided
that commencing on the Effective Date, each of Teleos Asset
Management LLC and LLM Capital Partners LLC (each, a “Related
Party”), entities affiliated with Daniel Gressel, a director,
and Patrick J. Landers, our president and a director, shall be allowed to
charge the Company $4,500 and $3,000, respectively, per month, representing an
allocable share of Related Party’s overhead, to compensate it for the Company’s
use of Related Party’s offices, utilities and personnel. The undersigned shall
also be entitled to reimbursement from the Company for its out-of-pocket
expenses incurred in connection with seeking and consummating an Initial
Business Combination. In addition, Flat Ridge Investments LLC, LLM Structured
Equity Fund L.P. and LLM Investors L.P. each will be entitled to repayment of
the $120,000, $78,400 and $1,600 non-interest bearing loans made by them,
respectively, to the Company to cover offering expenses, in accordance with the
repayment terms thereof.

 

5.                                       Neither
the undersigned, any member of the family of the undersigned, nor any affiliate
of the undersigned will be entitled to receive or accept a finder’s fee or any
other compensation in the event the undersigned, any member of the family of
the undersigned or any affiliate of the undersigned originates an Initial
Business Combination.

 

(2) Applies only to Mr. Minella,
LLM Structured Equity Fund L.P. and LLM Investors L.P.

 

 

6.                                       The
undersigned will escrow all of the undersigned’s shares of Founders’ Common
Stock until one year after the consummation by the Company of a Business Combination
subject to the terms of an escrow agreement which the Company will enter into
with the undersigned and Continental Stock Transfer & Trust Company,
as escrow agent.(3)

 

7.                                       To
the extent that the Underwriters do not exercise their over-allotment option to
purchase an additional 3,750,000 Units of the Company (as described in the
Prospectus), the undersigned agrees to permit the Company to repurchase from
the undersigned, at a purchase price equal to $0.0001 per share, a number of
shares of Founders’ Common Stock determined by multiplying (a) the product
of (i) 937,500, multiplied by (ii) a fraction, (x) the numerator
of which is the number of shares of Founders’ Common Stock held by the
undersigned, and (y) the denominator of which is the total number of
shares of Founders’ Common Stock, by (b) a fraction, (i) the
numerator of which is 3,750,000 minus the number of Units purchased by the
Underwriters upon exercise of their over-allotment option, and (ii) the
denominator of which is 3,750,000.  The
undersigned further agrees that to the extent that (i) the Underwriters
and the Company agree to increase the size of the offering in accordance with
the applicable securities laws and (ii) the undersigned has either
purchased additional shares of Founders’ Common Stock or received additional
shares of Founders’ Common Stock through a stock split or stock dividend
declared by the Company prior to the consummation of the IPO such that the
number of shares of Founders’ Common Stock outstanding after giving effect to
the upsized IPO will be equal to 20% of the aggregate issued and outstanding
Common Stock of the Company, then (i) the references to 3,750,000 in this Section 7
shall be changed to a number equal to 15% of the upsized offering, and (ii) the
reference to 937,500 in this Section 7 shall be changed to a number equal
to the sum of (x) 937,500 plus (y) 937,500 multiplied by a percentage
equal to the percentage by which the size of the offering was increased.(4)

 

8.                                       The
undersigned will escrow all of the undersigned’s Sponsors’ Warrants until
thirty days after the consummation by the Company of a Business Combination
subject to the terms of an escrow agreement which the Company will enter into
with the undersigned and Continental Stock Transfer & Trust Company, as
escrow agent.
(5)

 

9.                                       The
undersigned agrees that the undersigned will not transfer or sell any Sponsors’
Warrants the undersigned holds except in accordance with the transfer
restrictions set forth in such warrants, including the Warrant Agreement relating
thereto and the Escrow Agreement.(6)

 

10.                                 The
undersigned agrees not to sell or transfer any Founders’ Common Stock for a
period of one year from the consummation of an Initial Business Combination or
earlier if, subsequent to the Business Combination, (i) the closing price
of the Common Stock equals or exceeds $14.50 per share for any 20 trading days
within any 30-trading day period or (ii) the Company consummates a
subsequent liquidation, merger, stock exchange or other similar transaction
which results in all of the Company’s stockholders having the right to exchange
their shares of common stock for cash, securities or other property; provided, however, that
transfers

 

(3) Applies only to
parties to the Escrow Agreement.

(4) Applies only to
parties to the Escrow Agreement.

(5) Applies only to
parties to the Escrow Agreement.

(6) Applies only to
parties to the Escrow Agreement.

 

 

can be made to Permitted
Transferees who agree in writing to be bound to the transfer restrictions,
agree to vote in accordance with the majority of the votes cast by the holders
of the IPO Shares in the event that the Company solicits approval of its
stockholders of an Initial Business Combination and waive any rights to
participate in any liquidation distribution if the Company fails to consummate
an Initial Business Combination.  As used
herein, “Permitted Transferee” means a
transfer (i) to any officer or director of the Company, any affiliates or
family members of any officer or director of the Company or any affiliates of
any Sponsor (as defined herein), (ii) in the case of a natural person, by
gift to a member of such person’s immediate family or to a trust, the
beneficiary of which is a member of such person’s immediate family, an
affiliate of such person or to a charitable organization, (iii) in the
case of a natural person, by virtue of the laws of descent and distribution
upon death of such person, (iv) with respect to any Sponsor, by virtue of
the laws of Delaware or such Sponsor’s organizational documents upon dissolution
of such Sponsor, (v) in the case of a natural person, pursuant to a
qualified domestic relations order, (vi) in the event of the Company’s
liquidation prior to completion of an Initial Business Combination or (vii) in
the event the Company’s consummation of a liquidation, merger, stock exchange
or other similar transaction which results in all of the Company’s stockholders
having the right to exchange their shares of common stock for cash, securities
or other property subsequent to the Company’s consummation of its Initial
Business Combination.

 

The undersigned agrees that prior
to any transfer of any Founders’ Common Stock the undersigned will give written
notice to the Company expressing his desire to effect such transfer and
describing briefly the proposed transfer. Upon receiving such notice, the
Company shall present copies thereof to its counsel and the undersigned agrees
not to make any disposition of all or any portion of the Founders’ Common Stock
unless and until:

 

(a)                                  there
is then in effect a registration statement under the Securities Act of 1933, as
amended (the “Securities Act”) covering
such proposed disposition and such disposition is made in accordance with such
registration statement, in which case the required legends with respect to the
Founders’ Common Stock sold pursuant to such registration statement shall be
removed; or

 

(b)                                 if
reasonably requested by the Company, (A) the undersigned shall have
furnished the Company with an opinion of counsel, reasonably satisfactory to
the Company, that such disposition will not require registration of such
Founders’ Common Stock under the Securities Act, (B) the Company shall
have received customary representations and warranties regarding the transferee
that are reasonably satisfactory to the Company signed by the proposed
transferee and (C) the Company shall have received an agreement by such
transferee to the restrictions contained in the legend required with respect to
the Founders’ Common Stock and if applicable, those referred to in the first
paragraph of this Section 10.

 

11.                                 The
undersigned agrees not to participate in the formation of, or become an officer
or director of, any blank check company that may complete a business
combination with an entity in the financial services industry as its principal
business until the earlier of (i) the date on which the Company entered
into a definitive agreement regarding its Initial Business Combination or (ii) 24
months after the date of the Prospectus.

 

 

12.                                 The
undersigned agrees to be the                                 
of the Company until the earlier of the consummation by the Company of a
Business Combination or the liquidation of the Company. The undersigned’s
biographical information furnished to the Company and the Representative and
attached hereto as Exhibit A is true and accurate in all respects, does
not omit any material information with respect to the undersigned’s background.
Each of the undersigned’s Director and Officer Questionnaire and FINRA
Questionnaire furnished to the Company and the Representative and annexed as Exhibit B
hereto is true and accurate in all respects. The undersigned represents and
warrants that(7):

 

(a)                                  the
undersigned is not subject to, or a respondent in, any legal action for, any
injunction, cease-and-desist order or order or stipulation to desist or refrain
from any act or practice relating to the offering of securities in any
jurisdiction;

 

(b)                                 the
undersigned has never been convicted of or pleaded guilty to any crime (i) involving
any fraud, (ii) relating to any financial transaction or handling of funds
of another person, or (iii) pertaining to any dealings in any securities
and he is not currently a defendant in any such criminal proceeding; and

 

(c)                                  the
undersigned has never been suspended or expelled from membership in any
securities or commodities exchange or association or had a securities or
commodities license or registration denied, suspended or revoked.

 

13.                                 The
undersigned has full right and power, without violating any agreement by which
the undersigned is bound, to enter into this letter agreement and to serve as                                 
of the Company.

 

14.                                 The
undersigned hereby waives the undersigned’s right to exercise conversion rights
with respect to any shares of the Company’s Common Stock owned or to be owned
by the undersigned, directly or indirectly, and agrees that the undersigned
will not seek conversion with respect to such shares in connection with any
vote to approve an Initial Business Combination.

 

15.                                 The
undersigned hereby agrees to not propose, or vote in favor of, an amendment to
the Company’s Certificate of Incorporation to extend the period of time in
which the Company must consummate an Initial Business Combination prior to its
liquidation. Should such a proposal be put before stockholders, the undersigned
hereby agrees to vote against such proposal. The undersigned further agrees
that prior to the consummation of an Initial Business Combination, he will not
propose any amendment to Article SIXTH of the Company’s Amended and
Restated Certificate of Incorporation or support, endorse or recommend any
proposal that stockholders amend any of these provisions. This paragraph may
not be modified or amended under any circumstances.

 

16.                                 The
undersigned hereby agrees to not amend or cause to be amended, without the
written consent of the Underwriters, the Escrow Agreement to which the
undersigned is a party.(8)

 

(7) Applies only to
directors and officers of the Company.

(8) Applies only to
parties to the Escrow Agreement.

 

 

17.                                 In
the event that the Company does not consummate an Initial Business Combination
and must liquidate and its remaining net assets are insufficient to cover the
costs and expenses associated with completing such liquidation, the
undersigned, together with [David A. Minella/LLM Structured Equity Fund
L.P./LLM Investors L.P.], agrees to advance such funds necessary to complete
such liquidation and agrees not to seek repayment for such expenses.(9)

 

18.                                 This
letter agreement shall be governed by and construed and enforced in accordance
with the laws of the State of New York, without giving effect to conflicts of
law principles that would result in the application of the substantive laws of
another jurisdiction. The undersigned hereby (a) agrees that any action,
proceeding or claim against him arising out of or relating in any way to this
letter agreement (a “Proceeding”) shall be
brought and enforced in the courts of the State of New York of the United
States of America for the Southern District of New York, and irrevocably
submits to such jurisdiction, which jurisdiction shall be exclusive and (b) waives
any objection to such exclusive jurisdiction and that such courts represent an
inconvenient forum.

 

19.                                 As
used herein:

 

(a)                                  “Escrow Agreement” shall mean the
Escrow Agreement, to be dated on or about the Effective Date, by and among
Prospect Acquisition Corp., Continental Stock Transfer & Trust Company
and Flat Ridge Investments LLC, LLM Structured Equity Fund L.P., LLM Investors
L.P., Capital Management Systems, Inc., Michael P. Castine, SJC Capital,
LLC, Michael Downey, James Cahill, Daniel Gressel and John Merchant;

 

(b)                                 “Initial Business Combination” shall
mean the acquisition by the Company, whether through a merger, capital stock
exchange, asset acquisition, stock purchase, reorganization or similar type of
transaction, of one or more business or assets (“Target
Business” or “Target Businesses”),
whose collective fair market value is equal to at least 80% of the balance in
the Trust Fund, excluding deferred underwriting discounts and commissions and
resulting in ownership by the Company of at least 51% of the voting equity
interests of the Target Business or Businesses and control by the Company of
the majority of any governing body of the Target Business or Businesses;

 

(c)                                  “Insiders” shall mean all officers,
directors and stockholders of the Company immediately prior to the IPO;

 

(d)                                 “Founders’ Common Stock” shall mean
all of the shares of Common Stock of the Company acquired by an Insider prior
to the IPO;

 

(e)                                  “IPO Shares” shall mean the shares
of Common Stock issued in the Company’s IPO;

 

(f)                                    “Prospectus” shall mean the final
prospectus relating to the IPO;

 

(g)                                 “Sponsors” shall mean each of Flat
Ridge Investments LLC, LLM Structured Equity Fund L.P., LLM Investors L.P. and
Capital Management Systems, Inc.

 

 (9) Applies only to David A. Minella, LLM
Structured Equity Fund L.P. and LLM Investors L.P.

 

 

(h)                                 “Sponsors’ Warrants” shall mean the
warrants that are being sold privately by the Company simultaneously with the
consummation of the IPO; and

 

(i)                                     “Trust Account” shall mean the trust
account into which a portion of the net proceeds of the Company’s IPO will be
deposited.

 

20.                                 The
undersigned acknowledges and understands that the Underwriters and the Company
will rely upon the agreements, representations and warranties set forth herein
in proceeding with the IPO. Nothing contained herein shall be deemed to render
the Underwriters a representative of, or a fiduciary with respect to, the
Company, its stockholders or any creditor or vendor of the Company with respect
to the subject matter hereof.

 

21.                                 This
letter agreement shall be binding on the undersigned and such person’s
respective successors, heirs, personal representatives and assigns. This letter
agreement shall terminate on the earlier of (a) the consummation of an
Initial Business Combination and (b) the liquidation of the Company; provided,  that such
termination shall not relieve the undersigned from liability from any breach of
this agreement prior to its termination [and provided
further, that those provisions of Section [2] hereof relating
to the indemnification of the Company in the case of a liquidation shall
survive such liquidation.](10)

 

 

	
   

  	
   

  
	
   

  	
  Print Name
  of Insider

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Signature

  

 

(10) Applies only to David A. Minella, LLM Structured Equity Fund L.P.
and LLM Investors L.P.Exhibit 10.8

 

EXECUTION COPY

 

INVESTMENT
MANAGEMENT TRUST AGREEMENT

 

This Agreement
is made as of November 14, 2007 by and between Prospect Acquisition Corp.,
a Delaware corporation (the “Company”),
and Continental Stock Transfer & Trust Company (the “Trustee”).

 

WHEREAS, the Company’s registration statement
on Form S-1, No. 333-145110 (“Registration Statement”),
for its initial public offering of securities (“IPO”)
has been declared effective as of the date hereof (“Effective
Date”) by the Securities and Exchange Commission (capitalized
terms used herein and not otherwise defined shall have the meanings set forth
in the Registration Statement); and

 

WHEREAS, Citigroup Global Markets Inc. (“Citigroup”) is acting as the
representative of the several underwriters in the IPO (the “Underwriters”) pursuant to an
underwriting agreement dated on or about the date hereof between the Company
and Citigroup (the “Underwriting Agreement”); and

 

WHEREAS, as described in the Registration
Statement, and in accordance with the Company’s Certificate of Incorporation,
$247,000,000 of the gross proceeds of the IPO, including certain deferred
underwriting discounts and commissions and proceeds from the sale of the
Sponsors’ Warrants (or $283,375,000 if the underwriters’ over-allotment option
is exercised in full or a pro rata portion thereof pursuant to the terms of the
Underwriting Agreement if the underwriters’ over-allotment option is exercised
in part, but not in full, prior to the time of its expiration), will be
delivered to the Trustee to be deposited and held in a trust account for the
benefit of the Company and the holders of the Company’s common stock, par value
$.0001 per share, issued in the IPO as hereinafter provided (the amount to be
delivered to the Trustee will be referred to herein as the “Property”, the stockholders for
whose benefit the Trustee shall hold the Property will be referred to as the “Public Stockholders,” and the Public
Stockholders and the Company will be referred to together as the “Beneficiaries”);

 

WHEREAS, pursuant to the Underwriting
Agreement, a portion of the Property equal to $10,000,000 (or $11,500,000, if
the underwriters’ over-allotment option is exercised in full or a pro rata
portion thereof pursuant to the terms of the Underwriting Agreement if the
underwriters’ over-allotment option is exercised in part, but not in full,
prior to the time of its expiration as specified in a notice pursuant to
Paragraph 3(e) hereof) is attributable to deferred underwriting
commissions that will become payable by the Company to Citigroup upon the
consummation of an Initial Business Combination (as defined in the Registration
Statement) (the “Deferred Discount”); and

 

WHEREAS, the Company and the Trustee desire to
enter into this Agreement to set forth the terms and conditions pursuant to
which the Trustee shall hold the Property;

 

 

IT IS AGREED:

 

1.                                       Agreements and Covenants of Trustee. The Trustee hereby
agrees and covenants to:

 

(a)                                  Hold
the Property in trust for the Beneficiaries in accordance with the terms of
this Agreement in a segregated trust account (the “Trust
Account”) established by the Trustee at JPMorgan Chase, N.A.;

 

(b)                                 Manage,
supervise and administer the Trust Account subject to the terms and conditions
set forth herein;

 

(c)                                  In
a timely manner, upon the instruction of the Company, to invest and reinvest
the Property in United States “government securities” within the meaning of Section 2(a)(16)
of the Investment Company Act of 1940 having a maturity of 180 days or less,
and/or in any open ended investment company registered under the Investment
Company Act of 1940 that holds itself out as a money market fund selected by
the Company meeting the conditions of paragraphs (c)(2), (c)(3) and (c)(4) of
Rule 2a-7 promulgated under the Investment Company Act of 1940, as
determined by the Company;

 

(d)                                 Collect
and receive, when due, all principal and income arising from the Property,
which shall become part of the “Property,” as such term is used herein;

 

(e)                                  Notify
the Company and Citigroup of all communications received by it with respect to
any Property requiring action by the Company;

 

(f)                                    Supply
any necessary information or documents as may be requested by the Company in
connection with the Company’s preparation of the tax returns for the Trust Account;

 

(g)                                 Participate
in any plan or proceeding for protecting or enforcing any right or interest
arising from the Property if, as and when instructed by the Company to do so;

 

(h)                                 Render
to the Company, and to such other person as the Company may instruct, monthly
written statements of the activities of and amounts in the Trust Account
reflecting all receipts and disbursements of the Trust Account; and

 

(i)                                     Commence
liquidation of the Trust Account only after and promptly after receipt of, and
only in accordance with, the terms of a letter (each, a “Termination
Letter”), in a form substantially similar to that attached
hereto as either Exhibit A or Exhibit B hereto, signed
on behalf of the Company by its Chief Executive Officer, Chief Financial
Officer, Secretary or Assistant Secretary or other authorized officer of the
Company, and complete the liquidation of the Trust Account and distribute the
Property in the Trust Account only as directed in the Termination Letter and
the other documents referred to therein; provided, however, that in the event that a Termination Letter has not
been received by the Trustee by the date which is 24-months after the date of
the final prospectus for the IPO (the “Last Date”),
the Trust Account shall be liquidated in accordance with the procedures set
forth in the Termination Letter attached as Exhibit B hereto and
distributed to the stockholders of record on the Last Date. In all cases, the
Trustee shall provide Citigroup with a copy of any Termination Letters and/or
any other correspondence that it receives with respect to any proposed
withdrawal from the Trust Account

 

 

promptly after it
receives same. The provisions of this Section 1(i) may not be
modified, amended or deleted under any circumstances.

 

2.                                       Limited Distributions of Income from Trust Account.

 

(a)                                  Upon
written request from the Company, which may be given from time to time in a
form substantially similar to that attached hereto as Exhibit C,
the Trustee shall distribute to the Company the amount requested by the Company
to cover any income, franchise or other tax obligation owed by the Company as a
result of interest or other income earned on the funds held in the Trust
Account;

 

(b)                                 Upon
written request from the Company, which may be given from time to time in a
form substantially similar to that attached hereto as Exhibit D,
the Trustee shall distribute to the Company the amount requested by the Company
to cover expenses related to investigating and selecting a target business and
other working capital requirements; provided, however, that the aggregate amount of all such distributions
shall not exceed the lesser of (y) the aggregate amount of income actually
received on amounts in the Trust Account less an amount equal to estimated
taxes that are or will be due on such income at an assumed rate of 40% and (z) $2,750,000;

 

(c)                                  Distribute,
upon notice by the Company, the Deferred Discount, as defined in Section 3(e) to
Citibank; and

 

(d)                                 The
limited distributions referred to in Sections 2(a) and 2(b) above
shall be made only from interest collected on the Property and, in the case of Section 2(b),
the aggregate amount distributed by the Trustee to the Company may not exceed
$10,000,000, in the event the Underwriters’ over-allotment option in the
Offering is not exercised, or $11,500,000 if the Underwriters’ over-allotment
option in the Offering is exercised in full (or, if the size of the Offering is
increased or decreased, such greater or lesser amount as shall be set forth in
the Prospectus), less any applicable income taxes on the Property. Except as
provided in Section 1(i) and this Section 2, no other
distributions from the Trust Account shall be permitted.

 

3.                                       Agreements and Covenants of the Company. The Company hereby
agrees and covenants to:

 

(a)                                  Give
all instructions to the Trustee hereunder in writing, signed by the Company’s
Chief Executive Officer, Chief Financial Officer or other authorized officer.
In addition, except with respect to its duties under paragraphs 1(i), 2(a) and
2(b) above, the Trustee shall be entitled to rely on, and shall be
protected in relying on, any verbal or telephonic advice or instruction which
it in good faith believes to be given by any one of the persons authorized
above to give written instructions, provided that the Company shall promptly
confirm such instructions in writing;

 

(b)                                 Hold
the Trustee harmless and indemnify the Trustee from and against, any and all
expenses, including reasonable counsel fees and disbursements, or loss suffered
by the Trustee in connection with any action, suit or other proceeding brought
against the Trustee involving any claim, or in connection with any claim or
demand which in any way arises out of or relates to this Agreement, the
services of the Trustee hereunder, or the Property or any income

 

 

earned from investment of
the Property, except for expenses and losses resulting from the Trustee’s gross
negligence or willful misconduct. Promptly after the receipt by the Trustee of
notice of demand or claim or the commencement of any action, suit or
proceeding, pursuant to which the Trustee intends to seek indemnification under
this paragraph, it shall notify the Company in writing of such claim
(hereinafter referred to as the “Indemnified Claim”).
The Trustee shall have the right to conduct and manage the defense against such
Indemnified Claim, provided, that the Trustee shall obtain the consent of the
Company with respect to the selection of counsel, which consent shall not be
unreasonably withheld. The Trustee may not agree to settle any Indemnified
Claim without the prior written consent of the Company, which consent shall not
be unreasonably withheld, unless such settlement includes a full release of the
Company with respect to such Indemnified Claim. The Company may participate in
such action with its own counsel;

 

(c)                                  Pay
the Trustee an initial acceptance fee, an annual fee and a transaction
processing fee for each disbursement made pursuant to Section 2 as set
forth on Schedule A hereto, which fees shall be subject to modification by the
parties from time to time. It is expressly understood that the Property shall
not be used to pay such fees unless and until it is distributed to the Company
pursuant to Section 2. The Company shall pay the Trustee the initial
acceptance fee and first year’s fee at the consummation of the IPO and
thereafter on the anniversary of the Effective Date.  The Trustee shall refund to the Company the
annual fee (on a pro rata basis) with respect to any period after the
liquidation of the Trust Account. The Company shall not be responsible for any
other fees or charges of the Trustee except as set forth in this Section 3(c) and
as may be provided in Section 3(b) hereof (it being expressly
understood that the Property shall not be used to make any payments to the
Trustee under such Sections);

 

(d)                                 In
connection with any vote of the Company’s stockholders regarding a Business
Combination, provide to the Trustee an affidavit or certificate of a firm
regularly engaged in the business of soliciting proxies and/or tabulating
stockholder votes (which firm may be the Trustee) verifying the vote of the
Company’s stockholders regarding such Business Combination; and

 

(e)                                  Within
five business days after Citigroup’s over-allotment option (or any unexercised
portion thereof) expires or is exercised in full, provide the Trustee with a
notice in writing (with a copy to Citigroup) of the total amount of the
Deferred Discount to be released to Citigroup upon consummation of an Initial
Business Combination, which shall in no event be less than $10,000,000.

 

4.                                       Limitations of Liability. The Trustee shall have no
responsibility or liability to:

 

(a)                                  Take
any action with respect to the Property, other than as directed in paragraphs 1
and 2 hereof and the Trustee shall have no liability to any party except for
liability arising out of its own gross negligence or willful misconduct;

 

(b)                                 Institute
any proceeding for the collection of any principal and income arising from, or
institute, appear in or defend any proceeding of any kind with respect to, any
of the Property unless and until it shall have received instructions from the
Company given as

 

 

provided herein to do so
and the Company shall have advanced or guaranteed to it funds sufficient to pay
any expenses incident thereto;

 

(c)                                  Change
the investment of any Property, other than in compliance with paragraph 1(c);

 

(d)                                 Refund
any depreciation in principal of any Property;

 

(e)                                  Assume
that the authority of any person designated by the Company to give instructions
hereunder shall not be continuing unless provided otherwise in such
designation, or unless the Company shall have delivered a written revocation of
such authority to the Trustee;

 

(f)                                    The
other parties hereto or to anyone else for any action taken or omitted by it,
or any action suffered by it to be taken or omitted, in good faith and in the
exercise of its own best judgment, except for its gross negligence or willful misconduct.
The Trustee may rely conclusively and shall be protected in acting upon any
order, notice, demand, certificate, opinion or advice of counsel (including
counsel chosen by the Trustee), statement, instrument, report or other paper or
document (not only as to its due execution and the validity and effectiveness
of its provisions, but also as to the truth and acceptability of any
information therein contained) which is believed by the Trustee, in good faith,
to be genuine and to be signed or presented by the proper person or persons.
The Trustee shall not be bound by any notice or demand, or any waiver,
modification, termination or rescission of this Agreement or any of the terms
hereof, unless evidenced by a written instrument delivered to the Trustee
signed by the proper party or parties and, if the duties or rights of the
Trustee are affected, unless it shall give its prior written consent thereto;

 

(g)                                 Verify
the correctness of the information set forth in the Registration Statement or
to confirm or assure that any acquisition made by the Company or any other
action taken by it is as contemplated by the Registration Statement it being
understood that the foregoing shall not limit the Trustee’s obligation to act
upon such requests for distribution; and

 

(h)                                 File
information returns with the United States Internal Revenue Service and payee
statements with the Company, documenting the taxes payable by the Company, if
any, relating to interest earned on the Property.

 

(i)                                     Prepare,
execute and file tax reports, income or other tax returns and pay any taxes
with respect to income and activities relating to the Trust Account, regardless
of whether such tax is payable by the Trust Account or the Company (including,
but not limited to, income tax obligations), it being expressly understood that
as set forth in Section 1(i), if there is any income or other tax
obligation relating to the Trust Account or the Property in the Trust Account,
as determined from time to time by the Company and regardless of whether such
tax is payable by the Company or the Trust, at the written instruction of the
Company, the Trustee shall make funds available in cash from the Property in
the Trust Account an amount specified by the Company as owing to the applicable
taxing authority, which amount shall be paid directly to the company by
electronic funds transfer, account debit or other method of payment, and the
Company shall forward such payment to the applicable taxing authority.

 

 

5.                                       Termination. This Agreement shall terminate as follows:

 

(a)                                  If
the Trustee gives written notice to the Company that it desires to resign under
this Agreement, the Company shall use its reasonable efforts to locate a
successor trustee. At such time that the Company notifies the Trustee that a
successor trustee has been appointed by the Company and has agreed to become
subject to the terms of this Agreement, the Trustee shall transfer the
management of the Trust Account to the successor trustee, including but not
limited to the transfer of copies of the reports and statements relating to the
Trust Account, whereupon this Agreement shall terminate; provided, however,
that, in the event that the Company does not locate a successor trustee within
ninety days of receipt of the resignation notice from the Trustee, the Trustee
may submit an application to have the Property deposited with any court in the
State of New York or with the United States District Court for the Southern
District of New York and upon such deposit, the Trustee shall be immune from
any liability whatsoever; or

 

(b)                                 At
such time that the Trustee has completed the liquidation of the Trust Account
in accordance with the provisions of paragraph 1(i) hereof, and
distributed the Property in accordance with the provisions of the Termination
Letter, this Agreement shall terminate except with respect to Paragraph 3(b).

 

6.                                       Trust Account Waiver. 
The Trustee has no right, title, interest, or claim of any kind (“Claim”) in or to any monies or
Property in the Trust Account, and hereby waives any Claim in or to any monies
or Property in the Trust Account it may have in the future, and hereby agrees
not to seek recourse, reimbursement, payment or satisfaction for any Claim
against the Trust Account for any reason whatsoever.

 

7.                                       Miscellaneous.

 

(a)                                  The
Company and the Trustee each acknowledge that the Trustee will follow the
security procedures set forth below with respect to funds transferred from the
Trust Account. Upon receipt of written instructions, the Trustee will confirm
such instructions with an Authorized Individual at an Authorized Telephone
Number listed on the attached Exhibit E. The Company and the Trustee will
each restrict access to confidential information relating to such security
procedures to authorized persons. Each party must notify the other party
immediately if it has reason to believe unauthorized persons may have obtained
access to such information, or of any change in its authorized personnel. In
executing funds transfers, the Trustee will rely upon account numbers or other
identifying numbers of a beneficiary, beneficiary’s bank or intermediary bank,
rather than names. The Trustee shall not be liable for any loss, liability or
expense resulting from any error in an account number or other identifying
number, provided it has accurately transmitted the numbers provided.

 

(b)                                 This
Agreement shall be governed by and construed and enforced in accordance with the
laws of the State of New York, without giving effect to conflicts of law
principles that would result in the application of the substantive laws of
another jurisdiction. It may be executed in several original or facsimile
counterparts, each one of which shall constitute an original, and together
shall constitute but one instrument.

 

 

(c)                                  This
Agreement contains the entire agreement and understanding of the parties hereto
with respect to the subject matter hereof. Except for Section 1(i) (which
may not be amended under any circumstances), this Agreement or any provision
hereof may only be changed, amended or modified by a writing signed by each of
the parties hereto; provided, however, that no such change, amendment or modification may
be made without the prior written consent of the Public Stockholders, it being
the specific intention of the parties hereto that each Public Stockholder is
and shall be a third-party beneficiary of this paragraph 7(c) with the
same right and power to enforce this paragraph 7(c) as either of the
parties hereto, and provided, further, that this Agreement may not be changed,
waived, amended or modified in such a manner as to adversely affect the right
of the Underwriters to receive the Deferred Discount as contemplated herein without
the written consent of Citigroup. For purposes of this paragraph 6(c), the “consent
of the Public Stockholders” shall mean receipt by the Trustee of a certificate
from an entity certifying that (i) such entity regularly engages in the
business of serving as inspector of elections for companies whose securities
are publicly traded, and (ii) either (a) 70% of the Public
Stockholders of record as of a record date established in accordance with Section 213(a) of
the Delaware General Corporation Law, as amended (the “DGCL”),
have voted in favor of such amendment or modification or (b) 70% of the
Public Stockholders of record as of a record date established in accordance
with Section 213(b) of the DGCL have delivered to such entity a
signed writing approving such amendment or modification. As to any claim,
cross-claim or counterclaim in any way relating to this Agreement, each party
waives the right to trial by jury.

 

(d)                                 The
parties hereto consent to the jurisdiction and venue of any state or federal
court located in the City of New York, Borough of Manhattan, for purposes of
resolving any disputes hereunder.

 

(e)                                  Any
notice, consent or request to be given in connection with any of the terms or
provisions of this Agreement shall be in writing and shall be sent by express
mail or similar private courier service, by certified mail (return receipt
requested), by hand delivery or by facsimile transmission:

 

	
  if to the Trustee, to:

  	
  Continental Stock Transfer & Trust
  Company

  
	
   

  	
  17 Battery Place

  
	
   

  	
  New York, New York 10004

  
	
   

  	
  Attn: Steven G. Nelson and Frank DiPaolo

  
	
   

  	
  Fax No.: (212) 509-5150

  

 

	
  if to the Company, to:

  	
  Prospect Acquisition Corp.

  
	
   

  	
  695 East Main Street

  
	
   

  	
  Stamford, Connecticut 06901

  
	
   

  	
  Attn: Chief Executive Officer

  
	
   

  	
  Fax No.: (203) 656-0051

  

 

	
  in either case,

  	
   

  
	
  with a copy to:

  	
  Citigroup Global Markets Inc.

  
	
   

  	
  388 Greenwich Street

  
	
   

  	
  New York, New York 10013

  

 

 

	
   

  	
  Attn: General Counsel

  
	
   

  	
  Fax No.: (212) 816-7912

  

 

	
  and

  	
  Bingham McCutchen LLP

  
	
   

  	
  399 Park Avenue

  
	
   

  	
  New York, New York 10022

  
	
   

  	
  Attn: Floyd I. Wittlin, Esq.

  
	
   

  	
  Fax No.: (212) 752-5378

  

 

(f)                                    This
Agreement may not be assigned by the Trustee without the prior consent of the
Company and Citigroup.

 

(g)                                 Each
of the Trustee and the Company hereby represents that it has the full right and
power and has been duly authorized to enter into this Agreement and to perform
its respective obligations as contemplated hereunder. The Trustee acknowledges
and agrees that it shall not make any claims or proceed against the Trust
Account, including by way of set-off, and shall not be entitled to any funds in
the Trust Account under any circumstance.

 

(h)                                 Each
of the Company and the Trustee hereby acknowledge that Citigroup is a third
party beneficiary of this Agreement.

 

[SIGNATURE
PAGE FOLLOWS]

 

 

IN WITNESS WHEREOF, the parties have duly
executed this Investment Management Trust Agreement as of the date first
written above.

 

	
   

  	
  CONTINENTAL STOCK TRANSFER

  
	
   

  	
  & TRUST COMPANY, as Trustee

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ Steven Nelson

  
	
   

  	
  Name:

  	
    Steven Nelson

  
	
   

  	
  Title:

  	
    Chairman, President, Secretary

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  PROSPECT ACQUISITION
  CORP.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ David A. Minella

  
	
   

  	
  Name:

  	
    David A. Minella

  
	
   

  	
  Title:

  	
    Chief Executive Officer

  

 

 

SCHEDULE A

 

	
  Fee Item

  	
   

  	
  Time and method of payment

  	
   

  	
  Amount

  	
   

  
	
  Initial acceptance fee

  	
   

  	
  Initial closing of IPO by
  wire transfer

  	
   

  	
  $

  	
  1,000

  	
   

  
	
  Annual fee

  	
   

  	
  First year, initial
  closing of IPO by wire transfer; thereafter on the anniversary of the
  effective date of the IPO by wire transfer or check

  	
   

  	
  $

  	
  3,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Transaction processing fee
  for disbursements to Company under Section 2

  	
   

  	
  Deduction by Trustee from
  accumulated income following disbursement made to Company under
  Section 2

  	
   

  	
  $

  	
  250

  	
   

  

 

 

EXHIBIT A

 

[Letterhead of Company]

 

[Insert date]

 

Continental Stock Transfer &
Trust Company

17 Battery Place

New York, New York 10004

Attn:  Steven Nelson and Frank DiPaolo

 

Re: Trust Account No.                                           
Termination Letter

 

Gentlemen:

 

Pursuant to paragraph 1(i) of
the Investment Management Trust Agreement between Prospect Acquisition Corp. (“Company”) and Continental Stock
Transfer & Trust Company (“Trustee”),
dated as of
                              ,
2007 (“Trust Agreement”), this is to
advise you that the Company has entered into an agreement (“Business Agreement”) with
                                                          
(“Target Business”) to consummate a
business combination with Target Business (“Business
Combination”) on or about [insert date].
The Company shall notify you at least 48 hours in advance of the actual date of
the consummation of the Business Combination (“Consummation
Date”).

 

In accordance with the terms
of the Trust Agreement, we hereby authorize you to commence liquidation of the
Trust Account to the effect that, on the Consummation Date, all of funds held
in the Trust Account will be immediately available for transfer to the account
or accounts that the Company shall direct on the Consummation Date.

 

On the Consummation Date (i) counsel
for the Company shall deliver to you written notification that the Business
Combination has been consummated (“Counsel’s Letter”),
(ii) the Company shall deliver to you (a) [an
affidavit] [a certificate] of
                                  ,
which verifies the vote of the Company’s stockholders in connection with the
Business Combination and (b) written instructions with respect to the
transfer of the funds held in the Trust Account other than the Deferred
Discount (“Instruction Letter”) and (iii) Citigroup
shall deliver to you written instructions for delivery of the Deferred
Discount. You are hereby directed and authorized to transfer the funds held in
the Trust Account immediately upon your receipt of the Counsel’s Letter and the
Instruction Letter.  In the event that
certain deposits held in the Trust Account may not be liquidated by the
Consummation Date without penalty, you will notify the Company of the same and
the Company shall direct you as to whether such funds should remain in the
Trust Account and distributed after the Consummation Date to the Company. Upon
the distribution of all the funds in the Trust Account pursuant to the terms
hereof, the Trust Agreement shall be terminated and the Trust Account closed.

 

In the event that the
Business Combination is not consummated on the Consummation Date described in
the notice thereof and we have not notified you on or before the original
Consummation Date of a new Consummation Date, then, upon receipt of written
instruction from the Company, the funds held in the Trust Account shall be
reinvested as provided in the 

 

 

Trust
Agreement on the business day immediately following the Consummation Date as
set forth in the notice.

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  PROSPECT ACQUISITION  CORP.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

cc: Citigroup Global Markets
Inc.

 

 

EXHIBIT B

 

[Letterhead of Company]

 

[Insert date]

 

Continental Stock Transfer &
Trust Company

17 Battery Place

New York, New York 10004

Attn: Steven Nelson and
Frank DiPaolo

 

Re: Trust Account No.                       
Termination Letter

 

Gentlemen:

 

Pursuant to paragraph 1(i) of
the Investment Management Trust Agreement between Prospect Acquisition Corp. (“Company”) and Continental Stock
Transfer & Trust Company (“Trustee”),
dated as of
                          ,
2007 (“Trust Agreement”), this is to
advise you that the Company has been unable to effect a Business Combination
with a Target Company within the time frame specified in the Company’s
Certificate of Incorporation, as described in the Company’s prospectus relating
to its IPO.

 

In accordance with the terms
of the Trust Agreement, we hereby authorize you, to commence liquidation of the
Trust Account. You will notify the Company in writing as to when all of the
funds in the Trust Account will be available for immediate transfer (the “Transfer Date”) in accordance with
the terms of the Trust Agreement and the Certificate of Incorporation of the
Company.  You shall commence distribution
of such funds in accordance with the Trust Agreement and the Certificate of
Incorporation of the Company and you shall oversee the distribution of the
funds.  Upon the distribution of all the
funds in the Trust Account, your obligations under the Trust Agreement shall be
terminated.

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  PROSPECT ACQUISITION  CORP.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

cc: Citigroup Global Markets
Inc.

 

 

EXHIBIT C

 

[Letterhead of Company]

 

[Insert date]

 

Continental Stock Transfer &
Trust Company

17 Battery Place

New York, New York 10004

Attn: Frank DiPaolo and
Cynthia Jordan

 

Re: Trust Account No.

 

Gentlemen:

 

Pursuant to paragraph 2(a) of
the Investment Management Trust Agreement between Prospect Acquisition Corp. (“Company”) and Continental Stock
Transfer & Trust Company (“Trustee”),
dated as of                             ,
2007 (“Trust Agreement”), this is to
advise you that the Company hereby requests that you deliver to the Company
$                              of
the income earned and collected on the Property as of the date hereof. The
Company needs such funds to pay for the tax obligations as set forth on the
attached tax return or tax statement. In accordance with the terms of the Trust
Agreement, you are hereby directed and authorized to transfer (via wire
transfer) such funds promptly upon your receipt of this letter to the Company’s
operating account at:

 

[WIRE INSTRUCTION
INFORMATION]

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  PROSPECT ACQUISITION  CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

EXHIBIT D

 

[Letterhead of Company]

 

[Insert date]

 

Continental Stock Transfer &
Trust Company

17 Battery Place

New York, New York 10004

Attn: Frank DiPaolo and
Cynthia Jordan

 

Re: Trust Account No.

 

Gentlemen:

 

Pursuant to paragraph 2(b) of
the Investment Management Trust Agreement between Prospect Acquisition Corp. (“Company”) and Continental Stock
Transfer & Trust Company (“Trustee”),
dated as of
                        ,
2007 (“Trust Agreement”), this is to
advise you that the Company hereby requests that you deliver to the Company
$                          of
the income earned and collected on the Property as of the date hereof, which
does not exceed, in the aggregate with all such prior disbursements pursuant to
paragraph 2(b), if any, the maximum amount set forth in paragraph 2(b). The
Company needs such funds to cover its expenses relating to investigating and
selecting a target business and other working capital requirements. In
accordance with the terms of the Trust Agreement, you are hereby directed and
authorized to transfer (via wire transfer) such funds promptly upon your
receipt of this letter to the Company’s operating account at:

 

[WIRE INSTRUCTION
INFORMATION]

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  PROSPECT ACQUISITION  CORP.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

cc: Citigroup Global Markets
Inc.

 

 

EXHIBIT E

 

	
  AUTHORIZED INDIVIDUAL(S) FOR
  TELEPHONE CALL BACK

  	
   

  	
  AUTHORIZED TELEPHONE NUMBER(S)

  
	
   

  	
   

  	
   

  
	
  Company:  

  	
   

  	
  (203) 363-0885

  
	
   

  	
   

  	
   

  
	
  Prospect Acquisition Corp.

  695 East Main Street

  Stamford, Connecticut 06901

  Attn: Chief Financial Officer

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Trustee:

  	
   

  	
  (212) 845-3200

  
	
   

  	
   

  	
   

  
	
  Continental Stock
  Transfer & Trust Company

  17 Battery Place

  New York, New York 10004

  Attn: Frank DiPaolo, CFO

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