Sunday, November 25, 2012

Hey Big Boy: If You Represent Yourself to Be a Sophisticated Investor You'd Better Be Able to Back it Up

 “Getting an unsophisticated client was the golden prize. The quickest way to make money on Wall Street is to take the most sophisticated product and try to sell it to the least sophisticated client.”
-former Goldmanite and dipwad Greg Smith
Oct. 21, 2012
The one non-self-serving thing he's said.
From Bingham McCutchen:

“Big Boys” Held to Their Agreements 
On Oct. 26, 2012, the United States District Court for the Southern District of Ohio granted summary judgment in favor of Credit Suisse Securities (USA) LLC (“Credit Suisse”) in Pharos Capital Partners, L.P. v. Deloitte & Touche, L.L.P., No. 2:03-cv-362, 2012 WL 5334027 (S.D. Ohio Oct. 26, 2012).  The Court held that under New York or Ohio law, plaintiff Pharos Capital Partners, L.P. (“Pharos”) failed to prove it justifiably relied on Credit Suisse in connection with its $12 million private equity investment in National Century Financial Enterprises, Inc. (“NCFE”) because it expressly disavowed any such reliance in a letter agreement (the “Letter Agreement”). NCFE operated a healthcare finance business that was later found to be fraudulent. 
The decision is significant for the financial industry because it enforces a party’s representations in an agreement that it was relying on its own due diligence investigation in connection with its investment, rather than any alleged representations made by a placement agent. Prior to the decision in Pharos, many courts have been reluctant to enforce such agreements to defeat claims for fraud and negligent misrepresentation, which require a showing of justifiable or reasonable reliance.

NCFE hired Credit Suisse and The Shattan Group to act as co-placement agents in connection with NCFE’s private offering of convertible preferred stock and subordinated notes. In early 2002, Pharos approached Credit Suisse seeking an investment opportunity in the healthcare industry, and Credit Suisse introduced Pharos to NCFE. Pharos promptly began its due diligence investigation, met with the management of NCFE and received access to a data room of diligence materials.1

After its diligence investigation, but prior to its investment in NCFE, Pharos negotiated and signed the Letter Agreement with Credit Suisse n which Pharos acknowledged certain facts and made particular representations to Credit Suisse regarding its investment. “The parties referred to the Letter Agreement as a ‘big boy’ agreement because Pharos in essence said that it knew what it was doing and could take care of itself.”2 Specifically, as the Court observed, Pharos represented the following:

(a) That we are a sophisticated institutional investor and have such knowledge and experience in financial and business matters and expertise in assessing credit risk; that we are capable of evaluating the merits, risks and suitability of investing in the Securities; that we have conducted our own due diligence investigation of the Company, that we are relying exclusively on our due diligence investigation and our own sources of information and credit analysis with respect to the Securities and that we are able to bear the economic risks of and an entire loss of our investment in the Securities....

HT: M&A Law Prof Blog