“Big Boys” Held to Their Agreements

Steven G. Brody and Colleen J. O'Loughlin of Bingham McCutchen LLP

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 in 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;

(b) That (i) neither [Credit Suisse] nor any Affiliate (as defined herein) has been requested to or has provided us with any information or advice with respect to the Securities nor is such information or advice necessary or desired, (ii) neither [Credit Suisse] nor any Affiliate has made or makes any representation as to Company or the credit quality of the Securities; and (iii) [Credit Suisse] and any Affiliate may have acquired, or during the term of the Securities may acquire, non-public information with respect to the Company, which we agree need not be provided to us;

(c) That, in connection with the issue and purchase of Securities, neither the Agent nor any of its Affiliates have acted as our financial advisor or fiduciary. . . . [3]

The Court concluded that “the clear language of the Letter Agreement and the surrounding factors render any claimed reliance by Pharos unjustifiable. . . . To allow Pharos to proceed any further with its fraud and negligent misrepresentation claims would upset the risk allocation the parties bargained for.” [4]

The Court further held:

[D]iscovery has disproved the complaint’s allegations, and the issue is no longer whether Pharos can state a claim for fraud. Credit Suisse has proved the existence of language having greater force than a boilerplate disclaimer in a PPM. It has proved that the parties entered into a bargained-for, retrospective statement of their dealings. Their Agreement establishes that Pharos agreed not to rely on Credit Suisse and agreed that Credit Suisse had no duty to provide information to Pharos. [5]

Based on the above, the Court granted summary judgment in favor of Credit Suisse on all reliance-based claims asserted by Pharos. Pharos is an important decision because it affirmatively holds a sophisticated party to its written representations regarding who and what it was relying on in connection with an investment decision.

[1] Id. at *1-3.

[2] Id. at *8.

[3] Id. at *4-5.

[4] Id. at *9.

[5] Id. at *10.

Steven G. Brody, Partner,

Steve Brody brings his considerable leadership and organizational skills to multiparty, multijurisdictional proceedings.

He represents the largest and most well-known global financial services companies in a broad array of commercial disputes, including securities and other commercial matters. Steve also is an established authority on constitutional and advertising law, including First Amendment and Commerce Clause matters. Before joining Bingham, Steve was the New York litigation practice group leader for both legacy McKee Nelson and King & Spalding.

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Colleen J. O'Loughlin, Counsel,

Colleen J. O’Loughlin handles a wide variety of complex litigation and regulatory matters for financial institutions involving sophisticated financial instruments such as CDOs, asset and mortgage-backed securities, swaps, and other derivatives. She is experienced in litigating claims arising under federal and state securities laws, antitrust laws, and various other statutes and the common law. Prior to joining Bingham, Colleen clerked for the Hon. William H. Pauley III, U.S. District Court, Southern District of New York, in 2005–2006.

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Bingham McCutchen LLP

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Offering a broad range of market-leading practices focused on global companies, Bingham,, has approximately 1,000 lawyers in 14 locations worldwide. Follow the firm on Twitter @BinghamLaw. Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances, and reflects personal views of the authors and not necessarily those of their firm or any of its clients. For legal advice, please consult your personal lawyer or other appropriate professional. Reproduced with permission from Bingham McCutchen LLP. This work reflects the law at the time of writing.