When a business deal goes bad, it has to be someone’s fault, right? And if it is someone’s fault then that someone should have to pay the other participants in the deal who lost money, particularly where that someone has not been completely honest about the risks involved, right? Not always, and not where the business investor who is sophisticated enough to have known better should have been asking the right questions from the beginning, but simply failed to do so because that investor was a little too greedy.
That is what a federal district court ruled in applying New York law to a case we handled where our client because of a failed business venture was counter-sued by one of the participants for fraud and damages for all of the supposed money the participant would have made but for our client’s alleged misrepresentations concerning its experience and skills. See Street-Works Development LLC v. John Richman; 13 CV 774 (VB), SDNY, decided February 4, 2015.
The particular context of the case concerned whether the defendant in his counterclaims against our client and against individual members of the client had sufficiently and adequately plead fraud under New York law. In his pleadings, the defendant specifically let the court know just how sophisticated he was by claiming that “he had been the developer on real estate projects since he left graduate school”; had “partnered with high net-worth individuals”; and “successfully orchestrated over $3 Billion of real estate projects nationwide”. Given such experience and skill, the Court held that the defendant could have investigated the experience and background of the members, but since he failed to do so he could not have plausibly relied on the representations of our clients.
The Court based its decision on three cases. First, the Court held that where a party has the means to discover the truth of matters, but fails to do so, that party cannot claim fraud. Arfa v. Zamir, 76 A.D.3d 56 (1st Dep’t. 2010). Second, the Court stated that unless the facts to be investigated are peculiarly within the knowledge of the person making the representation, and therefore, the claimant would have no independent means of verification, the claimant will not be excused from conducting due diligence. Crigger v. Fahnestock and Co., Inc., 443 F.3d 230 (2nd Cir. 2006) (“Crigger”). And last, the Court ruled that a party will not be heard to complain of fraud when its own lack of due care is the cause of the harm. Lazard Freres & Co. v. Protective Life Ins. Co., 108 F.3d 1531 (2nd Cir. 1997) (“Lazard Freres”).
The guiding principle under New York law was stated by the Court in Lazard Freres: “[i]t is well established that ‘[w]here sophisticated businessmen engaged in major transactions enjoy access to critical information but fail to take advantage of that access, New York courts are particularly disinclined to entertain claims of justifiable reliance.’, citing Grumman Allied Indus., Inc. v. Rohr Indus., Inc., 748 F.2d 729, 737 (2d Cir.1984). And the Court in Crigger stated the rule even more succinctly: “[t]he law is indulgent of the simple or untutored; but the greater the sophistication of the investor, the more inquiry that is required.”
It is not always the case that a pleading so clearly allows a Court to rule on an issue of reliance in fraud. But here the pleading was direct and unambiguous. The defendant was not only an experienced businessman, he had a long history in real estate development. Such an individual had not only the experience but also the means to investigate and evaluate the alleged misrepresentations. This he failed to do and as a result could not be heard to claim reliance on such misrepresentations. Simply put our defendant was no fool and certainly not one of the suckers Mr. Barnum claimed were born every minute.