The Sixth Circuit recently ruled that sophisticated investors that execute so-called “big boy” agreements — a letter or other document proclaiming that an investor is sophisticated, will rely exclusively on its own due diligence and will bear the risk of the entire loss of its investment -- will have such proclamations used against them when evaluating fraud claims. An essential element of any fraud claim is establishing that a party relied on the other side's allegedly fraudulent statements. Per the Sixth Circuit in Pharos Capital Partners, LP v. Deloitte & Touche, LLP, No. 12-4381 (6th Cir. 2013), "big boy" agreements can destroy a parties "justifiable reliance" arguments and decimate fraud claims.
In that case, Pharos Capital Partners, LP, through what the court called vague allegations of reliance upon the Private Placement Memorandum at issue, asserted, among actions, claims of fraud and negligent misrepresentation against Credit Suisse Securities (USA), the private placement agent for securities investments in National Century Financial Enterprises, Inc. As part of the transaction, Pharos executed a "big boy" letter, which went beyond simple boilerplate disclaimers -- thereby defining the allocation of risk between the parties. Based upon this, the Sixth Circuit found that "the district court correctly held that Pharos could not justifiably rely on any statement by Credit Suisse because Pharos was a sophisticated investor, had substantial adverse information about National Century, and, most critically, signed an agreement disclaiming reliance on any statement by Credit Suisse.”
Lessons from Pharos abound for both transactional attorneys and litigators. The ruling makes it harder to create issues of fact, avoiding summary judgment or dismissal, simply by providing vague assertions of misstatements in documents and reliance; specific evidence must be provided. More importantly, the Sixth Circuit's decision makes clear that parties that declare themselves sophisticated investors will be held to that standard, especially when they negotiate and agree upon risk allocation terms (through a "big boy" agreement or otherwise). In short, if you declare that you are relying on your own knowledge and work and accept the risks associated with a transaction, arguments that you relied upon the other side's misstatements may fall upon deaf ears.