Here’s Why You Should Read The Documents Before Investing: Disclaimers Doom Fraud Suit

It’s not necessarily what someone may or may not say orally that determines whether a fraud suit will succeed or not – it can be that what’s written down will be crucial. That’s the message from a recent decision by a federal district court in Manhattan, striking down a securities fraud claim. 

According to the complaint in this case, the plaintiff, a Serbian-born psychiatrist who is a naturalized U.S. citizen, is "completely naive and uninformed as to financial matters." He claimed that he invested about $1 million in a real estate project after his adviser allegedly represented that his investment would be in the nature of a loan that would earn fixed interest in the amount of 15 percent per annum over three years, and that his principal would be returned at that time.
 
The plaintiff asserted that the returns on his investment, however, fell far short of what he allegedly was promised. In January 2006, July 2006, and January 2007, the plaintiff allegedly received partial interest payments of approximately $22,000 (far less than the allegedly promised annual return of approximately $150,000 a year) in what he characterizes as a "calculated gesture" by the defendants; he alleged that he received no other interest payments; and he alleged that his principal was not returned. The plaintiff claimed that all of the defendants engaged in securities fraud in connection with the solicitation of his ill-fated investment.
 
The court was not impressed with the plaintiff’s contentions. It ruled that his core securities fraud claims — those alleging that defendants represented to plaintiff that his investment would be in the nature of a loan — failed for the fundamental reason that “any reliance on the misstatements he alleges was unreasonable as a matter of law, given the innumerable disclaimers in the offering materials.”
 
As the court explained, the written offering materials “unambiguously" demonstrated the true nature of his investment, were replete with disclaimers as to the risks associated with the investment, and presented detailed descriptions of the securities that were "plainly inconsistent with an understanding of the investment as a loan with fixed interest payments." Among much else, it continued, the materials explained that these were speculative investments in a proposed real estate project, and contained two boldface disclaimers in all capitals, one stating that "AS WITH ANY REAL ESTATE INVESTMENT, THERE CAN BE NO ASSURANCE OR GUARANTEE THAT THE COMPANY WILL MEET ITS BUSINESS OR INVESTMENT OBJECTIVES," and the other stating that the "INVESTMENT AND DEVELOPMENT PROGRAM IS SPECULATIVE AND ENTAILS SUBSTANTIAL RISKS. SINCE MARKET RISKS ARE INHERENT IN ALL REAL ESTATE INVESTMENTS TO VARYING DEGREES, THERE CAN BE NO ASSURANCE THAT THE INVESTMENT OBJECTIVES…WILL BE ACHIEVED."
 
The case is Kosovich v. Metro Homes LLC, 09 Civ. 6992 (S.D.N.Y. Dec. 29, 2009).