Pharos Capital Partners, L.P. v. Deloitte & Touche, L.L.P.
905 F. Supp. 2d 814
S.D. Ohio2012Background
- Pharos Capital Partners, L.P. sues Credit Suisse Securities LLC for fraud related to a failed $12 million investment in National Century Financial Enterprises.
- Credit Suisse acted as a co-placement agent and allegedly failed to disclose misrepresentations about National Century’s operations.
- The parties signed a Letter Agreement in which Pharos acknowledged relying on its own due diligence and assumed risk of loss, with disclosure duties limited by the agreement.
- Pharos conducted extensive due diligence, reviewed data room materials, and engaged in a site visit with National Century in March 2002.
- Goldman Sachs withdrew as lead investor, but Pharos remained enthusiastic and proceeded to sign the stock purchase agreement on July 8, 2002.
- National Century later filed for bankruptcy in November 2002; Pharos’s $12 million investment lost value amid National Century’s fraud.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether no-reliance language defeats fraud claims | Pharos argues reliance on CS misstatements may survive despite no-reliance clause. | Credit Suisse contends the Letter Agreement cleanly allocates risk and forecloses justifiable reliance. | No justifiable reliance; summary judgment for Credit Suisse. |
| Choice of law for fraud and negligent misrepresentation | Pharos asserts Ohio law; CS argues New York law. | Either state's law governs, but reliance defeats both. | Reliance required; court applies whichever law governs, finding reliance lacking under either. |
| Whether § 1707.41 Ohio Securities Act claim requires justifiable reliance | Pharos asserts reliance need not be justifiable. | § 1707.41 requires justifiable reliance under Ohio law. | Justifiable reliance is an element; not proven; summary judgment for Credit Suisse. |
| Whether Pharos state a predicate § 1707.41 claim for secondary liability | Pharos alleges primary misrepresentation in PPM and secondary liability. | No viable predicate misrepresentation proven, so § 1707.41 cannot support secondary liability. | Pharos failed to prove a primary violation; § 1707.43 claim fails. |
| Whether Ohio recognizes aiding and abetting fraud | Pharos seeks liability under Restatement § 876. | Ohio does not recognize aiding and abetting under § 876. | Ohio does not recognize aiding and abetting fraud; Credit Suisse entitled to summary judgment on § 1707.43(A) aiding-and-abetting claim. |
Key Cases Cited
- Rissman v. Rissman, 213 F.3d 381 (7th Cir.2000) (no-reliance emphasis for sophisticated parties)
- Extra Equipamentos E Exportacao Ltda. v. Case Corp., 541 F.3d 719 (7th Cir.2008) (reliance can be settled on summary judgment with no-reliance clause)
- Paracor Fin., Inc. v. General Elec. Capital Corp., 96 F.3d 1151 (9th Cir.1996) (investors can bargain for own due diligence and disclaimers)
- Danann Realty Corp. v. Harris, 5 N.Y.2d 317 (N.Y.1959) (requirement of specificity for fraud-mitigating disclaimers)
- DIMON Inc. v. Folium, Inc., 48 F.Supp.2d 359 (S.D.N.Y.1999) (peculiar knowledge exception not applicable to sophisticated parties)
- Brown v. Earthboard Sports USA, Inc., 481 F.3d 901 (6th Cir.2007) (contextual factors for justifiable reliance)
- Harsco Corp. v. Segui, 91 F.3d 337 (2d Cir.1996) (no-reliance clauses and sophisticated parties)
- In re Nat’l Century Fin. Enterprises, Inc., Inv. Litig., No. 2:03-md-1565, 2006 WL 469468 (S.D.Ohio 2006) (MDL context for disclosures and duties)
- DeVries Dairy, L.L.C. v. White Eagle Coop. Ass’n., Inc., 132 Ohio St.3d 516 (Ohio 2012) (Ohio Supreme Court rejects Restatement § 876 aiding-and-abetting claim)