In our December 18, 2012 issue of Structured Thoughts, we examined a district court case that addressed the effectiveness of “Big-Boy Letters” in connection with a private sale of securities.14 “Big-Boy Letters” contain, among other provisions, representations that the investor is a sophisticated party that does not need to rely on the issuer of the relevant product or on the issuer’s agent. Additionally, these letters frequently include a waiver of all claims against the seller alleging the nondisclosure of non-public information about the issuer that may be known by the seller.
There has been some question as to the enforceability of Big-Boy Letters, because waivers of liability for securities fraud are void under Section 29(a) of the Securities Exchange Act of 1934. However, in October 2012, the district court in In re Nat'l Century Fin. Enterprises, Inc., Inv. Litig., 905 F. Supp. 2d 814 (S.D. Ohio 2012) (“Pharos”) granted summary judgment in favor of the defendant, Credit Suisse Securities, LLC (“Credit Suisse”), which was a placement agent in a private placement of securities that lost their full value. The court held that the parties’ Big-Boy Letter negated an element of the investor plaintiff’s, Pharos Capital Partners (“Pharos”), claim for securities fraud. The language of the letter was found to preclude a finding of justifiable reliance on the part of Pharos. As justifiable reliance is a necessary element of a successful fraud claim, the court granted Credit Suisse’s motion for summary judgment.
Sixth Circuit Review
In an October 2013 per curiam opinion, the Sixth Circuit Court of Appeals reviewed and roundly upheld the district court’s decision in Pharos. The Sixth Circuit court found that the district court correctly held that Pharos could not justifiably rely on any statement made by Credit Suisse, because Pharos was a sophisticated investor and had signed a Big-Boy Letter explicitly disclaiming such reliance.15 In addition, the court highlighted that Pharos had failed to present any particular evidence of reliance or evidence that Credit Suisse had knowledge of material information that could not be uncovered by an outside investor.16
This decision illustrates the utility of using carefully drafted Big-Boy Letters in connection with the offering of sophisticated structured products. A Big-Boy Letter will not waive liability for securities fraud, but it can eliminate a critical element of such a claim and thereby reduce the liability risk for issuers and underwriters involved in these offerings.