In the case of The HA2003 Liquidating Trust v. Credit Suisse Securities (USA) LLC, __ F.3d __ (7th Cir. 2008) ("HA2003"), HALO, an acquiring company, hired CSFB, an investment banker, to (i) renegotiate the economic terms of a stock acquisition of the dot-com target company,, and (ii) issue a fairness opinion on behalf of HALO in connection with the acquisition. Concluding that CSFB did not act grossly negligent in issuing the fairness opinion even though the fairness opinion was based on numbers known by HALO's management to be inaccurate, the Seventh Circuit refused to impose liability on CSFB for alleged damages suffered by HALO and its shareholders when HALO became insolvent and filed bankruptcy after the acquisition.

In 1999, HALO agreed to acquire the stock of Starbelly for between $70 to $100 million cash and $140 to $170 million in HALO stock. However, because HALO did not have the cash on hand and would violate certain covenants in HALO's loan agreement if it consummated the proposed transaction, HALO hired CSFB to renegotiate the price and issue a fairness opinion for HALO in connection therewith. On January 17, 2000, CSFB issued the fairness opinion, which did not indicate whether CSFB was successful in attempting to renegotiate the purchase price, and concluded that from a financial point of view, the consideration to be paid by HALO for the stock of Starbelly was fair. Both CSFB's engagement letter and its fairness opinion stated explicitly that CSFB relied on HALO's financial projections. CSFB did not undertake to verify the projections. Separately, HALO hired Ernst & Young ("Ernst") as a business consultant to evaluate the accuracy of the financials and the projections. Ernst concluded that HALO's projections were unrealistic, and communicated that conclusion to HALO's CEO and board of directors. The HA2003 opinion does not indicate whether CSFB knew of Ernst's conclusion, and if so, when CSFB learned of the conclusion.

The proxy solicitation sent to shareholders for approval of the stock acquisition included CSFB's fairness opinion, and investors approved the transaction, which then closed in May 2000. Shortly after the transaction closed, HALO fell into financial distress as a result of the cash drain from the acquisition and Starbelly's continuing losses. HALO filed bankruptcy in July 2001, and a liquidating trust was appointed.

Under CSFB's engagement letter with HALO, CSFB is liable only for bad faith or gross negligence. The liquidating trust sued CSFB for gross negligence based on CSFB's issuance of the fairness opinion. The arguments of the parties and Court's conclusion were as follows:

The Trust's Arguments Why CSFB Was Grossly Negligent:

  •  CSFB should have relied on Ernst's conclusion, rather than HALO's projections. 
  • CSFB should have withdrawn the fairness opinion, or issued a new one, after the market price for dot-com stocks began to decline. 
  • After CSFB issued the fairness opinion, but before the transaction closed, "any fool" could have seen that the purchase price should have been much lower.

CSFB's Arguments Why It was Not Grossly Negligent: 

  •  CSFB could not predict what would happen in the market. In fact, in mid-March 2000, two months after CSFB issued the fairness opinion, the market peaked. 
  • If "any fool" could have seen that prices should be much lower, then no one could have possibly relied on the fairness opinion. 
  • When the transaction closed, the market was at the same level as when the deal between HALO and Starbelly had been negotiated. 
  • HALO and CSFB had agreed that CSFB would issue one fairness opinion, as of a certain date, not multiple or revised opinions. Moreover, CSFB could not distinguish between short-term and long-term reverses in the market. Carrying the Trust's argument to its logical conclusion, CSFB would have been required to issue a new opinion every time the market shifted. 
  • In April 2000, a major HALO shareholder asked HALO management to seek a new valuation of Starbelly and an update of the fairness opinion. HALO management chose not to do so. 
  • The engagement letter between CSFB and HALO required CSFB to use the information provided by HALO. This was consistent with the industry norm. 
  • CSFB told HALO to hire someone to check the numbers. 
  • It was HALO that chose to go forward undaunted after receiving Ernst's conclusion. HALO cannot blame that on CSFB just because CSFB is a deep pocket.

The Seventh Circuit, adopting CSFB's arguments, ruled in favor of CSFB, concluding that CSFB had not acted grossly negligent.

The Seventh Circuit's opinion did not indicate if and when CSFB learned about Ernst's opinion, which arguably is a significant fact. While the court was probably correct that it makes sense to have different entities verify the numbers (Ernst) and crunch the numbers (CSFB) because specialists should "do what they are best at", it probably also makes sense to have those entities communicate with each other so that everyone has full information. If CSFB learned of Ernst's conclusion before CSFB issued its fairness opinion, such fact might warrant a different outcome. While CSFB might not have been required to verify the numbers, it seems that if CSFB knew the numbers were suspect, it should not be able to ignore that fact. On the other hand, the HA2003 opinion implies that anyone deciding to invest in or approve the transaction should have known that HALO's projections were speculative, suggesting that Ernst's conclusion may not have provided information that people could not figure out for themselves. In other words, anyone investing in or voting to approve such a transaction inherently must assume the business risks associated with that transaction.