On October 26, 2012, the Southern District of Ohio granted summary judgment in favor of Credit Suisse Securities LLC in a fraud suit brought by Pharos Capital Partners, L.P. in connection with Pharos’s “failed $12 million equity investment” in National Century Financial Enterprises, Inc. (“NCFE” or “National Century”). Pharos Capital Partners, L.P v. Deloitte & Touche, L.L.P. (In re National Century Financial Enterprises, Inc. Investment Litigation), 2012 WL 5334027, at *1 (S.D. Oh. Oct. 26, 2012) (Graham, J.). The court held “as a matter of law that Pharos could not have justifiably relied on [any] alleged misrepresentations and omissions made by Credit Suisse” because the parties had “entered into a Letter Agreement in which Pharos acknowledged that it was ‘a sophisticated institutional investor’ who was ‘relying exclusively’ on its own due diligence investigation and who would bear the risk of ‘an entire loss’ of its investment.” Id. The court's decision did not address the federal securities laws.


“Pharos is a limited partnership that makes private equity investments for its limited partner investors.” Id. In February 2002, Pharos contacted Credit Suisse about investment opportunities. At the time, “Credit Suisse was acting as a co-placement agent for National Century in connection with a $190 million private placement of securities.” Id. Heather Nicolau of Credit Suisse informed Bob Crants, one of Pharos’s managing partners, that Credit Suisse was “‘raising equity and mezzanine for … a profitable healthcare receivables company.’” Id. at *2. Crants responded that the Pharos team “actually know[s] quite a bit about the healthcare receivables business & would love to take a look.” Id.

Credit Suisse sent Pharos the private placement memorandum for the NCFE offering, as well as three boxes of due diligence materials, including NCFE’s yearly financial audits and the company’s unaudited financial data. One of Pharos’s managing partners subsequently emailed David Hurwitz of Credit Suisse “asking if the National Century deal was ‘all it’s cracked up to be.’” Id. Hurwitz answered: “I do believe NCFE is what it is cracked up to be. It’s extremely profitable and has been for many years. They are the dominant player in the industry and still have great growth opportunities.” Id.

In March 2002, following a site visit, Pharos informed Credit Suisse that it was “ready to close the deal at quarter’s end.” Id. at *3. However, the deal “did not close as quickly as Pharos had anticipated” because Goldman Sachs, which had been considering serving as lead investor, backed out of the transaction. Id. Credit Suisse informed Pharos of this development, and forwarded to Pharos the company’s “responses to a series of inquiries Goldman had posed about potential areas of concern,” including National Century’s history of related party transactions. Id. In May 2002, Pharos informed Credit Suisse that it had “‘waded through’” Goldman’s concerns and determined that it did not “‘see a material issue.’” Id. at 3.

In June 2002, Credit Suisse emailed Pharos a letter agreement stating that “Pharos was ‘relying exclusively’ on its own due diligence and would bear the risk of an entire loss and that Credit Suisse had made no representations as to National Century or the credit quality of the securities and had no duty to disclose non-public information to Pharos.” Id. at *4. Although Pharos’s managing directors initially balked at the no-reliance clause, Pharos ultimately signed a letter agreement on July 8, 2002 (the “Letter Agreement”) that “retained the language regarding reliance, risk, representations, and disclosure” (the “No Reliance Clause”). Id. The No Reliance Clause stated in relevant part as follows:

“[W]e are a sophisticated institutional investor and have such knowledge and experience in financial and business matters and expertise in assessing credit risk, that we are capable of evaluating the merits, risks and suitability of investing in the [s]ecurities, that we have conducted our own due diligence investigation of the [c]ompany, that we are relying exclusively on our own due diligence investigation and our own sources of information and credit analysis with respect to the [s]ecurities and that we are able to bear the economic risks of … an entire loss of our investment in the [s]ecurities.”


On November 18, 2002, Pharos’s $12 million investment in National Century “fully lost its value when National Century filed for bankruptcy” as a result of a “massive fraud.” Id. at *5. In March 2003, Pharos filed suit alleging that “Credit Suisse had knowledge of the material aspects of National Century’s fraud and [had] misrepresented to Pharos how National Century ran its operations.” Id. Pharos “further allege[d] that Credit Suisse should have disclosed facts about National Century’s fraud when Pharos conducted its due diligence investigation.” Id. Pharos brought claims for fraud, negligent misrepresentation and violations of the Ohio Securities Act. Credit Suisse moved for summary judgment based on the No Reliance Clause.

The Court Finds Pharos Could Not Have Justifiably Relied on Credit Suisse’s Alleged Misrepresentations

“Justifiable reliance is an element of both a fraud and a negligent misrepresentation claim.” Id. at *7. “In determining whether reliance is justifiable, courts consider such factors as the sophistication of the parties, the nature of their relationship, their access to information, whether the plaintiff initiated the transaction or sought to expedite it, the nature of the alleged misrepresentation, and the content of any agreement they entered into.” Id.

“After examining [these] factors,” the court found “as a matter of law that Pharos [could not] establish justifiable reliance.” Id. First, “[i]t was Pharos who first approached Credit Suisse, looking for an investment in the healthcare sector.” Id. Second, the court noted that this was “not a case where Pharos was shielded from adverse information about National Century.” Id. at *8. For example, “Pharos knew that Goldman Sachs had decided not to serve as lead investor.” Id. Pharos was also aware that Fitch, Inc. had put certain NCFE notes on a negative ratings watch, and that the company had been late in issuing its audited financial statements for 2001.

Third, the court found that the Letter Agreement “was the product of negotiations between the parties” and its language was “clear.” Id. The court noted that “[t]he parties referred to the Letter Agreement as a ‘big boy’ agreement because Pharos in essence said that it knew what it was doing and could take care of itself.” Id. “To underscore the point, the Agreement stated that Pharos would bear the risk of an ‘entire loss’ of its investment.” Id. The court determined that “the clear language of the Letter Agreement and the surrounding factors render[ed] any claimed reliance by Pharos unjustifiable.” Id. at *9.

The court emphasized that “[t]he case law strongly supports this conclusion in the context of sophisticated parties who have agreed to no-reliance language.” Id. “To allow Pharos to proceed any further with its fraud and misrepresentation claims would upset the risk allocation the parties bargained for.” Id. The court pointed to the Seventh Circuit’s decision in Rissmann v. Rissmann, 213 F.3d 381, 383 (7th Cir. 2000) (Easterbrook, J.). There, the Seventh Circuit explained that “securities transactions would be ‘impossibly uncertain’ if courts fail[ed] to protect the primacy of written agreements entered into by sophisticated parties.” National Century, 2012 WL 5334027, at *9 (quoting Rissmann, 213 F.3d at 383). The Seventh Circuit “rejected [the] plaintiff’s attempt to set aside a no-reliance clause and shift the risk in a way [that] ‘could not conceivably have been the outcome of the bargaining.’” Id. (quoting Rissmann, 213 F.3d at 383). Similarly, the court here found that “Pharos’s attempt to shift risk onto Credit Suisse must be rejected.” Id.

As to Pharos’s claim that Credit Suisse “had an independent duty to disclose material information to Pharos because Credit Suisse chose to act as National Century’s placement agent,” the court explained that the Letter Agreement “states that Pharos neither needed nor desired any information or advice from Credit Suisse about National Century and that Credit Suisse had no obligation to provide such information.” Id. at *10. The Letter Agreement further states that “Credit Suisse was not a financial advisor or fiduciary of Pharos.” Id. The court held that “[t]his unmistakable language defeats any argument Pharos now makes about a duty to disclose and renders unreasonable any expectation Pharos may have had about informational parity.” Id.

The court also rejected Pharos’s claim under New York law that “disclaimers do not preclude a party from claiming reliance on an alleged misrepresentation of a fact that is peculiarly within the other party’s knowledge.” Id. at *11. The court found “[t]his facet of law” to have no application here” because “[t]he peculiar knowledge exception was recognized to protect those parties who have ‘no independent means of ascertaining the truth.’” Id. (quoting Lazard Freres & Co. v. Protective Life Ins. Co., 108 F.3d 1531, 1542 (2d Cir. 1997) (Calabresi, J.))

Here, however, “Pharos had access to boxes of data room materials, conducted extensive due diligence, and communicated directly with National Century’s management.” Id.

Finally, the court found no basis for Pharos’s suggestion that it had signed the Letter Agreement under duress. “The factual record at most shows that Credit Suisse exerted financial or business pressures on Pharos” to sign the Letter Agreement. Id. The court held that “this does not constitute duress.” Id. “‘A defense of duress cannot be sustained by a contracting party who has simply been bested in contract negotiations by the ‘hard bargaining’ of another contracting party.” Id. (quoting Regent Partners, Inc. v. Parr Dev. Co., Inc., 960 F. Supp. 607, 612 (E.D.N.Y. 1997) (Gershon, J.)).

The court held that Credit Suisse was “entitled to summary judgment as to the fraud and misrepresentation claims.” Id. at *12. The court also granted summary judgment to Credit Suisse with respect to Pharos’s claims under the Ohio Securities Act. Id. at *17.