The Ruling

Last week, the US Seventh Circuit Court of Appeals issued its opinion in The HA2003 Liquidating Trust v. Credit Suisse Securities (USA) LLC, a case arising out of the bankruptcy of HA-LO Industries, a manufacturer and marketer of promotional products that sought bankruptcy protection in July 2001 after a disastrous attempt to expand into e-commerce via the acquisition of, a pre-revenue dot-com startup for which HA-LO paid US$240 million. In that acquisition, Credit Suisse's predecessor firm, Credit Suisse First Boston, had rendered a fairness opinion to HA-LO, stating that the merger consideration payable by HA-LO was fair to HA-LO from a financial point of view.

The plaintiff in this case, a trust established during
HA-LO's bankruptcy proceedings for the benefit of
HA-LO's creditors, sued Credit Suisse, alleging that Credit Suisse's reliance on projections prepared by HA-LO's management constituted "gross negligence" and that Credit Suisse should have instead relied upon the analysis performed by HA-LO's consultants, Ernst & Young, who had advised HA-LO's board and management that the projections were unrealistic. In addition, the plaintiff alleged that, as the market for dot-com stocks started to turn, Credit Suisse should have withdrawn or revised the fairness opinion it had previously rendered. However, the engagement letter stated that Credit Suisse would rely on the financial information and projections furnished by management, and HA-LO's management had rejected Ernst & Young's conclusion that those projections were "wholly speculative." Based on the language of the engagement letter, the Court of Appeals refused to impose any additional duties on Credit Suisse, stating
"[t]he engagement contract says that CSFB has no duty to double-check the predictions about's future revenue and no duty to update its opinion. CSFB did what it was hired to do. The Liquidating Trust's belief that CSFB should have been hired to do something different is not a basis for liability."

Crucial Role of the Engagement Letter

This ruling is useful for investment bankers to keep in mind when considering fairness opinion engagements and the language of their engagement letters. Credit Suisse should be thankful for the clarity and specificity of its engagement letter language - the Seventh Circuit specifically noted that Credit Suisse did not "write an insurance policy" for HA-LO, and declined to "throw out the detailed contract that HA-LO and CSFB had negotiated," which provided that Credit Suisse would prepare its opinion based on projections furnished by management and would have no duty to update the opinion after its issuance.

In the wake of a collapse as dramatic as HA-LO's, the hunt for a deep pocket will be aggressive, and the fairness opinion provider will often be the deepest pocket left standing. In this case, the Liquidating Trust was prepared to devote years of litigation to seeking a recovery against Credit Suisse, in the face of the plain language of Credit Suisse's engagement letter. As well as being a reminder of the critical role that "boilerplate" language can sometimes play, last week's Seventh Circuit decision is yet another example of the ingenuity of plaintiffs and their counsel when faced with a dramatic financial collapse, and of the continuing legacy of the dot-com bubble: HA-LO's US$240 million acquisition of closed in May 2000, and by July 2001
HA-LO had filed for bankruptcy. Under those circumstances, a fairness opinion provider should expect that every aspect of its engagement will be subjected to intense scrutiny.