The US Court of Appeals for the Seventh Circuit last week denied federal securities and related state law claims by a group of investors, which were brought against attorneys for statements made during a presentation regarding a potential real estate investment. The defendant attorney spoke only briefly during the presentation to the investors and discussed his firm’s role in structuring the real estate venture and the liability protections offered by use of a limited liability company (LLC) for the investment. After the investment venture failed, the investors sued the lawyer, his firm and another partner at that firm, claiming that the lawyer failed to disclose his inexperience with business and securities law, and did not correct the representation that the lawyer was “working for” the investors when in fact he was only the attorney for the LLC.
The Seventh Circuit affirmed summary judgment in favor of the defendants, rejecting the investors’ theory that they had reasonably relied on the lawyer’s misrepresentation through material omissions. The court held that the lawyer’s allegedly fraudulent omissions were only actionable where the attorney had a duty of disclosure to the investors. The court held that no reasonable investor could have believed that the lawyer or his firm would be involved with the investment beyond formation of the investment entities because the lawyer’s brief presentation only addressed the formation of the LLC, the investors had limited or no further interaction with counsel after the presentation, and the law firm did no further work on the investment after the investment entities were formed. As a result, no attorney-client relationship existed between the lawyer and the individual investors, and the lawyer had no duty of disclosure to the investors. Thus, the investors’ claims for securities fraud and legal malpractice could not stand in the absence of any duty. Related state law fraud and civil conspiracy claims were similarly rejected. Rosenbaum v. White, No. 11-3224 (7th Cir. Aug. 16, 2012).