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Posted: September 7, 2016

Plaintiff With Access to Corporate Records Was Not Reasonable in Relying on Misrepresentations

On September 1, 2016, the First Department issued a decision in MP Cool Investments Ltd. v. Forkosh, 2016 NY Slip Op. 05944, dismissing a fraud claim because the plaintiff’s alleged reliance on the defendant’s misrepresentations was not reasonable, explaining:

Where a cause of action is based in fraud, the complaint must allege misrepresentation or concealment of a material fact, falsity, scienter on the part of the wrongdoer, justifiable reliance and resulting injury. Furthermore, where the plaintiff is a sophisticated party, if the facts represented are not matters peculiarly within the defendant’s knowledge, and the plaintiff has the means available to it of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, the plaintiff must make use of those means, or it will not be heard to complain that it was induced to enter into the transaction by misrepresentations. . . .

Plaintiff is an experienced and sophisticated investor. It did not plead facts to support the justifiable reliance element of fraud. Plaintiff had total, unfettered access to every aspect of DuCool’s company information both before and after its initial investment, even before it held a controlling interest in DuCool. Although learning through the due diligence conducted by its own technology and business consultants that there were frequent technological problems with DuCool products, some of them severe, plaintiff proceeded to invest in the company. Thereafter, as the 49% shareholder, plaintiff had the largest percentage ownership of any individual shareholder and it had access to information concerning the operations of the business. There is no factual basis on which to conclude that the alleged fraud involved matters peculiarly within defendants’ knowledge, because plaintiff had the means to discover the truth behind any false claims about the condition of the company and whether this was a feasible investment.

(Internal quotations and citations omitted).

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