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Posted: June 6, 2016

Sophisticated Investor Must Plead Due Diligence Adequately to Plead Reasonable Reliance

On May 31, 2016, the First Department issued a decision in MP Cool Investments Ltd. v. Forkosh, 2016 NY Slip Op. 04159, holding that a sophisticated investor must plead its reasonable due diligence to state a claim for fraud.

In MP Cool Investments, the plaintiff brought claims “of common law fraud in connection with the production and sale of a commercial heating and ventilation system.” The trial court dismissed the claims “because they were not pleaded with the requisite particularity.” The First Department affirmed because, among other reasons,

[w]here 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. Circumstances constituting fraud must be set forth in a complaint in detail.

. . .

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) (emphasis added).

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