Commercial Division Blog
Posted: December 11, 2020 / Category Commercial Division Justices
Fraud Claims Based on Omissions Fail Where Agreement Expressly Contemplated Non-Disclosure of All Material Information
On November 5, 2020, Justice Borrok issued a Commercial Division decision dealing with a fraud claim in the context of a stock repurchase. In Silver Point Capital Fund, L.P. v. Riviera Resources, Inc., 2020 NY Slip Op. 51308(U), the Court held that a fraud claim based on an omission fails when the material information was withheld for securities law reasons.
In Silver Point Capital, defendant Riviera Resources, Inc. (“Riviera”) was a publicly traded corporation that contacted hedge funds Silver Point Capital Fund, L.P. and Silver Point Capital Offshore Master Fund, L.P. (collectively, “Silver Point”) to negotiate the repurchase of Riviera’s shares of stock. Pursuant to a stock repurchase agreement (“Repurchase Agreement”) Silver Point agreed to sell of its outstanding Riviera stock back to Riviera for $10.50, which was a 7% discount to the current market price.
In connection with the Repurchase Agreement, the parties entered into a side agreement which provided that
The Seller hereby acknowledges that it is aware that the Buyer may have access to certain material, nonpublic information regarding the Buyer, its financial condition, results of operations, businesses, properties, assets, liabilities, management, projections, appraisals, plans and prospects (the "Information"). Any such Information may be indicative of a value of the Common Stock that is substantially different than the purchase price reflected in the Purchase.
Silver Point alleged that it only signed the side agreement because Riviera represented that it was required as a result of Riviera’s plan to announce earnings in two days. Silver Point alleged that at the time the parties were negotiating the Repurchase Agreement, Riviera was in fact secretly receiving bids for the sale of a Riviera property representing 45% of Riviera’s market capitalization.
Shortly after Riviera publicly announced the sale of the property, Riviera’s stock priced surged 30%. Silver Point alleged that it would not have entered into the Repurchase Agreement had it known about the material non-public information about the property sale.
Silver Point’s complaint brought claims for (i) common law fraud, (ii) fraudulent inducement, (iii) fraudulent concealment, and (iv) unjust enrichment.
In dismissing Silver Point’s claims for fraud, the court noted that an essential element of a fraudulent inducement claim is detrimental reliance. To show detrimental reliance the plaintiff “has to show both that the defendant's alleged ‘misrepresentation induced plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentation directly caused the loss about which plaintiff complains (loss causation).’”
To show fraudulent concealment, the plaintiff “must allege all the foregoing elements of fraud as well as a duty on the part of the defendant to disclose the allegedly material information and failure to do so.”
The Court stated the “fraud, fraudulent inducement and fraudulent concealment claims are all based on the fact that Riviera did not disclose that it was in the process of negotiating the sale of [the property] . . . and that, had Silver Point known about this sale, it would have either not entered into the Repurchase Agreement or negotiated a different price.”
The Court found that because the side letter made it clear that Riviera “may have material non-public information about its properties, which necessarily included the [property at issue] . . . Silver Point cannot be said to have justifiably relied on any omission by Riviera[.]”
The attorneys at Schlam Stone & Dolan have extensive experience in high-stakes litigation that frequently involves complex issues including claims for fraud in the securities context. Contact Schlam Stone & Dolan attorney Chris Dyess at firstname.lastname@example.org if you or a client have questions regarding a securities law dispute.