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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: November 13, 2018

Fraud Claim Dismissed Because of Sophisticated Investor’s Lack of Due Diligence

On October 29, 2018, Justice Sherwood of the New York County Commercial Division issued a decision inĀ Unique Goals Intl., Ltd. v. Finskiy, 2018 NY Slip Op. 32788(U), dismissing a fraud claim because of the sophisticated plaintiff’s lack of due diligence, explaining:

The first cause of action for fraud is asserted by Faith Union and Unique Goals against all defendants. This claim is based upon misrepresentations by Finskiy upon which plaintiffs relied in making their investments. Essentially, plaintiffs contend Finskiy’s various misrepresentations fraudulently induced them to purchase stock in White Tiger.

The elements of a claim for fraud are an intentional misrepresentation of material fact, falsity, scienter, justifiable reliance and damages. In a fraudulent inducement claim, the alleged misrepresentation should be one of then-present fact, which would be extraneous to the contract and involve a duty separate from or in addition to that imposed by the contract and not merely a misrepresented intent to perform. In addition, claims of fraud must meet a heightened pleading standards requiring that the circumstances constituting the wrong be stated in detail.

Critically, reliance must be found to be justifiable under all the circumstances before a complaint can be found to state a cause of action in fraud. Sophisticated investors, like plaintiffs, must show they used due diligence and took affirmative steps to protect themselves from misrepresentations by employing what means of verification were available at the time. Although the complaint here attempts to cast Yanchukov as a newcomer to the mining business who relied on his close, personal friend Finskiy to guide him, Yanchukov, plainly, is a sophisticated businessperson with access to plentiful resources to protect himself and his investments, to obtain the requisite inspections and perform the necessary due diligence. While he may have lacked experience in the mining industry, he clearly had the resources necessary to obtain expert advice or, indeed, do an investigation. Moreover, to the extent that plaintiffs argue they were forced to rely on Finskiy’s representations about, e.g., the amount of gold reserves because an independent study would have been time and cost prohibitive, they could have required warranties that these facts are true be included in their purchase documents. Further, where a sophisticated plaintiff conducts no due diligence, he cannot demonstrate reasonable reliance as a matter of law. Such is the case here. Accordingly, the fraud claim is dismissed.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements or rules, including the rule that a sophisticated businessperson’s reliance on a false statement must be reasonable. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think you have been defrauded, or if someone has accused you or a client of defrauding them.

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