On December 27, 2018, Justice Bransten of the New York County Commercial Division issued a decision Norddeutsche Landesbank Girozentrale v. Tilton, 2018 NY Slip Op. 33386(U), holding that questions of fact precluded summary judgment on a fraud claim based on the issue of the plaintiff’s reliance on the alleged misrepresentations, explaining:
Defendants argue Plaintiffs fail to adequately plead justifiable reliance because they failed to conduct sufficient diligence into the structure and operation of the Funds prior to investing. As sophisticated investors, Plaintiffs had an obligation to conduct their own diligence. However, a sophisticated plaintiffs fraud claim will not be precluded where it has sufficiently alleged that defendant possessed peculiar knowledge of the facts underlying the fraud, and the circumstances present would preclude any investigation by plaintiff conducted with due diligence.
Here, Plaintiffs allege the Zohar Funds were owners of the Portfolio Companies and Tilton hid these facts from Plaintiffs. Moreover, as discussed above, the transaction documents and marketing materials provided to Plaintiffs did not put Plaintiffs on notice of Defendants’ alleged fraud in 2005.
Defendants also argue that the Administrative Law Judge in the SEC Proceeding noted that information relating to loan performance and categorization could be calculated from Trustee Reports using “basic math.” However, the SEC Proceeding concerned Defendants alleged fraud in overcharging investors for management fees, whereby Defendants allegedly miscategorized certain loans in order to value them higher than they were actually worth. The Administrative Law Judge’s determination that investors could have figured out the actual interest rate that had been paid on each individual loan using basic math does not necessarily mean that Plaintiffs in this action should have figured out the Funds were not investing in CDOs. Therefore, Defendants’ motion to dismiss based on failure to allege justifiable reliance is denied.
(Internal 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 email@example.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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