Defendant Can Be Held Liable Statements in Preliminary Offering Materials it Later Disclaimed

On August 5, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in NRAM PLC v. Societe Generale Corp., 2014 NY Slip Op. 32155(U), holding that the plaintiff had stated a claim for fraud based on statements the defendant later had disclaimed.

In NRAM PLC, the plaintiff brought "causes of action for fraud, breach of contract, and unjust enrichment in relation to a collateralized debt obligation" against several defendants. One defendant--Societe Generale Corporate and Investment Banking (SGCIB)--moved to dismiss. Among the issues the court addressed in denying SGCIB's motion were its arguments that it was not liable for the misrepresentations alleged in the Complaint. The court rejected those arguments, explaining:

SGCIB contends that Northern Rock is pointing to alleged misrepresentations in the Pitchbook, and that both the Pitchbook and OC say the offering is being made only through the OC, and that material not contained in the OC may not be relied upon. It is certainly the case in complex financings that there are frequently preliminary and final offering documents that contain such language of limitation. Customarily, large portions of the preliminary document are not excised from the final. Fine tuning and completion is the purpose of the exercise. Not so here, where significant portions of the Pitchbook do not appear in the OC. Much of this material is said to contain misrepresentations made as part of a fraudulent marketing scheme.

The court knows of no precedent for allowing an offerer of securities to use such a mechanic to amble away from liability for key misrepresentations used to induce investors to urchase securities. Disclaimers are recognized in New York in limited situations, if specifically tailored to alert investors to known risks. Abandonment in plain view of essential pieces of a fraudulent marketing plan is a different animal. If tolerated, malefactors would rush to own one. Markets would be negatively impacted, and the cost of capital inefficiently increased. SGCIB's position is unavailing.

SGCIB contends that the language of the OC shields it from liability because the OC attributes its contents to the Co-Issuers, legal entities just formed to hold the collateral and issue the Notes. Liability for misrepresentations is said to be quarantined to these corporate entities.
Regarding a similar provision, the court in Allstate Ins. Co. v Morgan Stanley & Co., 2013 NY Slip Op 31130(0), said that defendants may be liable for drafting and distributing statements they knew to be false, regardless of who they credit as the source of the information.

The group pleading doctrine supports Northern Rock's position of SGCIB's liability. The doctrine allows plaintiffs to rely on a presumption that statements in prospectuses, registration statements or other group-published information are the collective work of those individuals with direct involvement in the everyday business of the company. Under the doctrine, defendants are responsible for the documents they prepare and distribute because no specific connection between fraudulent representations in an offering memorandum and particular defendants is necessary where defendants are insiders or affiliates participating in the offer of the securities in question.

(Internal quotations and citations omitted) (emphasis added).