Pryor Cashman obtained a significant victory on behalf of client Sciens Capital Management, along with many of its principals and affiliates, in an action that was pending in the United States District Court for the Southern District of New York. Sciens is an investment advisory firm, which provides bespoke and integrated investment solutions to institutional and private equity clients around the globe.
The action was brought by an investor in one of Sciens's offshore investment funds, who alleged various federal securities law and related tort claims. In sum, the investor claimed he had been fraudulently induced into investing, and that purported fund mismanagement caused his investment to decline in value.
In a 42-page decision issued by Senior Judge Naomi Reice Buchwald on January 23, 2019, the Court granted Sciens' motion and dismissed the complaint in its entirety, with prejudice. Among other things, the Court recognized several important points in dismissing the securities fraud claims:
- The Plaintiff could not have relied upon alleged misstatements or omissions made after he agreed to invest;
- The Plaintiff's argument that each capital call made to investors constituted an additional securities transaction elided well-settled law that a transaction occurs when the parties become bound to effectuate the transaction; and, critically,
- A non-reliance clause contained in the subject subscription agreement precluded the Plaintiff, who was a highly-sophisticated former fund manager, from relying on alleged extrinsic statements in support of his claims.
Regarding this final point, the Plaintiff argued that a non-reliance clause must contain specific disclaimers of the particular representations forming the basis for a claim, but the Court rejected this argument, holding that no such specificity is required under SEC Rule 10b-5 where the parties are sophisticated.
Key Takeaways for Investment Advisors and Managers
The Plaintiff's voluminous complaint — running over 140 pages — forced the Court to rule on several other claims and legal issues that may be of interest to investment advisors and individual portfolio managers. For one, the Court dismissed the Plaintiff's derivative breach of fiduciary duty claim, brought under Cayman Islands law, because the alleged benefits received by the Defendants did not come "in some special way, at the expense of shareholders," and therefore did not constitute the sort of allegations sufficient to underpin the "fraud on the minority" exception to the general rule under Cayman law that a shareholder is not permitted to bring a derivative action on behalf of the company.
Sciens is represented by Pryor Cashman Partner Jonathan Shepard, Co-Chair of the firm's Investment Management Group, and Counsel Eric Dowell, a member of the firm's Litigation and Investment Management Groups. They also were assisted in the action by Litigation Associate Lauren Cooperman.
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