Bespeak Caution Doctrine
The phrase "bespeak
caution" has been used by the courts in recent cases as
a basis for determining whether a disclosure document has provided
sufficient warning. A recent Federal Court decision shows how
important this can be in protecting an issuer. In April, the
United States District Court for the Southern District of New
York ruled that an investor and her advisor could not show justifiable
reliance on offering summaries and oral statements painting a
"rosy picture" of low-risk, high-yield investments
in order to recoup losses on such investments. A certified financial
planner ("Planner") solicited a prospective client
(the "Client") and suggested that she invest the proceeds
of her deceased husband's life insurance policy in twelve different
limited partnerships that dealt in real estate. The investments
declined in value and the Client sued the Planner. In turn, the
Planner filed a third-party complaint against the issuers. The
Federal Court decision focused on the liability of the issuers.
The Planner's third-party complaint alleged that the issuers
made misrepresentations and material omissions regarding the
risk of investment in and the potential for profit from the deals.
The Court agreed with the issuers
that reliance on optimistic statements of safety, liquidity and
profitability as set forth in the offering materials, and in
conversations between the Planner and the issuers' personnel
was, as a matter of law, not reasonable. It was acknowledged
that the offering materials contained summaries that painted
an optimistic picture of a low-risk investment that promised
liquidity and substantial income yield. However, the Court noted
that the prospectus summaries also included clear directions
that prospective investors should examine the entire prospectus
for a full and fair description of the advantages and disadvantages
of such an investment. According to the decision, the prospectuses
were filled with warnings that investing in these partnerships
was risky. There were also sufficient cross-references for a
prospective investor to review the risks of an investment in
the respective partnerships.
While the case is limited to its
particular facts, the Court held that these explicit disclosures
clearly "bespeak caution" and that the prospectuses
contained sufficient warning of the risks involved in the investments
so that the Client could not reasonably rely on the "rosy
picture" painted by the prospectus summary or through conversations
with the general partner. The Court held that, "[the Planner]
and [the Client] were not free, under these circumstances, to
ignore the warnings in the prospectuses and to rely instead on
the representations made in the summaries of offering and in
the [Planner's] conversations with [the issuer's] personnel."
Based on the "bespeak caution" doctrine, the Court
dismissed the claims against the issuers which alleged the failure
adequately to disclose the risks of the investment. (The Court
did, however, uphold other claims by the Planner against the
issuers.)
Under the "bespeak caution"
doctrine, if a disclosure document is complete with adequate
warnings, whether in bold, large print or set forth repeatedly
throughout the document, an investor may, under certain circumstances,
be prevented from establishing a claim that he or she was unaware
of the various risks involved with investing in such an investment
vehicle. Thus, a well-drafted prospectus containing the necessary
disclosures may provide solid protection against disgruntled
investors seeking to recover the loss of their investment. |
