On May 10, 2010, the Supreme Court of New York County declined to dismiss a complaint brought against Wachovia Capital Markets, LLC d/b/a Wachovia Securities (Wachovia), accounting firm BDO Seidman, LLP, and others for their part in allegedly assisting the massive fraud committed by Le Nature’s, Inc. Le Nature’s collapsed after taking out $285 million in loans arranged and syndicated by Wachovia from the Plaintiffs, hedge fund manager Harbinger Capital Partners, other hedge fund managers and banks. The Plaintiffs aim to hold Wachovia liable for its alleged misrepresentations when it induced their investment, notwithstanding the existence of a “Big Boy” provision, or a specific disclaimer of reliance, in their credit agreement. (For more on “Big Boy” provisions, see “New York State Court Upholds ‘Big Boy’ Provisions and Dismisses Majority of MBIA’s Claims Against Merrill Lynch Relating to CDS Protection Sold by MBIA Referencing CDOs Issued by Merrill
,” Hedge Fund Law Report, Vol. 3, No. 17 (Apr. 30, 2010); “Big Boys Don’t Cry: How ‘Big Boy’ Provisions Can Help Hedge Fund Managers Avoid Liability for Insider Trading Violations
,” Hedge Fund Law Report, Vol. 2, No. 48 (Dec. 3, 2009); “When Do Hedge Fund Managers Have a Duty to Disclose Material, Nonpublic Information?
,” Hedge Fund Law Report, Vol. 2, No. 46 (Nov. 19, 2009).) The Trial Court found that the Plaintiffs’ allegations survived the pleading stage because, accepting their allegations as true, Wachovia “actively prevented any possibility that lenders could have discovered Le Nature’s’ true financial condition by . . . fronting Le Nature’s interest payments” to pre-existing lenders in order to conceal from the Plaintiffs Le Nature’s inability to timely make those interest payments. Thus, the Court held, even though the sophisticated investors had broad access to Le Nature’s books, the Court could not determine whether the investors “could not have ascertained” Le Nature’s true financial condition “by exercising reasonable diligence” on the existing record. We detail the background of the action and the Court’s legal analysis.