Issue: If there is evidence of fraud and wrongdoing in a investment sale, how quickly should it have been discovered by the investors?
|Area of Law:||Business Organizations & Contracts|
|Keywords:||Fraud and wrongdoing; Detection; Investment sale|
|Cited Cases:||398 F. Supp. 997; 511 F.2d 504; 908 F.2d 1385; 250 S.E.2d 587; 513 F. Supp. 571|
The ability to detect fraud from the rhetoric of a sales pitch is often evaluated in reference to the knowledge, skill and expertise of the investor. The courts applied this analysis in Briskin v. Ernst & Ernst, 398 F. Supp. 997 (C.D. Cal. 1975), in which the investors apparently were persuaded to invest their money on the basis of meetings they had with the offeror. There, the investors did not make their willingness to invest contingent on “review of Beck’s records and books, nor did they require that consummation of the transaction be put off until audited Beck financials . . . were available.” Id. at 1001. Closing was even expected prior to the preparation of any audited financial statements. The investors seemed more than eager to part with their money.
The Briskin court explained that once investors have “actual notice or reasonable suspicion of the falsity of the representations made, [they] must exercise due diligence and reasonable care in flushing out the facts which would disclose fraud.” Id. at 1003. The court had no choice but to find the investors in that case had ignored serious signals; however, it explained that some or even all of those signals are not always sufficient to put an investor on notice. The court concluded that
when the “experience and bargaining position” of the plaintiffs as well as “the nature of the transaction” are considered, the case against plaintiffs here is overwhelmingly persuasive. Had plaintiffs [instead] […]