ATTORNEY ADV ERTISING. Prior results do not guarantee a similar outcome.
White & Case LLP
1155 Avenue of the Americas
New York, NY 10036
United States
+ 1 212 819 8200
White & Case LLP
5 Old Broad Street
London EC2N 1DW
United Kingdom
+ 44 20 7532 10 00
December 2013
Client Alert
Capital Markets
A recent federal appellate ruling in favor of Credit Suisse in a fraud action brought by
Pharos Capital has strengthened the case for using so-called “Big Boy” letters. Pharos
held that a well-drafted Big Boy letter made it impossible for an investor to show
justifiable reliance and thereby doomed state law fraud and misrepresentation claims.
While these letters may not entirely block federal securities claims, they are a potent
tool for limiting any claim that requires a showing of reliance.
A US appellate court ruling recently upheld a decision in favor of Credit Suisse,
dismissing a fraud action by Pharos Capital (“Pharos”). The court held that because of
the parties’ “Big Boy” agreement, Pharos could not have justifiably relied on Credit
Suisse’s representations regarding a potential investment.1 This decision confirms that
“Big Boy” letters may shield parties from state law fraud and misrepresentation claims,
although these agreements may not fully protect against federal securities law claims or
SECclaims.
Big Boy Letters
So-called “Big Boy” letters are used in private investment transactions. The buyer
acknowledges that it is a sophisticated party; has experience and knowledge with these
kinds of investments; is relying on its own due diligence and investigation; and is not
relying on the counter-party’s representations or omissions. An investor signing a Big
Boy letter accepts that there is material information that it is not seeing, and commits
to relying on its own due diligence and expertise in making an investment decision. Big
Boy letters have become important to financial industry participants, where parties
often play multiple roles that may include financing, advising, managing and/or trading
in a company. In addition, in certain circumstances, companies or their affiliated
shareholders may be unable or unwilling to disclose certain material information to
potential purchasers of securities. Nonetheless, there have been questions about how
courts would treat Big Boy letters. The Fifth, Seventh and Ninth Circuits previously have
enforced Big Boy letters as against state law claims.2
The Pharos Decision
In 2002 Pharos, a private equity firm, approached Credit Suisse about potential
investments. At the time, Credit Suisse was acting as a co-placement agent for National
Century (“NCFE”), working to arrange a private placement of the company’s equity
securities. Over several months, Credit Suisse provided Pharos with a private
placement memo, as well as access to NCFE due diligence materials and management,
and expressed enthusiasm over NCFE’s prospects. Before the closing, Credit Suisse
emailed Pharos a Big Boy letter. The agreement stated that Pharos was relying
“exclusively” on its own due diligence and would bear the risk of loss on its
Big Boys Take Big Risks:
BigBoy Letter Bars Investor
State Law Fraud Claims
Owen Pell
Partner, New York
+ 1 212 819 8891
opell@whitecase.com
Francis Fitzherbert-Brockholes
Partner, London
+ 44 20 7532 14 00
ffitzherbert-brockho les@whitecase.com
