Recently, Law360 covered a decisive victory by Winget, Spadafora & Schwartzberg LLP’s clients in Rimu Capital Ltd. v. Ader et al. before the U.S. District Court for the Southern District of New York. Through an Opinion and Order (“Order”) United State District Judge Lewis J. Liman granted WSS LLP’s motion to dismiss all claims against the Firm’s clients.
Rimu involved a $25 million fraud and breach of fiduciary duty claim arising from an investment in the Sponsor of a failed special purpose acquisition company (“SPAC”). Through its 99-page complaint, Rimu alleged that the attorneys representing the Sponsor in the challenged transaction (“WSS LLP’s clients”) aided and abetted both a breach of fiduciary duty and a fraudulent scheme. Rimu claimed a fiduciary duty existed under the Investment Advisers Act of 1940 because Rimu was a former client of a registered investment advisor under common control with the Sponsor’s principal. Further, Rimu alleged the prior relationship created a duty that applied to the challenged transactions because investment adviser fees Rimu owed were rolled over into the challenged transaction. As such, Rimu alleged the Sponsor’s principal had a duty to disclose certain alleged material information that was purportedly omitted.
In rejecting Rimu’s argument, the Order confirms that sophisticated commercial parties may define the nature of their relationship through contract. Here, the Court observed the “Subscription Agreement” Rimu entered into represented and warranted that: (1) Rimu was an accredited investor within the meaning of Regulation D under the Securities Act of 1933 and could bear the risk of loss for its $25 million investment; (2) Rimu knew about the business and operations of the SPAC having “carefully reviewed the information contained in the SPAC’s registration statement;” (3) Rimu affirmed no investment recommendation was made and stated it did not seek information or advice from the Sponsor; and (4) Rimu acknowledged the Sponsor and its affiliates had material non-public information that was not disclosed and Rimu waived any claim it could have based on such non-disclosure. With these representations, the Court found no fiduciary duty exists. The Court then rejected Plaintiff’s argument that the Investment Advisers Act of 1940 created a fiduciary duty finding the limited duties arising from the parties’ contractual relationship was consistent with the Act, and that Plaintiff’s allegations did not show an investment recommendation was made or that an investment adviser’s fee was charged with respect to the challenged transaction.
As to the aiding and abetting fraud claims, the Court found that much of Rimu’s fraud allegations concerned alleged omissions, which could not satisfy Federal Rule of Civil Procedure 9(b) due to the lack of a fiduciary relationship creating a duty to disclose such information. The Court further observed there was no reason for WSS’ clients to believe any material omission occurred because of the substantial representations Rimu made that it was relying solely on its own investigation of the SPAC and its Sponsor. The remaining few alleged affirmative misrepresentations were found to either be unactionable or truthful.
Finally, the Court noted the only alleged wrongful conduct alleged against WSS LLP’s clients were actions taken in the context of their role as attorney for the Sponsor and its Principal. Here, the Court observed “Under New York law, attorneys may only be held liable for aiding and abetting fraud where they step outside their role as attorneys, not where they are “merely performing work within the scope of [their] duties.” As the complaint did not allege that WSS LLP’s clients deviated significantly from their role as attorneys, Rimu failed to allege facts sufficient to create a reasonable inference WSS LLP’s clients substantially assisted with the alleged wrongful acts.
The Order reaffirms key protections for professionals caught in lawsuits arising from their professional services in transactions that are later disputed. This outcome is an important reminder that clear contractual language and rigorous legal advocacy continue to offer strong defenses in litigation.
Winget, Spadafora & Schwartzberg, LLP’s Securities Litigation and Enforcement Practice Group are experienced at explaining complex transactions to the Court in simple and straightforward language that achieves positive results at key litigation inflection points. Should you have any questions about the defense of Fraud, Securities Fraud, Breach of Fiduciary Duty, Aiding and Abetting, or other claims arising under the Investment Advisers Act of 1940, please do not hesitate to contact a member of our firm.
This matter was handled by New York partner Alexander A. Truitt.
