Mixed Statements of Fact and Hyperbole Found to Be Actionable for Fraud PurposesPrint Article
- Posted on: Apr 6 2019
One of the issues that courts have to address when deciding fraud claims is whether a statement contains hyperbole or concrete facts. The former, which are not actionable, includes puffery, optimism, future expectations, and opinion, while the latter, which are actionable, includes statements of present or historical fact. Sometimes, the line between these types of statements is blurred or non-existent. Other times, the line is easy to discern. While determining the difference is difficult enough, the task becomes more complicated when the representations at issue contain present or historical facts and hyperbole. In Solomon Capital, LLC v. Lion Biotechnologies, Inc., 2019 N.Y. Slip Op. 02621 (1st Dept. Apr. 4, 2019) (here), the First Department held that such mixed statements satisfy the falsity element of a fraud claim.
What is the Difference Between Puffery and a Concrete Statement of Fact?
To assert a fraud claim, a plaintiff must allege “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 178 (2011) (internal quotation marks and citation omitted); Lama Holding Co. v Smith Barney, 88 N.Y.2d 413, 421 (1996).
Often, plaintiffs complain that statements couched in terms of “belief” or “expectation” are false and should be actionable. Not surprisingly, however, courts have declined to find such statements actionable. The reason: they are “mere puff” or statements of opinion or exaggeration that no reasonable person would take seriously.
In contrast to puffery and expressions of opinion, a misrepresentation is a false statement of present or historical fact. Oregon Public Employees Retirement Fund v. Apollo Group Inc., 774 F.3d 598, 606 (9th Cir. 2014). Misrepresentations of fact are actionable because they are capable of objective verification. E.g., White v. Davidson, 150 A.D.3d 610, 611 (1st Dept. 2017). See also SEC v. Todd, 642 F.3d 1207, 1216-17 (9th Cir. 2011).
Sometimes, as in Solomon Capital, the statement at issue is a mix of hyperbole and verifiable fact. Depending on the facts and circumstances, such statements may be actionable.
Solomon Capital, LLC v. Lion Biotechnologies, Inc.
[Ed. Note: The background discussion below comes from the motion court’s recitation of the alleged facts.]
Solomon Capital involved two Israeli businessmen (plaintiffs Solomon Sharbat (“Sharbat”) and Shelhav Raff (“Raff”)) who were retained by defendant Lion Biotechnologies, Inc. (“Lion”) to raise capital to fund the biotech’s growth and research efforts.
In June 2012, Sharbat and Raff were introduced to Lion’s chief financial officer who told them that Lion needed to raise $30 million to fund research and development. During a conference call with Lion representatives, Sharbat made a number of representations that the plaintiffs alleged to be false. These included that: (1) Sharbat had formerly run a U.S. public company and, therefore, was aware of the obligations of public companies; (2) Sharbat had previously raised “hundreds of millions of dollars” for biotech companies such as Lion; (3) Sharbat and Raff had “massive investors” who were prepared to invest in Lion, (4) the investments were a “done deal”; (5) Sharbat was personally acquainted with at least one major investor who would make a sizable investment in Lion of at least $500,000; and (6) Sharbat and Raff would make substantial investments in Lion themselves.
Thereafter, Sharbat claimed that (1) “he could obtain financing for Lion, especially in Israel,” (2) he and Raff “could obtain investments” from Sheba Medical Center, a hospital in Israel, and (3) he and Raff “had obtained high-value investors for Lion in Israel.” Lion asserted that these statements were also false.
In addition to the foregoing alleged misrepresentations, the plaintiffs claimed that Sharbat failed to disclose that he had been the target of investigations by the Financial Industry Regulatory Authority, Inc. (“FINRA”). In July 2012, FINRA filed a complaint against Sharbat for illegally inducing clients to participate in a restricted securities transaction, which resulted in a default judgment entered against him in November 2012.
Sharbat also allegedly failed to disclose that he had been involved in litigations over his business practices. Lion, which was then-based in California and had no contacts in New York, did not conduct a litigation search on the plaintiffs and did not discover this information until sometime later.
Thereafter, Lion engaged the plaintiffs to obtain investors in the United States and in Israel. The plaintiffs, however, were unable to do so. In connection with their efforts, the plaintiffs sought reimbursement of $135,000 in expenses. Lion refused to pay, claiming that the plaintiffs induced it to offer them a promissory note in the amount of $135,000, one-half (½) of a share of Lion common stock for each dollar invested (67,500 shares), and the right to convert in the next financing of Lion on the same terms offered to the investors they brought to the company.
Proceedings Before the Motion Court
In April 2016, the plaintiffs brought an action for breach of contract and unjust enrichment, seeking recovery of their expenses, and investment in Lion. On June 3, 2016, Lion filed its original counterclaims. On January 11, 2017, the motion court, inter alia, dismissed without prejudice the counterclaims for fraud and breach of fiduciary duty with leave to replead. Lion then filed amended counterclaims, asserting claims for fraudulent misrepresentation, fraudulent concealment, breach of fiduciary duty, negligent misrepresentation (the first through fourth counterclaims), and breach of implied-in-fact contract (fifth counterclaim).
The plaintiffs moved to dismiss the first through fourth counterclaims, and the 11th affirmative defense for fraudulent inducement, which sought rescission of the parties’ agreement. The plaintiffs contended, among other things, that the fraud counterclaims and the fraud affirmative defense should be dismissed because the alleged misrepresentations were puffery or involved expectations of future conduct.
The motion court agreed with the plaintiffs and granted the motion to dismiss. The motion court found that the alleged misrepresentations could not form the basis of a fraud claim because they were “mere puffery” and “[o]pinions of value or future expectations.”
The motion court also found that “[t]he statements alleged in the counterclaims” were “representations of future conduct” that were “not actionable statements of fact.” These statements included: “plaintiffs had investors who ‘were prepared to invest,’ a major investor who ‘would make a sizable investment,’ Sharbat and Raff ‘would make substantial investments,’ Sharbat ‘could obtain financing,’ and ‘could obtain investments from representatives and affiliates’ of a hospital in Israel.”
In addition, the motion court found that statements in which Sharbat said that he and his “colleagues had ‘massive investors,’ the investments ‘were a done deal’, [he] raised ‘hundreds of millions of dollars’ for biotech companies like defendant, and he had obtained ‘high-value investors’ in Israel” were mere puffery or expectation. Similarly, noted the motion court, “a broad assertion that Sharbat raised a lot of money in his career, clearly is puffery.” Finally, the statement that Sharart and Raff “would invest their own money” was held to be “non-actionable opinion or future expectations.”
The First Department’s Decision
On appeal, the First Department “unanimously reversed, on the law.” Slip Op. at *1.
The Court found that “that the eleventh affirmative defense and first through fourth counterclaims [were] adequately pleaded.” Id. Although the Court reinstated the affirmative defense and counterclaims, the Court found that one of the statements was “mere puffery”:
In support of the eleventh affirmative defense and first counterclaim alleging fraudulent inducement, defendant alleges, as relevant herein, that, during a conference call with its CEO and CFO, plaintiff Solomon Sharbat, who was at the time a registered broker dealer with the Financial Industry Regulatory Authority (FINRA), represented, on behalf of himself and the other plaintiffs, that he had previously run a publicly traded U.S. company, that he had raised hundreds of millions of dollars for other biotech companies, that he had “massive investors” who were prepared to invest in defendant, and that these investments were “a done deal.” Sharbat allegedly later asserted that he “had obtained high-value investors for [defendant] in Israel.”
The statement that investments were “a done deal” is mere puffery; it has no fixed meaning.
Id. (citation omitted).
Regarding the mixed statements of hyperbole and verifiable fact, the Court stated as follows:
However, Sharbat’s statements that he had “massive investors” who were prepared to invest in defendant and that he “had obtained high-value investors for [defendant] in Israel,” while partially hyperbolic, make concrete factual representations that go beyond mere puffery. Simply stated, Sharbat asserted that he had investors lined up and ready to go, when in fact he had none. Since plaintiffs were retained by defendant to bring investors in, these statements constitute misrepresentations of material facts for purposes of the fraudulent inducement counterclaim.
Finally, the Court held that the statements concerning Sharbat’s experience – i.e., that Sharbat had previously run a publicly traded U.S. company and that he had raised hundreds of millions of dollars for other biotech companies – were “concrete and measurable misrepresentations.” Id. (citations omitted).
A fraud plaintiff must allege that a statement would be misleading to a reasonable person given the information available to him or her. Within this mix of information are expressions of puffery, opinion, and optimism that do not give rise to a claim sounding in fraud. The reason is that puffery, opinion, and statements of expectation are too general to cause a reasonable person to rely upon them. As Judge Learned Hand explained over 100 years ago: “[t]here are some kinds of talk which no sensible man takes seriously, and if he does he suffers from his credulity. If we were all scrupulously honest, it would not be so; but, as it is, neither party usually believes what the seller says about his own opinions, and each knows it.” Vulcan Metals Co. v. Simmons Mfg. Co., 248 F. 853, 857 (2d Cir. 1918).
Solomon Capital is an example of a case in which general statements of opinion, which are not actionable, are considered in context such that they are examined for their objective falsity. By doing so, Solomon Capital teaches that mixed statements of hyperbole and verifiable fact may form a basis for a fraud claim when those statements address circumstances that the speaker knows to be false and can be objectively verified as such.