“Sophisticated and Well-Counseled Entity” Did Not Make Prima Facie Claim of Fraud; No Due Diligence Demonstrated

In reversing the motion court’s denial of defendant’s motion to dismiss plaintiff’s causes of action for fraud, the First Department, over a strong dissent, determined the complaint did not, as a matter of law, establish justifiable reliance upon alleged misrepresentation.  In essence, the First Department determined that “sophisticated and well-counseled entities,” to preserve a prima facie claim of fraud, must demonstrate due diligence in taking measures to protect against fraud:

Plaintiff alleges that it was fraudulently induced to issue a financial guaranty for a portion of an investment by defendant’s misrepresentation that a nonparty hedge fund was taking a long position in the investment when in fact, such fund was actually a short seller, which was influencing the selection of the reference portfolio it was effectively betting against. ……[P]laintiff’s amended complaint …fails to establish justifiable reliance as a matter of law. Indeed, plaintiff fails to plead that it exercised due diligence by inquiring about the nonpublic information regarding the hedge fund with which it was in contact prior to issuing the financial guaranty, or that it inserted the appropriate prophylactic provision to ensure against the possibility of misrepresentation…. ACA Fin Guar Corp v Goldman, Sachs, & Co, 2013 NY Slip Op 03429, 1st Dept, 5-14-13