Judge Agrees with BSF, Rejects Investor Suit Under 'Bespeaks Caution' Doctrine
The case began with a rogue employee of commodities broker MF Global Ltd. losing some $140 million in unauthorized overnight trading in wheat futures in 2008.
What followed was an investor class-action claiming $1 billion in damages. Defendants included MF Global and Man Group plc, a London-based publicly-traded hedge fund manager which had spun off MF Global in a 2007 IPO. The plaintiffs claimed that MF Global’s IPO prospectus was false and misleading because it failed to disclose deficiencies in risk management controls that allegedly facilitated the rogue trading.
But in September 2009, BSF, representing Man Group, won dismissal of the suit. BSF attorneys argued that the IPO prospectus contained nearly 30 pages describing "Risk Factors," including a warning that "our risk-management methods may prove to be ineffective because of their design, their implementation or the lack of adequate, timely information."
The prospectus added, "Employee...misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation."
In dismissing the case and rejecting plaintiffs’ request to file an amended complaint, federal Judge Victor Marrero of the Southern District of New York applied the "bespeaks caution" doctrine, a judicially created rule providing that cautionary language can render forward-looking statements inactionable under securities fraud laws if a risk that was warned about comes to pass. MF Global’s prospectus had expressly disclosed the precise risk that an employee might injure the company by committing criminal or fraudulent acts despite internal control systems.
The court also agreed with BSF's argument that the plaintiffs had failed to identify any statement of present or historical fact in the prospectus that was actually false. Plaintiffs have appealed to the Second Circuit.
The case was handled by BSF partners David Barrett and Marilyn Kunstler, and associates Matthew Tripolitsiotis and Melissa Kho.