South-Western Legal Studies in Business

"Bespeaks Caution" Doctrine Applies to Prospective Statements, Not Historical Facts
Description Appeals court held that an investor who lost money in the collapse of a firm could sue the firm and its officers for misrepresentation. While the firm's prospectus was cautionary and covered by the "bespeaks caution" doctrine, false statements about certain facts would not be protected by the doctrine and could be the basis for liability.
Topic Consumer Protection
Key Words Prospectus; Misrepresentation; Bespeaks Caution Doctrine
C A S E   S U M M A R Y
Facts Smart World Technologies (SW) began offering and selling “membership interests” in the company through a written prospectus. Stolz bought $250,000 worth of the unregistered securities. Soon after his purchase, SW went into bankruptcy. Stolz sued SW and its officers for securities violations. The district court dismissed the suit under the “bespeaks caution” doctrine, finding that the prospectus contained sufficient cautionary language concerning possible risks so that an investor could not be misled. Stolz appealed.

Reversed. Under the “bespeaks caution” doctrine, whereby a defendant may not be liable under the Securities Act for making misrepresentations in a prospectus if the alleged misrepresentations were sufficiently balanced by cautionary language, that language must be examined in the context of the representations to determine whether the language warns of the specific contingency that lies at the heart of the alleged misrepresentation. Stolz claims that he was told that SW had hired an investment bank to take the company public with a large stock offering. He was not told that the bank had failed to raise any money for the SW and that no IPO was planned. If this claim is true, then it goes to the heart of the matter and the “bespeaks caution” doctrine would not apply. That issue should go to trial.

Citation P. Stolz Family Partnership L.P. v. Daum, 355 F.3d 92 (2nd Cir., 2004)

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