South-Western Legal Studies in Business

When Both Parties to Securities Deal Have Dirty Hands, Neither Can Win
Description Court held that where a seller of securities deceived the buyer about the status of the company, and the buyer deceived the seller about its funds to buy the securities, the doctrine of in pari delicto would apply and neither could recover against the other.
Topic Securities Law
Key Words Fraud; In pari delicto
C A S E   S U M M A R Y
Facts BrandAid authorized the issuance of 80 million shares of stock but only 7.1 million were sold to the public. Cyberian, through its agent Massey, contacted BrandAid about investing in the company and offered to buy 23.5 million shares for $21 million. It asserted it had cash for the purchase in a New York bank, which in fact it did not. Cyberian stated that it would leave the current management team at BrandAid in place. During discussions, BrandAid provided false information about its status to Cyberian. BrandAid was in deep legal and financial trouble, but did not reveal these facts. The parties agreed to the deal, but Cyberian never delivered the money for the stock. Cyberian demanded the right to vote the 23.5 million shares of stock it had not paid for, promising to deliver real estate in China worth $21 million for the stock. Cyberian claimed it could vote its shares of stock and voted out all directors of BrandAid, which then sued Cyberian for fraud, securities fraud and breach of contract. Cyberian counterclaimed much the same.
Decision

Neither party is entitled to any recovery against the other. The in pari delicto doctrine states that “if the parties are in pari delicto—equal fault—then recovery will be denied.” Cyberian made false statements to BrandAid and falsely claimed it had paid for the stock when it tried to take control of the company. BrandAid deceived Cyberian about its legal and financial situation. Application of the doctrine here will not preclude effective enforcement of the securities laws and protection of the investing public. As Shakespeare wrote in Romeo and Juliet, “A plague o’ both your houses!”

Citation BrandAid Marketing v. Biss, 419 F.Supp.2d 329 (S.D., N.Y., 2005)

Back to Securities Law Listings

©1997-2006  SW Legal Studies in Business. All Rights Reserved.