This case involves a man who purchased a private banking franchise in the California through a partnership with two family trusts. The partnership operated a bank and the principle activity of the partnership was to provide financial support to ventures involving the acquisition of companies. The exclusive lender to the acquisition venture deals was a local bank. The partnership and the local bank became involved in an investment enterprise that was to offer $40 million in shares and limited partnership units to investors in management buyout opportunities. Two of the local bank’s entities and the man’s bank were to serve as placement agents for the offering and a corporation was retained as the manager of the offering. The man was one of the four shareholders in the corporation and he was supposed to serve as one of the corporation’s officers during its management contract with the investment enterprise. The local bank was to serve as a financial consultant in the investment enterprise. The local bank decided to recommend a bank customer of high valuation (a securities company) as a new potential partner for the man in the investment enterprise. The man later discovered that the securities company had a “creditworthiness” issue in the past. He consulted the local bank about this and they assured him that it had conducted due diligence on the securities company and that they were highly-valued bank customers. The man later formed a partnership with the securities company. Soon after, one of the partners of the securities company ousted the man from his bank in breach of his management contract and the partnership agreement. The securities company also committed securities tax fraud, which drove the man’s bank into insolvency. The man learned that the local bank had concealed the fact that it had previously terminated its credit relationship with the securities company for committing fraud on the local bank.
Question(s) For Expert Witness
1. Does a bank owe a fiduciary duty to a third-party investor if it refers the third-party to an investment partner with a history of fraudulent conduct?
Expert Witness Response
Generally, if a bank has had extensive prior dealings with a third-party and the bank is in a position to have superior knowledge of about an investment partner’s banking history with them, it has a fiduciary duty to disclose important information about the investment partner’s creditworthiness. This is especially the case if the bank knows or has reason to know that the third-party investor is placing its trust and confidence in the bank. Usually, when a bank undertakes to answer credit questions of a third-party investor about an investment partner, it must make a full, complete and truthful disclosure. In this case, the local bank had a fiduciary duty to disclose to the man that the investment partner had a history of fraudulent conduct. This is because the man was relying on the bank in this case to look out for his interests. Since the man had asked the bank about the investment partner’s previous banking problems, the man and the bank had a confidential, fiduciary relationship where the bank was required to disclose the information that it knew about the investment partner. The bank’s fiduciary duty to the man was created in this case because there was really no other way that the man could have learned about the investment partner’s fraudulent conduct on his own. Since the bank had a fiduciary duty to the man in this case, the bank should have given him all of the relevant information about the investment partner’s committing fraud in the past.
About the author
Inna Kraner, J.D.
Inna Kraner, J.D., is currently Associate Director of Development - William S. Richardson School of Law. She worked in client development at Proskauer Rose LLP, and held various marketing positions at Skadden, Arps, Slate, Meagher & Flom LLP. She has experience litigating corporate, industrial, financial, regulatory, and controversy matters. Inna graduated with a J.D. from Boston College Law School and a B.A. from Brandeis University.
