In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 06-3842

THE HA2003 LIQUIDATING TRUST,

Plaintiff-Appellant,

v.

CREDIT SUISSE SECURITIES (USA) LLC,

Defendant-Appellee.

____________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 04 C 3163—Robert W. Gettleman, Judge.

____________

ARGUED SEPTEMBER 25, 2007—DECIDED FEBRUARY 20, 2008

____________

Before EASTERBROOK, Chief Judge, and BAUER and

KANNE, Circuit Judges.

EASTERBROOK, Chief Judge. HA-LO Industries made

and sold “promotional products”—items such as coffee

mugs bearing company logos that could be given to employees or used to advertise the firms’ businesses. In the

1990s HA-LO began to explore ways of making sales

through electronic commerce rather than a traditional

sales force. Toward the end of 1999 John Kelley, HA-LO’s

CEO, decided that the way to enter the world of electronic

commerce was to acquire Starbelly.com, Inc., a startup

that Kelley believed had a promising e-commerce system—but that was burning through venture capital at
2 No. 06-3842

$3 million a month, had never made a sale, and thus

was a risky proposition.

HA-LO agreed to purchase Starbelly.com for

$240 million, of which between $70 million and

$100 million would be paid in cash and the rest in HA-LO

stock. The cash was more than HA-LO had in hand, and

paying that much would have placed it in violation of

several loan covenants. In need of advice, HA-LO hired

Credit Suisse First Boston (CSFB) (now Credit Suisse

Securities) as an investment banker and Ernst & Young

as a business consultant.

CSFB tried to renegotiate the price, structure payments to prevent a violation of loan covenants, arrange

new credit facilities to cover the cash outlay, and obtain

standstill agreements from Starbelly.com’s investors

(who otherwise might be able to use the stock received

in the acquisition to take effective control of HA-LO). It

also gave HA-LO a “fairness opinion” representing that,

“as of the date hereof [January 17, 2000], the Merger

Consideration is fair to HA-LO from a financial point of

view.” Both CSFB’s engagement letter and the fairness

opinion specified that CSFB relied on HA-LO’s financial

projections, which it had not tried to verify. That was

the task of Ernst & Young, which told Kelley and HA-LO’s

Board of Directors that the projections were unrealistic.

Ernst & Young concluded that Starbelly.com was

unlikely to generate anywhere near the projected revenue

stream. Kelley did not accept that advice. The parties

have stipulated that “Kelley presented HA-LO’s Board

with revenue projections for Starbelly even though he

knew these projections were based on assumptions

about Starbelly’s technology Kelley knew to be false.”

A proxy solicitation sent to shareholders in April 2000

included a copy of CSFB’s fairness opinion. Investors

approved the merger, which closed in May 2000.
No. 06-3842 3

Starbelly.com’s technology never paid off for HA-LO.

Within months HA-LO was in financial distress, not only

because of the hefty cash payout (which led to debt-service

obligations) but also because Starbelly.com encountered

continuing losses. In July 2001 HA-LO entered bankruptcy. A successor to HA-LO emerged from the firm’s

reorganization (see http://www.halo.com), as did a trust

for the benefit of its creditors. The HA2003 Liquidating

Trust was formed to collect as much as possible from

anyone associated with the disastrous transactions of

1999 and 2000 and distribute the proceeds to the firm’s

pre-bankruptcy creditors. This suit against CSFB is one

of the Trust’s endeavors. It was filed under the diversity

jurisdiction; the governing law, specified by the engagement letter between HA-LO and CSFB, is that of New

York.

The engagement letter obliges HA-LO to hold CSFB

harmless from all losses not caused by “bad faith or gross

negligence”. The Trust does not accuse CSFB of bad

faith but does maintain that the fairness opinion was

the result of gross negligence. According to the Trust,

CSFB (a) should have relied on Ernst & Young’s evaluation of Starbelly.com’s prospects, rather than the projections furnished by HA-LO’s board and officers, and (b)

should have withdrawn its opinion, or at least prepared

a new one, after the market price of many dot-com stocks

began to decline.

The district court held a bench trial and concluded that

CSFB had not been grossly negligent. It had neither the

ability nor the obligation to outsmart the stock market,

the technology sector of which (represented by the

NASDAQ Composite Index) peaked in mid-March 2000,

just when the Trust insists that any fool could have seen

that prices should be much lower. In April and May 2000

the index was below its historic high but approximately

the same as it had been in December 1999, when the
4 No. 06-3842

deal had been negotiated. The district court added that

HA-LO had contracted and paid for one opinion, not a

series of opinions, and it was stipulated that even after

a major investor asked management in April 2000 to

secure a new fairness opinion, “Kelley’s failure to seek a

new valuation of Starbelly and a ‘bring down’ opinion

was not simply inattention, but was a deliberate choice.

Instead of requesting an updated fairness opinion . . .

Kelley continued to support the merger, on the terms

and at the original price he had negotiated”.

The district court found it impossible to label as “grossly

negligent” CSFB’s decision to do what the contract required it to do: use the figures and projections furnished by its client. The district court added that, because

Kelley and other members of HA-LO’s board actually

knew everything that the Trust accuses CSFB of ignoring,

it is impossible to establish damages. (Indeed, the

parties stipulated that “E&Y’s technology due diligence

had revealed to Kelley that the [Starbelly revenue] projections were wholly speculative exercises”.) These factual

findings—and whether someone is negligent is a question

of “fact” (albeit an “ultimate fact”) for the purpose of

Fed. R. Civ. P. 52, see Cicero v. United States, 812 F.2d

1040, 1041 (7th Cir. 1987); cf. Pullman-Standard v. Swint,

456 U.S. 273 (1982)—are dispositive unless clearly erroneous, which they are not.

Much of the Trust’s brief reflects a view that fairness

opinions are worthless (but expensive) paper, purchased

by corporate managers at the urging of the Supreme

Court of Delaware in decisions such as Smith v. Van

Gorkom, 488 A.2d 858 (Del. 1985) (Trans Union). Some

scholars think Trans Union and its successors mistaken,

see Daniel R. Fischel, The Business Judgment Rule and

the Trans Union Case, 40 Bus. Law. 1437 (1985); Steven

M. Davidoff, Fairness Opinions, 55 Am. U. L. Rev. 1557
No. 06-3842 5

(2006), and others doubt that fairness opinions contain

much useful information, given their dependence on management’s numbers and the malleability of discountedcash-flow analysis that underlies most of these opinions.

See, e.g., Lucian Arye Bebchuk & Marcel Kahan, Fairness

Opinions: How Fair Are They and What Can Be Done

About It?, 1989 Duke L.J. 27 (1989). Still others have

concluded that, whether or not Trans Union was wise,

competitive forces have shaped the terms and conditions

under which fairness opinions are prepared so that they

are today valuable to investors. See Charles W. Calomiris

& Donna M. Hitscherich, Banker Fees and Acquisition

Premia for Targets in Cash Tender Offers: Challenges to

the Popular Wisdom on Banker Conflicts, 4 J. Empirical

Legal Studies 909 (2007).

But why should it matter to this case who is right in

that debate? If the Supreme Court of Delaware had held

in a tort suit that all of HA-LO’s promotional mugs must

be shipped in crates made of inch-thick steel, to prevent

all risk that pottery shards from breakage in transit

could escape and injure anyone, that would greatly

increase the costs of doing business and injure HA-LO’s

investors but would not support an award of damages

against the sellers of steel crates. Like our hypothetical

crate maker, CSFB is fulfilling a market demand. The

possibility that judges, regulators, or legislators have

caused “too much demand” for a particular service, inducing firms to buy something worth less than its price, is

no reason to mulct the service’s provider.

CSFB followed the norm in this business—more to

the point, it followed the rules in its contract with

HA-LO—and relied on management’s numbers. It told

HA-LO to hire someone to check those numbers. Separating number-creation from number-evaluation is not

illegal and may make business sense. The division of

labor between number verifiers (Ernst & Young) and
6 No. 06-3842

number crunchers (CSFB) is not to be sneezed at; the

division of labor has large benefits for an economy, as

it allows specialists to do what they are best at.

After Ernst & Young told HA-LO that its expectations

about the Starbelly.com technology and prospects were

wildly excessive, HA-LO stuck to its guns. It can’t blame

that on CSFB. This suit is nothing but an attempt to

find a deep pocket to reimburse investors for the costs of

managers’ blunders. Cf. Fehribach v. Ernst & Young

LLP, 493 F.3d 905 (7th Cir. 2007). But CSFB did not

write an insurance policy against managers’ errors of

business judgment. Compelling investment banks to

provide business-risks insurance as part of a fairness

opinion would just make investors worse off, as that

would increase the price of each opinion. Investors would

pay ex ante for any benefit received ex post—and the bar

would pocket a substantial portion of the transfer payments. Insurance is cheaper (free, really) when achieved

via the stock market. Investors can diversify their holdings; then when acquiring firms, such as HA-LO, overpay in an acquisition, investors gain in their role as

shareholders of the acquired firms. Diversification protects investors without the costs of insurance and litigation.

The Trust’s assertion that CSFB should have foreseen

the end of the dot-com boom is an appeal to hindsight. The

NASDAQ Composite Index was higher in March 2000,

when the materials for the shareholders’ vote were written, than when the deal was negotiated (the index stood

at 3,715 on December 16, 1999). On May 3, 2000, when

the merger closed, the NASDAQ Composite Index was

3,707, up from mid-April (when it had been as low as

3,321), though down 36% from its high of 5,046 on

March 9, 2000. Prices were volatile; no one knew whether

it would go up or down next. (Indeed, no one knows

today the future direction of the stock market.) Was
No. 06-3842 7

the reverse temporary or a portent of doom? Inability to

see the future differs from “gross negligence.” If CSFB

was too optimistic, then so were all of HA-LO’s managers and millions of investors who bought dot-com stocks

in 1999 and 2000. Empirical studies too numerous to

recount show that people who lack inside information

can’t beat the market—either the market as a whole, or

the price for particular stocks—for more than brief periods.

Trying to turn lemons into lemonade, the Trust insists

that the downturn after March 9, 2000, should have led

CSFB to yank its opinion as “stale” and write a new one.

This supposes that CSFB could distinguish short-term

from long-term reverses, and there is no reason to think

that it could (let alone that a lack of prescience is “gross

negligence”). Investors who bought technology stocks

in April and May 2000—for every seller there is a buyer,

after all—surely did not think that they were putting

themselves in a must-lose position. But if as the Trust

insists “everyone knew” that the decline that began in

March 2000 was bound to continue, and that a bubble

had burst, then it was unnecessary for CSFB to say so.

HA-LO’s board, and its investors who had to vote in

April 2000, could look at the stock market for themselves.

It is unnecessary to restate what is already in plain view

of the investing public. See Wielgos v. Commonwealth

Edison Co., 892 F.2d 509 (7th Cir. 1989). And, to repeat, CSFB undertook to deliver an opinion as of one

date. Updates require extra work, which must be paid

for. HA-LO’s managers not only did not offer to pay

CSFB for an updated opinion but also, as the parties

stipulated, decided not to request such an opinion even

if CSFB had been willing to render one for free.

In the end, the Trust wants us to throw out the detailed contract that HA-LO and CSFB had negotiated and

to make up a set of duties as if this were tort litigation.

That would be a mistake, one very costly for investors
8 No. 06-3842

at other firms who would have to pay a risk premium to

investment bankers in the future. Intelligent adults can

set their own standards of performance, and courts must

enforce the deal they have struck. See Wallace v. 600

Partners Co., 658 N.E.2d 715 (N.Y. 1995). The engagement contract says that CSFB has no duty to doublecheck the predictions about Starbelly.com’s future revenues and no duty to update its opinion. CSFB did what

it was hired to do. The Trust’s belief that CSFB should

have been hired to do something different is not a basis

of liability.

AFFIRMED

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—2-20-08