Opinion ID: 676495
Heading Depth: 3
Heading Rank: 2

Heading: The Insolvency Claim

Text: 18 Jackson National next asserts that the prospectus failed to disclose that the LBO had rendered Insilco insolvent prior to the 1989 offering. The complaint asserts that [t]he Registration Statement represented that Insilco would be able to meet the debt obligations (both principal and interest) imposed on it as a result of the leveraged buyout, either through the cash flow to be generated by its operations and by borrowing, or by cost savings, or, if necessary, by asset sales. The actual language of the prospectus states: 19 The Company's ability to meet its debt service requirements will require the Company to achieve increases in operating performance and financial results from current levels, or to dispose of assets. There can be no assurance that the Company will be able to achieve such increases in cash flow or effect dispositions that may become necessary. 20 The discussion in the prospectus of Insilco's solvency was in the form of an opinion that the Company and its subsidiaries considered as one enterprise, (i) have been and will continue to be solvent, (ii) do not have and will not have unreasonably small capital to carry on their businesses and (iii) have been and will continue to be able to pay their debts as they mature. The reasonableness of Jackson National's reliance on this opinion to support its contention that it could not have known of an imminent bankruptcy must be assessed against the actual language of the prospectus. The opinion was contingent on future events--especially the ability to generate increased operating income--over which Insilco had only limited control, and was followed immediately by the caveat that [n]o assurance can be given, however, that a court would confirm the Company's positions with respect to these [solvency] issues. The prospectus also provided pro forma financial information, the accuracy of which Jackson National does not dispute, showing the impact of the LBO on the company's finances. Furthermore, the prospectus explicitly disclosed the obvious--that the company's high debt-to-equity ratio resulting from the LBO might adversely affect the company's ability to meet principal and interest payments as they came due. 21 These disclosures provided actual notice of potential insolvency, much less the inquiry notice sufficient to trigger the duty to timely investigate and file the complaint. Jackson National knew it was investing in sub-investment grade junk bonds, but assumed the considerable risk involved in the hope of receiving a substantial return on its investment. The prospectus fully disclosed the nature of the risks associated with the investment, including the possibility that Insilco's precarious financial condition might prompt a bankruptcy court to deem the company insolvent. In addition, sixteen months later the May 1990 Offering Memorandum revealed that Insilco was not performing as anticipated, and that the company was experiencing severe cash flow problems that might render it unable to meet its current liabilities. Thus, Jackson National was on notice that Insilco's earlier opinion about its ability to continue as a going concern was being eviscerated by later events. Jackson National cannot claim that it lacked notice of Insilco's insolvency when the company's public disclosures warned of the very contingency about which Jackson National now complains. See Brumbaugh v. Princeton Partners, 985 F.2d 157, 163 (4th Cir.1993); I. Meyer Pincus & Assocs., P.C. v. Oppenheimer & Co., 936 F.2d 759, 762-63 (2d Cir.1991); Landy v. Mitchell Petroleum Technology Corp., 734 F.Supp. 608, 617-18 (S.D.N.Y.1990). Just because Jackson National's high risk investment turned out to be an unworkable one does not allow Jackson National to second-guess its investment decision and plead fraud by hindsight. Denny v. Barber, 576 F.2d 465, 470 (2d Cir.1978) (Friendly, J.); see Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1129-30 (2d Cir.1994) (misguided optimism is not a cause of action).