Court Opinion

ID: 3001495
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:17:17.159307+00
Date Added: 2024-06-11T18:02:00.821707
License: Public Domain

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 em-
ployees 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 sys-
tem—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 pay-
ments 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 bank-
ruptcy. 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 engage-
ment 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 evalua-
tion of Starbelly.com’s prospects, rather than the projec-
tions 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 re-
quired it to do: use the figures and projections fur-
nished 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] pro-
jections 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 errone-
ous, 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 man-
agement’s numbers and the malleability of discounted-
cash-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, induc-
ing 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. Sepa-
rating 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 pay-
ments. Insurance is cheaper (free, really) when achieved
via the stock market. Investors can diversify their hold-
ings; then when acquiring firms, such as HA-LO, over-
pay in an acquisition, investors gain in their role as
shareholders of the acquired firms. Diversification pro-
tects investors without the costs of insurance and litiga-
tion.
  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 writ-
ten, 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 man-
agers 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 re-
peat, 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 de-
tailed 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 engage-
ment contract says that CSFB has no duty to double-
check the predictions about Starbelly.com’s future reve-
nues 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