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A federal appellate court has clarified the hoary doctrine of in pari delicto in declining to hold the parties in a lawsuit over a failed investment venture equally at fault. “The doctrine . . . means more than just ‘two wrongs make a right,’ ” the 2d U.S. Circuit Court Court of Appeals said in an opinion written by U.S. District Judge Jed S. Rakoff of the Southern District of New York, sitting by designation. BrandAid Marketing Corp. v. Biss, 05-5243-cv, Citing Pinter v. Dahl, 486 U.S. 622, 636 (1988), Rakoff said that application of the doctrine requires that the plaintiff be “an active, voluntary participant in the unlawful activity that is the subject of the suit.” In the case at hand, plaintiff BrandAid’s misrepresentations about its financial health to defendant Cyberian Enterprises were not severe enough to match up with Cyberian’s failure to pay for its 23.5 million shares in BrandAid common stock, he wrote. “Because . . . plaintiff’s wrongdoing was far less culpable than defendants’ and because, in any event, plaintiff’s wrongdoing was not in any meaningful respect the cause of defendants’ fraud and misconduct, the doctrine of in pari delicto is not here applicable,” Rakoff wrote. The case arose after Cyberian contacted BrandAid to express interest in purchasing shares of BrandAid common stock for $21 million. Cyberian falsely assured BrandAid that it had sufficient cash to finance the investment, and that it had “no plans to change BrandAid’s board of directors or management,” Rakoff wrote. For its part, BrandAid did not “disclose the full extent of its actual and contingent liabilities and ongoing problems,” Rakoff said. He pointed out, however, that the company’s various filings with the Securities and Exchange Commission disclosed “very serious liabilities, few assets and little cash.” BrandAid and Cyberian entered into an agreement to consummate the deal, but Cyberian later admitted that it lacked the funds to pay for the shares in BrandAid. In response, BrandAid sued Cyberian and its attorney, Steven S. Biss, alleging breach of contract, fraud and violations of the federal securities laws. Cyberian counterclaimed for fraud, tortious interference with contract and breach of an implied covenant of good faith and fair dealing. U.S. District Judge William H. Pauley III, of the Southern District of New York, had dismissed all claims against all of the parties, finding that each side had acted poorly, and therefore applied the doctrine of in pari delicto-”in equal fault.” “To find for plaintiff, this Court would have to ignore BrandAid’s repeated misrepresentations and omissions to Cyberian,” Pauley said. “Such a ruling would sanction the very activities prohibited by federal securities laws.” Conversely, any ruling in favor of Cyberian would “reward them for their misdeeds,” he added. The 2d Circuit panel, however, disagreed with the district court’s application of the doctrine. The court explained that a requirement for invocation of the doctrine is that the plaintiff’s wrongdoing must be at least substantially equal to that of the defendant’s. It said this was not the case in the present situation. In this case, it said, “BrandAid’s omissions pale in comparison to defendants’ fraudulent scheme.” Paul W. Siegert, a solo practitioner who represented BrandAid, said he was “very surprised” at the outcome. “I have been a lawyer for 33 years, and have seen very few cases decided on that grounds,” Siegert said. He said his client has “monster claims . . . and because of this decision Judge Pauley will have a hearing on the damages or enter a new judgment.” Biss represented himself and Cyberian in the case. He did not return calls for comment.

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