Late last week, VeroBlue Farms USA Inc. (VBF) asked the Second Circuit Court of Appeals to review a decision that found in favor of Canaccord Genuity LLC, an investment banking company hired to help raise funds for VBF. The aquaculture business alleged that Canaccord aiding VBF’s own founders’ fraudulent acts and fiduciary breaches, causing it $80 million in losses. Judge John P. Cronan’s opinion dismissed the 221-page fourth amended complaint with prejudice after finding that VBF previously agreed to release its claims against Canaccord.
The Southern District of New York decision recounts the founding of VBF in 2014 by five individuals who were in complete or near control of the company until 2018. Reportedly, the founders misappropriated VBF assets and falsely represented the company’s technology and financial viability. In particular, they allegedly touted its “Opposing Flows Technology” as providing a superior water filtration and oxygenation water system for VBF’s fish tanks, when in fact it did not work.
In February 2015, VBF retained Canaccord to raise debt for VBF’s parent company, VBF Canada. The parties signed an “Engagement Agreement,” that reportedly bound the Canadian parent and its subsidiaries.
In relevant part, the agreement explicitly provided that Canaccord had no duty to verify the accuracy or completeness of information provided by VBF, as that was solely the responsibility of the aquaculture company. Among other allegations, VBF alleged that Canaccord drafted marketing decks which contained false statements concerning VBF’s technology and profitability that Canaccord allegedly knew or should have known of.
When Canaccord threatened to sue VBF in August 2016 because the company obtained financing on its own and refused to pay fees allegedly due under the Engagement Agreement, the parties entered into a “Mutual Release.” Thereunder, VBF agreed to pay Canaccord nearly $500,000 and to release all claims arising from or relating to the Engagement Agreement.
Judge Cronan found the Mutual Release, secondarily the Engagement Agreement, and thirdly the in pari delicto doctrine pivotal in dismissing VBF’s claims. “[U]nder the plain terms of the Mutual Release, VBF released Canaccord from liability for the claims it now brings,” the opinion said.
Judge Cronan explained that the Engagement Agreement expressly allowed Canaccord to rely on statements made by the founders. Such reliance “therefore cannot ‘smack of intentional wrongdoing,’” even if the information relied on was false, the court wrote. Finally, Judge Cronan upheld Canaccord’s in pari delicto defense, a doctrine that prohibits courts from interceding in a case between wrongdoers, after finding that no exception applied.
The opinion also denied Canaccord’s motion for sanctions, reasoning that VBF’s behavior was “concerning,” but did not obviate their imposition. “VBF’s actions again toe the line between exuberant litigation tactics and bad faith conduct,” Judge Cronan wrote.