Ronald Tirapelli (“Tirapelli”) and Michael Webb (“Webb”) operate auto dealerships in the Chicago metropolitan area. In March 2000, they began discussions with Lee Wiskowski (“Wiskowski”), a founder of Advanced Equities, Inc. (“Advanced”) and an executive with Telecom Capital Group (“TCG”), regarding possible investment in TCG. TCG had retained Advanced to raise capital through private placements of TCG securities. Tirapelli and Webb had both previously invested in private placements and, because of their financial status and business experience, each qualified as an accredited investor under applicable securities laws.
Following a presentation by Wiskowski and a TCG affiliate, Tirapelli and Webb agreed to purchase 2 ½ shares of TCG each at a price of $100,000 per share. They each completed and signed subscription documents. The subscription documents, albeit at the end, in the “legalese” or legal boilerplate section of one of the agreements, contained both a non-reliance clause and an integration clause. The non-reliance clause stated that in evaluating the investment the subscriber “has relied solely upon the materials made available to the undersigned at the undersigned’s request and independent investigations made by the undersigned . . . and no representations or warranties (oral or written) have been made to the undersigned with respect thereto.” The integration clause stated that the “Subscription Documents constitute the entire agreement among the parties hereto with respect to the subject matter hereof and may be amended only by a written execution of all parties.
In May 2001, Tirapelli and Webb tendered their shares to Advanced and sought to rescind their investments based upon alleged misrepresentations regarding TCG. They claimed they relied upon certain oral representations that turned out to be misrepresentations in making their investments. Advanced refused to accept the shares or the rescission request citing the non-reliance and integration clauses in defense. Tirapelli and Webb then sued Advanced.
The Court of Appeals upheld the trial court decision that dismissed the suit on the basis of the two clauses. According to the courts, a fraud or rescission claim must be supported by a showing of reasonable reliance upon a material omission or misrepresentation; there are sound policy reasons precluding fraud claims based on oral statements outside the written agreement where the agreement itself states that the written word is to be given primacy. Placing primacy on the written word is a primary function of the securities laws and reduces the possibility of faulty memories and fabrication. Without such primacy, parties to securities transactions would be unable to avoid the risk of claims based on oral representations, thus reducing the value of the securities. If the claimants had thought the oral representations were so important to their investment decisions then they should have negotiated for a modification or exclusion of the clauses, or the inclusion into the agreement of the alleged oral statements. The Tirapelli case suggests that a court will uphold a contract as written and that each clause and word has meaning. Please be sure to read each and every provision of any agreement you are asked to sign. Please give us a call if there is a provision you do not understand.