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NC: No Liability for Lawyer's Bad Investment Advice when Plaintiff Doesn't Perform Due Diligence

Hahne v. Hanzel, 161 N.C. App. 494, 588 S.E.2d. 915 (2003)

NC: Securities law

Student Contributor: David Yanoff

Facts:  Plaintiffs were experienced investors and businesspersons. Defendant, during the course of representing plaintiffs with respect to other unrelated matters involving incorporation, encouraged plaintiffs to invest in a company called Invinca-Shield. Defendant explained that Invinca-Shield was in “excellent financial condition”, and plaintiffs purchased large quantities of its stock without asking to see the company’s financial statements or performing any other due diligence. The share subscription agreement plaintiffs signed indicated that “Subscriber is not acquiring the shares based on any representation . . . by any person . . .with respect to the future value of . . . the shares, but rather upon an independent examination [of the company].” The defendant did not prevent any of the plaintiffs from reading the investment letters or subscription agreements, but some of the plaintiffs allegedly signed the agreements without reading them or asking for any further information. Plaintiff’s brought suit for professional negligence and legal malpractice alleging they lost money as a result of the investment. The trial court granted summary judgment for defendant, finding plaintiffs contributorily negligent, and plaintiffs appealed.

Issue: Can an attorney who offers investment advice to experienced investors be held liable in a malpractice action if the investment turns out badly?

Ruling:  Not if the plaintiffs, as experienced investors, failed to perform their own due diligence, at least on the facts of this case where plaintiffs signed an agreement expressly disclaiming reliance on any advice. Defendant has the burden of proving contributory negligence, but here that burden was met.

Lesson(s):   Lawyers may largely protect themselves from liability for giving investment advice by assuring that clients disclaim reliance, and encouraging clients to perform their own due diligence before investing (so if they don’t, they were warned). This may not apply to completely inexperienced investors. 

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Posted in: North Carolina, Securities