You may have heard that a group of Chinese investors filed a fraud action here in Virginia against Governor McAuliffe and others for $17,920,000, plus punitive damages exceeding $53,000,000. Earlier this month, a federal judge dismissed the case, finding that the allegations were insufficient to allow a jury to even consider the claim. Should you, dear reader, ever find yourself on the receiving end of a $71M fraud lawsuit, try to stay calm, and read my earlier blog post about what kind of facts are needed to make out a facially valid fraud claim. The plaintiffs in this particular case were unable to present such facts, so they lost. If a plaintiff cannot allege in good faith facts sufficient to satisfy each element of a fraud claim, the case will be dismissed no matter how much money is at stake.
According to the original complaint filed against Governor McAuliffe (it was originally filed in Fairfax County Circuit Court, then removed to federal court in Alexandria), the case was brought “to remedy a $120 million scam perpetrated by savvy and politically connected operatives and businessmen.” The Defendants allegedly offered–in exchange for a $500,000 investment from each plaintiff in an electric car company–to leverage their political connections to ensure that the plaintiffs’ visa applications would be approved by U.S. Citizenship and Immigration Services. The Chinese investors claimed that McAuliffe lied about a number of things in order to secure those $500,000 investments:
Mr. McAuliffe, Mr. Rodham, and Charles Wang defrauded investors with one false representation after another. They misrepresented the number of direct and indirect jobs the company could, would, and did generate (a key factor in whether Plaintiffs’ visas would be approved). They said GreenTech had been selected as a Department of Defense contractor. They trumpeted the quality and advancement of GreenTech’s technology. They claimed GreenTech’s collateral exceeded the amount of loans Plaintiffs and other investors would be making to fund GreenTech’s start-up. They told investors that they had received more orders than they could keep up with. They talked up GreenTech’s significant investments in China. They told investors they had won a lawsuit against a watchdog organization that had been critical of GreenTech (it was dismissed for lack of jurisdiction). And they told the investors that they would obtain permanent residency in the United States. All of these representations were false.
That sounds pretty bad, you might be thinking. So why were these allegations insufficient to make out a valid claim under Virginia law for fraud? As laid out in my earlier blog post, actionable fraud consists of (1) a false representation, (2) of a present, material fact, (3) made intentionally and knowingly, (4) with intent to mislead, (5) reasonable reliance by the party misled, and (6) resulting damage. Moreover, to survive dismissal in federal court, the claim must be pleaded with “particularity.” That means the complaint must (1) identify the fraudulent statements which were made and the documents or oral representations containing them, (2) the time and place of each statement and the person responsible for making (or not making – in the case of omissions) the same, and (3) the content of such statements, the manner in which they misled the plaintiff, and the manner in which plaintiff relied on the statements. (See U.S. ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 379 (4th Cir. 2008)).
In the case against McAuliffe, the court first observed that the plaintiffs had not identified which of them had relied on which statement, or how the statements at issue were communicated to them. In other words, they failed to meet the particularity requirement. If a plaintiff cannot allege in detail how a fraud was committed, courts will generally not permit the case to proceed to a jury and will dismiss it at the outset.
Next, the court looked at a statement alleged to have been made by one of the other defendants (Hillary Clinton’s brother, Anthony Rodham), and noted that the complaint lacked any detailed allegations that Mr. Rodham knew his statement was false, or how it was material to the plaintiffs’ decision to invest. The court also pointed out that the plaintiffs had failed to allege any specific facts relating to the reliance element needed to prevail on any fraud claim.
With respect to statements allegedly made by the Governor, the court found them to be either “puffery” (as opposed to misrepresentations of fact) or forward-looking statements (as opposed to statements relating to present facts). Statements relating to future events that turn out to be false are not fraudulent as a matter of law. A broken promise might support a breach-of-contract action, but not a fraud claim.
The court further found that the plaintiffs had failed to meet the “reasonable reliance” element. To state a valid claim for fraud, a plaintiff must show that its reliance on the false representation was reasonable and justified. The plaintiffs in this case failed to do that:
The Plaintiffs claim that they invested in the Limited Partnership interests in reliance upon certain statements made to them by Defendants in oral presentations and in written statements contained in newsletters, websites, and social media, but they did not read the English-language private placement memorandum, subscription agreement, partnership agreement, power of attorney, or related formal documents presented to them before they invested.
So there you have it. Just because you get sued for $71,000,000 doesn’t mean you need to start thinking about bankruptcy. If the person suing you doesn’t allege facts sufficient to meet all elements of the claim for which you are being sued, it’s the judge’s job to dismiss the case at the outset. That’s what happened here.