Attack of the Indirect Investor

A company’s indirect investors may sue the company and its principals for fraud, according to a recent federal court ruling in Robert Colman et al. v. Theranos Inc. et al.1 Investment managers who syndicate investment opportunities through single purpose vehicles (SPVs) should be concerned about the ruling because it undermines their control over potential disputes with portfolio companies and their relationships with portfolio company management.

The portfolio company made false and misleading statements, according to plaintiffs

Plaintiffs Robert Colman and Hilary Taubman-Dye sued Theranos, Inc. in 2016 claiming that Theranos and its executives made false and misleading statements for the purpose of inducing the plaintiffs to indirectly purchase Theranos securities. The defendants’ statements violated Section 25400(d) of the California Corporations Code2 and constituted common law fraud, according to the plaintiffs.

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