Disclosure as Defense: When Written Offering Materials Negate Claims of Fraudulent Misrepresentation

By: Jeffrey M. Haber

In Cortlandt St. Recovery Corp. v. TPG Capital Mgt., L.P., 2026 N.Y. Slip Op. 02775 (1st Dept. May 5, 2026), the Appellate Division, First Department, examined the limits of fraud claims arising from complex private‑equity financing transactions. Cortlandt alleged that two private equity firms used dividend recapitalizations and misleading offering materials to extract value from an acquisition through debt‑funded equity redemptions, ultimately rendering the issuer insolvent. Although the claims centered on alleged misrepresentations in an offering memorandum governing subordinated notes, the First Department dismissed the action in its entirety, holding that the written disclosures, read as a whole, negated any claim of actionable misrepresentation.

Cortlandt St. Recovery Corp. v. TPG Capital Mgt., L.P.[1]

Cortlandt alleged that in 2005, private equity firms TPG Capital Mgt., L.P (“TPG”) and Apax Partners, L.P.  (“Apax”) formed a consortium to acquire TIM Hellas, a Greek telecommunications company that was profitable and nearly debt‑free at the time. To accomplish this acquisition, the consortium created a complex structure of interrelated Luxembourg entities collectively referred to as the Hellas entities, including Hellas II. These entities served as acquisition vehicles and issued preferred equity certificates (“PECs”) and convertible preferred equity certificates (“CPECs”) to their shareholders, including the defendants.

Following the acquisition, Cortlandt asserted that the consortium pursued a strategy designed to extract value from the Hellas entities through aggressive leverage, independent of the company’s financial performance. According to Cortlandt, defendants employed dividend recapitalizations – transactions in which new debt is issued not to fund operations or repay existing obligations, but to generate cash distributions to equity holders. By 2006, this approach allegedly left TIM Hellas and the affiliated entities burdened with substantial debt and no longer profitable.

In April 2006, Hellas Finance issued €500 million in notes, which Cortlandt described as an initial recapitalization. The proceeds were used to redeem outstanding PECs and CPECs, resulting in approximately €376 million being paid directly to defendants. Afterward, the consortium allegedly sought to sell TIM Hellas but was unable to find a buyer. Faced with these failed efforts, defendants allegedly pursued a second and more extensive recapitalization.

On December 21, 2006, Hellas II issued €960 million in euro‑denominated subordinated notes and $275 million in U.S. dollar‑denominated subordinated notes pursuant to an indenture and offering memorandum (“OM”) governed by New York law. On the same day, Hellas I issued more than €200 million in payment‑in‑kind (“PIK”) notes. Collectively, the Hellas entities borrowed approximately €1.5 billion. Clearstream International S.A. (“Clearstream”) and Euroclear Bank SA/NV (“Euroclear”) were the registered holders of the subordinated notes.

Cortlandt alleged that the OM contained materially false and misleading statements intended to deceive purchasers of the subordinated notes. Specifically, the OM allegedly represented that the proceeds would be used to repay subordinated shareholder loans and that the subordinated notes would be secured by PECs and CPECs issued by Hellas II. According to Cortlandt, defendants knew these statements were false because they allegedly intended from the outset to use the proceeds to redeem CPECs – equity instruments rather than debt – and to do so immediately after the notes were issued. Cortlandt further contended that the OM stated that CPECs would not be redeemed until more senior debt, including the subordinated notes, had been paid, and that the CPEC terms themselves prohibited redemption if doing so would render Hellas II insolvent.

Despite these restrictions, Cortlandt claimed the proceeds of the subordinated and PIK notes were used to redeem CPECs held largely by defendants. Approximately €1.185 billion was allegedly paid to the consortium, of which roughly €946 million was characterized as a dividend. Cortlandt alleged that internal consortium communications demonstrated the transaction was structured to distribute impermissible dividends and that no independent valuation of the CPECs was conducted. According to Cortlandt, the dividend recapitalization effectively caused Hellas II’s insolvency, leaving it unable to service its debt obligations. Hellas II allegedly defaulted on the subordinated notes on October 15, 2009.

Cortlandt brought the action as assignee of the beneficial owners of interests in the subordinated notes. Although Cortlandt did not itself own the notes, it claimed valid assignments transferring all rights to pursue related claims. Cortlandt further alleged that its assignors were authorized by registered holders such as Clearstream and Euroclear to bring suit, relying on Euroclear’s operating rules and documentation, including Statements of Account and Certificates of Holding. The action, originally filed in 2011 and recommenced in 2017, asserted claims for fraud and breach of contract arising from alleged misrepresentations and violations of the indenture and offering documents.

Defendants moved to dismiss. The motion court granted defendants’ motions to dismiss the amended complaint in its entirety as against defendants David Bonderman and James Coulter and as against all defendants to the extent plaintiff’s claims for fraud and breach of contract sought to recover damages related to the sub notes registered to Clearstream, but denied the motions as to all defendants except Bonderman and Coulter insofar as the claims related to the sub notes registered to Euroclear.[2] 

On appeal, the Appellate Division, First Department modified the motion court’s order to grant defendants’ motions to dismiss in their entirety.

The Court held that “[p]laintiff failed to state a valid fraud claim because it did not allege any actionable misrepresentations.[3] The Court noted that plaintiff alleged that the OM misrepresented that the proceeds of the sub notes would be used to “redeem deeply subordinated shareholder loans from the Sponsors” when defendants always intended to use them to redeem the CPECs.[4] However, the Court found that the terms of the OM addressed the very misrepresentation of which plaintiff complained.[5] In this regard, said the Court, the OM “use[d] the terms ‘deeply subordinated shareholder loans’ and ‘CPECs’ interchangeably — referring to ‘deeply subordinated shareholder loans in the form of convertible preferred equity certificates (‘CPECs’), which are treated as equity in [the] financial statements’ and explain[ed] that ‘[t]o facilitate the redemption of the deeply subordinated shareholder loans from the Sponsors as described in ‘Use of proceeds,’ certain CPECs [would] be valued in a certain way and then redeemed.”[6] 

The Court also found that plaintiff’s allegation that the OM misrepresented that “the Sub Notes would be secured by the CPECs and [the PECs] issued by [Hellas Telecommunications (Luxembourg) II, S.C.A.]” because defendants “always intended to redeem the CPECs and PECs in order to pay the proceeds of the Sub Notes to themselves” was not supported by the terms of the OM.[7] The Court explained that “the OM did not suggest that the Sub Notes would be secured by all of the CPECs and PECs then in existence — only by a certain percentage of the total CPECs and PECs ‘outstanding at any time.’”[8] Instead, said the Court, “[t]he OM also made clear that at least some CPECs would be redeemed in connection with the subject transaction.”[9] 

The Court rejected plaintiff’s argument that the OM was misleading because it provided only one option for redemption: “Once the Company does not have any other debt liability to pay or to provide for, with priority to the CPECs, it has the option to redeem CPECs at the greater of par value and market value reduced by 0.5%.”[10] In doing so, the Court reasoned that “[t]his language did not, however, suggest that this was the only circumstance in which CPECs could be redeemed but rather described the redemption parameters in such circumstance.”[11] 

Takeaway

Cortlandt reinforces that fraud claims based on written offering materials rise or fall on the text of those documents as a whole, not on isolated phrases taken out of context. Where an offering memorandum expressly discloses the economic substance of a transaction, a plaintiff cannot plausibly plead misrepresentations by recharacterizing disclosed information as something else or by ignoring explanatory cross‑references within the document.

The Court emphasized that sophisticated investors are charged with reading offering documents carefully and holistically. When, as in Cortlandt, an offering memorandum expressly explains that “deeply subordinated shareholder loans” take the form of convertible preferred equity treated as equity in financial statements, allegations that the issuer misrepresented its intended use of proceeds are undermined by the very document on which the plaintiff relies.

The ruling also highlights that allegations that a defendant secretly intended to act inconsistently with the offering documents are insufficient where the documents themselves anticipate, describe, or permit the challenged conduct. In Cortlandt, disclosure that some equity would be redeemed, even if substantial, defeated claims premised on the notion that any redemption was concealed or prohibited.

Finally, the Court underscored that security representations must be read precisely. Statements that debt will be secured by a percentage of equity outstanding “at any time” do not guarantee that all existing equity will remain in place. A plaintiff cannot transform partial, conditional security disclosures into absolute promises of collateral maintenance.

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice.

Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions and not on matters handled by the firm.

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[1] The facts of the case come from the motion court’s decision.

[2] The sub notes refer to the Subordinated Floating Rate Notes due 2015.

[3] Slip Op. at *1, citing Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 (2009).

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id.