A federal court decision interpreting an investment bank’s engagement letter on a motion to dismiss highlights the risk that—absent careful drafting—financial advisors may be held liable to third-party beneficiaries on both contract and fiduciary duty claims. Baker v. Goldman Sachs, Civ. No. 09-10053-PBS (D. Mass. Sept. 15, 2009).

The financial advisor represented a closely held company, founded and controlled by the Bakers, in connection with its review of potential strategic transactions in early 2000. Allegedly relying on the financial advisor’s advice, the company entered into a stock-for-stock merger agreement with a Dutch buyer, and the deal closed in June 2000. Just months later, the Wall Street Journal uncovered a massive accounting fraud at the Dutch buyer, whose shares subsequently lost all value and whose collapse cost the Bakers their investment. Seeking to recoup some of their losses, the Bakers filed suit against the financial advisor for breach of contract and fiduciary duty. The financial advisor moved to dismiss, arguing that its engagement agreement was with the closely held company alone and that it owed neither fiduciary nor contractual duties to the Bakers.

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