Is It Fraud, or Is It ‘Puffery’?

The criminal complaint against Carlos Watson, which was unsealed this week, contains some jaw-dropping accusations, including that Watson, the founder of Ozy Media, lied about its numbers, fabricated documents and asked a colleague to impersonate a YouTube executive on a conference call with Goldman Sachs.

But there is also a less headline-grabbing accusation: When making his case to potential investors, Mr. Watson allegedly named other investors in the deal — even though not everyone on the list had, in fact, committed that money. While clearly unethical — and we’re not defending it — that one part of the criminal complaint doesn’t sound far off from a practice that seems all too common in business. How many times has a real estate agent exaggerated the interest in a property? Or a private equity firm misled a buyer about competition for an asset? The business world calls this “bluffing.” Lawyers call it “puffing.”

Sheel Mohnot, a co-founder of Better Tomorrow Ventures, estimates that once a week someone on his team will say after a pitch meeting, “Yeah, that’s bull.” For better or worse, some over-optimism is expected in business. But where is the line?

“Puffery” is, perhaps surprisingly, defensible. U.S. courts have effectively adopted a “puffery doctrine” that allows companies leeway to make sweeping statements. A U.S. District Court, for example, applied this thinking in a lawsuit against Ford Motor for failures of Firestone tires on its vehicles, ruling that certain broad proclamations — like “safety comes first” — were simple acts of puffery. Vagueness is also a common tool for bankers selling a company; they might, for example, tell a potential buyer that three parties are interested, while not mentioning that the prices that two of those parties are willing to pay are lower than the selling floor.

Article source: https://www.nytimes.com/2023/02/25/business/dealbook/company-puffing-fraud.html