Lawsuit Claiming Fraud Commenced Five Years Too Late: Investors Beware.

In Zeng v. Wang, the Court of Appeals of Virginia reminded practitioners of a couple important lessons. Here are two of them. First, investors should read and understand the fine print of any prospectus before signing on the dotted line. Second, the statute of limitations in Virginia for fraud is only two years. There are exceptions to that time limit, but you must act diligently if you are to avail yourself of them.

Electric Car Company Fails to Spark.

The case arose from a failed project to build and sell electric cars in Virginia. Allegedly, Charles Wang, through “immigration agents,” sought to encourage investment from China in his US business. Ultimately, a group of investors, including Wei Zeng, bought into the idea of investing in Wang’s electric vehicle startup called Greentech Automotive Project. 

Greentech’s promotional materials, distributed to the Zeng investors through their immigration agent and presumably coming from Greentech, sang Greentech’s praises as a new and innovative and already successful company. But those marketing materials included numerous false statements. They falsely advertised the source of investments in the new company, falsely stated that start up money for the new business came from an “over-collateralized” loan that made investors’ money safe, falsely claimed the company had entered a joint venture with another company, and falsely claimed to have sold out of its production of electric cars.

Relying, they said, on those false promises, the Zeng investors each put up half a million dollars.

When Greentech proved unable to raise money to make the business successful, it declared bankruptcy and went out of business. But for some early interest payments, Zeng and the other investors lost everything.

If you’re thinking that all those false representations sound like fraud, they sure sounded that way to Zeng. 

But Mr. Wang, a corporate securities lawyer, before accepting the Zeng investors’ money, provided them a private placement memorandum and other “offering materials” that explained how risky Greentech’s business was. The PPM explained that, contrary to the marketing materials, Greentech had no “prior operating history,” and that its business was “highly speculative and entail[ed] a high degree of risk, including the risk of loss of [the] entire investment.” The PPM, which the Zeng investors signed, specifically recited that investors “relied on nothing other than the Offering Materials” in deciding whether to make an investment.” 

If You Sign an Agreement, You’re Bound by It, No Ifs, Ands, or Buts.

The Court of Appeals ruled that Zeng and the other investors were bound by their signed agreement that the only information they relied on before investing in Greentech was from the offering materials. The PPM, on its face, made the marketing materials, which contained false statements, irrelevant. 

Zeng and the other investors complained, though, that the offering materials were “legal documents,” and that they did not understand them in part because they were in English and they were native Chinese speakers. 

The language barrier and false marketing materials notwithstanding, the Court concluded that the investors could not escape the limitations in the PPM. The Court reasoned that people who sign binding agreements are presumed to understand them and are bound by them. If a language barrier made it difficult for investors to understand what they were signing, it was their duty to either not sign it or get help to better understand it. 

Finally, the Court concluded that any discrepancy between the marketing materials, that might have contained fraudulent statements, and the offering materials, that gave a clear picture of Greentech’s business, put Zeng and the other investors on notice to figure out for themselves whether Greentech was a good investment. 

Statute of Limitations for Fraud is Two Years, Very Few Ifs, Ands, or Buts.

If there was possible fraud, Zeng was on notice of it when he signed the PPM in 2012. By that reasoning, Zeng had until 2014, two years after the alleged fraud, to bring a lawsuit against Wang. 

But Zeng waited until 2019 to file suit. That was two years after a 2017 meeting where Zeng says he first really learned of Gentech’s financial peril and that he’d been defrauded into investing. Zeng reasoned that under Virginia law he wasn’t obligated to file a lawsuit for fraud until after he discovered the fraud. Since, he said, he didn’t learn of the fraud until 2017, suing in 2019 was just in time before the expiration of the two year statute of limitations. 

That delay of five years, though, between 2014 (two years after the PPM was signed) and 2019 (when Zeng finally sued), was five years too long. 

It’s true that the Virginia statute of limitations for fraud tolls (i.e., pauses) during the time that the fraud goes undiscovered even though the victim acts with due diligence. But Zeng, the Court held, did not act diligently back in 2012. Back then, he should have learned that something was wrong in the way that Greentech marketed itself. Given the discrepancies between the marketing materials and the offering materials, Zeng “could not simply wait to see if the ‘risks [of the investment] materialized before filing suit.’” The PPM was a “’big, flashing sign,’” that Zeng ignored at his peril.

And it was his peril. His lawsuit, filed five years too late, was dismissed. Half a million dollars and significant business and personal expectations were lost. The Court of Appeals upheld the dismissal. Judge Friedman wrote the opinion. There was no dissent.

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If you have any questions about this post or other appellate issues, please contact Cullen Seltzer at (804)783-7235 or CSeltzer@sandsanderson.com .