Big boy letter definition

A private contract for securities transactions between sophisticated investors, in which one party is protected against lawsuits from the other party

                                

What is big boy letter?

Big boy letter is a letter between sellers and buyers of security. The letter ensures that the buyers will not sue the sellers for the possibility of non-disclosed information relevant to the security.

The letter offers protection to the investors involved in the transaction of a financial instrument when one party has confidential information which could affect the security value. They confirm that no legal action will be taken against the other party on the basis of withholding information or in accordance with insider trading laws. The big boy letter is beneficial for the investors (either the seller or the buyer) who has information which is not publicly available.

This form of contract is criticised because it can serve as a method to bypass insider trading regulation. The transaction considered in the letter is based on a piece of information that is not available for the wider market participants and investors. The validity of big boy letters in securities transactions is subject to debates regarding the waiver of liability.

Big boy letter meaning

When sellers ask for a big boy letter to be signed, it usually indicates that there is information that is known by the seller but not available to the buyer. The information could negatively affect the security value when it becomes known to the public.

By signing the letter, the buyer confirms that the decision is made on the basis of their own analysis. It is conducted using the information gathered by the investors without regard to the information which may or may not have been provided by the seller.  The letter protects the seller from legal action taken from the buyer but it doesn't protect them from a lawsuit from third parties.

A well-known example of the use of a big boy letter is the case with Smith Barney, formerly known as Salomon Smith Barney. Smith Barney entered a sale transaction with Jefferies Group for World Access bonds for $20 million. Afterwards, Jefferies Group resold the bonds to a hedge fund R2. After the transaction took place, the telecommunication company World Access announced that it had run out of cash. The news had an immediate effect and the bond value decreased by 30 per cent.