## Facts

- Refco Inc., an international brokerage firm, accumulated large uncollectible receivables from extending credit to customers who incurred major trading losses.
- Refco management allegedly concealed these receivables through recurring “round-trip” loans and related-party transactions timed around reporting dates, temporarily shifting bad debts to an affiliate controlled by Refco’s CEO and reversing the shifts shortly after period close.
- The alleged effect was to remove hundreds of millions of dollars in receivables from Refco’s balance sheet at each reporting date and present Refco as more creditworthy and profitable than it was.
- Mayer Brown LLP and partner Joseph P. Collins served as Refco’s long-time outside counsel.
- Plaintiffs alleged the Mayer Brown defendants helped structure and document multiple iterations of the round-trip transactions and interacted with third-party participants.
- Plaintiffs also alleged the Mayer Brown defendants drafted or helped draft offering documents and SEC filings, including materials for Refco’s August 2005 IPO, that omitted Refco’s true financial condition and the concealed receivables.
- The fraud became public in October 2005 soon after the IPO, leading to a collapse in Refco’s securities, bankruptcy, and investor losses.
- Lead plaintiffs, on behalf of a putative investor class, asserted federal securities claims against the Mayer Brown defendants in a consolidated action; the Mayer Brown defendants moved to dismiss under Rule 12(b)(6).

## Issues

1. Whether outside counsel can be liable as primary violators under § 10(b) and Rule 10b-5 based on allegedly assisting deceptive transactions and drafting corporate offering materials and SEC filings containing misstatements.
2. Whether outside counsel can be liable as “control persons” under § 20(a) for Refco’s fraud where the complaint does not adequately plead primary § 10(b) liability by the outside-counsel defendants.

## Decision

- The court granted the motion to dismiss the § 10(b) and Rule 10b-5 claims against Mayer Brown and Collins.
- The court held the allegations described, at most, aiding-and-abetting conduct, for which there is no private right of action under § 10(b).
- The court concluded plaintiffs did not adequately allege that the Mayer Brown defendants made misstatements attributable to them at the time of dissemination or committed deceptive acts on which investors relied.
- The court dismissed the § 20(a) control-person claims because they are derivative and were not supported by adequately pleaded primary liability or sufficiently specific allegations of control by outside counsel.

## Legal Principles

- Private plaintiffs cannot recover under § 10(b) on an aiding-and-abetting theory; only primary violations are actionable in private suits.
- A secondary actor’s participation in drafting or facilitating a client’s public disclosures does not, without attribution, make the secondary actor the “maker” of the statements for § 10(b) purposes.
- “Scheme” allegations cannot be used to recharacterize non-actionable aiding-and-abetting into a private § 10(b) claim; investor reliance requires that the defendant’s own deceptive conduct reach the market in a manner tied to the investment decision.
- Section 20(a) control-person liability requires an underlying primary securities-law violation and nonconclusory allegations that the defendant had power to control the primary violator and culpably participated in the violation.

## Conclusion

The court dismissed federal securities claims against Refco’s outside counsel, holding that alleged behind-the-scenes legal work in structuring transactions and drafting issuer disclosures, without public attribution or investor reliance on the lawyers’ own deceptive acts, does not state a private § 10(b) claim, and that § 20(a) control-person liability was not adequately pleaded.


In re Refco, Inc. Securities Litigation, 609 F. Supp. 2d 304 (S.D.N.Y. 2009)