## Facts

- Refco Inc., a commodities brokerage and financial services firm, collapsed in 2005 after extensive accounting fraud by senior insiders, including its CEO.
- Management allegedly concealed hundreds of millions of dollars in uncollectible receivables and losses, materially overstating Refco’s financial condition.
- The scheme allegedly used related-party entities and round-trip transactions to shift bad debts off Refco’s balance sheet at reporting dates.
- Refco’s misstated financials allegedly enabled transactions benefiting management and the company in the short term, including a leveraged buyout and an initial public offering.
- Refco retained outside professionals, including auditors (KPMG LLP and Grant Thornton LLP) and legal and financial advisers, in connection with audits and major transactions.
- After bankruptcy, a litigation trust was formed; the trustee sued the outside professionals on behalf of Refco, alleging they aided and abetted the fraud and/or negligently failed to detect and prevent it.
- Defendants argued that under New York law the insiders’ misconduct was imputable to Refco and that the trustee’s claims were barred by in pari delicto.
- The case reached the New York Court of Appeals on certified questions concerning imputation, the adverse-interest exception, and in pari delicto in suits brought by a corporate successor.

## Issues

1. Whether senior managers’ fraud committed within the scope of their authority is imputed to the corporation, so that a litigation trustee standing in the corporation’s shoes is subject to in pari delicto defenses.
2. Whether the adverse-interest exception prevents imputation when insiders commit fraud that benefits themselves but also keeps the company operating and able to raise capital.
3. Whether New York law recognizes a special exception allowing malpractice or similar claims against auditors, lawyers, and other professionals notwithstanding imputation and in pari delicto.

## Decision

- The court held that the insiders’ fraudulent conduct was imputed to Refco because it occurred within the scope of their authority and was intended, at least in part, to benefit the corporation in the short term.
- The court held the adverse-interest exception did not apply because the misconduct was not “totally adverse” to Refco; the scheme helped the company survive and attract financing.
- The court held in pari delicto barred the trustee’s claims because the trustee stood in Refco’s shoes and Refco, through imputation, was at least equally at fault.
- The court declined to create a gatekeeper or professional-malpractice carve-out to in pari delicto.
- The court’s answers to the certified questions supported dismissal of the trustee’s claims against the outside professionals.

## Legal Principles

- A corporate agent’s acts and knowledge are imputed to the corporation when the agent acts within the scope of employment, even if motivated by self-interest, so long as the conduct is at least partly intended to benefit the corporation.
- The adverse-interest exception is narrowly limited to situations where the agent has totally abandoned the principal’s interests and acted entirely for the agent’s own or another’s purposes; short-term corporate benefit defeats the exception.
- In pari delicto bars recovery by a wrongdoer against another wrongdoer for damages arising from the wrongdoing; when management’s fraud is imputed to the corporation, the corporation (and its trustee/successor) may be barred from suing third-party professionals for the same misconduct.
- A litigation trustee asserting corporate causes of action takes the corporation’s claims subject to defenses that could have been asserted against the corporation.
- New York courts will not judicially create a broad exception to in pari delicto for claims against outside auditors, lawyers, or similar professionals based on alleged failure to detect or prevent internal corporate fraud.

## Conclusion

The court reaffirmed strict New York rules on imputing senior management fraud to the corporation and applied in pari delicto to bar a bankruptcy litigation trustee, standing in the corporation’s shoes, from recovering from outside professionals for participation in or failure to detect that fraud, absent a narrowly defined adverse-interest showing.


Kirschner v. KPMG LLP, 15 N.Y.3d 446, 938 N.E.2d 941 (N.Y. 2010)