## Facts

- Institutional investors purchased securities associated with Refco Inc., a brokerage firm later revealed to have concealed large related-party losses through sham transactions.
- Refco allegedly used quarter-end “round-trip” loans and other transactions to temporarily remove related-party receivables from its balance sheet and then reverse the transactions after reporting periods.
- Plaintiffs alleged Refco’s outside counsel, Mayer Brown LLP, and partner Joseph P. Collins designed, structured, and implemented the sham transactions and drafted related documents.
- Plaintiffs also alleged defendants drafted or reviewed portions of offering memoranda, registration statements, and public filings that omitted the fraud and misstated Refco’s financial condition.
- The alleged misstatements in the offering materials were attributed to Refco or others, not to Mayer Brown or Collins, when disseminated to the market.
- Plaintiffs sued under Exchange Act § 10(b) and Rule 10b-5 (misstatements, omissions, and scheme liability) and asserted control-person liability under § 20(a).
- The district court dismissed under Rule 12(b)(6), and plaintiffs appealed.

## Issues

1. Whether outside counsel can be primarily liable under Rule 10b-5(b) for drafting or editing misstatements that were publicly attributed only to the issuer at dissemination.
2. Whether allegations that counsel participated in or structured deceptive transactions state a private claim for primary “scheme” liability under Rule 10b-5(a) and (c).
3. Whether issuer’s outside counsel owed investors a duty to disclose supporting omission-based Rule 10b-5 liability.
4. Whether § 20(a) control-person liability can stand absent a pleaded primary violation by the alleged control persons.

## Decision

- The Second Circuit affirmed dismissal of all claims against Mayer Brown and Collins.
- Rule 10b-5(b): Defendants were not primary violators because they did not “make” the alleged misstatements; the statements were not attributed to them when disseminated.
- Rule 10b-5(a) and (c): The alleged conduct amounted, at most, to nonactionable aiding and abetting in a private action because investors did not rely on defendants’ own deceptive acts.
- Omissions: Defendants owed no duty of disclosure to investors because there was no fiduciary or similar relationship of trust and confidence and no direct communications with plaintiffs.
- Section 20(a): The control-person claim failed because plaintiffs did not plead a primary violation by Mayer Brown or Collins.

## Legal Principles

- In a private Rule 10b-5(b) action, a secondary actor is a “maker” of a statement only if the statement is attributed to that actor at the time of public dissemination; drafting or editing, without attribution, is insufficient.
- Reliance for private misstatement liability requires that the market received the statement as coming from the defendant; reliance on issuer statements that may have been prepared with behind-the-scenes assistance does not establish primary liability for the assister.
- Rule 10b-5(a) and (c) cannot be used to repackage misstatement-based allegations into “scheme” claims when the asserted conduct is essentially substantial assistance to the issuer’s misstatements and investor reliance is only on the issuer’s disclosures.
- Omission liability under Rule 10b-5 requires a duty to speak; outside counsel ordinarily owes duties to the client, not to investors, absent a fiduciary or similar trust relationship.
- Section 20(a) liability requires an underlying primary securities-law violation; without a primary violation by the alleged controller, the claim fails.

## Conclusion

The Second Circuit held that outside counsel and its partner could not be sued privately as primary violators under Rule 10b-5 for drafting misleading issuer disclosures or facilitating sham transactions where the statements were not publicly attributed to them, investors did not rely on their independent deceptive acts, and they owed no duty to disclose to investors; without a primary violation, § 20(a) control-person liability also failed.


Pac. Inv. Mgmt. Co. LLC v. Mayer Brown LLP, 603 F.3d 144 (2d Cir. 2010)