## Facts

- Refco, Inc., a brokerage and clearing services firm, allegedly accumulated significant uncollectible customer debt.
- To conceal losses, Refco allegedly used “round-trip loans” that shifted bad debt off its books through third parties.
- Mayer Brown, Refco’s principal outside counsel, allegedly participated in 17 round-trip loans by drafting transaction documents, negotiating terms, and communicating with third-party participants.
- In August 2004, investment funds affiliated with Thomas H. Lee Partners acquired a majority stake in Refco through a leveraged buyout, investing more than $450 million.
- During transaction due diligence, the funds requested information about Refco’s financial condition and liabilities.
- The funds alleged Mayer Brown made and/or conveyed misrepresentations and omissions directly to them in due-diligence responses, concealing the round-trip loans and Refco’s true exposure.
- Refco collapsed in 2005 after the concealed practices became public, and the funds alleged losses exceeding $245 million.
- The funds sued Mayer Brown asserting federal securities fraud (§ 10(b) and Rule 10b-5), civil RICO, and New York claims for fraud and negligent misrepresentation; the law firm moved to dismiss under Rule 12(b)(6).

## Issues

1. Whether a law firm can be liable as a primary violator under § 10(b) and Rule 10b-5 for misstatements and omissions in offering and financial materials when the statements were not attributed to the law firm when disseminated.
2. Whether civil RICO claims are barred when the alleged racketeering predicates are based on conduct that would be actionable as securities fraud, even if pled as mail or wire fraud.
3. Whether the complaint adequately pleads New York common-law fraud against the law firm based on alleged direct due-diligence misrepresentations and omissions.
4. Whether the complaint states a viable New York negligent-misrepresentation claim against the law firm arising from due-diligence communications.

## Decision

- The court granted the motion to dismiss the § 10(b)/Rule 10b-5 claims because the complaint did not plead a primary violation by Mayer Brown under the Second Circuit’s attribution requirement.
- The court dismissed the civil RICO claims as barred by the PSLRA amendment precluding civil RICO liability predicated on conduct actionable as securities fraud.
- The court dismissed the negligent-misrepresentation claim under New York law.
- The court denied the motion to dismiss the New York common-law fraud claim, holding the funds plausibly alleged knowing misrepresentations and omissions made directly to them in due diligence, reasonable reliance, and loss causation.

## Legal Principles

- A secondary actor’s private § 10(b) liability for misstatements requires that the misstatements be attributable to that actor at the time of dissemination; conduct amounting to assistance in another’s misstatements is not privately actionable aiding and abetting.
- The PSLRA bars civil RICO claims to the extent they rely on predicate acts that are based on conduct that would be actionable as securities fraud, regardless of how the predicates are labeled.
- Under New York law, a fraud claim may proceed where a plaintiff plausibly alleges (i) a material misrepresentation or omission, (ii) scienter, (iii) reliance, and (iv) causation and damages, including where a professional allegedly makes direct misstatements in transaction due diligence.
- Negligent misrepresentation under New York law requires more than ordinary professional involvement and typically turns on a relationship and duty supporting reliance distinct from an intentional fraud theory.

## Conclusion

The court limited federal exposure for a law firm tied to a client’s securities-related deception by applying the attribution requirement for § 10(b) primary liability and the PSLRA’s bar on securities-based civil RICO claims, while allowing a New York fraud claim to proceed based on alleged direct, knowing misrepresentations and omissions made to private-transaction counterparties during due diligence.


Thomas H. Lee Equity Fund V, L.P. v. Mayer Brown, Rowe & Maw LLP, 612 F. Supp. 2d 267 (S.D.N.Y. 2009)