Refco Claims Against Mayer Brown Should Stick, Report Says
Law360, New York —
The special master in the Refco Inc. securities fraud multidistrict litigation said Sunday that Mayer Brown LLP and Grant Thornton LLP should remain on the hook for aiding and abetting claims because there were enough factual questions that could be considered by a jury at trial.
The firms are part of the sprawling litigation brought by Sphinx Ltd. funds, which allegedly lost $263 million when Refco collapsed in 2005, because of their suspected roles in Refco’s $1.5 billion fraud scheme that sent ex-CEO Phillip R. Bennett to prison for 16 years.
The funds contend that Mayer Brown attorneys assisted in the fraud by preparing and reviewing documents related to an alleged scheme to cover up customer losses by hiding receivables, and that Grant Thornton, as Refco’s auditor, knew about the precarious financial state but issued reports to the contrary.
The two firms have asked a New York federal court to summarily dismiss the claims against them on several grounds, including that the funds can’t establish they relied on Refco’s alleged misrepresentations when making financial decisions and that the funds can’t prove intent on Refco’s part to induce them to rely on the information.
But for each of those arguments, Special Master Daniel J. Capra stated in a report Sunday that the firms did not meet the criteria needed to have the claims dismissed by summary judgment.
“In order to prevail in this action, the plaintiffs must show SPhinX/PlusFunds actually relied on a misrepresentation by Refco,” the report said. “The plaintiffs have raised admissible evidence that does raise a question of fact.”
That evidence, in terms of the reliance argument, hinges, in part, on a Fitch report about Refco’s credit rating that the funds’ risk committee assessed.
The funds argued that if Refco’s receivables had been accounted properly, the report would have been very different. But Mayer Brown and Grant Thornton maintained in their motion to dismiss that the Fitch rating was not a statement from Refco and thus the funds could not have relied on it.
“But the defendants cite no law which provides that a fraud claim must be based on reliance on statements coming from the defendant’s mouth,” the report said. “Nor could that be the case; if it were, a defendant could escape liability for fraud by simply allowing — even paying — others to spread a lie.”
Capra also shot down the firms’ argument regarding intent — that Refco didn’t allegedly intend to defraud the funds, just the investors — saying it looks at the alleged fraud much too narrowly because the funds, as customers, are essential for the conduct to take place.
Grant Thornton spokeswoman Michele M. Mazur maintained Monday that the company’ auditing work was in compliance with industry standards.
“We look forward to demonstrating that our work complied with professional standards,” she said.
Representatives for the other parties did not immediately respond to requests for comment.
The suit arose from revelations that Refco’s ex-CEO had concealed $430 million in debt through complex trading and lending schemes and shell companies in an effort to bolster the company’s financial reports.
Refco sought Chapter 11 protection in October 2005, two months after a $583 million initial public offering and about a year after it was purchased for $1.9 billion in a leveraged buyout by Thomas H. Lee Partners LP.
Five days before Refco sought protection, more than $312 million was transferred from the Sphinx accounts at Refco to unprotected offshore accounts. The hedge fund group ultimately settled with Refco creditors, agreeing to turn over $263 million.
Meanwhile, federal investigators believe Refco had been covering up customer trading losses by transferring securities to appear as debts owed by Refco Group Holdings Inc., a holding company controlled by former directors. Directors later hid RGHI’s receivables from auditors by transferring funds to make the debt appear to be from an entity not related to RGHI, prosecutors alleged.
The plaintiffs are represented by Lee M. Andelin, Leo R. Beus and Dennis Blackhurst of Beus Gilbert PLLC and David M. Molton, Andrew Dash and Mason Simpson of Brown Rudnick LLP.
Mayer Brown is represented by Craig D. Singer, John K. Villa and George A. Borden of Williams & Connolly LLP.
Grant Thornton is represented by Linda T. Coberly, Bruce R. Braun and Catherine W. Joyce of Winston & Strawn LLP and Luke A. Connelly.
The case is Krys et al. v. Sugrue et al., case number 1:08-cv-03065, in the U.S. District Court for the Southern District of New York.
–Additional reporting by Emily Atkin and Martin Bricketto. Editing by Andrew Park.