2nd Circ. Revives Bid To Reopen PlusFunds Bankruptcy

Law360, New York (January 21, 2015, 10:22 PM ET) — The Second Circuit on Wednesday gave the trustee of a former Refco client another opportunity to reopen the bankruptcy of hedge fund manager PlusFunds Inc., which entered Chapter 11 soon after Refco collapsed in 2005 amid an accounting scandal, saying the bankruptcy court must give more information about its reasons for denying a motion.

The panel said a bankruptcy court had not given enough information about its reasons for denying, on concerns over prejudice, a request to reopen the bankruptcy made by Harbour Trust Co. Ltd., the trustee of former PlusFunds business partner Sphinx.

U.S. District Judge Paul Crotty had affirmed in February a bankruptcy court’s May 2013 decision not to grant the motion. Judge Crotty’s decision is the one the Second Circuit overturned Wednesday.

PlusFunds was an investment client of Sphinx, which kept accounts at Refco. Five days before Refco Inc. filed for Chapter 11 in October 2005, more than $312 million was transferred from the Sphinx accounts at RCM to its affiliate Refco LLC. Investors claim that this transfer was directed by PlusFunds CEO Chris Sugrue.

Sphinx and PlusFunds both eventually went bankrupt.

The trustee that oversees the Sphinx business, Harbour Trust, is seeking to reopen the PlusFunds bankruptcy, which would extend the ​term of its charter as a liquidating trust.
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But Derivatives Portfolio Management Ltd., the defendant-cross-appellant in the Second Circuit case, doesn’t want that liquidating trust extended​ because DPM says it may allow Harbour to bring claims that should be over and done with. DPM says some of the claims in question are being dealt with in New Jersey litigation against Refco.​

“The expiration of the trust and the express limitations on the trustee’s powers after that expiration lead to one inescapable conclusion — the trustee now lacks standing to continue prosecuting the causes of action against the DPM defendants,” DPM said.

With the new decision, the Second Circuit has given Sphinx’s trustee another chance to get that trust extended.

“Upon review of the record and relevant law, we are unable to ascertain whether the bankruptcy court fully considered whether any of the parties would suffer prejudice if it granted the trustee’s motion to reopen … We therefore remand to the bankruptcy court to explain what prejudice, if any, would result from reopening the case,” the panel said.

Past court decisions have held PlusFunds’ Sugrue partially accountable for the $312 million transfer.

In May, the special master in the Refco Inc. securities fraud multidistrict litigation recommended that a New York federal judge enter a $669 million judgment against five defendants, for their roles in the scheme that brought down the massive commodity brokerage.

U.S. District Judge Jed Rakoff adopted that recommendation in June.

Under special master Ronald Hedges’ proposal, Sugrue, ex-Refco Group Ltd. President Tone Grant, former Refco CEO Phillip R. Bennett, former Refco Vice President Thomas Hackl and Refco Group Holdings Inc. must pay $669,370,991, plus $78,430 in interest for each day after April 29 until the judgments were entered.

While the defendants had already been judged years earlier to be liable by default, Hedges’ report focused on the damages the group owed stemming from the massive losses Sphinx and PlusFunds investors incurred.

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.

A lawyer for Harbour Trust declined to comment. A lawyer for DPM ​declined to comment.

Harbour Trust is represented by David Molton, Andrew Dash and Daniel Saval of Brown Rudnick LLP and by Leo R. Beus of Beus Gilbert PLLC.

Appellees and cross-appellants Robert Aaron, Derivatives Portfolio Management Ltd., Derivatives Portfolio Management LLC, and DPM Mellon Ltd. were represented by Gregg Galardi, Daniel Egan, and Andrew Bunn of DLA Piper LLP.

The case is In re: PlusFunds Group Inc., case numbers 14-817 and 14-940, in the U.S. Court of Appeals for the Second Circuit.

–Additional reporting by Ed Beeson and Erin Coe. Editing by Jeremy Barker.

http://www.law360.com/articles/613565/2nd-circ-revives-bid-to-reopen-plusfunds-bankruptcy