Cayman Law Will Apply To Suit Over Offshore Refco Funds
Law360, New York (May 21, 2015, 8:30 PM ET) — A New Jersey federal judge ruled Wednesday that Cayman Islands law applies to a lawsuit accusing a former Sphinx hedge fund director of improperly depositing $312 million into offshore Refco Inc. accounts days before the brokerage firm’s high-profile bankruptcy, ruling that the case was contractually bound to the islands.
U.S. District Judge Jerome B. Simandle rejected the recommendation of a special master who said New York law should be applied to the case against fund director Robert Aaron, who is accused of rendering the money inaccessible when he transferred it to unprotected accounts held by Refco’s Cayman affiliate just days before the brokerage firm filed Chapter 11 in 2005 amid an accounting scandal.
The judge found that the special master had failed to consider a fund management agreement that called for the application of Cayman law and rejected arguments from the fund liquidators that the law of the case doctrine governed their claim for breach of fiduciary duty, which is pending in multidistrict securities litigation against Sphinx, its business partner PlusFunds Group and Refco in New York.
Judge Simandle noted that in moving for the case to be heard under New York or New Jersey law, fund liquidators Kenneth M. Krys, Margot MacInnis and Sphinx trustee Harbour Trust Co. Ltd. did not dispute that Sphinx Managed Futures Fund money was transferred to Refco Capital Markets, the firm’s Cayman affiliate, and that the agreement with Aaron dictated application of Cayman law.
“Therefore, because the disputed claim concerns alleged acts of a former director in his capacity as a director of a Cayman corporation, the internal affairs doctrine presumptively requires the application of Cayman law,” Judge Simandle said.
The 2008 state suit by the plaintiffs, who also subsequently went bankrupt, was removed to federal court in New Jersey, where Aaron reportedly lives, and then conditionally transferred to New York to be folded into multidistrict litigation stemming from Refco’s insolvency proceedings.
Past court decisions have held PlusFunds’ CEO Christ Sugrue was partially accountable for the $312 million transfer. In June 2014, U.S. District Judge Jed Rakoff adopted the recommendation of the MDL special master to enter a $669 million judgment against Sugue and four Refco entities for their roles in the scheme that brought down the massive commodity brokerage.
B. John Pendleton Jr., an attorney for the defendants, declined to comment Thursday, citing the ongoing litigation.
Representatives for the plaintiffs didn’t respond to requests for comment.
The plaintiffs are represented by David J. Molton, Andrew S. Dash and Mason C. Simpson of Brown Rudnick, and Leo R. Beus, L. Richard Williams, Malcolm Loeb, Thomas A. Gilson and Lee M. Andelin of Beus Gilbert PLLC.
The defendants are represented by B. John Pendleton Jr., Andrew O. Bunn, Kristin A. Pacio and Gina Trimarco of DLA Piper LLP.
The case is Krys v. Aaron, case number 1:14-cv-02098, in U.S. District Court for the District of New Jersey.