In the Courts

In Judge Jos' A Cabranes' opinion for the Second Circuit, the court held that, while the Refco investors relied on the false information, in private damages actions under the federal securities laws, secondary actors ' including attorneys ' are only liable for false statements attributable to that actor at the time of dissemination. As the statements at issue were all attributed to Refco, and the court additionally found that the plaintiff's claims that Mayer Brown and Collins participated in a scheme to defraud were foreclosed by extension of the Supreme Court's prior decision in Stoneridge, 552 U.S. 148 (2008), the Second Circuit affirmed the dismissal originally ordered by district court Judge Gerard E. Lynch in 2009.

The plaintiffs were buyers of Refco securities who had acquired the instruments prior to the brokerage firm's collapse in 2005. This occurred upon public discovery that Refco officials had concealed hundreds of millions of dollars in Refco debt via circular, third-party transactions, which enabled Refco to report receivables owed to it by a number of unrelated third parties rather than a Refco-affiliated holding company. In particular, the case before the Second Circuit revolved around 17 such transactions from 2000-2005. In addition to these claims, the plaintiffs alleged that Collins and Mayer Brown bore responsibility for false statements contained within three particular Refco documents.

The plaintiff's Second Circuit appeal required the court to address two issues regarding the scope of liability in private lawsuits via private right of action under Rule 10b-5. Particularly, the first question asked whether Mayer Brown, as Refco's outside counsel, was liable for false statements allegedly crafted by it, but attributed to Refco when disseminated.

In part, the plaintiffs encouraged the adoption of a “creator standard,” whereby a defendant could be held liable for creating a false statement that investors rely on, regardless of whom the statement is attributed to when it is disseminated. Notably, the plaintiffs' argument was supported by an amicus curiae brief submitted by the SEC. The court rejected the creator standard, in favor of secondary actor liability only in instances where the false statements are directly attributed to the secondary actor.

The second question addressed whether the plaintiffs' claims that Mayer Brown and Collins participated in a scheme to defraud investors were foreclosed by the Supreme Court's prior decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008).

In Stoneridge, a case involving deceptive conduct as opposed to the false statements before the Second Circuit, the Supreme Court had rejected Rule 10b-5 claims when the plaintiffs had relied on an issuing firm's statements, and therefore could not show actual reliance on the defendants' deceptive conduct. The Second Circuit applied the Stoneridge reasoning, holding that “[i]f a plaintiff must rely on a secondary actor's own deceptive conduct to state a claim under rule 10b-5(a) and (c), it stands to reason that a plaintiff must rely on a secondary actor's own deceptive statements ' and not on statements conveyed to the public through another source and not attributed to the defendant ' to state a claim under Rule 10b-5(b).”

Further, the court added that an attribution requirement was consistent with the court's prior rejection of a “substantial participation” test ' in favor of a bright line rule ' to distinguish aiding and abetting claims under Rule 10b-5 from primary violations of the rule. As the court noted that Refco had filed the false statements, not Mayer Brown or Collins, and “nothing about Mayer Brown's or Collins' actions made it necessary or inevitable that Refco would mislead investors,” the Second Circuit affirmed the district court's decision.

In the Courts and Business Crimes Hotline were written by Matthew
Alexander, an associate at Kirkland & Ellis LLP, Washington, DC.

Second Circuit Finds Law Firm Mayer Brown and Former Partner Not Liable For Investors' Losses

On April 27, 2010, in Pacific Investment Management Co. v. Mayer Brown, No. 09-1619-cv, the Second Circuit found law firm Mayer Brown, LLC and its former partner Joseph P. Collins not liable in connection with their representation of Refco Inc., related to securities fraud at the now-bankrupt brokerage firm. The plaintiffs, Pacific Management Company, LLC and RH Capital Associates, LLC, had alleged that Mayer Brown and Collins tried to hide Refco's uncollectable debt from investors by assisting with a scheme involving fraudulent transactions between the brokerage firm and third parties. Additionally, Mayer Brown and Collins were alleged to have, in part, drafted documents containing false information as a part of Refco security offerings. According to the court, Mayer Brown served as Refco's primary counsel from 1994 until 2005, with Collins as the firm's primary contact and billing partner.

In a separate decision in 2009 in the Southern District of New York that is currently under appeal, Collins was previously convicted of wire fraud, securities fraud, and conspiracy for his alleged actions.

In Judge Jos' A Cabranes' opinion for the Second Circuit, the court held that, while the Refco investors relied on the false information, in private damages actions under the federal securities laws, secondary actors ' including attorneys ' are only liable for false statements attributable to that actor at the time of dissemination. As the statements at issue were all attributed to Refco, and the court additionally found that the plaintiff's claims that Mayer Brown and Collins participated in a scheme to defraud were foreclosed by extension of the Supreme Court's prior decision in Stoneridge, 552 U.S. 148 (2008), the Second Circuit affirmed the dismissal originally ordered by district court Judge Gerard E. Lynch in 2009.

The plaintiffs were buyers of Refco securities who had acquired the instruments prior to the brokerage firm's collapse in 2005. This occurred upon public discovery that Refco officials had concealed hundreds of millions of dollars in Refco debt via circular, third-party transactions, which enabled Refco to report receivables owed to it by a number of unrelated third parties rather than a Refco-affiliated holding company. In particular, the case before the Second Circuit revolved around 17 such transactions from 2000-2005. In addition to these claims, the plaintiffs alleged that Collins and Mayer Brown bore responsibility for false statements contained within three particular Refco documents.

The plaintiff's Second Circuit appeal required the court to address two issues regarding the scope of liability in private lawsuits via private right of action under Rule 10b-5. Particularly, the first question asked whether Mayer Brown, as Refco's outside counsel, was liable for false statements allegedly crafted by it, but attributed to Refco when disseminated.

In part, the plaintiffs encouraged the adoption of a “creator standard,” whereby a defendant could be held liable for creating a false statement that investors rely on, regardless of whom the statement is attributed to when it is disseminated. Notably, the plaintiffs' argument was supported by an amicus curiae brief submitted by the SEC. The court rejected the creator standard, in favor of secondary actor liability only in instances where the false statements are directly attributed to the secondary actor.

The second question addressed whether the plaintiffs' claims that Mayer Brown and Collins participated in a scheme to defraud investors were foreclosed by the Supreme Court's prior decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. , 552 U.S. 148 (2008).

In Stoneridge, a case involving deceptive conduct as opposed to the false statements before the Second Circuit, the Supreme Court had rejected Rule 10b-5 claims when the plaintiffs had relied on an issuing firm's statements, and therefore could not show actual reliance on the defendants' deceptive conduct. The Second Circuit applied the Stoneridge reasoning, holding that “[i]f a plaintiff must rely on a secondary actor's own deceptive conduct to state a claim under rule 10b-5(a) and (c), it stands to reason that a plaintiff must rely on a secondary actor's own deceptive statements ' and not on statements conveyed to the public through another source and not attributed to the defendant ' to state a claim under Rule 10b-5(b).”

Further, the court added that an attribution requirement was consistent with the court's prior rejection of a “substantial participation” test ' in favor of a bright line rule ' to distinguish aiding and abetting claims under Rule 10b-5 from primary violations of the rule. As the court noted that Refco had filed the false statements, not Mayer Brown or Collins, and “nothing about Mayer Brown's or Collins' actions made it necessary or inevitable that Refco would mislead investors,” the Second Circuit affirmed the district court's decision.

In the Courts and Business Crimes Hotline were written by Matthew
Alexander, an associate at Kirkland & Ellis LLP, Washington, DC.