In re Refco Inc. Securities Litigation, ___ F.Supp.2d ___, 2009 WL 724378 (S.D.N.Y. 2009)

Brief Summary
Plaintiffs alleged a Securities Act § 10(b) violation against a law firm for allegedly helping draft an issuer’s misleading statements. The allegations were held insufficient because the investors, based solely on knowledge that the firm was issuer’s primary outside counsel, could not have reasonably understood the law firm to have made the statements.

Complete Summary
Shareholders of Refco, Inc. brought suit under § 10(b) of the Securities Exchange Act against Refco’s former law firm, Mayer Brown. The District Court, Southern District of New York, granted Mayer Brown’s motion to dismiss under Fed. R. Civ. P. 12(b)(6).

Plaintiffs sought to hold Mayer Brown liable as a primary violator of Rule 10b-5(b), or alternatively for scheme liability. For these purposes, it was undisputed that Refco’s IPO registration statement, among other documents, contained materially misleading statements. It was also undisputed that Mayer Brown played a part in drafting these statements.

Mayer Brown was not properly pled as a primary violator, the court held, because, despite the extent of the firm’s actual involvement in drafting the statements, plaintiffs could not have reasonably understood the misleading statements to be attributable to Mayer Brown. Plaintiffs merely alleged that Mayer Brown was listed as primary outside counsel on the relevant documents, and therefore investors expected the firm had been involved in the preparation and review of such documents. This allegation, the court held, was insufficient to establish that plaintiffs reasonably understood Mayer Brown, rather than Refco, to be making the statements, and was therefore insufficient to establish primary violator liability.

Regarding plaintiffs’ allegation of scheme liability under Rule 10b-5(a) and (c), the court held such liability foreclosed by Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008). Under Stoneridge a participant in a scheme to violate section 10(b) is not liable to a plaintiff unless the plaintiff in fact relied on the participant’s deceptive conduct. The Stoneridge court noted that reliance cannot be established when a participant’s conduct is too “remote” from a plaintiffs’ decision to invest. Id. at 769-70.

In the present case it was undisputed that plaintiffs had no knowledge of Mayer Brown’s conduct. Plaintiffs argued that the firm’s conduct was not “remote” because Mayer Brown was more directly involved in the alleged scheme than were the participants in the Stoneridge scheme. Rebuffing this argument, the court held, “[t]he issue is not the distance between the issuer and the defendant, but rather the distance between the defendant’s conduct and the investor.” Refco at *9.

Significance of Opinion
This opinion intercepts the Stoneridge holding in a way that insulates category of potential defendant from § 10(b) liability.

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