In Re Refco, Inc. Securities Litigatio

609 F.Supp.2d 304 (2009)

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Nature of the Case

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Facts

Refco's business model involved extending credit to its customers so that they could trade on margin and leverage their capital into larger trades, for which Refco could again extend credit. Refco began making loans without adequately assessing customers' credit-worthiness or the risks of their trading activities. A number of customers suffered massive trading losses. The loans now became 'uncollectible receivables' that Refco's customers were unwilling or unable to repay. It is alleged that Refco's management devised a scheme to conceal them from the public and Refco's investors. They transferred the loans onto the books of Refco Group Holdings, Inc. (Holdings). Holdings owed hundreds of millions of dollars to Refco. Holdings had no assets. Holdings receivables were periodically made to disappear from Refco's books through so-called 'round-trip loans' in which the receivables owed to Refco from Holdings were replaced with receivables purportedly owed by a third-party customer. Refco Capital Markets Ltd. would loan hundreds of millions of dollars to a third-party customer who then, through its account at Refco, simultaneously loaned the same amount to Holdings. Refco's books would show 'loans' to third-party customers, and the Holdings receivables would be gone. Just days after the financial period closed, the transactions were unwound - the 'loans' repaid, and the uncollectible receivables from Holding were returned to Refco's books. Refco concealed its multi-hundred million dollar losses from the public and its investors. D1 explained the structure and terms of the transactions to potential third-party participants, negotiate the loans, draft and revise the documentation for the transactions including the relevant loan agreements, promissory notes, guarantees and indemnification letters, transmit documents to the participants, distribute executed copies of the documents, and mark the third-party customers' promissory notes to Refco Capital Markets Ltd as 'paid in full' when the transaction was unwound. Meanwhile the insiders in Refco issued $ 600 million in bonds to public investors in connection with a leveraged buy-out. D1participated in drafting the documents that were filed with the SEC in order to induce investors to purchase Refco's Bonds and, later, to effectuate an IPO. D1 drafted in part and disseminated the Offering Memorandum to investors. D1 played a significant role in drafting and reviewing the IPO Registration Statement, which was prepared at the same time as the Bond Registration Statement. Both the IPO and Bond Registration Statements were materially false and misleading. Plaintiffs allege that D1 knew, or were reckless in not discovering, that Refco's statements made in the Offering Memorandum, the Bond Registration Statement, and the IPO Registration Statement were false or materially misleading.

D1 moved to dismiss under 12(b)(6).