Pacific Investment Management Co. LLC v. Mayer Brown Llp

603 F.3d 144 (2nd Cir. 2010)

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Nature of the Case

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Facts

Refco extended credit to its customers so that they could trade on 'margin' with money borrowed from Refco. In the late 1990s, Refco customers suffered massive trading losses and were unable to repay hundreds of millions of dollars of margin loans extended by Refco. Refco, allegedly with the help of Ds, arranged a series of sham transactions designed to conceal the losses. Ps allege that Refco transferred its uncollectible debts to Refco Group Holdings in exchange for a receivable purportedly owed from RGHI to Refco. Refco, allegedly with the help of Ds, engaged in a series of sham loan transactions at the end of each quarter and each fiscal year to pay off the RGHI receivable. They loaned money to third parties, who then loaned the same amount to RGHI, which in turn used the funds to pay off Refco's receivable. Days after the fiscal period closed, all of the loans were repaid, and the third parties were paid a fee for their participation in the scheme. Refco reported receivables owed to it by various third parties rather than the related entity RGHI. Ps, who purchased securities from Refco during the period that defendants were allegedly engaging in fraud, commenced this action after Refco declared bankruptcy in 2005. They asserted claims for violation of § 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, along with claims for 'control person' liability under § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). Ds allegedly participated in the creation of the false statements contained in various documents. The District Court dismissed Ps' claims against Ds. The Court found that no statements in those documents were attributed to Ds and that Ps had therefore alleged conduct akin to aiding and abetting, for which securities laws provide no private right of action. The court also dismissed Ps' Rule 10b-5(a) and (c) claims for 'scheme liability' concluding that the decision in Stoneridge foreclosed that theory of liability. This appeal resulted.