Thomas H. Lee Equity Fund V, L.P. v. Mayer Brown, Rowe & Maw Llp

612 F.Supp.2d 267 (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. P negotiated with Refco to purchase equity in Refco. D concealed the round-trip loans from P. D did respond to P's information and due diligence requests and provided a number of documents. D handled the drafting and negotiating of the transactional documents, provided information directly to P and their advisors, and coordinated access to documents and information being provided by Refco and its affiliates. During this time frame, D also handled round-trip loans for Refco. P invested more than $450 million in Refco and acquired the majority of Refco's stock through a leveraged buy-out. Refco collapsed shortly thereafter, and P lost $245 million. P sued D claiming numerous misrepresentations in connection with the LBO. P eventually asserted claims under Section 10(b), section 78j(b), RICO, and state law claims for fraud and negligent misrepresentation. D moved to dismiss under 12(b)(6).