Kirschner v. Kpmg Llp

• Decision Date: 23 December 2009
• Docket Number: Docket No. 09-2027-cv (CON).,Docket No. 09-2020-cv (L).
• Citation: 590 F.3d 186
• Parties: Marc S. KIRSCHNER, as Trustee of the Refco Litigation Trust, Plaintiff-Appellant, v. KPMG LLP, Grant Thornton LLP, Mayer Brown LLP, Ingram Micro, Inc., Cim Ventures, Inc., William T. Pigott, Mayer Brown International LLP, PricewaterhouseCoopers LLP, Liberty Corner Capital Strategies, LLC, Banc of America Securities, LLC, Credit Suisse Securities (USA) LLC, and Deutsche Bank Securities, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

590 F.3d 186

Marc S. KIRSCHNER, as Trustee of the Refco Litigation Trust, Plaintiff-Appellant, v. KPMG LLP, Grant Thornton LLP, Mayer Brown LLP, Ingram Micro, Inc., Cim Ventures, Inc., William T. Pigott, Mayer Brown International LLP, PricewaterhouseCoopers LLP, Liberty Corner Capital Strategies, LLC, Banc of America Securities, LLC, Credit Suisse Securities (USA) LLC, and Deutsche Bank Securities, Inc., Defendants-Appellees.

Docket No. 09-2020-cv (L).

Docket No. 09-2027-cv (CON).

United States Court of Appeals, Second Circuit.

Heard: September 18, 2009.

Decided: December 23, 2009.

Corrected: December 28, 2009.

Kathleen M. Sullivan, Quinn Emanuel Urquhart Oliver & Hedges, LLP, New York, N.Y. (Richard I. Werder, Jr., Sascha N. Rand, Sanford I. Weisburst, K. McKenzie Anderson, Quinn Emanuel Urquhart Oliver & Hedges, LLP, New York, N.Y., on the brief), for Plaintiff-Appellant.

Linda T. Coberly, Winston & Strawn LLP, Chicago, IL, for Defendant-Appellee Grant Thorton LLP.

Kevin A. Burke, Howrey, LLP, New York, N.Y. (Gary F. Bendinger, Sarah D. Abeles, Howrey LLP, New York, N.Y., on the brief), for Defendant-Appellee KPMG LLP.

Philip D. Anker, Lori A. Martin, John V.H. Pierce, Anne K. Small, Jeremy S. Winer, Wilmer Cutler Pickering Hale and Dorr LLP, New York, N.Y., on the brief, for Defendants-Appellees Banc of America Securities, Credit Suisse Securities and Deutsche Bank Securities.

Anthony Candido, Clifford Chance LLP, New York, N.Y., on the brief, for Defendant-Appellee Mayer Brown International.

James J. Capra, Jr., Orrick, Herrington & Sutcliffe LLP, New York, N.Y., Kenneth Y. Turnbull, Orrick, Herrington & Sutcliffe LLP, Washington, DC, on the brief, for Defendant-Appellee Pricewaterhouse-Coopers.

Robert F. Wise, Jr., Paul Spagnoletti, Davis Polk & Wardell LLP, New York, N.Y., on the brief, for Defendants-Appellees Ingram Micro, Inc. and CIM Ventures, Inc.

Kevin H. Marino, John D. Tortorella, Marino, Tortorella & Boyle, P.C., Chatham, N.J., on the brief, for Defendants-Appellees William T. Pigott and Liberty Corner Capital Strategies.

John K. Villa, George A. Borden, Craig D. Singer, Williams & Connolly LLP, Washington, DC, on the brief, for Defendant-Appellee Mayer Brown LLP.

Before: NEWMAN, PARKER, and LIVINGSTON, Circuit Judges.

JON O. NEWMAN, Circuit Judge.

This appeal concerns the standing of the trustee of a bankrupt corporation's litigation trust to sue third parties who allegedly assisted corporate insiders in defrauding the corporation's creditors. The appeal primarily raises the issue of whether, under New York law, the acts of the corporate insiders can be imputed to the corporation, in which event, pursuant to the so-called Wagoner rule, the trustee for a debtor corporation lacks standing to recover against third parties for damage to the creditors, see Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir.1991), or whether the "adverse interest" exception precludes imputation. Plaintiff-Appellant Marc Kirschner ("the Trustee"), in his capacity as the Trustee of the Refco Litigation Trust, appeals from the May 8, 2009, judgment of the District Court for the Southern District of New York (Gerard E. Lynch, then District Judge), dismissing the Trustee's suit for lack of standing under the Wagoner rule. See Kirschner v. Grant Thornton LLP, 07 Civ. 11604, 2009 WL 1286326 (S.D.N.Y. Apr.14, 2009). The Trustee brought the suit on behalf of Refco Group Ltd., LLC ("RGL"), its indirect subsidiary, Refco Capital Markets, Ltd. ("RCM"), and Refco Inc., the entity created by Refco's initial public offering (collectively "Refco") against senior management of Refco, law firms, and accounting firms that allegedly participated in defrauding Refco's creditors.

The Trustee principally argues that the District Court erred in imputing the insiders' wrongdoing to Refco because the Trustee contends, the Refco insiders, in perpetrating the fraud, totally abandoned Refco's interests, and therefore the adverse interest exception to imputation applies. We conclude that the issues concerning imputation and the adverse interest exception raise questions of New York law as to which considerable uncertainty exists. We therefore certify to the New York Court of Appeals questions the answers to which will govern our ultimate disposition of this appeal.

Background

Making clear why we believe certification of state law questions is needed requires a detailed account of the Trustee's factual allegations and a full understanding of the District Court's opinion.

The background facts are taken from the Trustee's complaint, the allegations of which are assumed to be true for purposes of adjudicating the Defendants' motion to dismiss. These facts are well summarized in the District Court's opinion:

I. The Refco Fraud

Prior to its collapse in the fall of 2005, Refco was among the world's largest providers of brokerage and clearing services in the international derivatives, currency, and futures markets. (Compl. ¶ 56) Beginning in the late 1990s, Refco's controlling officer-shareholders— Phillip R. Bennett, Tone N. Grant, Robert C. Trosten, and Santo C. Maggio (collectively, the "insiders")—with the aid of certain professionals and financial advisors, orchestrated a complex fraudulent scheme to artificially enhance Refco's performance and conceal Refco's true financial condition, so that these insiders, through the company's August 2004 leveraged buy-out ("LBO") and its August 2005 IPO, could cash out their interests in Refco on lucrative terms. (Compl. ¶¶ 4-7, 32, 59-149) That scheme, which has been thoroughly discussed in [the District] Court's prior opinions, involved both concealment of Refco's uncollectible debt and the misappropriation of customer assets.

The concealment of Refco's uncollectible debt involved a two-part process. First, hundreds of millions of dollars in uncollectible trading losses and other operating expenses were transferred and converted into legitimate receivables owed to Refco by RGHI, a related-party holding company, or "alter-ego[,]" owned by Bennett and Grant. (Compl. ¶¶ 35, 39, 60, 65, 68) These transfers offloaded debt from Refco, specifically RGL—the holding company through which Refco's business was primarily conducted prior to the IPO and which was controlled by RGHI—and artificially inflated RGL's earnings capability. (Compl. ¶ 68) Refco's apparent financial outlook was further improved by the fact that Refco then charged RGHI as much as 35 percent interest on the sham receivables, which between 2001 and 2004 amounted to at least $250 million. (Compl. ¶ 71) Although that accrued interest was recorded as income at Refco, it was never, in fact, collected. (Id.)

Next, the insiders disappeared the receivables parked at RGHI through a series of so-called round-trip loans. This additional maneuver was necessary because the disclosure of large "related-party" receivables—the sum of which dwarfed Refco's net income—would have raised red flags among investors and regulators. (Compl. ¶¶ 75-78) These "loans," which straddled the end of each fiscal year starting in 1998 and, after the LBO, at the end of several fiscal quarters as well, all worked in essentially the same way. (Compl. ¶¶ 77-79) Several days before Refco closed its books for each financial period, RCM—an unregulated, indirect subsidiary wholly owned by RGL and thus by Bennett and Grant (Compl. ¶¶ 32, 57)—would loan hundreds of millions of dollars to a third-party customer who then, through the customer's account at Refco, simultaneously loaned the same amount to RGHI. (Compl. ¶ 78) The loan agreements between the third party and RCM—which were done on a book basis (the principal never changed hands)—were meticulously structured so that they were essentially risk-free to the third-party customers: the customers' loans to RGHI were guaranteed by Refco, and the customers profited for their participation in the "loans" through interest earned on their loans to RGHI, which by design exceeded the interest they were charged by RCM. (Compl. ¶ 79-81) RGHI, in turn, used the loans from the customers to pay down the money it owed to Refco for its uncollectible receivables. (Compl. ¶ 78) The net effect of these transactions was that at the close of each reporting period, Refco's books would show apparently legitimate loans to third-party customers, and the RGHI receivables would be gone. (Id.) Then, just days after the financial period closed, the transactions were unwound—the "loans" were repaid, and the uncollectible receivables from RGHI were returned to Refco's books. (Compl. ¶ 79) Through these transactions, Refco lent money to itself, through third parties, to conceal its trading losses, its true operating expenses, and the fictitious nature of hundreds of millions of dollars in revenue. (Compl. ¶ 83)

In addition to concealing Refco's debt, the insiders routinely misappropriated customer assets held at RCM in order to obtain cash infusions to prop up other Refco entities. (Compl. ¶¶ 57, 94-95) This cash was distributed to Refco affiliates through a series of intercompany transfers that contained no safeguards and for which no appropriate documents were kept. (Compl. ¶¶ 7, 94-105) Although the receiving entities had no ability to repay these "loans," Refco's overall financial health depended on the steady influx of these illicit RCM assets (Compl. ¶¶ 95, 98), and, accordingly, the insiders kept careful track of these transactions and distributed among themselves daily "cash flow" statements that calculated the amount of customer assets available for diversion to other Refco entities. (Compl. ¶¶ 99-100) The size of these uncollateralized intercompany transfers—like the size of Refco's concealed debt—was substantial; they involved hundreds of millions of dollars and dwarfed Refco's total capital. (Compl. ¶¶ 101, 104, 329) At the time of the LBO, Refco affiliates owed RCM approximately two billion dollars. (Compl. ¶ 102)

II....