In re Refco Sec. Litig..Marc S. Kirschner

• Decision Date: 13 December 2010
• Docket Number: Nos. 07 MDL 1902(JSR), 07 Civ. 8165(JSR).,s. 07 MDL 1902(JSR), 07 Civ. 8165(JSR).
• Citation: 759 F.Supp.2d 301
• Parties: In re REFCO SECURITIES LITIGATION.Marc S. Kirschner, as Trustee of the Refco Private Actions Trust, Plaintiff,v.Philip R. Bennett, Santo C. Maggio, Robert C. Trosten, Mayor Brown, LLP, Mayor Brown International, LLP, and Grant Thornton, LLP, Defendants.
• Court: U.S. District Court — Southern District of New York

759 F.Supp.2d 301

In re REFCO SECURITIES LITIGATION.Marc S. Kirschner, as Trustee of the Refco Private Actions Trust, Plaintiff,

v.Philip R. Bennett, Santo C. Maggio, Robert C. Trosten, Mayor Brown, LLP, Mayor Brown International, LLP, and Grant Thornton, LLP, Defendants.

Nos. 07 MDL 1902(JSR), 07 Civ. 8165(JSR).

United States District Court, S.D. New York.

Dec. 13, 2010.

Michael Barry Carlinsky, Nicholas John Calamari, Rebecca J. Trent, Rex Lee, Richard Irving Werder, Jr., Robert Craig Juman, Sarah Leslie Rubin, Sascha Nicholas Rand, Stephen Andrew Broome, Quinn Emanuel Urquhart & Sullivan, LLP, New York, NY, for Plaintiff.Effrey T. Golenbock, Golenbock Eiseman Assor Bell & Peskoe LLP, Barbara Moses, Judith Leonore Mogul, Gates Salyers Hurand, Rachel Marissa Korenblat, Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C., Beth Ann Tagliamonti, Bradley E. Lerman, David Emilio Mollon, Ruth Anne Braun, Winston & Strawn LLP, New York, NY, John S. Williams, Thomas George Ward, Williams & Connolly LLP, Washington, DC, Catherine W. Joyce, Linda T. Coberly, Winston & Strawn LLP, Chicago, IL, for Defendant.

ORDER

JED S. RAKOFF, District Judge.

On June 3, 2010, Special Master Daniel J. Capra issued a Report and Recommendation in the above-captioned case recommending that the Court adopt the following conclusions:

(1) The Trustee has adequately pled a claim for fraudulent inducement as to those FX Customer deposits made after the 2004 leveraged buyout (“LBO”).

(2) The Trustee has not adequately pled a claim for fraudulent inducement as to those FX Customer deposits made before the 2004 LBO.

(3) The Trustee has not adequately pled a claim for breach of fiduciary duty.

(4) The Trustee has not adequately pled a claim for conversion.

(5) The Motion to Dismiss the Fifth, Sixth and Seventh Claims for Relief against Mayor Brown should be granted. Those dismissals should be with prejudice because the Trustee cannot allege facts that would create a plausible claim that Mayer Brown substantially assisted the customer scheme.

(6) The Motion to Dismiss the Fifth Claim for Relief against Grant Thornton should be denied with respect to those FX Customer deposits with RCM made after the 2004 LBO.

(7) The Motion to Dismiss the Fifth Claim for Relief against Grant Thornton should be granted with respect to those FX Customer deposits with RCM made before the 2004 LBO. The dismissal should be with prejudice because the Trustee cannot show that the primary wrong caused any injury.

(8) The Motions to dismiss the Sixth and Seventh Claims for Relief against Grant Thornton should be granted. The dismissals should be with prejudice because the Trustee cannot allege facts that would create a plausible claim of a primary wrong.

See 06/03/2010 R & R at 41–42.

After plaintiff timely submitted objections to the Special Master's recommendations and defendants responded thereto, the Court heard oral argument on July 28, 2010. Having now reviewed the matter de novo, the Court finds itself fully persuaded by the Special Master's thorough and well-reasoned Report and Recommendation and hereby adopts it in full as if incorporated herein.

In particular, the Court finds no reason to disturb the conclusions of the Honorable Judge Gerard E. Lynch as set forth in Kirschner v. Bennett, 648 F.Supp.2d 525 (S.D.N.Y.2009). The law of the case doctrine “posits that when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case.” Liona Corp. v. PCH Assocs. ( In Re PCH Assocs.), 949 F.2d 585, 592 (2d Cir.1991) (quoting Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 815–16, 108 S.Ct. 2166, 100 L.Ed.2d 811 (1988)). This “doctrine is admittedly discretionary and does not limit a court's power to reconsider its own decisions prior to final judgment.” Virgin Atl. Airways, Ltd. v. Nat'l Mediation Bd., 956 F.2d 1245, 1255 (2d Cir.1992), cert. denied, 506 U.S. 820, 113 S.Ct. 67, 121 L.Ed.2d 34 (1992). Still, as noted by the Second Circuit, “the major grounds justifying reconsideration are ‘an intervening change of controlling law, the availability of new evidence, or the need to correct a clear error or prevent manifest injustice.’ ” Id. (quoting 18 Charles A. Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice & Procedure § 4478 at 790 (1981)). No such circumstances are present in this case, however.

Accordingly, the Court affirms and adopts in all respects the conclusions set forth in the Report and Recommendation of June 3, 2010.

SO ORDERED.

REPORT AND RECOMMENDATION OF THE SPECIAL MASTER

DANIEL J. CAPRA, Special Master.

This is a report and recommendation to Hon. Jed S. Rakoff concerning motions brought by the defendants Grant Thornton, LLP, Mayer Brown LLP and Mayer Brown International LLP (collectively, the “Professional Defendants”) to dismiss the complaint filed against each by Marc S. Kirschner as Trustee of the Refco Private Actions Trust (“Trustee” or “Private Actions Trustee”).¹ The Trustee originally filed this action in New York State Supreme Court on behalf of Refco's foreign-exchange customers (the “FX Customers”), asserting claims under New York law against certain Refco insiders, professionals, and advisors for, inter alia, breach of fiduciary duty, fraud, and conversion. See Kirschner v. Bennett, 2008 WL 1990669 (S.D.N.Y. May 7, 2008) (denying Trustee's motion to remand or abstain on the ground that the case is “related” to Refco's Chapter 11 bankruptcy). The Trustee alleges that the FX customers collectively suffered losses totaling more than half a billion dollars when insiders at Refco ² diverted assets from their accounts at Refco Capital Markets (“RCM”) in order to bankroll the Refco fraud. On August 25, 2009, Judge Lynch granted the Professional Defendants' motions to dismiss the original complaint, granting the Trustee leave to replead. Kirschner v. Bennett, 648 F.Supp.2d 525, 528 (S.D.N.Y.2009) (cited herein as “Op.”). ³ This report and recommendation addresses the motions by the Professional Defendants to dismiss the Amended Complaint.

I. IntroductionA. Facts

The original complaint, all claims of which were dismissed by Judge Lynch in his August, 2009 opinion, centers around what has been called “the Refco fraud.” See e.g., Op. at 529. The facts surrounding the fall of Refco have been recounted in a number of opinions by Judge Lynch, see, e.g., id. at 528–531; Kirschner v. Grant Thornton, 2009 WL 1286326 (S.D.N.Y.), as well as in Reports and Recommendations of the Special Master in Krys v. Sugrue. Familiarity with the basics will be assumed, but a short discussion of the Trustee's allegations most pertinent to the FX Customer claims is appropriate. ⁴

Refco's controlling officers (collectively, the “Insiders”), with the assistance of the Professional Defendants, orchestrated “a complex fraudulent scheme to artificially enhance Refco's performance and conceal Refco's true financial condition.” Op. at 530. Refco carried a large uncollectible debt from a related company, Refco Group Holdings, Inc. (“RGHI”), and hid this debt through a series of so-called “round trip loans” taking place just before and after reporting periods. Id. at 529–30. Judge Lynch refers to the round-trip loans—as well as other efforts to hide the RGHI debt—as part of the “receivables scheme.” (Op. at 545).

The goal of the receivables scheme was to allow Refco to continue operations until the Insiders could cash out. (Amended Complaint ¶¶ 1–3). By concealing Refco's true financial condition, the Refco insiders were able to effectuate a leveraged buyout (“LBO”) in August 2004 and an initial public offering (“IPO”) in August 2005. Id. (These acts are also part of the receivables scheme according to Judge Lynch.) Together, these events allowed the Refco Insiders to cash out their holdings in Refco at a time when, unbeknownst to the public, Refco affiliates owed RCM approximately two billion dollars. Id. Additionally, the LBO caused Refco to acquire $1.4 billion of bank and bond debt which became senior to the debt that Refco-controlled entities owed to RCM, despite representations in the Offering Circular that it was “effectively junior to all existing and future liabilities.” Id. The debt acquired in the LBO “altogether foreclosed repayment of RCM's customer assets, including those belonging to the FX customers.” (Amended Complaint ¶ 7).

The cashing-out depended on maintaining business operations, and that meant obtaining funds to operate Refco and its affiliates. (Amended Complaint 12). Refco obtained those funds in large part by misappropriating RCM customer assets, including funds entrusted to RCM by the FX customers. Id. All but a de minimis portion of the customer assets were diverted from RCM to Refco Capital LLC (“RCC”) under the guise of loans to “customers” that were in fact intercompany, related parties that could not repay what was taken. Id. Judge Lynch refers to the siphoning of customer funds as the “customer scheme.” (Op. at 545).

B. The Margin Annex

The Margin Annex is a subsection of the customer agreement that FX Customers entered into with RCM. It governed RCM's use of and access to customer margin. ⁵ Specifically, the Margin Annex permitted RCM to “loan, pledge, hypothecate or otherwise use or dispose of such cash, securities, and other property free from any claim or right, until settlement in full of all Transactions entered into pursuant to the [FX] agreement.” Op. at 535 (citing Rand Dec. Ex. 1 at 24). The Margin Annex further provided that, pursuant to such use, “[RCM]'s sole obligation shall be to return to [FX Customers] such cash, like amounts of similar cash, securities and other property (or the cash value thereof in the event of any liquidation of collateral) to the extent they are not deemed to be collateral to secure Transactions entered into pursuant to this Agreement with any Refco Entities or have not been applied against...