In re Refco, Inc. Securities Litigation

Facts

: Refco, Inc. was one of the world’s largest providers of brokerage and clearing services in the international derivatives, currency, and futures markets. Refco’s business model involved extending credit to its customers so they could make larger trades. Over time, Refco began making loans without sufficiently gauging the credit-worthiness of customers. In the late 1990’s, due to several global financial crises, customers suffered huge trading losses and were not able to repay the loans. Instead of revealing these multi-hundred million dollar losses, Refco hid the losses by essentially making loans to itself through third parties, which would remove the losses from Refco’s books at the end of each fiscal period until they were returned just days after the financial period closed. These were referred to as “round-trip loans.” Mayer Brown, Rowe & Maw LLP (Mayer Brown) (Defendant) was Refco’s outside counsel from 1994 to Refco’s collapse in 2005. Mayer Brown (Defendant) was familiar with Refco’s operations and finances and participated in 17 rounds of the round-trip loan transactions from 2000 to 2005. Specifically, Defendant explained the structure and terms of the round-trip loans to potential third-party participants, negotiated the loans, and drafted and revised the documentation for the transactions. Defendant later hid those losses in documents drafted for the Securities and Exchange Commission and for Refco’s initial public offering, during which Refco sold approximately one-fifth of its shares to investors. In 2003, Thomas H. Lee Equity Fund V, L.P. (THL) (Plaintiff) became interested in purchasing an interest in Refco. Defendant was responsible for responding to Plaintiff’s due diligence requests in connection with the purchase. In doing so, Defendant purposely hid the round-trip loans from the fund. In 2004, the fund acquired a majority ownership interest in Refco. In 2005, Refco’s losses became public, its stocks plunged, and it filed for bankruptcy. The fund suffered millions of dollars in losses as a result. Plaintiff investors brought a class action against Mayer Brown (Defendant), claiming damages for Defendant’s knowledge and assistance regarding Refco’s fraudulent actions. Plaintiff also sued, claiming damages under common law fraud for fraudulent statements that Defendant made directly to Plaintiff. Defendant moved to dismiss all claims under Fed. R. Cov. P. 12(b)(6)