Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, April 1, 2009

In re Refco, Inc. Securities Litigation

The federal district court for the Southern District of New York recently dismissed charges against the Meyer Brown law firm in In re Refco, Inc. Securities Litigation, 2009 WL 724378 (S.D.N.Y. Mar. 17, 2009).  As you may recall, one of Meyer Brown's partners, Joseph P. Collins, was indicted for his role in the fraud to cover up the true financial condition of the international brokerage firm.  Plaintiffs argued that the law firm's alleged substantial involvement in the fraud made them liable in damages under Rule 10b-5.  While the court's analysis is a straightforward application of Central Bank and Stoneridge (the judge rejecting the plaintiff's attempt to distinguish Stoneridge because that case involved "remote" participants in the fraud), what is interesting is the judge's footnote 15:

It is perhaps dismaying that participants in a fraudulent scheme who may even have committed criminal acts are not answerable in damages to the victims of the fraud. However, as the Court noted in Stoneridge, the fact that the plaintiff-investors have no claim is the result of a policy choice by Congress. 128 S.Ct. at 769. In 1995, in reaction to the Supreme Court's decision in Central Bank, Congress authorized the SEC-but not private parties-to bring enforcement actions against those who “knowingly provide [ ] substantial assistance to another person” in violation of the federal securities laws. See PSLRA, Pub.L. No. 104-67, § 104, 109 Stat. 737, 757, codified in 15 U.S.C. § 78t(f). This choice may be ripe for legislative re examination. While the impulse to protect professionals and other marginal actors who may too easily be drawn into securities litigation may well be sound, a bright line between principals and accomplices may not be appropriate. There are accomplices and there are accomplices: after all, in the criminal context when the Godfather orders a hit, he is only an accomplice to murder-one who “counsels, commands, induces or procures” but he is nonetheless liable as a principal for the commission of the crime. 18 U.S.C. § 2(a). Likewise, some civil accomplices are deeply and indispensably implicated in wrongful conduct. Perhaps a provision authorizing the SEC not only to bring actions in its own right but also to permit private plaintiffs to proceed against accomplices after some form of agency review would provide the necessary flexibility without involving the courts in standardless and difficult-to-administer line-drawing exercises.

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