Securities Law Prof Blog

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

Monday, May 24, 2010

Plaintiffs In Refco Securities Fraud Action File Petition for Rehearing En Banc

Plaintiffs in Pacific Investment Management Co., LLC v. Mayer Brown LLP filed a petition for rehearing en banc ( Download 09-1619-cv_Petition_for_Rehearing_En_Banc) on May 10.  As you will recall, Mayer Brown was the law firm that represented Refco, a large brokerage and clearing firm, and Mayer Brown's partner, Joseph Collins, served as Refco's "go-to guy" for many years.  Refco, of course, suffered massive losses that were concealed in its securities filings, including a registration statement, and eventually filed for bankruptcy.  Collins ultimately was convicted on two counts of securities fraud and one count to commit securities fraud. The Second Circuit, in its April 27, 2010 opinion, held that plaintiffs could not sue Collins for damages under Rule 10b-5 essentially because the false statements made in the registration statement were not attributed to Collins.  In their petition for en banc hearing plaintiffs emphasize that (1) Mayer Brown and Collins drafted false portions of the registration statement, reviewed SEC comments and participated in group drafting session; (2) the offering memorandum and registration statement identified Mayer Brown as Refco's counsel; (3) the false sections were sections that investors would expect to be drafted by attorneys; and (4) Collins was convicted of securities fraud for his efforts.  Accordingly, how could Mayer Brown and Collins not be primary violators of the federal securities laws for purposes of Central Bank and Stoneridge?  The effect of the decision, as the petition emphasizes, is to immunize a wide class of persons who intentionally draft false statements for public distribution.

Plaintiffs' petition is something of a "hail Mary" pass, because the Second Circuit has been strict in its "attribution" requirement where the drafter is not a corporate official.  Nevertheless, they make a persuasive argument in a case that presents very attractive facts for the plaintiffs, so let's wait and see what happens next.

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