CAPITAL MANAGEMENT SELECT FUND LTD. v. Bennett
680 F.3d 214
| 2d Cir. | 2012Background
- This appeal involves former customers of Refco Capital Markets (RCM) challenging Section 10(b) claims against Refco officers and Grant Thornton LLP arising from rehypothecation of customer securities.
- RCM operated as a Bermuda-registered broker-dealer with activities conducted in New York, and its customer accounts were non-discretionary and commingled in a fungible pool.
- The Customer Agreement gave RCM a first-priority security interest in all customer assets and authorized use of those assets for financing, including rehypothecation.
- Customers alleged RCM rehypothecated excess margin and fully-paid securities, contrary to representations in the Customer Agreement and Trade Confirmations.
- The district court dismissed for lack of standing and failure to plead deception; the Second Circuit affirmed, holding no Section 10(b) remedy due to insufficient plausible deception.
- The court also rejected theories based on federal/state law ambiguities and shingle theory, and concluded written agreements adequately disclosed rehypothecation rights.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does the claim survive Section 10(b) standing and scienter requirements? | RCM Customers argued deceptive conduct under 10(b) alleging misrepresentation. | Defendants contended no standing and insufficient intent. | No 10(b) standing or strong inference of scienter established. |
| Was the Customer Agreement a misrepresentation regarding rehypothecation of excess margin securities? | Agreement misrepresented safeguards against rehypothecation. | Agreement clearly allowed rehypothecation of excess margin securities. | No misrepresentation; contract language preserved rehypothecation rights. |
| Did shingle theory and regulatory compliance claims support liability? | Implicit duties under shingle theory created liability. | Explicit disclosures and Rule 15a-6 framework negated implied duties. | Shingle theory rejected; disclosures defeated implied duties. |
| Do account statements and oral statements support deception claims? | Statements suggested assets were held or safeguarded; misled customers. | Statements contradicted by contractual rehypothecation rights; disclosures control. | Not deceptive under the circumstances; statements insufficient to plead 10(b) fraud. |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (strong inference of scienter must be cogent and compelling)
- Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (U.S. 1975) (standing/intent related to purchases and sales)
- Luce v. Edelstein, 802 F.2d 49 (2d Cir. 1986) (contractual promises and intent required for fraud claims)
- Mills v. Polar Molecular Corp., 12 F.3d 1170 (2d Cir. 1993) (breach of contract as basis for 10(b) requires intent to deceive)
- VanCook v. SEC, 653 F.3d 130 (2d Cir. 2011) (shingle theory discussed and limited by explicit disclosures)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (standard for pleading scienter)
- Starr ex rel. Estate of Sampson v. Georgeson S'holder, Inc., 412 F.3d 103 (2d Cir. 2005) (denies shingle theory when disclosures suffice)
- Ouaknine v. MacFarlane, 897 F.2d 75 (2d Cir. 1990) (particularized facts for intent inference under 10(b))
- United States v. Finnerty, 533 F.3d 143 (2d Cir. 2008) (conduct not liability for NYSE rule violation absent representation)