Capital Management Select Fund Ltd. v. Bennett
670 F.3d 194
2d Cir.2012Background
- RCM Customers sue former Refco officers and Grant Thornton for alleged Section 10(b) deception via rehypothecation of customer securities.
- District Court dismissed for lack of standing under Blue Chip Stamps and for failure to plead deceptive conduct; plaintiffs appealing.
- Customer Agreement grants RCM a first-priority security interest and broad rights to use or dispose of customer collateral, including rehypothecation.
- Agreement provides return of non-collateral securities as cash value; accounts are non-discretionary and involve fungible collateral rather than segregated securities.
- Trade Confirmations reiterate rehypothecation rights; Section H selects New York law/venue; RCM operated as offshore unregulated entity; U.S. regulatory compliance implications discussed.
- Appeal consolidated from related Refco bankruptcy actions; court reviews de novo and liberally, but must plead plausible facts showing intent to deceive.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standings and deception under 10(b) | RCM Customers were deceived by rehypothecation terms. | No standing under purchaser-seller rule; no deceptive conduct pled. | No 10(b) claim remedy; standing lacking or not supported by pleadings |
| Whether the Customer Agreement was a misrepresentation | Agreement concealed broad rehypothecation rights for excess margin/fully-paid securities. | Agreement unambiguously warned of full rehypothecation; not a misrepresentation. | Not misrepresentation; no 10(b) liability |
| Shingle theory liability for broker conduct | Shingle theory imposes implied duties; RCM breached through rehypothecation. | Explicit disclosures defeat shingle-based claims; not liable. | No shingle theory liability |
Key Cases Cited
- Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (Supreme Court 1975) (standing requirements and purchaser-seller concept discussed)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (Supreme Court 2007) (strong inference of scienter standard)
- ECA & Local 134 IBEW Joint Pension Fund v. JPMorgan Chase Co., 553 F.3d 187 (2d Cir. 2009) (strong circumstantial evidence/conscious misbehavior framework)
- Luce v. Edelstein, 802 F.2d 49 (2d Cir. 1986) (contract breach as fraud where intent not to perform at contract formation)
- Mills v. Polar Molecular Corp., 12 F.3d 1170 (2d Cir. 1993) (breach of contract alone not fraud unless intent to deceive shown)
- Wharf (Holdings) Ltd. v. United Intl. Holdings, Inc., 532 U.S. 588 (Supreme Court 2001) (contractual misrepresentation elements under 10b-5)
- Ouaknine v. MacFarlane, 897 F.2d 75 (2d Cir. 1990) (particularized facts supporting intent inference)
- VanCook v. SEC, 653 F.3d 130 (2d Cir. 2011) (shingle theory limitations in broker-liability context)
- Starr ex rel. Estate of Sampson v. Georgeson S'holder, Inc., 412 F.3d 103 (2d Cir. 2005) (disclosure sufficiency and duties in shingle context)
- Ambrosino v. Rodman & Renshaw, Inc., 972 F.2d 776 (7th Cir. 1992) (written disclosures control oral misrepresentations)