In Re Refco Inc. Securities Litigation
826 F. Supp. 2d 478
S.D.N.Y.2011Background
- MDL case concerning Refco-related losses of SPhinX funds and PlusFunds; defendants include DPM entities, Mellon, and individuals Aaron and Castranova; SPhinX funds held in segregated Refco accounts allegedly moved to unprotected RCM accounts; Special Master Capra issued R&R recommending dismissals/adoptions; Court reviewed de novo and adopted R&R in full.
- Core entities: SPhinX hedge funds (Cayman), SPhinX Trust/PlusFunds as investment manager, DPM as administrator, Mellon as successor to DPM, Aaron and Castranova as DPM officers; alleged breach of Service Agreement and indemnity obligations.
- Plaintiffs allege DPM failed to keep excess cash segregated, misreported risk, and authorized transfers to unprotected accounts; Mellon allegedly assumed DPM duties; Aaron/Castranova as officers implicated in fiduciary breaches; several counts are challenged under New York choice-of-law, Wagoner issues, and NJRICO.
- The action centers on whether the Service Agreement and related duties created fiduciary obligations and whether alleged misrepresentations and transfers caused direct harm to SMFF/PlusFunds; the court ultimately adopts the Special Master’s recommendations dismissing several counts and allowing some to proceed against specific defendants.
- Key procedural posture: court held de novo review of R&R and adopted it; specific counts dismissed with prejudice for certain defendants; others remain under inquiry for fiduciary duties and NJRICO.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Breach of contract liability for Mellon | Krys contends Mellon assumed DPM duties under the Service Agreement | Mellon did not sign or assume the contract; no veil-piercing | Count I/III dismissed against Mellon. |
| Breach of covenant of good faith and fair dealing | Implied duties not duplicative of contract; duties may be implied | Duplicative of contract; no independent implied obligation | Count II dismissed in full. |
| Indemnity under the Service Agreement | DPM/Mellon obligated to indemnify SMFF | Mellon never party to Service Agreement; no indemnity | Count III dismissed as to Mellon. |
| Breach of fiduciary duty against Castranova | Castranova acted with trust/confidence; fiduciary duties owed | No direct fiduciary duty; liability as officer disputed | Count V against Castranova dismissed with prejudice. |
| NJRICO viability | Pattern of racketeering; direct injury to SMFF/PlusFunds | No NJRICO enterprise/organization; flaws in proximate causation | Count X dismissed with prejudice. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (pleading standard: plausibility required for factual allegations)
- Twombly v. Bell Atlantic Corp., 550 U.S. 544 (U.S. 2007) (pleading must raise plausible claim)
- EBC I, Inc. v. Goldman Sachs & Co., 5 N.Y.3d 11 (N.Y. 2005) (fiduciary duties and reliance issues in financial contexts)
- Barling v. Wilheim, 306 F.3d 17 (8th Cir. 2010) (example of pleading standards (not central to this case))
- Guard-Life Corp. v. S. Parker Hardware Mfg. Corp., 50 N.Y.2d 183 (N.Y. 1980) (high-level planning/coordination required for enterprise)
- White Plains Coat & Apron Co. v. Cintas Corp., 460 F.3d 281 (2d Cir. 2006) (elements for tortious interference with contract/prospective contract)
- Montreal Pension Plan v. Banc of America Securities, LLC, 591 F. Supp. 2d 586 (D.N.J. 2008) (choice-of-law and the role of New York law in fiduciary claims)
- Ball (State v.), 661 A.2d 261 (N.J. 1995) (NJROCO organization requirement standard (Ball))