In Re Refco Securities Litigation
779 F. Supp. 2d 372
S.D.N.Y.2011Background
- Refco group and affiliates allegedly induced PlusFunds directors to divert SMFF funds from segregated to unsegregated accounts for insiders' benefit.
- PlusFunds/SPhinX held assets in customer-segregated accounts at Refco LLC; transfers occurred to Refco Capital Markets, Ltd. (unregulated) and were allegedly misappropriated.
- The Miscreants were directors of PlusFunds; their conduct was imputed to PlusFunds/SPhinX absent a valid exception.
- Plaintiffs allege the transfers violated protective covenants for customer funds and harmed SMFF/PlusFunds by reducing interest earned.
- Special Master Capra/ Judge Hedges recommended dismissal under in pari delicto and Wagoner; the Court reviews de novo and partially agrees with those findings.
- Court remands for further proceedings and holds pleadings adequately plead the adverse interest exception, contrary to the Special Master on this point.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the adverse interest exception applies. | Krys argues insiders acted entirely adversely to SPhinX/PlusFunds. | Defendants contend no applicable adverse-interest exception. | Yes; pleadings adequately plead the adverse interest exception. |
| Whether SPhinX/PlusFunds benefited from the transfers beyond interest income. | Plaintiffs contend no benefit to SPhinX/PlusFunds from the transfers. | Defendants argue any nominal benefits negate the exception. | Court rejects; benefits alleged do not defeat the adverse-interest exception. |
| Whether the asserted benefits (seed capital, credit facility, investor help) undermine pleading of adverse interest. | Alleged benefits arose from general relationship, not the illicit transfers. | Defendants rely on those benefits as connection to the misconduct. | Court finds no adequate link to the transfers; pleading remains viable. |
| Whether in pari delicto/Wagoner bars apply to bar the claims. | Plaintiffs seek relief despite related wrongdoing by insiders. | Bar applies given fiduciary wrongdoing by insiders. | Court rejects wholesale application; adverse-interest exception defeats bar here. |
| Whether the complaint adequately pleads wrongdoing by insiders to permit imputation against PlusFunds/SPhinX. | Amended Complaint sufficiently alleges insider misconduct. | Defendants dispute the sufficiency of the predicate allegations. | Yes; pleadings adequate under de novo review. |
Key Cases Cited
- Kirschner v. KPMG LLP (Kirschner III), 15 N.Y.3d 446 (N.Y. 2010) (adverse-interest exception limits to outright theft/embezzlement when insider benefits only insiders)
- Center v. Hampton Affiliates, Inc., 66 N.Y.2d 782 (N.Y. 1985) (adverse-interest exception requires insider to act against principal entirely for own/third-party benefit)
- Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991) (prudential limitation on standing under federal law for in pari delicto)
- Kirschner v. KPMG LLP, (see Kirschner III) (N.Y. 2010) (see Kirschner III for adverse-interest framework)