(CN) – A federal judge in Manhattan dismissed for lack of standing a claim filed by the Refco Litigation Trust against company insiders and advisors, because Refco’s own management allegedly perpetrated the fraud that sunk the company. U.S. District Judge Gerard Lynch said a trustee cannot sue over wrongdoing committed by the debtor itself.
The futures-trading firm filed for Chapter 11 after its top executives sold their interests to a private equity firm for $507 million. The company’s trustee claimed that before cashing out, Refco’s managers misappropriated customer assets and concealed debt. The company loaned money to itself through third parties to conceal its trading losses, its true operating expenses and the fictitious nature of hundreds of millions of dollars in revenue, according to the complaint. Refco’s concealed debt purportedly dwarfed its capital.
Judge Lynch concluded that the claims against the investment banks, accountants Grant Thornton and PricewaterhouseCoopers, and law firm Mayer Brown must be dismissed because the trustee “cannot possible assert that Refco’s corporate structure concealed its debts from itself.” He said Refco participated and benefitted from the very wrong for which it seeks to recover.
The judge dismissed the motions in their entirety with prejudice, citing the Wagoner rule, which states, “Management’s misconduct is imputed to the corporation, and because a trustee stands in the shoes of the corporation, the rule bars a trustee from suing to recover for a wrong that he himself essentially took part in.”
Refco’s trustee, Marc S. Kirschner, originally filed suit in Cook County, Ill., alleging fraud, breach of fiduciary duty and malpractice.