(CN) – Mayer Brown LLP and former partner Joseph P. Collins can’t be held liable for allegedly misleading investors in statements attributed to their former client, the now-bankrupt brokerage firm Refco, the 2nd Circuit ruled.
Investors filed a securities fraud claim against the law firm and Collins, accusing them of helping Refco hide massive losses.
Collins, who handled the Refco account, was sentenced in January to 7 years in prison for his role in the scheme. He has appealed his conviction.
Refco initially got into trouble by allowing customers to trade in securities on credit. When Refco clients suffered massive trading losses in the dot-com bust, they were unable to repay hundreds of millions in so-called “margin loans” to Refco.
Mayer Brown and Collins allegedly arranged a series of sham transactions that hid the company’s losses from investors. They then drafted financial reports that concealed the bogus deals, making Refco appear more stable than it was, investors claimed.
A federal judge dismissed the claims against the firm and Collins, in part because the allegedly false statements had been attributed to Refco and not to its outside counsel.
The Manhattan-based federal appeals court agreed. Secondary actors such as Mayer Brown and Collins can be held liable, the court ruled, but only for false statements attributed to them at the time of publication.
Investors had admitted that they were unaware of the allegedly fraudulent transactions when they bought Refco securities, the ruling states.
“[T]he mere fact that the ultimate result of a secondary actor’s deceptive course of conduct is communicated to the public through a company’s financial statements is insufficient to show reliance on the secondary actor’s own deceptive conduct,” Judge José Cabranes wrote (original emphasis).