It is going to take a unique set of facts to establish the existence of scheme liability in the wake of the Stoneridge decision. Earlier this week, in the Refco securities class action, a S.D.N.Y. court dismissed the securities fraud claims against Refco’s outside counsel. In its decision, the court found the plaintiffs adequately alleged that the law firm facilitated Refco’s fraudulent transactions, but not that the company’s investors relied on any misstatements by the law firm in purchasing their securities.
The court may have been forced to apply Stoneridge, but it was not happy about it. In an interesting footnote, the court suggested that “a bright line between principals and accomplices may not be appropriate” and offered its own policy solution: “Perhaps a provision authorizing the SEC not only to bring actions in its own right but also to permit private plaintiffs to proceed against accomplices after some form of agency review would provide the necessary flexibility without involving the courts in standardless and difficult-to-administer line drawing exercises.” Do all judges secretly long to be legislators?
Press coverage of the decision can be found in the WSJ Law Blog and the American Lawyer.
Holding: Motion to dismiss granted.
Quote of note: “The nub of plaintiffs’ contention is that as Refco’s primary counsel, the . . . defendants could not be ‘remote’ within the meaning of Stoneridge, because they were directly involved in creating and executing the fraudulent scheme, including the drafting of misleading communications to Refco investors. Plaintiffs’ reading of ‘remote’ is myopic. The issue is not the distance between the issuer and the defendant, but rather the distance between the defendants’ conduct and the investor.”
The 10b-5 Daily 