Mayer Brown: Saved by Stoneridge, But Still Slammed by Judge

[WSJ Law Blog]

The law firm Mayer Brown got itself out of some hot water Tuesday, but not before enduring some harsh words from Manhattan federal judge Gerard Lynch (whose name has, incidentally, surfaced as a possible Second Circuit appointee by President Obama).

On Tuesday, Lynch dismissed claims against Mayer Brown and partner Joseph Collins (pictured), who represented Refco before and during its 2005 IPO. A group of plaintiff shareholders had alleged that Mayer Brown and Collins helped perpetrate a fraud at Refco by documenting loans that hid huge losses at the now-defunct brokerage giant. When Refco went public, Mayer Brown was one the firms that drafted the public documents for the IPO. Click here for the opinion; here for the story from the American Lawyer’s Susan Beck.

Judge Lynch, in dismissing Mayer Brown from the suit, relied heavily on the Supreme Court’s recent ruling in the Stoneridge case, in which the Court barred investors from bringing private lawsuits against third parties in corporate-fraud cases unless they relied on actions by those parties when making investment decisions. Lynch ruled that even if Mayer Brown and Collins engaged in fraudulent activity on Refco’s behalf, they were not liable to shareholders unless they made misstatements directly to them.

John “Sean” Coffey of Bernstein Litowitz Berger & Grossmann, a lawyer for the investors, told the American Lawyer that his clients still have claims against a long list of defendants. Coffey told AmLaw he was disappointed with Lynch’s ruling, but not terribly surprised, given the tough standard set by Stoneridge. “It highlights that something is very very wrong with the state of the law,” says Coffey.

Judge Lynch seemed to agree with Coffey, at least in part. Late in the opinion, Lynch penned a footnote, which stated:

It is perhaps dismaying that participants in a fraudulent scheme who may even have committed criminal acts are not answerable in damages to the victims of the fraud. However, as the Court noted in Stoneridge, the fact that the plaintiff-investors have no claim is the result of a policy choice by Congress. . . . This choice may be ripe for legislative re-examination . . . a bright line between principals and accomplices may not be appropriate. There are accomplices and there are accomplices: after all, in the criminal context when the Godfather orders a hit, he is only an accomplice to murder — one who “counsels, commands, induces or procures” but he is nonetheless liable as a principal for the commission of crime. Likewise, some civil accomplices are deeply and indispensably implicated in the wrongful conduct.”

Collins has been indicted on several charges related to the Refco situation. Collins has maintained his innocence. Click here and here for pieces on Collins and his criminal case.

In a written statement, Mayer Brown said it was pleased with Lynch’s decision, adding that “the firm acted in a professional, competent, and ethical manner in its work on behalf of Refco.”