Plaintiffs-appellants appeal from a judgment of the District Court (Gerard E. Lynch, Judge) dismissing their claims for securities fraud against defendants- appellees, a law firm and one of its attorneys. We consider here (1) whether a corporation's outside counsel can be liable for false statements those attorneys allegedly create, but which were not attributed to the law firm or its attorneys at the time the statements were disseminated; and (2) whether plaintiffs' claims that defendants participated in a scheme to defraud investors are foreclosed by the Supreme Court's decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008).
We hold that a secondary actor can be held liable for false statements in a private damages action for securities fraud only if the statements are attributed to the defendant at the time the statements are disseminated. We further hold that plaintiffs' claims that defendants participated in a scheme to defraud investors are not meaningfully distinguishable from the claim at issue in Stoneridge, and, therefore, were properly dismissed.
The opinion of the court was delivered by: Jose A. Cabranes, Circuit Judge
Argued: December 14, 2009
Before: CABRANES and PARKER, Circuit Judges, and AMON, District Judge.*fn2
Judge Parker concurs in the judgment and in the opinion of the Court and files a separate concurring opinion.
This appeal presents primarily two questions about the scope of federal securities laws: (1) whether, under § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5 ("Rule 10b- 5"), 17 C.F.R. § 240.10b-5, a corporation's outside counsel can be liable for false statements that those attorneys allegedly create, but which are not attributed to the law firm or its attorneys at the time the statements were disseminated; and (2) whether plaintiffs' claims that defendants participated in a scheme to defraud investors are foreclosed by the Supreme Court's decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008).
Plaintiffs-appellants, Pacific Investment Management Company, LLC and RH Capital Associates, LLC (jointly, "plaintiffs") appeal from a judgment of the United States District Court for the Southern District of New York (Gerard E. Lynch, Judge) dismissing their claims against defendantsappellees Mayer Brown, LLC ("Mayer Brown"), a law firm, and Joseph P. Collins ("Collins"), a former partner at Mayer Brown. Plaintiffs alleged that defendants violated federal securities laws in the course of representing the now-bankrupt brokerage firm Refco Inc. ("Refco"). Specifically, they claimed that defendants (1) facilitated fraudulent transactions between Refco and third parties for the purpose of concealing Refco's uncollectible debt and (2) drafted portions of Refco's security offering documents that contained false information. Although defendants allegedly created false statements that investors relied upon, all of those statements were attributed to Refco, and not Mayer Brown or Collins, at the time of dissemination.
We hold that a secondary actor*fn3 can be held liable in a private damages action brought pursuant to Rule 10b-5(b) only for false statements attributed to the secondary- actor defendant at the time of dissemination. Absent attribution, plaintiffs cannot show that they relied on defendants' own false statements, and participation in the creation of those statements amounts, at most, to aiding and abetting securities fraud. We further hold that plaintiffs' claims that defendants participated in a scheme to defraud investors are not meaningfully distinguishable from the claim at issue in Stoneridge, and therefore were properly dismissed.
In reviewing the District Court's dismissal of an action pursuant to Fed. R. Civ. P. 12(b)(6), we accept as true the following nonconclusory allegations set forth in plaintiffs' Second Amended Complaint. See Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949-50 (2009); South Cherry Street, LLC v. Hennessee Group LLC, 573 F.3d 98, 100 (2d Cir. 2009). This case arises from the 2005 collapse of Refco, which was once one of the world's largest providers of brokerage and clearing services in the international derivatives, currency, and futures markets. According to plaintiffs, Mayer Brown served as Refco's primary outside counsel from 1994 until the company's collapse. Collins, a partner at Mayer Brown, was the firm's primary contact with Refco and the billing partner in charge of the Refco account. Refco was a lucrative client for Mayer Brown and Collins' largest personal client.
As part of its business model, Refco extended credit to its customers so that they could trade on "margin"-i.e., trade in securities with money borrowed from Refco. In the late 1990s, Refco customers suffered massive trading losses and consequently were unable to repay hundreds of millions of dollars of margin loans extended by Refco. Concerned that properly accounting for these debts as "write-offs" would threaten the company's survival, Refco, allegedly with the help of defendants, arranged a series of sham transactions designed to conceal the losses.
Specifically, plaintiffs allege that Refco transferred its uncollectible debts to Refco Group Holdings, Inc. ("RGHI")-an entity controlled by Refco's Chief Executive Officer-in exchange for a receivable purportedly owed from RGHI to Refco. Recognizing that a large debt owed to it by a related entity would arouse suspicion with investors and regulators, Refco, allegedly with the help of defendants, engaged in a series of sham loan transactions at the end of each quarter and each fiscal year to pay off the RGHI receivable. It did so by loaning money to third parties, who then loaned the same amount to RGHI, which in turn used the funds to pay off Refco's receivable. Days after the fiscal period closed, all of the loans were repaid and the third parties were paid a fee for their participation in the scheme. The result of these circular transactions was that, at the end of financial periods, Refco reported receivables owed to it by various third parties rather than the related entity RGHI.
Mayer Brown and Collins participated in seventeen of these sham loan transactions between 2000 and 2005, representing both Refco and RGHI. According to plaintiffs, defendants' involvement included negotiating the terms of the loans, drafting and revising the documents relating to the loans, transmitting the documents to the participants, and retaining custody of and distributing the executed copies of the documents.
Plaintiffs also allege that defendants are responsible for false statements appearing in three Refco documents: (1) an Offering Memorandum for an unregistered bond offering in July 2004 ("Offering Memorandum"), (2) a Registration Statement for a subsequent registered bond offering ("Registration Statement"), and (3) a Registration Statement for Refco's initial public offering of common stock in August 2005 ("IPO Registration Statement"). Each of these documents contained false or misleading statements because they failed to disclose the true nature of Refco's financial condition, which had been concealed, in part, through the loan transactions described above.
Defendants allegedly participated in the creation of the false statements contained in each of the documents identified above. Collins and other Mayer Brown attorneys allegedly reviewed and revised portions of the Offering Memorandum and attended drafting sessions. Collins and another Mayer Brown attorney also personally drafted the Management Discussion & Analysis ("MD&A") portion of the Offering Memorandum, which, according to plaintiffs, discussed Refco's business and financial condition in a way that defendants knew to be false. The Offering Memorandum was used as the foundation for the Registration Statement, which was substantially similar in content. According to plaintiffs, defendants further assisted in the preparation of the Registration Statement by reviewing comment letters from the Securities and Exchange Commission ("SEC") and participating in drafting sessions. Finally, plaintiffs allege that defendants were directly involved in reviewing and drafting the IPO Registration Statement because they received, and presumably reviewed, the SEC's comments on that filing.
Both the Offering Memorandum and the IPO Registration Statement note that Mayer Brown represented Refco in connection with those transactions. The Registration Statement does not mention Mayer Brown. None of the documents specifically attribute any of the information contained therein to Mayer Brown or Collins.
Plaintiffs, who purchased securities from Refco during the period that defendants were allegedly engaging in fraud, commenced this action after Refco declared bankruptcy in 2005. They asserted claims for violation of § 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, along with claims for "control person" liability under § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a).
The District Court dismissed plaintiffs' claims against Mayer Brown and Collins pursuant to Fed. R. Civ. P. 12(b)(6). See In re Refco, Inc. Sec. Litig., 609 F. Supp. 2d 304 (S.D.N.Y. 2009). With respect to plaintiffs' claim that defendants violated Rule 10b-5(b) by drafting and revising portions of Refco's public documents, the Court found that no statements in those documents were attributed to defendants and that plaintiffs had therefore alleged conduct akin to aiding and abetting, for which securities laws provide no private right of action. See id. at 311-14. The District Court also dismissed plaintiffs' Rule 10b-5(a) and (c) claims for "scheme liability" upon concluding that the Supreme Court's decision in Stoneridge foreclosed that theory of liability. See id. at 314-19. Finally, the District Court dismissed plaintiffs' § 20(a) claims because plaintiffs failed adequately to plead an underlying violation of federal securities law. See id. at 319.
We review de novo a District Court's dismissal for failure to state a claim, see Fed. R. Civ. P. 12(b)(6), assuming all well-pleaded, nonconclusory factual allegations in the complaint to be true. See Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949-50 (2009); Selevan v. N.Y. Thruway Auth., 584 F.3d 82, 88 (2d Cir. 2009).
This appeal concerns the scope of the private right of action available under § 10(b) of the Exchange Act and Rule 10b-5 (hereinafter, "Rule 10b-5 liability"). Section 10(b) makes it unlawful "for any person, directly or indirectly, . . . [t]o use or employ, in connection with the purchase or sale of any security . . . , any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe." 15 U.S.C. § 78j(b). Rule 10b-5, promulgated thereunder, provides as follows:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with ...