NEW YORK (Reuters) – Two accounting firms and a law firm won dismissal of a lawsuit on behalf of former Refco Inc currency trading customers who lost more than $500 million when the defunct futures and commodities broker went bankrupt.
U.S. District Judge Gerard Lynch on Tuesday said Marc Kirschner, a trustee representing the customers, failed to show that Ernst & Young LLP [ERNY.UL], Grant Thornton LLP and the law firm Mayer Brown LLP knew of or substantially assisted in the fraudulent diversion of assets that led to Refco’s demise.
The Manhattan federal judge, however, gave permission for Kirschner to file a new complaint. Citing the trustee’s access to a “substantial trove” of Refco documents, Lynch said: “It is far from clear that repleading would be futile.”
Refco and 23 affiliates filed for Chapter 11 protection from creditors in October 2005, two months after going public and a week after revealing that former Chief Executive Philip Bennett hid $430 million of debt.
Bennett is serving a 16-year prison sentence. Refco’s bankruptcy is one of the largest in U.S. history, according to BankruptcyData.com.
Grant Thornton had been an outside auditor for Refco, and given the company clean bills of health for the 2003, 2004 and 2005 fiscal years. Mayer Brown was Refco’s primary law firm, and Ernst provided tax services to various Refco entities.
In his 35-page opinion, Lynch said Grant Thornton’s work gave it “a complete picture of how Refco and the Refco fraud, functioned.”
He also said Mayer Brown “actively participated in carrying out Refco’s fraudulent misstatement of its financial position,” while Ernst performed to work for Refco “despite apprehending the scope of the fraud.”
The judge said it was “puzzling” Kirschner chose to file a complaint similar to one found “wholly inadequate” in a prior case. He nevertheless gave the trustee until Sept. 25 to decide whether to amend his complaint.
Mayer Brown spokeswoman Aimee Jasculca said the firm was pleased with Lynch’s decision and still believes it “acted in a professional, competent and ethical manner in its work on behalf of Refco.”
An Ernst spokesman declined immediate comment. Representatives for Kirschner and Grant Thornton did not immediately return requests for comment.
In April, Lynch dismissed claims in a separate Refco-related lawsuit against Bank of America Corp (BAC.N), Credit Suisse roup AG (CSGN.VX) and Deutsche Bank AG (DBKGn.DE).
The latest case is Kirschner v. Bennett, U.S. District Court, Southern District of New York (Manhattan), No. 07-8165. (Reporting by Jonathan Stempel; Additional reporting by Chelsea Emery in New York and Rachelle Younglai in Washington, D.C.) (Reporting by Jonathan Stempel; editing by Andre Grenon)