Refco Customers Lose Appeals Bid on Dismissal of Suit Against Executives

Former Refco Inc. (RFXCQ) customers lost a bid in appeals court to reverse a lower-court ruling that dismissed their claims against the bankrupt brokerage.

U.S. District Judge Gerald Lynch’s ruling that Refco executives and its auditor didn’t breach agreements with customers was upheld by a three-judge panel of the Second Circuit Court of Appeals, according to a filing today in Manhattan.

The plaintiffs included Capital Management Select Fund and other investment funds that had assets with Refco. They claimed that Refco executives used securities deposited with the company as collateral for loans.

“They fail to make sufficient allegations that their agreements with RCM misled them,” the appeals judges said in their ruling.

The defendants included former Chief Executive Officer Phillip Bennett, former Refco Chief Financial Officer Robert Trosten, former secretary Philip Silverman, and the auditing firm Grant Thornton LLP.

MF Global, which was spun off from Man Group Plc in 2007, was built up partly through an acquisition of Refco’s assets. Refco went bankrupt two months after its August 2005 initial public offering that raised $670 million, saying Bennett had hidden hundreds of millions of dollars in bad debt.

Bennett, 60, pleaded guilty to bank fraud and money laundering in 2008 and is serving a 16-year prison sentence.

New Trial

The fraud conviction of Joseph Collins, Refco’s former outside lawyer, was reversed yesterday by the same federal appeals court. The panel found that the trial judge improperly instructed a juror outside the presence of Collins’s lawyers.

Collins, found guilty in 2009 of helping Bennett and other executives defraud investors of $2.4 billion, is entitled to a new trial, the appeals court said. Collins, who is free on bail, was sentenced to seven years in prison.

The case is Capital Management Select Fund Ltd. v. Bennett, 08-6166, U.S. court of Appeals for the Second Circuit (Manhattan).

To contact the reporter on this story: Don Jeffrey in New York at djeffrey1@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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