- Krys v. Pigott, Case No. 12-3575(L) (2d Cir. Apr. 11, 2014)
- Under New York law, claims of aiding and abetting (i) fraud and (ii) breach of fiduciary duty require "actual knowledge" of, respectively, the fraudulent scheme and the applicable breach of duty; "constructive knowledge" is insufficient. The Court raised, but declined to rule on, the issue of whether a showing of "conscious avoidance of knowledge" would be sufficient to meet the "actual knowledge" test. As such, the Court's affirmed the District Court's dismissal of the plaintiff's claims and denied the plaintiff's alternative request to amend the complaint.
- Procedural context:
- Appeal from a partial, final judgment of the District Court for the S.D.N.Y. dismissing plaintiff's claims of aiding and abetting fraud and breach of fiduciary duty against the appellee-defendants, pursuant to Rule 12(b)(6).
- Refco, Inc., and its subsidiaries provided execution and clearing services for the financial industry. Refco suffered large trading losses and, in order to hide such losses, engaged in a fraudulent scheme, which included, among other things, the improper use of segregated funds and certain "round trip loan transactions" with a company owned by Refco's founder and third-party customers, including the defendants in this action. The Refco fraud collapsed in 2005 and Refco filed for bankruptcy. The SPhinX Funds are a family of hedge funds based in the Cayman Islands, created by PlusFunds Group, Inc. The plaintiffs in this action are the joint offfical liquidators of the SPhinX Funds. One of the SPhinX funds maintained its customer-segregated accounts at Refco LLC, a regulated entity. The Amended Complaint alleges that the manager of the SPhinX fund authorized Refco to transfer the funds in SphinX's segregated accounts to other companies in the Refco family, in Refco's absolute disecretion. More than $260,000,000 in customer funds were transferred from segregated accounts at the regulated Refco entity to non-segregated accounts at a non-regulated Refco entity. Upon Refco's bankruptcy filing, these funds could not be recovered. The plaintiffs in this action asserted numerous claims against multiple defendants, including, as relevant here, claims against the third-party participants in Refco's "round-trip loan transactions" for aiding and abetting the fraud and breaches of fiduciary duty perpetuated by Refco and its officers, directors and affiliates.
- Kearse, Pooler, and Livingston
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