On April 11, 2014, in a significant victory for Ingram Micro, Inc. and its subsidiary CIM Ventures, Inc. (Ingram Micro), the U.S. Court of Appeals for the Second Circuit affirmed a 2012 decision by the U.S. District Court for the Southern District of New York dismissing claims brought against Ingram Micro by the Joint Official Liquidators of the SPhinX Funds, a group of Cayman Islands-based hedge funds allegedly defrauded by Refco, Inc. The decision marks the successful conclusion of more than five years of litigation.
Plaintiffs alleged that Ingram Micro aided and abetted the fraud that ultimately led to the Refco bankruptcy in 2005 by entering into so-called “round trip loans” with Refco in 2000 and 2001. Plaintiffs sought $263 million in damages.
Ingram Micro moved to dismiss, and the district court referred the motion to a special master, who recommended dismissal of all claims against Ingram Micro. He found that Ingram Micro could not be said to have known or consciously avoided knowing that the round-trip loan transactions were being used for fraudulent purposes and that Ingram Micro could not have known that Refco was breaching a fiduciary duty to the SPhinX Funds, which were not formed until after Ingram Micro’s round-trip loan transactions with Refco. The district court, in an opinion by Judge Rakoff, approved the Special Master’s recommendation, with only slight modifications in reasoning, and dismissed the case against Ingram Micro with prejudice.
In a 28-page opinion issued April 11, 2014, the Second Circuit affirmed Judge Rakoff’s dismissal of all claims against the Ingram Micro and other round-trip loan defendants. The court held that, as Ingram Micro argued, the complaint failed to allege the essential element of actual knowledge necessary to sustain the claims for aiding and abetting Refco in its fraud and breach of fiduciary duties. The court distinguished constructive knowledge, which is not sufficient under New York law, from actual knowledge, which requires allegations from which a plausible inference can be drawn that defendants knew they were aiding the primary fraud. Plaintiffs relied on conclusory allegations that the loans were suspicious, but failed to allege that Ingram Micro and the other loan defendants knew about the critical details of the accounting fraud perpetrated by Refco or the manner in which Refco used the loans to accomplish the fraud. The court also rejected plaintiffs’ request for leave to amend their complaint because the additional facts plaintiffs sought to allege showed that Refco had deceived defendants about the purpose of the loans and therefore did not support the claims.
The Davis Polk litigation team includes partners Robert F. Wise Jr. and Paul Spagnoletti, associate Jami Johnson, and former associate Ian R. Rooney. All members of the Davis Polk team are based in the New York office.