Refco is a favorite case of mine, since it is a Chicago case and also the first time I used the expression “big swinging sticks.” I try to keep it clean on this blog, but occasionally I can’t resist wordplay that implies my visceral reaction to the true rogues that pepper my posts.
Equity Firm Battles Grant Thornton In Refco Fraud Suit
A federal judge tossed Thomas H. Lee Equity Fund V LP’s claims of negligent misrepresentation and professional malpractice but allowed a claim of aiding and abetting fraud to go forward against the auditing and consulting firm.
The suit…alleges Grant Thornton knew about the now-defunct Refco’s fraudulent loan transactions in April 2004 — during the time Thomas H. Lee was considering a $450 million investment in Refco in the form of a leveraged buyout. The lawsuit alleges that Thomas H. Lee lost more than $245 million after making the investment in August 2004 and blames Grant Thornton for making “numerous misrepresentations” regarding Refco’s dire financial state.
Judge Gerard E. Lynch ruled Wednesday that “defendant’s motion to dismiss is granted with respect to plaintiffs’ negligent misrepresentation and professional malpractice claims, and denied as to all other claims.”
Lynch’s ruling says the complaint failed to prove that Grant Thornton had “any duty of reasonable care” to make sure the plaintiff knew about the fraudulent loans because, among other things, the audits were not performed with Thomas H. Lee’s specific investment plan in mind.
However, the judge, in upholding parts of the case, ruled that Thomas H. Lee was right in asserting that Grant Thornton was aware that Refco was making the now-infamous round-trip loans and that the auditors knew the loans were “suspicious.”
The judge added that Grant Thornton’s claims that it was never provided with documentation sufficient to discover the fraud are “belied by the complaint’s allegation … that [Grant Thornton]” discovered a $545 million suspicious transaction between Refco and a third party. Such a loan should have been a red flag for any auditor, the judge said.
Counsel in this matter for Grant Thornton is Bradley E. Lerman, Winston & Strawn LLP. The company and counsel, contacted Thursday, had no immediate comment. Counsel for Thomas H. Lee could not be determined Thursday and the company had no immediate comment.