     08-6166-cv(L)
     Capital Management Select Fund Ltd., et al. v. Bennett et al.

 1                        UNITED STATES COURT OF APPEALS

 2                            FOR THE SECOND CIRCUIT

 3                               August Term, 2009

 4

 5    (Argued: October 19, 2009                  Decided: January 10, 2012)

 6      Docket Nos.    08-6166-cv(L) 08-6167-cv (Con) 08-6230-cv (Con)

 7   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

 8    CAPITAL MANAGEMENT SELECT FUND LTD., INVESTMENT & DEVELOPMENT
 9    FINANCE CORPORATION, IDC FINANCIAL S.A., GLOBAL MANAGEMENT
10    WORLDWIDE LIMITED, individually and on behalf of all others
11    similarly situated, ARBAT EQUITY ARBITRAGE FUND LIMITED,
12    RUSSIAN INVESTORS SECURITIES LIMITED, VR GLOBAL PARTNERS, L.P.,
13    PATON HOLDINGS, LTD., VR CAPITAL GROUP LTD., and VR ARGENTINA
14    RECOVERY FUND LTD.,
15
16                Plaintiffs-Appellants,
17                      v.

18    PHILLIP R. BENNETT, PHILIP SILVERMAN, ROBERT C. TROSTEN,
19    RICHARD N. OUTRIDGE, SANTO C. MAGGIO, LEO R. BREITMAN, GRANT
20    THORNTON LLP, TONE N. GRANT, and REFCO GROUP HOLDINGS, INC.,
21
22                Defendants-Appellees,

23    JOSEPH J. MURPHY, RONALD O’KELLEY, NATHAN GANTCHER, DENNIS A.
24    KLEJNA, PERRY ROTKOWITZ, CREDIT SUISSE GROUP, CREDIT SUISSE
25    FIRST BOSTON, GOLDMAN SACHS GROUP, INC., GOLDMAN SACHS & CO.,
26    BANK OF AMERICA SECURITIES, LLC, BANK OF AMERICA CORP, MERRILL
27    LYNCH & CO, MERRILL LYNCH PIERCE, FENNER & SMITH INCORPORATED,
28    JP MORGAN CHASE & CO, JP MORGAN SECURITIES, INC., SANDLER
29    O’NEIL & PARTNERS, L.P., HSBC HOLDINGS, PLC, HSBC SECURITIES
30    {USA} INC., WILLIAM BLAIR & COMPANY, LLC, HARRIS NESBITT CORP.,
31    CMG INSTITUTIONAL TRADING, LLC, SAMUEL A. RAMIREZ & CO., INC.,
32    THE WILLIAMS CAPITAL GROUP, L.P., UTENDAHL CAPITAL PARTNERS,
33    L.P., REFCO SECURITIES, LLC, THL ENTITIES,
34
35                Defendants,


                                           1
 1    BANK FUR ARBEIT UND WIRTSCHAFT UND OSTERREICHISCHE POSTPARKASSE
 2    AKTIENGESELLSEHAFT, GERALD M. SHERER, WILLIAM M. SEXTON, THOMAS
 3    H. LEE PARTNERS, LP, THOMAS H. LEE ADVISORS, LLC, THL MANAGERS
 4    V, L.L.C., THL EQUITY ADVISORS V, LLP, THOMAS H. LEE EQUITY
 5    FUND V, L.P., THOMAS H. LEE PARALLEL FUND V, LP, THOMAS H. LEE
 6    EQUITY (CAYMAN) FUND V, LP, THOMAS H. LEE INVESTORS LIMITED
 7    PARTNERSHIP, 1997 THOMAS H. LEE NOMINEE TRUST, THOMAS H. LEE,
 8    DAVID V. HARKINS, SCOTT L. JAECKEL, SCOTT A. SCHOEN,
 9
10                 Consolidated-Defendants.
11    - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

12    B e f o r e:     WINTER and POOLER, Circuit Judges.*

13            Appeal from an order entered by the United States District

14    Court for the Southern District of New York (Gerard E. Lynch,

15    Judge), dismissing plaintiffs’ claims under Section 10(b) for

16    failure to plead deceptive conduct.     We affirm.

17                                     SCOTT A. EDELMAN (Sander Bak &
18                                     Michael Shepherd, on the brief),
19                                     Milbank, Tweed, Hadley & McCloy
20                                     LLP, New York, New York, for
21                                     Plaintiffs-Appellants; Co-Lead
22                                     Counsel for Lead Plaintiffs and
23                                     the Putative Class.
24
25                                     Richard L. Stone (Mark A.
26                                     Strauss, on the brief), Kirby
27                                     McInerney & Squire LLP, New York,
28                                     New York, for Plaintiffs-
29                                     Appellants; Co-Lead Counsel for
30                                     Lead Plaintiffs and the Putative
31                                     Class.
32
33                                     Claire P. Gutekunst, Jessica
34                                     Mastrogiovanni, and Jed Friedman,


          *
           This panel originally included the Honorable Jed S. Rakoff,
     United States District Judge for the Southern District of New
     York, sitting by designation; however, Judge Rakoff has recused
     himself. Therefore, this case is decided by the remaining judges
     in accordance with Second Circuit Internal Operating Procedure
     E(b).

                                        2
 1   Proskauer Rose, LLP, New York,
 2   New York, for Defendant-Appellee
 3   Richard N. Outridge.
 4
 5   Barbara Moses, Judith L. Mogul,
 6   and Rachel Korenblat, Morvillo,
 7   Abramowitz, Grand, Iason, Anello
 8   & Bohrer, P.C., New York, New
 9   York, for Defendant-Appellee
10   Robert C. Trosten.
11
12   Stuart I. Friedman, Ivan Kline,
13   and Jonathan Daugherty, Friedman
14   & Wittenstein P.C., New York, New
15   York, for Defendant-Appellee
16   William M. Sexton.
17
18   LINDA T. COBERLY and Bruce R.
19   Braun, Winston & Strawn LLP,
20   Chicago, Illinois, for Defendant-
21   Appellee Grant Thornton LLP.
22
23   Laura E. Neish, Zuckerman Spaeder
24   LLP, New York, New York, for
25   Defendant-Appellee Tone N. Grant.
26
27   David V. Kirby, Krantz & Berman,
28   LLP, New York, New York, for
29   Defendant-Appellee Philip
30   Silverman.
31
32   Susan S. McDonald, Jacob H.
33   Stillman, Mark D. Cahn, and David
34   M. Becker, Securities and
35   Exchange Commission, Washington,
36   D.C., for Amicus Curiae Securites
37   and Exchange Commission.
38
39   RICHARD A. ROSEN (Walter Rieman,
40   Paul, Weiss, Rifkind, Wharton &
41   Garrison LLP, New York, New York;
42   Greg A. Danilow, on the brief,
43   Weil Gotshal & Manges LLP, New
44   York, New York, Paul, Weiss,
45   Rifkind, Wharton & Garrison LLP,
46   New York, New York, for
47   Defendants THL Partners.
48


      3
 1    WINTER, Circuit Judge:

 2             Former customers (“RCM Customers”) of Refco Capital

 3    Markets, Ltd. (“RCM”), a subsidiary of the now-bankrupt Refco,

 4    Inc., appeal from Judge Lynch’s dismissal of their Section

 5    10(b) securities fraud claims against former corporate officers

 6    of Refco and Refco’s former auditor, Grant Thornton LLP.1

 7    Appellants claim that appellees breached the agreements with

 8    the RCM Customers when they rehypothecated or otherwise used

 9    securities and other property held in customer brokerage

10    accounts.

11             The district court dismissed the claims for lack of
12    standing and failure to allege deceptive conduct, see In re
13    Refco Capital Mkts., Ltd. Brokerage Customer Sec. Litig., No.

14    06 Civ. 643, 2007 WL 2694469 (S.D.N.Y. Sept. 13, 2007) (“RCM

15    I”); In re Refco Capital Mkts., Ltd. Brokerage Customer Sec.

16    Litig., 586 F. Supp. 2d 172 (S.D.N.Y. 2008) (“RCM II”); In re

17    Refco Capital Mkts., Ltd. Brokerage Customer Sec. Litig., Nos.

18    06 Civ. 643, 07 Civ. 8686, 07 Civ. 8688, 2008 WL 4962985
19    (S.D.N.Y. Nov. 20, 2008) (“RCM III”) (on a motion for
20    reconsideration).

21             We hold that appellants have no remedy under the

22    securities laws because, even assuming they have standing, they

23    fail to make sufficient allegations that their agreements with

           1
             A group of defendants associated with Thomas H. Lee Partners, L.P., a
     private equity firm that at relevant times held a majority interest in Refco
     (the “THL Defendants”) were also appellees; however, the appeal against those
     parties is hereby dismissed pursuant to a joint stipulation.

                                           4
 1    RCM misled them or that RCM did not intend to comply with those

 2    agreements at the time of contracting.          We therefore affirm.

 3                                    BACKGROUND

 4             On an appeal from a grant of a motion to dismiss, we

 5    review de novo the decision of the district court.            See Staehr

 6    v. Hartford Fin. Servs. Group, 547 F.3d 406, 424 (2d Cir.

 7    2008).     We construe the complaint liberally, accepting all

 8    factual allegations in the complaint as true, and drawing all
 9    reasonable inferences in the plaintiff’s favor.            Chambers v.
10    Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002).             “To

11    survive a motion to dismiss, however, a complaint must allege a

12    plausible set of facts sufficient to raise a right to relief

13    above the speculative level.”        S.E.C. v. Gabelli, 653 F.3d 49,

14    57 (2d Cir. 2011).

15    a)   The Parties and Their Businesses

16             Capital Management Select Fund Limited and other named

17    appellants2 are investment companies, which, along with members

           2
             This appeal arises from three separate actions that were consolidated
     at the pretrial phase: RCM I, 2007 WL 2694469 (S.D.N.Y. Sept. 13, 2007) (the
     “Class Action”); VR Global Partners, L.P. et al. v. Bennett et al., No. 07
     Civ. 8686, 2007 WL 4827764 (S.D.N.Y. filed Oct. 9, 2007) (the “VR Action”; and
     Capital Management Select Fund Ltd. v. Bennett, No. 07 Civ. 8688, 2007 WL
     4837768 (S.D.N.Y. filed Oct. 9, 2007) (the “Capital Management Action”). Lead
     plaintiffs in the original Class Action are Global Management Worldwide Ltd.,
     Arbat Equity Arbitrage Fund Ltd., and Russian Investors Securities Ltd. All
     three lead plaintiffs in the Class Action are commonly controlled investment
     funds. Plaintiffs in the VR Action are VR Global Partners, L.P., Paton
     Holdings Ltd., VR Capital Group Ltd., and VR Argentina Recovery Fund, Ltd.
     (collectively “VR Plaintiffs”). In their complaint, VR Plaintiffs describe
     themselves as “private investment funds,” each of which operates as either a
     limited liability partnership or limited liability company registered in Grand
     Cayman. Plaintiffs in the Capital Management Action are Capital Management
     Select Fund Ltd., Investment & Development Finance Corporation, and IDC
     Financial S.A. Capital Management is an investment company incorporated under

                                           5
 1    of the putative class, held assets in securities brokerage

 2    accounts with RCM.     RCM is one of three principal operating

 3    subsidiaries of the now-bankrupt Refco, a publicly traded

 4    holding company that, through its operating subsidiaries,

 5    provided trading, prime brokerage, and other exchange services

 6    to traders and investors in the fixed income and foreign

 7    exchange markets.     Appellees are various former officers and

 8    directors of Refco and/or its affiliates (the “Refco Officer

 9    Defendants”), and Refco’s former auditor, Grant Thornton, LLP.

10          RCM operated as a securities and foreign exchange broker

11    that traded in over-the-counter derivatives and other financial

12    products on behalf of its clients.        Although RCM was organized

13    under the laws of Bermuda and represented itself as a Bermuda

14    corporation, it operated from New York at all relevant times.

15    These operations were under the leadership of, and through a

16    sales force of account officers and brokers employed by, its

17    affiliated corporation, Refco Securities, LLC, (“RSL”), a

18    wholly-owned subsidiary of Refco that operated as a U.S.-based

19    broker-dealer registered with the SEC.
20    b)   Brokerage Account Customer Agreements
21          RCM Customers held securities and other assets in non-

22    discretionary securities brokerage accounts with RCM pursuant



     the laws of the Bahamas. Investment & Development Finance is an investment
     company incorporated under the laws of the British Virgin Islands. IDC
     Financial is an investment company incorporated under the laws of Panama.

                                          6
 1   to a standard form “Securities Account Customer Agreement” with

 2   RCM and RSL (the “Customer Agreement”).   RCM Customers’

 3   securities and other property deposited in their accounts were

 4   not segregated but were commingled in a fungible pool.     As a

 5   result, no particular security or securities could be

 6   identified as being held for any particular customer.      Such a

 7   practice is common in the brokerage industry.   See Levitin v.

 8   PaineWebber, Inc., 159 F.3d 698, 701 (2d Cir. 1998) (“Customer
 9   accounts with brokers are generally not segregated, e.g. in
10   trust accounts.    Rather, they are part of the general cash

11   reserves of the broker.”); U.C.C. § 8-503 cmt. 1 (“[S]ecurities

12   intermediaries generally do not segregate securities in such

13   fashion that one could identify particular securities as the

14   ones held for customers.”); Adoption of Rule 15c3-2 Under the

15   Securities Exchange Act of 1934, Exchange Act Release No. 34-

16   7325, 1964 WL 68010, *1 (1964) (“[W]hen [customers of broker-

17   dealers] leave free credit balances with a broker-dealer the

18   funds generally are not segregated and held for the customer,

19   but are commingled with other assets of the broker-dealer and

20   used in the operation of the business.”).

21        The Customer Agreement included a margin provision that

22   permitted RCM Customers to finance their investment

23   transactions by posting securities and other acceptable

24   property held in their accounts as collateral for margin loans

25   extended by RCM.   Under the margin provision, RCM, upon

                                      7
 1    extending a margin loan to a customer, had the right to use or

 2    “rehypothecate”3 the customer’s account securities and other

 3    property for RCM’s own financing purposes.           For example, RCM

 4    might pledge customers’ securities as collateral for its own

 5    bank loans or sell the securities pursuant to repurchase

 6    agreements (“repos”).4      The parties dispute whether the

 7    rehypothecation rights were limited to securities serving as

 8    collateral or whether they also included securities that were
 9    excess collateral.      We discuss this dispute, infra.
10             We briefly provide a generic background.       From an ex ante

11    perspective, such margin provisions provide distinct, but

12    related, economic benefits to both the brokerage and its

13    customers.     For the customers, the margin provision provides

14    the ability to invest on a leveraged basis and thereby earn

15    amplified returns on their investment capital.           As for the

16    brokerage, the ability to rehypothecate its customers’

17    securities presents, among other things, an additional and
18    inexpensive source of secured financing.          See Michelle Price,

           3
             Rehypothecation technically refers to a broker’s re-pledging of
     securities held in its customer’s margin account as collateral for a bank
     loan. Similarly, a broker may sell the securities through a repurchase
     agreement, which is functionally equivalent to a secured loan. See infra Note
     4. Hereinafter we will refer to rehypothecation in the general sense -- i.e.,
     a broker’s use and/or pledging of its customer’s margin account securities to
     obtain financing for its own transactions.
           4
             A repurchase agreement is an agreement involving the simultaneous sale
     and future repurchase of an asset. In a typical repurchase agreement, the
     original seller buys back the asset at the same price at which he sold it,
     with the original seller paying the original buyer interest on the implicit
     loan created by the transaction. See In re Comark, 124 B.R. 806, 809 n.4
     (Bankr. C.D. Cal. 1991).

                                           8
 1   Picking over the Lehman Carcass - Asset Recovery, Banker, Dec.

 2   1, 2008, available at 2008 WLNR 24064913 (“[Without

 3   rehypothecation rights] the prime broker would have to use its

 4   unsecured credit facilities, the cost of which is currently in

 5   the region of 225 to 300 basis points above that of secured

 6   credit.”).

 7        While these types of margin provisions provide economic

 8   benefits to both parties, like any creditor-debtor arrangement

 9   they also create counterparty risks.   The brokerage bears the

10   risk that its customers default on margin loans that could

11   become under-secured due, for example, to a precipitous decline

12   in the value of the posted collateral.   Likewise, of course,

13   the customers face the possibility that the brokerage, having

14   rehypothecated its customers’ securities, fails, making it

15   unable to return customer securities after those customers meet

16   their margin debt obligations.

17        Counterparty risks associated with margin financing have

18   long been recognized by industry participants and regulators

19   alike.   In the United States, for example, margin financing has




                                      9
 1    been subject to federal5 and state6 regulation, and, even

 2    longer still, to self-imposed limitations by brokers and self-

 3    regulating organizations.7       In general, margin restrictions

 4    attempt to reduce the counterparty risk associated with margin

 5    financing by limiting the types of securities that can be

 6    posted by an investor as collateral for a margin loan and

 7    limiting the amounts that can be borrowed against that

 8    collateral.8

 9             Similarly, at least in the United States, brokers’

10    rehypothecation activities have long been restricted by
11    federal9 and state law,10 and by rules promulgated by the

           5
             Federal regulation of margin financing for securities purchases was
     introduced in the 1913 Federal Reserve Act. See Board of Governors of the
     Federal Reserve System, A Review and Evaluation of Federal Margin Regulations
     45 (1984). After the 1929 stock market crash, Congress imposed sweeping
     regulation of margin financing under the Exchange Act, 15 U.S.C. §§ 78a to
     78hh-1. Statutory authority for regulating margin financing was granted under
     Section 7 of the Act. See id. § 78g.
           6
             State regulation of margin financing generally arises under Article 8
     of the Uniform Commercial Code.
           7
             The New York Stock Exchange (“NYSE”) first established margin
     restrictions for exchange members in 1913 when it required its members to
     impose margin levels that were “proper and adequate.” See Board of Governors
     of the Federal Reserve System, supra, at 45. The NYSE currently restricts
     customer margin levels under NYSE Rule 431 which, inter alia, limits the
     amount of credit that can be used by a customer to purchase securities. See
     NYSE Rule 431, available at 2003 WL 25658590.
           8
             See, e.g., Federal Reserve Board Regulation T, 12 C.F.R. § 200.1 et
     seq. (imposing initial and maintenance margin requirements on investors
     purchasing securities on margin); see also Federal Reserve Board Regulation U,
     12 C.F.R. § 221.1 et seq. (similar margin restrictions applicable to banks and
     other lenders); Federal Reserve Board Regulation X, 12 C.F.R. § 224.1 et seq.,
     (similar margin restrictions applicable to margin loans not explicitly covered
     by other regulations).
           9
             The SEC first restricted brokers’ rehypothecation rights with the
     adoption of Rule 8c-1, 17 C.F.R. § 240.8c-1, and Rule 15c2-1, 17 C.F.R. §
     240.15c2-1, in 1940. In general, these rules prohibit the following

                                          10
 1    principal stock exchanges.11       These restrictions generally

 2    limit a broker’s ability to commingle its customers’ securities

 3    without their consent, and limit a broker’s rehypothecation

 4    rights with respect to a customer’s “excess margin securities”

 5    i.e., securities not deemed collateral to secure a customer’s

 6    outstanding margin debt, and “fully-paid securities, ” i.e.,

 7    securities in a cash account for which full payment has been

 8    made.12

 9          The upshot of these restrictions is that in the United

10    States, brokers and investors alike are limited in the amount

11    of leverage that is available to amplify returns.            However,

12    since the development of globalized capital and credit markets,

13    investors have sought to avoid these limitations by seeking

14    unrestricted margin financing through, among other sources,
15    unregulated offshore entities.        See, e.g., Metro-Goldwyn-Mayer,

16    Inc. v. Transamerica Corp., 303 F. Supp. 1354 (S.D.N.Y. 1969)


     activities without first obtaining consent from the customer: (i) commingling
     of the securities of different customers as collateral for a loan; (ii)
     commingling a customer’s securities with its own under the same pledge; and
     (iii) pledging a customer’s securities for more than the customer owes. See
     Statement of Commission Issued in Connection with the Adoption of Rules X-8C-1
     and X-15-C2-1, Exchange Act Release No. 2690, 1940 WL 974 (1940).
           10
              See Report of Special Study of Securities Markets of the Securities
     and Exchange Commission, H.R. Doc. No. 88-95, pt. 1, at 406 (1963) (listing
     statutory hypothecation restrictions under the laws of Iowa, Michigan,
     Nebraska, and New York).
           11
              Id. at 405-07 (listing rehypothecation restriction rules of the
     various exchanges).
           12
              See, e.g., SEC Rule 15c3-3 (prohibiting a broker from rehypothecating
     an amount of customer’s collateral in excess of 140 percent of the customer’s
     outstanding margin debt), 17 C.F.R. § 240.15c3-3.

                                          11
 1   (leveraged buyout of Metro-Goldwyn-Mayer financed through the

 2   Eurodollar market, thus avoiding U.S. margin restrictions);

 3   Martin Lipton, Some Recent Innovations to Avoid the Margin

 4   Regulations, 46 N.Y.U. L. Rev. 1 (1971).   In recent years,

 5   U.S.-based broker-dealers have satisfied investor demand for

 6   unrestricted margin financing by providing financing to
 7   institutional investors, -- e.g., hedge funds -- through, inter
 8   alia, unregulated foreign affiliates that are not subject to

 9   U.S. margin or rehypothecation restrictions.   See Noah Melnick

10   et al., Prime Broker Insolvency Risk, Hedge Fund J., Nov. 2008
11   (“US prime brokers commonly rely on [foreign] unregulated

12   affiliates for margin lending or securities lending and/or to

13   act as custodians in non-US jurisdictions.”); Sherri Venokur &

14   Richard Bernstein, Protecting Collateral against Bank

15   Insolvency Risk--Part I, Sept. 8, 2008, at 1 (“U.S. registered

16   broker-dealers enter into derivatives transactions through

17   their unregulated affiliates in order to reduce capital reserve

18   requirements but also to be able to use counterparty

19   collateral.”); Roel C. Campos, SEC Comm’r, Remarks before the

20   SIA Hedge Funds & Alternative Investments Conference (June 14,

21   2006) (noting that certain hedge fund financing is generally

22   booked through foreign, unregulated affiliates).

23        In the instant case, RCM held itself out as, and the

24   record indicates that at least some of the RCM Customers

25   understood it to be, an unregulated offshore broker.

                                   12
 1   c)   The Lawsuit

 2         The event giving rise to this action is the collapse of

 3   Refco, RCM’s now-bankrupt parent corporation.   On October 20,

 4   2005, a little more than two months after issuing an initial

 5   public offering of its stock, Refco announced a previously

 6   undisclosed $430 million uncollectible receivable and disavowed

 7   its financial statements for the previous three years.   The

 8   uncollectible receivable stemmed, in part, from losses suffered

 9   by Refco and several of its account holders during the late
10   1990s. Rather than disclose its losses to the public and its
11   investors at that time, Refco’s management devised and

12   implemented a “round robin” loan scheme to conceal the losses.

13   The first part of this scheme involved Refco transferring its

14   uncollectible receivables to the books of Refco Group Holdings,

15   Inc. (“RGHI”), an entity owned and controlled by appellee-

16   defendant Phillip R. Bennett, Refco’s then-President, CEO, and

17   Chairman.   Then, in order to mask the magnitude and related-

18   party nature of the RGHI receivable, a Refco entity (alleged by
19   plaintiffs typically to be RCM) would extend loans to multiple

20   unrelated third parties that would in turn lend the funds to

21   RGHI to pay down the uncollectible receivables.   In this

22   manner, Refco effectively eliminated the uncollectible related-

23   party receivable from its books just prior to each relevant

24   financial period but would unwind the loans shortly thereafter.

25   The transactions allegedly took place over the course of six

                                    13
 1    years, between 1998 and 2004, and were never disclosed in

 2    Refco’s public securities filings.         By 2004, the RGHI

 3    receivable had grown to an amount alleged to be in excess of $1

 4    billion.

 5            Prior to Refco’s 2005 disclosure, beginning in late 2003,

 6    THL, a private equity investment fund that focuses on the

 7    acquisition of equity stakes in mid-to-large capitalization

 8    companies, began exploring investment opportunities in Refco,

 9    and ultimately completed a leveraged buyout in August 2004.

10            Following Refco’s disclosure of its $430 million

11    uncollectible receivable, customers holding accounts with RCM,

12    including appellants, attempted to withdraw their assets from

13    RCM.        This began the proverbial “run on the bank,” and, on

14    October 13, 2005, Refco announced a unilateral 15-day

15    moratorium on all RCM trading activities.          On October 17, 2005,

16    Refco, along with RCM and several other Refco affiliates, filed

17    for Chapter 11 bankruptcy protection in the Southern District

18    of New York.       In a December 30, 2005 bankruptcy filing, RCM

19    disclosed that it owed its customers approximately $4.16

20    billion, while holding only $1.905 billion in assets.

21            Along with a host of other plaintiffs who brought actions
22    in the wake of Refco’s collapse,13 on January 26, 2006,


             13
              See Am. Fin. Int’l Group-Asia, L.L.C. v. Bennett, No. 05 Civ. 8988,
     2007 WL 1732427 (S.D.N.Y. June 14, 2007); In re Refco, Inc. Sec. Litig., 503
     F. Supp. 2d 611 (S.D.N.Y. 2007); Thomas H. Lee Equity Fund V, L.P. v. Bennett,
     No. 05 Civ. 9608, 2007 WL 950133 (S.D.N.Y. Mar. 28, 2007); In re Refco, Inc.,

                                          14
 1    plaintiff-appellant Global Management Worldwide Limited, an

 2    investment fund organized under the laws of Bermuda, filed a

 3    putative class action on behalf of all brokerage customers of

 4    RCM who held securities with RCM and/or RSL between October 17,

 5    2000 and October 17, 2005.       On September 5, 2006, Global

 6    Management Worldwide filed a Consolidated Amended Class Action

 7    Complaint, in which Arbat Equity Arbitrage Fund Limited and

 8    Russian Investors Securities Limited, both “commonly controlled

 9    investment funds,” were added as Co-Lead Plaintiffs of the

10    putative class.     The amended complaint named appellees as

11    defendants.    The complaint alleges that Refco’s corporate

12    officers caused RCM to improperly sell or lend securities and

13    other assets from RCM Customers’ trading accounts to various

14    Refco affiliates in order to fund Refco’s operations.             The

15    complaint further alleges that this practice was approved by,

16    and well known to, all members of Refco senior management.

17          On September 13, 2007, the district court dismissed the

18    putative class action suit for plaintiffs’ failure to allege

19    deceptive conduct.      However, it granted plaintiffs leave to
20    replead as to certain defendants.         RCM I, 2007 WL 2694469, at

21    *12-13.    On October 9, 2007, two separate groups of plaintiffs

22    -- one group associated with investment fund VR Global

23    Partners, L.P., (“VR Plaintiffs”), and a second group


     No. 06 Civ. 1888, 2006 WL 1379616 (S.D.N.Y. May 16, 2006); In re SPhinX, Ltd.,
     371 B.R. 10 (S.D.N.Y. 2007).

                                          15
 1   associated with investment fund Capital Management Select Fund

 2   Ltd. (“CM Plaintiffs”) -– filed individual actions based on

 3   allegations similar to those raised in the putative class

 4   action complaint.   Thereafter, on November 20, 2007, the

 5   district court consolidated all three actions for pretrial

 6   purposes, subsequent to which the lead plaintiffs in the

 7   putative class action filed a Second Amended Complaint.

 8        In the consolidated action, all plaintiffs alleged

 9   violations of Sections 10(b) and 20(a) of the Exchange Act and

10   Rule 10b-5 against all Refco Officer Defendants, and violations

11   of Rule 10b-16 against all Refco Officer Defendants who,

12   together with RCM and Refco, allegedly extended margin credit

13   to RCM Customers without adequately disclosing RCM’s use of

14   Customer securities.   15 U.S.C. §§ 78j(b), 78l (Sections 10(b)

15   and 20(a) of the Exchange Act); 17 C.F.R. §§ 240.10b-5, .10b-16

16   (Rules 10b-5 and 10b-16).    In addition, VR Plaintiffs alleged

17   violations of Section 10(b) and Rule 10b-5 as against Grant

18   Thornton.

19        On August 28, 2008, the district court granted motions to

20   dismiss filed by various Officer Defendants and Grant Thornton.
21   RCM II, 586 F. Supp. 2d at 174.      In granting the motions to

22   dismiss, the court rejected RCM Customers’ Section 10(b) claim

23   for lack of standing under the purchaser-seller rule of Blue

24   Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975).      RCM II,

25   586 F. Supp. 2d at 178-81.   As a separate ground for dismissal,

                                     16
 1   the court ruled that plaintiffs failed to adequately plead

 2   deceptive conduct through any affirmative act or

 3   misrepresentation, breach of fiduciary duty, or any other

 4   manner.    Id. at 181-94.

 5        Finally, as to RCM Customers’ Section 20(a) claims, the

 6   court concluded that because plaintiffs could not bring a claim

 7   against any defendant for a primary violation of Section 10(b)

 8   and Rules 10b-5 and 10b-16, plaintiffs necessarily lacked

 9   standing to bring a controlling person action under Section
10   20(a).    Id. at 195.

11        In considering RCM Customers’ request for leave to

12   replead, the court first noted that all plaintiffs had the

13   benefit of filing their complaints after the court’s September

14   13, 2007 Opinion and Order, which detailed the deficiencies in

15   the initial class-action pleading.   Id. at 196.    The court also

16   observed that VR Plaintiffs and CM Plaintiffs all had more than

17   adequate access to Refco’s internal files, including books,

18   records, and corporate minutes, as a result of their
19   participation in the Refco bankruptcy proceeding.    Id.   Finding

20   no indication that RCM Customers could provide additional facts

21   to cure their pleading defects, the district court denied RCM
22   Customers’ request for leave to replead.   Id.
23        On September 12, 2008, plaintiffs filed a motion to

24   reconsider the district court’s denial of leave to replead.    In

25   their motion, RCM Customers asserted that, given the

                                   17
 1   opportunity to replead, they would be able to establish

 2   deceptive conduct by showing that RCM improperly rehypothecated

 3   the Customers’ fully-paid securities.      The district court

 4   granted the motion for reconsideration but again denied RCM

 5   Customers leave to replead.     RCM III, 2008 WL 4962985.      The

 6   court determined that even if RCM Customers could establish

 7   deceptive conduct based on RCM’s rehypothecation of fully-paid

 8   securities, plaintiffs still had no standing as “actual
 9   purchaser[s] or seller[s]” under Blue Chip Stamps.       Id. at *3.

10         This appeal followed.

11                                 DISCUSSION

12         RCM Customers seek to recover under Section 10(b) of the

13   Exchange Act, 15 U.S.C. § 78j(b).      RCM Customers assert that

14   they were deceived by, inter alia, the terms of the Customer

15   Agreement and RCM’s written Trade Confirmations, RCM’s written

16   account statements, and oral representations by certain

17   appellees.
18   a)   Section 10(b)
19         We turn first to Section 10(b), which makes it unlawful to

20   “use or employ, in connection with the purchase or sale of any

21   security . . . any manipulative or deceptive device or

22   contrivance in contravention of such rules and regulations as

23   the Commission may prescribe.”     15 U.S.C. § 78j(b).   The

24   elements of a Section 10(b) claim are familiar to all federal

25   courts.   A plaintiff claiming fraud must allege scienter, “a

                                       18
 1   mental state embracing intent to deceive, manipulate, or

 2   defraud,” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551

 3   U.S. 308, 319 (2007) (quoting Ernst & Ernst v. Hochfelder, 425

 4   U.S. 185, 193 n.12 (1976)), and must “state with particularity

 5   facts giving rise to a strong inference that the defendant

 6   acted with the required state of mind.”   15 U.S.C. § 78u-

 7   4(b)(2).   A “strong inference of scienter” is one that is “more

 8   than merely ‘reasonable’ or ‘permissible’ -- it must be cogent

 9   and compelling, thus strong in light of other explanations.”
10   Tellabs, 551 U.S. at 323-24.    This strong inference of scienter

11   can be established by alleging either “(1) that defendants had

12   the motive and opportunity to commit fraud, or (2) strong

13   circumstantial evidence of conscious misbehavior or

14   recklessness.”   ECA & Local 134 IBEW Joint Pension Trust of

15   Chi. v. JP Morgan Chase Co., 553 F.3d 187, 198 (2d Cir. 2009).

16        Although no claim for breach of contract is pursued by

17   appellants, the gravamen of their Section 10(b) claim is such a

18   breach.    Breaches of contract generally fall outside the scope
19   of the securities laws.   See Gurary v. Winehouse, 235 F.3d 792,
20   801 (2d Cir. 2000) (“[T]he failure to carry out a promise made

21   in connection with a securities transaction is normally a

22   breach of contract and does not justify a Rule 10b-5 action

23   . . . unless, when the promise was made, the defendant secretly

24   intended not to perform or knew that he could not perform.”

25   (citation and internal quotation marks omitted) (quoting Mills

                                     19
 1   v. Polar Molecular Corp., 12 F.3d 1170, 1176 (2d Cir. 2000)));

 2   Desert Land, LLC v. Owens Fin. Grp., Inc., 154 Fed. App’x. 586,

 3   587 (9th Cir. 2005) (“[T]he mere allegation that a contractual

 4   breach involved a security does not confer standing to assert a

 5   10b-5 action.”).

 6        However, although “[c]ontractual breach, in and of itself,

 7   does not bespeak fraud,” Mills, 12 F.3d at 1176, it may

 8   constitute fraud where the breaching party never intended to
 9   perform its material obligations under the contract.   See Cohen
10   v. Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994) (“The failure to

11   fulfill a promise to perform future acts is not ground for a

12   fraud action unless there existed an intent not to perform at

13   the time the promise was made.”).   Private actions may succeed

14   under Section 10(b) if there are particularized allegations

15   that the contract itself was a misrepresentation, i.e., the

16   plaintiff’s loss was caused by reliance upon the defendant’s

17   specific promise to perform particular acts while never
18   intending to perform those acts.    See Wharf (Holdings) Ltd. v.
19   United Int’l Holdings, Inc., 532 U.S. 588 (2001) (defendant

20   violated Section 10(b) when it sold a security while never

21   intending to honor its agreement); Ouaknine v. MacFarlane, 897

22   F.2d 75, 81 (2d Cir. 1990) (Section 10(b) plaintiff adequately

23   alleged facts to imply the defendants intended to deceive when

24   they issued an offering memorandum); Luce v. Edelstein, 802

25   F.2d 49, 55-56 (2d Cir. 1986) (allowing Section 10(b) claim

                                   20
 1   where plaintiff alleged defendant’s promises made in

 2   consideration for a sale of securities were known by defendant

 3   to be false); cf. Mills, 12 F.3d at 1176 (denying Section 10(b)

 4   claim because plaintiff alleged no facts probative of

 5   defendant’s intent at contract formation).

 6        We have also held that where a breach of contract is the

 7   basis for a Section 10(b) claim, the “promise . . . must

 8   encompass particular actions and be more than a generalized
 9   promise to act as a faithful fiduciary.”   Luce, 802 F.2d 55.
10        With respect to the present action, we add that a simple

11   disagreement over the meaning of an ambiguous contract combined

12   with a conclusory allegation of intent to breach at the time of

13   execution will not do.   Either the alleged breach must be of a

14   character that alone provides “strong circumstantial evidence”

15   of an intent to deceive at the time of contract formation, ECA,

16   553 F.3d at 198, or there must be allegations of particularized

17   facts supporting a “cogent and compelling” inference of that
18   intent, Tellabs, 551 U.S. at 324; Int’l Fund Mgmt. S.A. v.
19   Citigroup Inc., Nos. 09 Civ. 8755, 10 Civ. 7202, 10 Civ. 9325,

20   11 Civ. 314, 2011 WL 4529640, at *9 (S.D.N.Y. Sept. 30, 2011).

21   In the present case, there are no particularized allegations of

22   fact supporting such an inference of deceptive intent at the

23   time of execution of the Customer Agreements.   Therefore, the

24   requisite intent must be inferred, if at all, from the Customer

25   Agreement itself and the nature of the alleged breach.

                                    21
 1    b)   The Customer Agreement as a Misrepresentation
 2
 3          RCM Customers claim that they were deceived into believing

 4    that their securities and other assets would be safeguarded,

 5    and, in particular, that RCM would not rehypothecate excess

 6    margin or fully-paid securities.         They allege that, in fact,

 7    RCM routinely rehypothecated all of its customers’ securities,

 8    regardless of the customers’ outstanding margin debt, and did

 9    so from the start of each customer’s account.           The allegations

10    as to RCM’s conduct are sufficient to satisfy the element of

11    intent at the time of contract formation.           The crux of the

12    issue, therefore, is whether RCM’s rehypothecation of

13    securities even when they were not deemed collateral was so

14    inconsistent with the provisions of the Customer Agreement that
15    the Agreement was itself a deception.14
16          Section B15 of the Customer Agreement establishes the

           14
              There is no issue regarding the financial sophistication of the RCM
     Customers. They are investment funds with access to the finest advisory
     resources. Indeed, all plaintiffs have alleged that, from the outset, they
     knew of, and were sensitive to, the counterparty risk associated with a
     broker-dealer’s rehypothecation of its customers’ securities.
           15
              Section A of the Customer Agreement clearly indicates that RCM
     Customers’ accounts were non-discretionary. This section states, in relevant
     part:
           A.    AUTHORIZATION

           1. Authority to Act. You hereby authorize [RCM] to purchase, sell,
           borrow, lend, pledge or otherwise transfer Financial Instruments
           (including any interest therein) for your account in accordance with
           your oral or written instructions . . . Except to the extent you have
           expressly authorized someone else to buy, sell and otherwise effect
           Transactions on your behalf and for your account, all Transactions
           introduced to [RCM] by RSL on your behalf and entered into pursuant to
           this Agreement shall be initiated orally or in writing by you.


                                          22
1     terms by which RCM would extend margin financing to RCM

2     Customers, and provides in relevant part:
 3
 4          B.   MARGIN
 5
 6          This Margin section applies in the event [RCM]
 7          finances any of your Transactions from time-to-
 8          time in Financial Instruments.
 9
10          1. Security Interest. [RCM] reserves the right
11          to require the deposit or maintenance of
12          collateral (consisting of cash, United States
13          government obligations or such other marketable
14          securities or other property which may be
15          acceptable to [RCM]) to secure performance of
16          your obligations to [RCM]. . . . To secure your
17          obligations under Transactions entered into
18          pursuant to this Agreement, you hereby grant to
19          [RCM] and its affiliates (collectively, “Refco
20          Entities”) a first priority, perfected security
21          interest in all of your cash, securities and
22          other property (whether held individually or
23          jointly with others) and the proceeds thereof
24          from time-to-time in the possession or under the
25          control of such Refco Entities, whether or not
26          such cash, securities and other property were
27          deposited with such Refco Entities.
28
29          2. Rights and Use of Margin. [RCM] shall have
30          the right to loan, pledge, hypothecate or
31          otherwise use or dispose of such cash, securities
32          and other property free from any claim or right,
33          until settlement in full of all Transactions
34          entered into pursuant to this Agreement. [RCM’s]
35          sole obligation shall be to return to you such
36          cash, like amounts of similar cash, securities
37          and other property (or the cash value thereof in
38          the event of any liquidation of collateral) to
39          the extent they are not deemed to be collateral


     App. 154.
           Because RCM could not trade securities for RCM Customers’ accounts
     without oral or written instructions, it is clear that RCM Customers’ accounts
     were non-discretionary -- that is, RCM Customers, not RCM, had “control over
     the account[s] and ha[d] full responsibility for trading decisions.” de
     Kwiatkowski v. Bear, Stearns & Co., Inc., 306 F.3d 1293, 1302 (2d Cir. 2002).

                                     23
 1        to secure Transactions entered into pursuant to
 2        this Agreement with any Refco Entities or have
 3        not been applied against obligations owing by you
 4        to Refco Entities, whether as a result of the
 5        liquidation of positions and any Transactions
 6        entered into pursuant to this Agreement or
 7        otherwise.
 8
 9   App. 154.

10        Section B.1 states that upon RCM’s extension of margin

11   financing to a customer -- even a dime -- RCM would obtain a

12   “first priority, perfected security interest in all of [RCM
13   Customers’] cash, securities and other property (whether held

14   individually or jointly with others) and the proceeds thereof.”

15   App. 154.    Section B.1 also gave RCM the right to demand

16   additional collateral in the event that a customer’s collateral

17   became insufficient to secure the customer’s outstanding margin

18   debt -- if, for example, the value of the customer’s securities

19   collateral decreased in value such that RCM’s margin loan was

20   under-secured.

21        In addition, Section B.2 states that, if a customer’s

22   securities are no longer deemed collateral to secure the

23   customer’s outstanding margin debt, RCM was obligated to

24   “return” such securities to the customer.    It is evident that

25   the promised “return” did not contemplate either securities or

26   their value being returned to the actual possession of the RCM

27   Customers.   Margin accounts move up or down with both the

28   buying or selling by the customer and the price movements of

29   the collateral.   The constant transfer of collateral back and

                                     24
 1   forth between accounts in RCM’s name or a customer’s name would

 2   have imposed administrative costs on all parties, and no one

 3   argues that such constant transfers were required by the

 4   Customer Agreement.   Moreover, all of the RCM Customers had to

 5   have been aware that, if RCM was not asking for more

 6   collateral, some of their securities were probably excess

 7   collateral.   However, there is no allegation or indication that

 8   any RCM Customer ever noticed or complained about the lack of
 9   back-and-forth transfers.

10        In context, therefore, “return” must mean that, with

11   respect to securities not deemed to be collateral, the customer

12   could demand their return from the fungible pool.    Moreover, in

13   the case of a requested “return,” RCM had the option of

14   transferring physical securities or the “cash value thereof in

15   the event of any liquidation of collateral.”   Thus, RCM, after

16   rehypothecating all its customers’ securities, could have

17   satisfied a demand for “return” of excess securities by paying

18   their cash value in lieu of the actual securities.

19        On review of the Customer Agreement, we conclude that it

20   unambiguously warned the RCM Customers that RCM intended to

21   exercise full rehypothecation rights as to the Customers’

22   excess margin securities.

23        Stripped of verbiage not pertinent to this dispute and

24   substituting a crude and colloquial description for the
25   specified collateral, Sections B.1 and 2 read:

                                    25
 1          B.   Margin
 2
 3               This Margin section applies in the event
 4          [RCM] finances any of your Transactions . . . in
 5          [your account].
 6
 7               1. Security Interest. [RCM] reserves the
 8          right to require . . . [appropriate stuff as]
 9          collateral . . . [T]o secure performance of your
10          obligations to [RCM] . . . you hereby grant to
11          [RCM] . . . a first priority, perfected security
12          interest in all your [stuff] in the possession of
13          . . . [Refco Entities] . . . .
14
15               2. Rights and Use of Margin. [RCM] shall
16          have the right to . . . use or dispose of such
17          [stuff] free from any claim or right, until
18          settlement in full of all Transactions . . . .
19          [RCM’s] sole obligation shall be to return to you
20          such [stuff] . . . to the extent [it is] not
21          deemed to be collateral to secure Transactions
22          . . . .
23
24   App. 154.

25          Appellants’ argument that the first use of “such [stuff]”

26   in B.2 refers only to “stuff” deemed to be collateral is not

27   consistent with the language of the agreement.   The only

28   referent for the first “such [stuff]” is “all your [stuff]” in

29   B.1.   Moreover, the second use of “such [stuff]” in B.2 is

30   modified by “to the extent [it is] not deemed to be collateral,”

31   a most peculiar modifier if “such [stuff]” means only “stuff”

32   deemed to be collateral.

33          RCM Customers also allege that RCM rehypothecated Customer

34   assets at times that RCM Customers had no outstanding margin

35   debt in breach of the Customer Agreement.   However, the Customer
36   Agreement provides only that the cash value of securities not


                                      26
 1    deemed collateral shall be “return[ed]” to the customers, i.e.,

 2    recorded on RCM’s books as money payable on demand to the

 3    particular customer.      A perfectly plausible reading of the

 4    Agreement is that, on the occasions that some customers had no

 5    outstanding margin transactions, they had only a right to demand

 6    payment of the value of 100 percent of the securities that had

 7    been given to RCM.

 8          There is, therefore, no disparity between the provisions of

 9    the Customer Agreement and RCM’s conduct remotely supportive of

10    a claim that the Agreement was a misrepresentation actionable

11    under Section 10(b).

12          The Trade Confirmation also supports this conclusion.

13    Section D.2 of the Customer Agreement incorporates the terms of

14    the Trade Confirmation, which include, among other things, a

15    reiteration of RCM’s rights to “sell, pledge, hypothecate,

16    assign, invest or use, such collateral or property deposited

17    with it.”    App. 712.
18    c)   Consistency with Federal and State Law
19
20          RCM Customers also contend that our interpretation of

21    Section B.2 is inconsistent with federal and/or state law and

22    that ambiguities in the Customer Agreement should be construed

23    to comply with applicable legal rules.16         RCM Customers argue


           16
              Appellants also argue that the district court’s interpretation was
     inconsistent with custom and practice, but they do not state what the customs
     and practices are or how they are inconsistent with this agreement. Absent
     allegations as to such customs and practices and given the clarity of the

                                           27
 1    that RCM was subject to SEC Rules 15c3-1, 17 C.F.R. § 240.15c3-

 2    1, and 15c3-3, 17 C.F.R. § 240.15c3-3,17 and New York state law,

 3    which would have limited RCM’s rehypothecation rights with

 4    respect to excess margin securities.         However, even assuming

 5    arguendo the existence of ambiguities in the Customer Agreement,

 6    we disagree.

 7          The district court rejected these arguments regarding

 8    federal law based on our decision in United States v. Finnerty,
 9    533 F.3d 143 (2d Cir. 2008).        RCM II, 586 F. Supp. 2d at 191-92.

10     Finnerty held that a defendant may be liable under Section

11    10(b) and Rule 10(b)(5) for violation of a NYSE rule only if the

12    defendant had made a representation regarding compliance with

13    the rule.    Finnerty, 533 F.3d at 149-50.        The district court

14    concluded that because plaintiffs made no allegations that “RCM

15    (or any Refco affiliate or employee) made any representation

16    that RCM was subject to, or would comply with, any such

17    regulations, much less [Rules 15c3-1 and 15c3-3],” RCM could not



     Customer Agreement and Trade Confirmations, we will not discuss this claim
     further.
           17
              SEC Rule 15c3-1, the so-called Net Capital Rule, generally requires
     brokers and dealers to maintain sufficient capital to protect their customers
     from the firm’s potential insolvency, see 17 C.F.R. § 240.15c3-1, and Rule
     15c3-3, the so-called Customer Protection Rule, requires brokers and dealers
     to obtain and maintain physical possession or control of all fully-paid and
     excess margin securities in a customer’s account. See 17 C.F.R. § 240.15c3-
     3(b)(1). Under Rule 15c3-3, “excess margin securities” is defined as those
     securities in the customer’s account whose market value exceeds 140 percent of
     the customer’s outstanding margin debt. 17 C.F.R. § 240-15c3-3(a)(5). Thus,
     the Customer Protection Rule prohibits a broker from rehypothecating a
     customer’s margin account securities in excess of 140 percent of the
     customer’s outstanding margin debt.

                                           28
 1   be found liable under Section 10(b) and Rule 10b-5 for violating

 2   Rules 15c3-1 and 15c3-3.   RCM II, 586 F. Supp. 2d at 192.

 3        Here, more than simply remaining silent as to whether it

 4   was complying with U.S. law, RCM represented that it was not a

 5   U.S.-regulated company.    Although RCM did state that it was

 6   subject to “all applicable laws” in the trade confirmations,

 7   that simply raises the question of what laws were applicable.

 8   In short, RCM’s alleged violation of federal law does not in and

 9   of itself constitute deceptive conduct.

10        The Security and Exchange Commission has expressed a
11   concern, as amicus curiae, that affirming the district court in
12   this regard will viscerate the so-called “shingle theory” of

13   broker-dealer liability under Section 10(b), and will be

14   inconsistent with our recent decision in VanCook v. SEC, 653

15   F.3d 130 (2d Cir. 2011).   We disagree.

16        Under the shingle theory, a broker makes certain implied

17   representations and assumes certain duties merely by “hanging
18   out its professional shingle.”   Grandon v. Merrill Lynch & Co.,
19   Inc., 147 F.3d 184, 192 (2d Cir. 1998).

20        In VanCook, we held that VanCook’s late-trading practice

21   “violated [Rule 10b-5] because it constituted an implied

22   representation to mutual funds that” VanCook was complying with

23   a rule restricting late-trading.      VanCook, 653 F.3d at 141.   We

24   reasoned that “by submitting orders after that time for

25   execution at the current day’s [Net Asset Value], VanCook made

                                      29
 1   an implied representation that the orders had been received

 2   before 4:00 p.m., because such late trading incorporates an

 3   implicit misrepresentation by falsely making it appear that the

 4   orders were received by the intermediary before 4:00 p.m. when

 5   in fact they were received after that time.”    Id. at 140-41

 6   (internal quotation marks and alterations omitted).    We also

 7   noted that VanCook’s scheme violated his employer “mutual funds’

 8   own express wish’s, as set out in their propectuses,” id. at

 9   140, and involved “steps to make it appear to any outside

10   observer . . . that his customers’ . . . orders had been
11   finalized by 4:00 p.m.,” id.     Based in part on the explicit and

12   implied misrepresentations, we affirmed the order of the SEC

13   that VanCook violated Rule 10b-5 and Section 10(b).    Id. at 141.

14           However, the facts alleged in the instant matter do not, as

15   asserted by appellant, give rise to liability based on “conduct

16   inconsistent with an implied representation; specifically a

17   broker-dealer’s implied representation under the ‘shingle

18   theory’ that it will deal fairly with the public in accordance
19   with the standards of the profession.”    Appellants’ 18(j) Letter
20   at 2.    Surely, RCM’s affirmative representations that it was not
21   a U.S.-regulated company trump any implied representation under

22   the shingle theory.

23           Indeed, we have previously denied shingle theory claims

24   against a broker that made adequate explicit disclosure with

25   regard to the subject matter of the claimed implied duties.       See

                                       30
 1   Starr ex rel. Estate of Sampson v. Georgeson S'holder, Inc., 412

 2   F.3d 103, 111 (2d Cir. 2005) (denying plaintiffs' Rule 10b-5

 3   claim under the shingle theory because defendant disclosed

 4   allegedly excessive markups).   In the instant case, RCM's

 5   Customer Agreement and its standard form Trade Confirmation

 6   expressly disclosed RCM's rehypothecation rights as well as

 7   RCM's status as an offshore unregulated entity.   These

 8   disclosures were made in conjunction with a bargained-for

 9   agreement between sophisticated counter-parties that could be

10   expected to understand the relevant benefits and risks.   Thus,

11   there is no liability under the shingle theory.

12        The terms of the Customer Agreement indicated that, insofar

13   as RCM was acting as executing broker for its customers, RCM was

14   not purporting to comply with the Rules in question but was

15   relying on the safe harbor from broker registration provided

16   under SEC Rule 15a-6, 17 C.F.R. § 240.15a-6.   In general, Rule

17   15a-6 exempts from the federal broker-dealer registration

18   requirements of Section 15(a) of the Exchange Act, 15 U.S.C. §

19   78o, “foreign entities engaged in certain activities involving
20   U.S. investors and securities markets.”   See Registration
21   Requirements for Foreign Broker-Dealers, Exchange Act Release

22   No. 27,017, 54 Fed. Reg. 30013, 30013 (July 18, 1989).    In

23   particular, Rule 15a-6(a)(3) exempts from registration foreign




                                     31
 1    brokers18 that induce or attempt to induce trades in securities

 2    by “major U.S. institutional investors” and “U.S. institutional

 3    investors” so long as any trades are “effected through” a U.S.-

 4    registered broker-dealer and various conditions are met both by

 5    the foreign broker and the registered dealer that effects the

 6    trades.      See 17 C.F.R. § 240.15a-6(a)(3)(i)(A).

 7          Section G.1 of the Customer Agreement, entitled “Respective

 8    Status of [RCM] and RSL,” provides in relevant part:

 9          [RCM] and RSL are all wholly owned subsidiaries
10          of the Refco Group Ltd., LLC, a US corporation.
11          RSL is a US corporation and a broker-dealer
12          registered with the US Securities and Exchange
13          Commission. [RCM] is a Bermuda Corporation.
14
15    App. 156-57.

16          This language clearly indicates that RSL is a U.S.

17    corporation and registered with the SEC, thereby implying that

18    RSL would comply with SEC regulations.            However, Section G.1

19    represents RCM only as a Bermuda Corporation and makes no

20    suggestion that RCM was registered with the SEC or would comply

21    with federal securities regulations.            Furthermore, the Customer

22    Agreement’s frequent references to RSL as “introducing”


           18
                Under Rule 15a-6, a “foreign broker or dealer” is defined as:

           [A]ny non-U.S. resident person (including any U.S. person engaged in
           business as a broker or dealer entirely outside the United States,
           except as otherwise permitted by this rule) that is not an office or
           branch of, or a natural person associated with, a registered broker or
           dealer, whose securities activities, if conducted in the United States,
           would be described by the definition of “broker” or “dealer” in sections
           3(a)(4) or 3(a)(5) of the Act.

     17 C.F.R. § 240.15a-6(b)(3).

                                             32
 1    transactions to RCM on the customers’ behalf clearly represented

 2    that trades executed at RCM for its customers would be “effected

 3    through” RSL to RCM in accordance with the requirements of Rule

 4    15a-6(a)(3)(i)(A).19

 5          Accordingly, whether or not RCM was technically in

 6    compliance with the Rule 15a-6(a)(3) safe harbor,20 the Customer

 7    Agreement clearly represented that RCM undertook no obligation

 8    to comply with Rules 15c3-1 and 15c3-3.

 9          Similarly, to the extent that RCM was acting as its

10    customers’ prime broker, RCM undertook no apparent obligation to

11    comply with federal securities laws, including Rules 15c3-1 and

12    15c3-3.    Section G.1 of the Customer Agreement establishes the

13    role and function of RCM when acting as prime broker and states:
14          Trades Executed Away From [RCM], but cleared by
15          [RCM] (Prime Brokerage) –- [RCM] acts as your
16          clearing, settlement and financing agent (your
17          prime broker) in connection with Transactions
18          executed at your Executing Broker(s). Where
19          [RCM] is acting as your prime broker, no [RCM]
20          entity is involved in executing Transactions.
21
22    App. 157.


           19
              Although RCM would have been exempt from registration under Rule 15a-
     6, RSL, as introducing broker, would have been required to comply with Rules
     15c3-1 and 15c3-3, because, pursuant to Rule 15a-6, the U.S.-registered broker
     through which transactions between the U.S. customer and the foreign broker
     are effected retains responsibility for, inter alia, complying with Rules
     15c3-1 and 15c3-3. See 17 C.F.R. §§ 240.15a-6(3)(iii)(A)(5),(6). Thus, to
     the extent that trades were executed by RCM for its customers, with RSL acting
     as introducing broker, it was RSL, not RCM, that bore the responsibility of
     complying with Rules 15c3-1 and 15c3-3.
           20
              RCM Customers cite in their complaint a draft memorandum from Refco’s
     counsel, Mayer, Brown, Rowe & Maw LLP, expressing counsel’s view that RCM was
     unable to rely on the exemption from U.S. registration provided by Rule 15a-6.



                                           33
 1          The SEC has defined “prime broker” as “a registered broker-

 2    dealer that clears and finances the customer trades executed by

 3    one or more other registered broker-dealers (‘executing broker’)

 4    at the behest of the customer.”        Prime Broker Comm. Request, SEC

 5    No-Action Letter, 1994 WL 808441, at *1 (Jan. 25, 1994).             The

 6    Commission requires prime brokers to comply with certain federal

 7    securities laws, including Rules 15c3-1 and 15c3-3.            Id. at *11.

 8    However, insofar as RCM was not a U.S.-registered broker-dealer,

 9    and thus not a “prime broker” for purposes of complying with

10    U.S. federal securities laws, RCM, when acting in its role as

11    prime broker, was not representing that it would comply with
12    Rules 15c3-1 and 15c3-3.21      We therefore conclude that the

13    Customer Agreement represented that RCM intended to exercise

14    full rehypothecation rights without being subject to the Rules

15    in question.

16          RCM Customers also assert that RCM was subject to New York

17    General Business Law Section 339-e, which, in general, restricts

18    a broker’s rehypothecation rights with respect to fully-paid or
19    excess margin securities.       N.Y. Gen. Bus. Law § 339-e (McKinney

20    2004).    RCM Customers argue that Section 339-e applies because

21    Section H of the Customer Agreement and Paragraph 6 of the Trade



           21
              We cannot, from the pleadings, reach any conclusions as to whether,
     at the time it rehypothecated its customers’ securities, RCM was acting as
     executing broker or prime broker. Nor can we make any conclusions as to
     whether RCM and/or RSL were actually in compliance with Rules 15a-6, 15c3-1 or
     15c3-3. Such conclusions are not, however, pertinent to our disposition of
     this matter.


                                           34
 1   Confirmation specified that the agreement would be governed by,

 2   and construed in accordance with, New York law.   In particular,

 3   Section H of the Customer Agreement, entitled “LAW AND

 4   JURISDICTION,” reads:

 5        This Agreement shall be governed by and construed
 6        with New York law and you agree that the courts
 7        of New York, located in the Borough of Manhattan
 8        (Federal or State), are to have jurisdiction to
 9        settle any disputes which may arise out of or in
10        connection with this Agreement. Any suit, action
11        or proceedings arising out of or in connection
12        with this Agreement (“Proceedings”) commenced by
13        you, may only be brought in New York. [RCM] may
14        take proceedings against you in New York (Federal
15        or State) or any other court of competent
16        jurisdiction, US or otherwise. The taking of
17        Proceedings by [RCM] in one or more jurisdictions
18        does not preclude the taking of Proceedings by
19        [RCM] in any other jurisdiction, whether
20        concurrently or not. You irrevocably waive (and
21        irrevocably agree not to raise) any objection
22        which you may have now or subsequently to [RCM’s]
23        laying of the venue of any Proceedings in any
24        court and any claim that any such Proceedings
25        have been brought in an inconvenient forum.
26
27   App. 157.

28        The district court determined that Section H constituted a

29   choice of law provision that governed only the Customer

30   Agreement itself.   RCM II, 586 F.Supp.2d at 192 n.27.    However,

31   RCM Customers assert that Section H establishes that New York

32   law governed the overall relationship between RCM and RCM

33   Customers, including RCM’s use of RCM Customers’ collateral.    We

34   agree with the district court.   Section H neither created, nor

35   represented, any affirmative obligations on RCM to conform to




                                      35
 1    New York margin-lending restrictions.22         By its clear terms, the

 2    provision was included only as a choice of law and venue

 3    provision that would govern should any conflicts arise “out of

 4    or in connection with” the Customer Agreement.

 5    d)   The Account Statements as a Misrepresentation
 6
 7          In addition to their deception-in-the-contract argument,

 8    appellants also claim that the monthly account statements sent

 9    by RCM were deceptive because those statements identified

10    security positions that were “In Your Account” and other

11    securities as “Open Financing Transactions,” indicating that the

12    latter were being held as collateral.          They argue that these

13    statements implied that the securities held “In Your Account”

14    were not being rehypothecated but were being held on behalf of

15    the customer.

16          However, no such inference could reasonably have been drawn

17    by a signatory to the Customer Agreement, which gave RCM the

18    right to rehypothecate all securities, whether excess collateral
19    or not, as discussed supra.        Based on the terms of the Customer
20    Agreement, the distinction between collateral securities and



           22
              The Trade Confirmation also did not create, deceptively or otherwise,
     an inference that New York law would apply. Paragraph 6 of the Trade
     Confirmation provides that:
                 All transactions between RCM and you shall be subject to all
                 applicable laws, rules, practices and customs and to the terms of
                 the applicable customer agreement and of any other written
                 agreement between you and RCM.

     App. 712. This provision cannot be portrayed as deceptive in this matter
     because neither the Trade Confirmation nor the Customer Agreement state which
     bodies of laws are “applicable.”

                                           36
 1    non-collateral securities had no bearing on rehypothecation

 2    rights, but rather on what securities, or the equivalent cash

 3    value thereof, customers could withdraw from their account.

 4    Thus, these statements do not purport to make any

 5    representation, deceptive or otherwise, about what securities

 6    may or may not have been rehypothecated.

 7    e)   Oral Statements by RCM Representatives
 8
 9          RCM Customers also allege that oral statements made by RCM

10    representatives were deceptive.        They state that during

11    discussions about the RCM Customers’ desire for low-risk

12    investments and a safe place to hold securities, RCM

13    representatives stated that:        (i) RCM did not engage in

14    proprietary trading; (ii) their business involved only

15    executing, clearing, and financing trades in exchange for

16    commissions and interest payments; and (iii) RCM’s securities

17    financing business was a matched-book, which insulated RCM from
18    direct market risk.23     Appellants argue that, in context, these

19    statements created the perception that RCM was “a dependable
20    custodian” for their securities and would not rehypothecate

21    excess margin securities.

22          However, none of these statements had any bearing on how

23    RCM intended to use excess margin securities.           They state only

24    that RCM’s business was that of a broker-dealer and that it took

           23
              In a matched-book business, a broker accepts securities as collateral
     for a loan and then uses those same collateral securities to borrow funds,
     thereby offsetting its exposure to risk that the original loan will become
     under-secured.

                                           37
 1    steps to limit its risk.       No reasonable, much less

 2    sophisticated, investor would understand these statements as an

 3    affirmative representation that RCM would not rehypothecate

 4    excess margin securities.

 5          Moreover, any doubt was removed by the terms of the

 6    Customer Agreements, which granted RCM the right to

 7    rehypothecate all customer securities whenever a customer had a

 8    margin balance and the right to return customer securities in

 9    the form of cash.     These provisions clearly represented that

10    securities might be tied up in transactions even when not deemed

11    to be collateral.     Therefore, the only affirmative statements by

12    RCM concerning the rehypothecation of customer securities were

13    the terms of the Customer Agreement, which were not deceptive.24

14                                    CONCLUSION

15          We have also considered appellants’ remaining claims and

16    find them without merit.       For the foregoing reasons, we affirm.

17

18




           24
              We note two additional matters. First, RCM Customers do not argue
     that the alleged oral misrepresentations constitute a fraud independent of
     their rehypothecation claims. Second, if the oral statements might be taken
     to suggest that RCM would not rehypothecate excess margin securities, there is
     caselaw holding that “the written statement controls the oral one.” Ambrosino
     v. Rodman & Renshaw, Inc., 972 F.2d 776, 786 (7th Cir. 1992) (quoting
     Teamsters Local 282 Pension Trust Fund v. Angelos, 762 F.2d 522, 530 (7th Cir.
     1985)).

                                           38
