Legal Briefs

Last month Boston LBO shop Thomas H. Lee Partners sued Mayer Brown Rowe & Maw, accusing the Chicago law firm of hiding the true, ghastly nature of options trader Refco Inc. until it was too late. Mayer Brown called the suit “without merit” and plans to defend itself “vigorously.”

T.H. Lee ended up buying a large stake in Refco for $508 million in 2004, only to see the investment evaporate a year later when Refco went belly-up. T.H. Lee, which is seeking $245 million in the lawsuit, got a big shot in the arm last month from a bankruptcy examiner tasked with diving into the wreck of Refco. The examiner surfaced with a 416-page report laying much of the blame at the feet of Mayer Brown and its chief commodities attorney, Joseph Collins.

The report found that Collins and his Mayer Brown colleagues helped Refco draft 17 “round trip” loans—between company entities and outside investors—to conceal the grime building up on Refco’s balance sheet. The loans totaled as much as $720 million as Refco’s losses mounted, according to the report. Mayer Brown said the report is based on circumstantial evidence and called it, like T.H. Lee’s suit, meritless. Refco, or what’s left of it, has already been sued by shareholders. That suit doesn’t name Mayer Brown as a defendant, although the plaintiff’s attorney signaled that might soon change.

The examiner’s report and T.H. Lee’s suit raise an interesting legal point, one the U.S. Supreme Court is set to take up in its next session. Advisors such as lawyers have largely been left out of the ubiquitous shareholder suits that follow deals-gone-bad and company collapses and general corporate malfeasance. According to the Chicago Tribune, of the 1,236 corporate fraud convictions over the last five years, only 23 of the guilty parties were lawyers.

The high court, however, is set to hear a case this fall involving a shareholder suit accusing a cable company of bilking investors. The plaintiffs in that case have attempted to obtain damages not only from the cable company but also the outside lawyers who allegedly helped perpetrate the fraud. The outcome of the case could make it easier to target outside advisors in shareholder suits.

One more interesting tidbit: T.H. Lee’s suit was filed by Weil, Gotshal & Manges, the same law firm that assisted the buyout firm’s due diligence of Refco. There is a real possibility that Weil Gotshal will put some of its own lawyers on the stand should this case actually make it to court. Interestingly, the bankruptcy examiner’s report also found fault with Weil Gotshal, saying the firm should have seen through some of the allegedly sham transactions. The law firm has denied the implication.