On April 25, 2011, the United States District Court for the Southern District of New York rejected a special master’s recommendation to dismiss the Refco Inc. multidistrict securities litigation (MDL), noting that the special master failed to read the complaint in a light most favorable to the plaintiffs.  On December 6, 2010, Special Master Daniel J. Capra recommended dismissal of the plaintiffs’ claims, reasoning that plaintiffs were partially to blame for some of the wrongdoing at issue.  However, in the instant action, Judge Jed S. Rakoff disagreed, saying that only a few lines out of the 300-page amended complaint support such a reading.  Specifically, the judge stated: “A motion to dismiss is not designed to be a game of ‘gotcha’ that ignores the clear thrust of hundreds of pages of specific allegations in favor of a line or two here or there that is arguably inconsistent with that thrust.”  For hedge fund managers, this brief opinion is important in illustrating the extent to which a court will impute (or decline to impute) the bad acts of individual directors or officers of a hedge fund management company to the management company itself or the funds under its management.  This article summarizes the background of the action and the court’s legal reasoning, focusing on the in pari delicto doctrine and the “adverse interest exception” – or, in English, the extent to which an entity may be blamed for the bad acts of an individual.