The United States Court of Appeals for the Second Circuit has enunciated a “bright line” standard for imposing liability on so-called “secondary actors” under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.  Lead plaintiffs Pacific Investment Management Company LLC and RH Capital Associates LLC (the Funds) lost money in the 2005 collapse of brokerage Refco Inc. (Refco).  The Funds alleged that Refco engaged in a series of sham loan transactions in an effort to conceal a substantial amount of uncollectible debt.  The Funds sued Refco, along with certain of its affiliates, underwriters and outside counsel, including law firm Mayer Brown LLC (Mayer Brown) and former firm partner Joseph P. Collins (Collins), alleging securities fraud.  Mayer Brown and Collins were involved in negotiating and drafting the documents for many of the sham loan transactions.  They also prepared a private placement memorandum and registration statements for three Refco securities offerings.  Significantly, however, none of the allegedly false statements made in the memorandum or either of the registration statements was specifically attributed to either Mayer Brown or Collins.  Those defendants moved to dismiss the Funds’ claims against them for failure to state a cause of action.  The District Court and the Second Circuit agreed, holding that the mere act of helping to prepare the allegedly false statements did not give rise to liability under Rule 10b-5.  In order for liability to attach, the alleged false statements must be clearly attributed to the secondary actors.  In addition, the court held that, because the Funds admittedly had no idea that Mayer Brown and Collins were involved in negotiating and documenting the sham transactions, they could not have relied on any actions by those two defendants.  Consequently, the Funds’ claim of “scheme liability” also failed.  This article discusses the factual background, including a review of the mechanics of the Refco fraud, and the Second Circuit's legal analysis.