(CN) - A federal judge has affirmed the dismissal of securities fraud claims against former principals of Refco Inc. and the company's auditor, Grant Thornton LLP.
     Former customers of Refco Capital Markets, a subsidiary of bankrupt financial services company, Refco, claimed that Refco corporate officers violated customer agreements when they extended margin credit without properly disclosing use of customers' securities.
     But Judge Ralph Winter of the 2nd Circuit court in New York upheld dismissal of the customers' three consolidated lawsuits for lack of standing, as well as failure to show how Refco officers had deceived them.
     "We hold that appellants have no remedy under the securities laws because, even assuming they have standing, they fail to make sufficient allegations that their agreements with RCM misled them or that RCM did not intend to comply with those agreements at the time of contracting," the ruling states.
     The plaintiffs in the case were investment companies which held assets in Refco Capital Markets brokerage accounts. Under a margin provision of those agreements, Refco Capital Markets retained the right to "rehypothecate" the customers' securities to cover losses or exercise other financial options.
     A footnote in the opinion states: "Rehypothecation technically refers to a broker's re-pledging of securities held in its customer's margin account as collateral for a bank loan."
     Refco Capital Markets' parent company Refco, collapsed after it announced just two months before an IPO that it had failed to disclose hundreds of millions of dollars in losses.
     In late 2005, the company filed for bankruptcy, revealing that it owed its customers more than $4 billion but only had about $1.9 billion in assets.
     The plaintiffs were among several entities which filed suit to recover damages after Refco's collapse. In late 2007, three separate actions were consolidated into a putative class action which alleged that Refco officers breached customer agreements when they rehypothecated and used securities in customers' brokerage accounts.
     But Judge Winter said that the class failed to show how they were deceived by the terms of the contract, or were duped into believing that securities and assets in their brokerage accounts would be safeguarded.
     "On review of the customer agreement, we conclude that it unambiguously warned the RCM Customers that RCM intended to exercise full rehypothecation rights as to the customers' excess margin securities," the ruling states.
     The judge also found that because Refco had stated that it was not a U.S. regulated entity, rehypothecation rights in the agreement were not subject to either SEC rules or New York state law.
     "In short, RCM's alleged violation of federal law does not in and of itself constitute deceptive conduct," Judge Winter found, adding that the customers' monthly account statements were not deceptive "about what securities may or may not be rehypothecated."
     But the customers also claimed that Refco Capital Market representatives led them to believe that their securities would be safeguarded, and that the subsidiary would not rehypothecate excess margin securities.
     "However, none of these statements had any bearing on how RCM intended to use excess margin securities. They state only that RCM's business was that of a broker-dealer and that it took steps to limit its risk. No reasonable, much less sophisticated, investor would understand these statements as an affirmative representation that RCM would not rehypothecate excess margin securities," the rulng states. "Moreover, any doubt was removed by the terms of the customer agreements, which granted RCM the right to rehypothecate all customer securities whenever a customer had a margin balance and the right to return customer securities in the form of cash. These provisions clearly represented that securities might be tied up in transactions even when not deemed to be collateral. Therefore, the only affirmative statements by RCM concerning the rehypothecation of customer securities were the terms of the customer agreement, which were not deceptive."