Filed 01/04/2008 Page 1 of 9. Case 1:05-cv GEL Document 451. UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK x. 05 Civ.

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1 Case 1:05-cv GEL Document 451 Filed 01/04/2008 Page 1 of 9 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK x In re REFCO, INC. SECURITIES LITIGATION 05 Civ (GEL) x LEAD PLAINTIFFS' MEMORANDUM OF LAW IN RESPONSE TO NON-SETTLING DEFENDANTS' OPPOSITION TO MOTION FOR (I) PRELIMINARY APPROVAL OF PARTIAL SETTLEMENT WITH DEFENDANT DENNIS A. KLEJNA, (II) PRELIMINARY CERTIFICATION OF CLASS FOR PURPOSES OF SETTLEMENT, (III) PRELIMINARY APPROVAL OF FORM AND MANNER OF NOTICE, AND (IV) SCHEDULING A FINAL APPROVAL HEARING GRANT & EISENHOFER P.A. Stuart M. Grant (SG-8157) James J. Sabella (JS-5454) Jonathan D. Margolis (JM-1 128) 485 Lexington Avenue, 29th Floor New York, NY Telephone: (646) Facsimile : (646) and - Megan D. McIntyre Christine M. Mackintosh Chase Manhattan Centre 1201 North Market Street Wilmington, DE Telephone: (302) Facsimile: (302) BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP John P. Coffey (JC-3832) Salvatore J. Graziano (SG-6854) John C. Browne (JB-0391) Jeremy P. Robinson David Webber (DW-3876) 1285 Avenue of the Americas New York, NY Telephone: (212) Facsimile : (212) Attorneys for Lead PlaintiffRH Capital Associates LLC and Co-Lead Counselfor the Putative Class Attorneys for Lead PlaintiffPacific Investment Management Company LLC and Co-Lead Counsel for the Putative Class

2 Case 1:05-cv GEL Document 451 Filed 01/04/2008 Page 2 of 9 Table of Contents Page Table of Authorities... ii ARGUMENT...2 THE NON-SETTLING DEFENDANTS' OBJECTION TO PRELIMINARY APPROVAL OF THE SETTLEMENT SHOULD BE OVERRULED BECAUSE THEY LACK STANDING TO OBJECT TO THE SETTLEMENT...2 Conclusion...5 i

3 Case 1:05-cv GEL Document 451 Filed 01/04/2008 Page 3 of 9 Cases Table of Authorities Armco Inc. v. North Atlantic Ins. Co., No. 98 Civ (AGS), 1999 U.S. Dist. LEXIS 3954 (S.D.N.Y. Mar. 29, 1999)...3,3,4 Elliott Co. v. Liberty Mut. Ins. Co., 434 F. Supp. 2d 483 (N.D. Ohio 2006)...5 In re Integra Realty Resources, Inc., 262 F.3d 1089 (10th Cir. 2001)...4 In re Michael Milkin & Assocs. Sec. Litig., 150 F.R.D. 57 (S.D.N.Y. 1993)...3 Murken v. Solv-Ex Corp., 139 N.M. 633, 136 P.3d 1043 (N.M. Ct. App. 2006)...5 N. Y Hotel & Motel Trades Council v. Hotel Ass'n ofn. Y. C., 747 F. Supp (S.D.N.Y. 1990)...3 In re NASDAQ Market-Makers Antitrust Litig., 176 F.R.D. 99 (S.D.N.Y. 1997)...3 Sabater v. Lead Indus. Ass'n, No. 00 Civ (LMM), 2001 U.S. Dist. LEXIS (S.D.N.Y. Sept. 21, 2001)...3 In re Saxon Sec. Litig., No. 82 Civ (MJL), 1985 WL (S.D.N.Y. Oct. 30, 1985)...3 In re School Asbestos Litig., 921 F.2d 1330 (3d Cir. 1990)...5 Travelers Indemnity Co. v. Citgo Petroleum Corp., 166 F.3d 761 (5th Cir. 1999)...5 Zupnick v. Fogel, 989 F.2d 93 (2d Cir. 1993)...2,2,3 Page Miscellaneous Herbert B. Newberg, Newberg on Class Actions 11:55, at 178 (4th ed. 2002)...5 ii

4 Case 1 : 05-cv GEL Document 451 Filed 01/04 /2008 Page 4 of 9 Lead Plaintiffs Pacific Investment Management Company LLC and RH Capital Associates LLC (together, "Lead Plaintiffs") respectfully submit this memorandum of law in response to the Non-Settling Defendants' opposition to Lead Plaintiffs' motion for: (i) preliminary approval of the partial settlement of this securities class action as against defendant Dennis A. Klejna ("Klejna"); (ii) preliminary certification of the proposed class for purposes of the settlement with Klejna; (iii) preliminary approval of the form and manner of notice to putative class members; and (iv) the scheduling of a hearing on final approval of the settlement and any application for attorneys' fees. The Non-Settling Defendants ' objection to preliminary approval of Lead Plaintiffs' proposed settlement with defendant Klejna is based on their assertion that approval is premature because Klejna may need to litigate with the D&O insurance carriers to get the carriers to pay for the settlement. The Non-Settling Defendants argue that approval of the settlement might prove to be a waste of the Court's time and the Settlement Class' s resources absent an agreement with or judgment against the carriers obligating them to pay for the settlement.) The Non-Settling Defendants' objection should be overruled because they lack standing to object to the settlement on this basis. Non-settling defendants lack standing to object to settlements entered into by other defendants unless such settlements would prejudice the legal rights of the non-setting defendants by, for example, depriving them of contractual or legal rights. Here, the Non-Settling Defendants complain only that approval of the settlement might waste the resources of the Settlement Class2 or of the Court; they do not assert that the proposed 1 Non-Settling Defendants ' Response, dated Dec. 21, 2007 ("Non-Settling Def. Mem.") at 3. 2 The Non-Settling Defendants are not members of the Settlement Class. See Stipulation and Agreement of Settlement at 8-9.

5 Case 1:05-cv GEL Document 451 Filed 01/04/2008 Page 5 of 9 settlement would impair any rights of the Non-Settling Defendants. Therefore, they lack standing to object and the objection must be overruled. The Court should also note that the Non- Settling Defendants ' argument would put Lead Plaintiffs and Klejna in a procedural cul-de-sac. For while the Non-Settling Defendants argue that the insurance coverage issue must be resolved prior to preliminary approval of the settlement, the insurers have cited the lack of approval of the settlement as a ground for not agreeing to pay their portion of it. Thus, the insurers have taken the position that the proposed settlement does not constitute a legal obligation by any party to pay until the settlement proposal has received approval by a court with proper jurisdiction to grant such approval. Accordingly, such settlement would not constitute Loss, as that term is defined in the primary policy and incorporated by the Axis Policy, until it is approved by a court. Declaration of James J. Sabella, dated January 4, 2007 ("Sabella Decl.") Exhs. A, B. This is precisely the Catch-22 that the Non-Settling Defendants desire, since, as discussed below, the Non-Settling Defendants' true motivation is to prevent any insurance proceeds from being used to pay the Klejna settlement. It is respectfully submitted that the Court should not permit such gambit to succeed. ARGUMENT THE NON-SETTLING DEFENDANTS' OBJECTION TO PRELIMINARY APPROVAL OF THE SETTLEMENT SHOULD BE OVERRULED BECAUSE THEY LACK STANDING TO OBJECT TO THE SETTLEMENT The Non-Settling Defendants' objection to preliminary approval must be rejected because they lack standing to object to the settlement. In the Second Circuit, it is settled law that "[u]sually a nonsettling defendant lacks standing to object to a court order approving a partial settlement because a nonsettling defendant is ordinarily not affected by such a settlement." Zupnick v. Fogel, 989 F.2d 93, 98 (2d Cir. 2

6 Case 1:05-cv GEL Document 451 Filed 01/04/2008 Page 6 of ); accord In re NASDAQ Market-Makers Antitrust Litig., 176 F.R.D. 99, 103 (S.D.N.Y. 1997) ("[g]enerally, a non-settling defendant lacks standing to object to approval of a settlement because the non-settling defendant is not affected by that settlement.") This rule is strictly enforced because, as the Second Circuit has explained, the rule "advances the policy of encouraging the voluntary settlement of lawsuits." Zupnick, 989 F.2d at 98 (internal quotation marks omitted).3 There is a narrow exception to the general rule that non-settling defendants cannot object to settlements by other defendants, which "permit[s] a non-settling defendant to object where it can demonstrate that it will sustain some formal legal prejudice as a result of the settlement." Zupnick, 989 F.2d at 98 ( internal quotation marks omitted); accord In re NASDAQ Market- Makers Antitrust Litig., 176 F.R.D. at 103; N. Y. Hotel & Motel Trades Council v. Hotel Ass'n of N.Y.C., 747 F. Supp. 1074, 1078 (S.D.N.Y ). "In the Second Circuit, non-settling defendants will only have standing to challenge an agreement between two other parties when the non-settling party can demonstrate that it will be legally prejudiced as a result of the settlement." Sabater v. Lead Indus. Ass'n, No. 00 Civ (LMM), 2001 U.S. Dist. LEXIS 14758, at *7-8 (S.D.N.Y. Sept. 21, 2001). Such formal legal prejudice "has only been found to exist in rare circumstances, such as when the settlement agreement strips a non-settling party of a claim for contribution or indemnification, or invalidates a non-settling party's contract rights." Armco Inc. v. North Atlantic Ins. Co., No. 98 Civ (AGS), 1999 U.S. Dist. LEXIS 3954, at *3 (S.D.N.Y. Mar. 3 See In re Michael Milkin & Assocs. Sec. Litig., 150 F.R.D. 57, 65 (S.D.N.Y. 1993) ("the law favors and encourages the settlement of class action suits"); In re Saxon Sec. Litig., No. 82 Civ (MJL), 1985 WL 48177, at *I (S.D.N.Y. Oct. 30, 1985) ("In class actions in particular, there is an overriding public interest in favor of settlement") (internal quotation marks omitted). 3

7 Case 1:05-cv GEL Document 451 Filed 01/04/2008 Page 7 of 9 29, 1999). "A settlement that does not divest non-settling parties of their legal claims or prevent the assertion of those claims does not constitute legal prejudice to the non-settling parties." Id. At bar, the Non-Settling Defendants' objection to preliminary approval of the settlement with Klejna is premised solely on their assertion that approval is premature because Klejna may need to litigate with the D&O insurance carriers to get the carriers to pay for the settlement. They complain only that approval of the settlement might waste the resources of the Settlement Class or of the Court;4 they do not assert that the proposed settlement would deprive them of any rights. Therefore, they lack standing to object. The Non-Settling Defendants' memorandum of law betrays that their true motivation in opposing approval of the settlement has nothing to do with conserving the resources of the Court or the Settlement Class. What they really seek to conserve are the insurance proceeds for their own use. Thus, they complain that this settlement calls for the carriers to contribute more than Klejna's pro rata share of insurance proceeds,5 and - while they do not assert this as a basis for opposing preliminary approval of the settlement - they are obviously worried that there might not be sufficient insurance left to fund settlements by them if and when they decide to settle.6 Such concerns provide no basis for denial of approval of the settlement. First, any concern by the Non-Settling Defendants that Klejna has outmaneuvered them with respect to settlement strategy does not give them standing to object to the settlement. "[I]t is not sufficient for [non-settling defendants] to show merely the loss of some practical or strategic advantage in litigating their case." In re Integra Realty Resources, Inc., 262 F.3d 1089, 4 Non-Settling Def. Mem. at 3. 5 Non-Settling Def. Mem. at See, e.g., Non-Settling Def. Mem. at 6 (the settlement "is a blatant attempt to `grab' insurance proceeds"). 4

8 Case 1:05-cv GEL Document 451 Filed 01/04/2008 Page 8 of (10th Cir. 2001). "Mere allegations by a nonsettling party that prejudice exists because there is a loss of `resource sharing,' `broader discovery,' or `bargaining power,' is insufficient." Murken v. Solv-Ex Corp., 139 N.M. 633, 635, 136 P.3d 1043, 1045 (N.M. Ct. App. 2006) (quoting Herbert B. Newberg, Newberg on Class Actions 11:55, at 178 (4th ed. 2002)). Second, the Non-Settling Defendants have no cognizable legal right to complain about Klejna entering into a good faith settlement that consumes some, most or all of the insurance coverage. The law is clear that "an insurer can settle or pay claims in good faith to one insured, even if this results in actual exhaustion of the policy limits to the detriment of another insured... A contrary holding would discourage the reasonable settlement of disputes." Elliott Co. v. Liberty Mut. Ins. Co., 434 F. Supp. 2d 483, (N.D. Ohio 2006); see Travelers Indemnity Co. v. Citgo Petroleum Corp., 166 F.3d 761, 767 (5th Cir. 1999) ("an insurer is not subject to liability for proceeding, on behalf of a sued insured, with a reasonable settlement... even if the settlement eliminates (or reduces to a level insufficient for further settlement) coverage for a co-insured"). The parties objecting to a settlement "bear the burden of demonstrating that they have standing" to object. In re School Asbestos Litig., 921 F.2d 1330, 1332 (3d Cir. 1990). The Non- Settling Defendants have not shown, nor could they, that they will suffer "formal legal prejudice" as a result of the settlement. Their objection to preliminary approval must, therefore, be rejected. Conclusion For the reasons set forth herein and in Lead Plaintiffs' memorandum in support of preliminary approval of the settlement, it is respectfully submitted that the Court should overrule 5

9 Case 1:05-cv GEL Document 451 Filed 01/04/2008 Page 9 of 9 the Non-Settling Defendants' objection to preliminary approval of the settlement with Klejna and should grant Lead Plaintiffs' motion.7 Dated: January 4, 2008 GRANT & EISENHOFER P.A. BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP By: /s/ James Sabella Stuart M. Grant (SG-8157) James J. Sabella (JS-5454) Jonathan D. Margolis (JM-1 128) 485 Lexington Avenue, 29th Floor New York, NY Telephone: (646) Facsimile: (646) and- Megan D. McIntyre Christine M. Mackintosh Chase Manhattan Centre 1201 North Market Street Wilmington, DE Telephone: (302) Facsimile: (302) By: /s/ John P. Coffey John P. Coffey (JC-3832) Salvatore J. Graziano (SG-6854) John C. Browne (JB-0391) Jeremy P. Robinson David Webber (DW-3876) 1285 Avenue of the Americas New York, NY Telephone: (212) Facsimile: (212) Attorneys for Lead Plaintiff RH Capital Associates LLC and Co-Lead Counselfor the Putative Class Attorneys for Lead PlaintiffPacific Investment Management Company LLC and Co-Lead Counsel for the Putative Class Lead Plaintiffs are submitting herewith a revised Notice, which explicitly informs the putative Class that the insurance carriers have, to date, indicated their opposition to funding the settlement. See Sabella Decl. Exh. C. 6

10 Case 1 : 05-cv GEL Document Filed 01/04/2008 Page 1 of 1 CERTIFICATE OF SERVICE I hereby certify that on January 4, 2008 the attached Lead Plaintiffs ' Memorandum of Law in Response to Non- Settling Defendants ' Opposition to Motion for (I) Preliminary Approval of Partial Settlement with Defendant Dennis A. Klejna, (II) Preliminary Certification of Class for Purposes of Settlement, (III) Preliminary Approval of Form and Manner of Notice, and (IV) Scheduling a Final Approval Hearing and Declaration of James J. Sabella in Response to the Non- Settling Defendants Objection to the Proposed Settlement with Dennis Klejna was filed electronically. Notice of this filing will be electronically mailed to all parties registered with the Court's electronic filing system. /s/ James Sabella James Sabella