Former chief of Refco charged with fraud
By Martin Waller, Businesstimesonline

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US FEDERAL prosecutors last night charged the former chief executive of Refco, the American commodities and futures broker, with securities fraud as its shares fell sharply for a third consecutive day.
British-born Phillip Bennett was charged over hundreds of millions of dollars in transactions owed to the company by an entity he controlled. He could face up to 20 years in jail if found guilty.

The money has been repaid with interest, but Refco has given warning that its financial statements for the past four years were not reliable.

When Refco went public two months ago in a $583 million (£333 million) initial public offering, Mr Bennett and -others known and unknown- hid from investors related-party transactions between Refco and the other company, according to prosecutors.

The complaint laid against him says that when the transactions were disclosed to the market the share price plummeted, leading to a loss to investors of over a billion dollars.

Lawyers for Mr Bennett, who has been suspended as chairman and chief executive, were not immediately available to comment on the charges.

The development came as the credit agencies, Standard & Poor's and Moody's, downgraded their ratings for Refco. Moody's said that its review would focus on the short-term credit and liquidity risks inherent in the operation of Refco's brokerage and capital markets businesses and assess the damage to customer relationships.

There have been fears that the affair could lead clients to shun the company and there were suggestions last night that some were already moving their business to rival firms.

On Wall Street, Refco shares fell more than 20 per cent to $10.87 in afternoon trading, compared with the IPO launch price of $22. The shares have more than halved this week as the scandal has rocked US financial markets.

The broker, one of the largest players on the Chicago Mercantile Exchange, has announced a full investigation into the affair.It faces class-action lawsuits from investors over statements made in official documents at the time of its flotation.

The US Securities and Exchange Commission is believed to have launched its own inquiry. The company has admitted that the debts owed by Mr Bennett's company stretch as far back as 1998, when he took over running Refco.

Refco's chairman at that time, Thomas Dittmer, described Mr Bennett as having a "bulletproof" track record of sound decision-making and a recognised financial stature.

Mr Bennett, who has taken indefinite leave from the company, has refused to comment.

PATH TO THE TOP

Phillip Bennett, 57, is a Cambridge University graduate and chartered accountant. Between 1970 and 1981 he worked at Chase Manhattan Bank in New York, Toronto, Brussels and London. He joined Refco in 1981, becoming president, chief executive and chairman in 1998.

October 13, 2005
Ex-Chief of Refco Is Charged by U.S.
By JENNY ANDERSON and RIVA D. ATLAS

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The former chairman and chief executive of one of the world's largest commodities brokerage firms, Refco, has been charged with securities fraud, accused of hiding $435 million in the months before the company was taken public.

The executive, Phillip R. Bennett, 57, of Gladstone, N.J., was arrested Tuesday night and charged in a criminal complaint yesterday by federal prosecutors in Manhattan.

Federal authorities say that Mr. Bennett hid hundreds of millions of dollars in related-party transactions between Refco and a company controlled by Mr. Bennett, Refco Group Holding, from late last year through this month. The transactions were not disclosed in documents describing the company's initial public offering in August, when it raised $583 million, selling stock at $22 a share.

"He had been keeping this debt secret from investors and regulators," Michael J. Garcia, the United States attorney in Manhattan, said at a news conference. Mr. Bennett faces a maximum sentence of 20 years in prison if convicted.

Mr. Bennett's lawyer, Gary Naftalis, said in court "there was no justification whatsoever to arrest Mr. Bennett" and that the government "jumped the gun."

Mr. Bennett was freed on a bond of $50 million, including $5 million in cash. At the bail hearing, a federal prosecutor, David Esseks, called Mr. Bennett, who is a British citizen, a flight risk, saying that Mr. Bennett was heard on tape on Monday telling a colleague that "he was going to Europe in 48 hours, and that's what prompted us to act as quickly as we did," according to Bloomberg News.

Riding a global boom in futures and derivatives trading, Refco has become one of the largest global clearing firms for derivatives. Much of the growth came under Mr. Bennett, who had been chief executive since 1998. The firm, based in New York, acts as a broker, buying and selling futures, commodities, government securities and other option products.

Refco disclosed the debt owed to it by Mr. Bennett on Monday. Both he and Santo C. Maggio, president and chief executive of Refco Securities and Refco Capital markets, two divisions of the firm, were placed on immediate leave from the company. Mr. Bennett paid back the $435 million as well as accrued interest, transferring from an account in his name 350 million euros, which was converted to $424 million.

Shares of Refco, which plunged after the announcement on Monday, fell sharply for a third day yesterday, closing down $3, at $10.85.

Mr. Garcia said his prosecutors were able to move quickly because the company had publicly outlined the problems and its stock had fallen so sharply, wiping out more than $1 billion in shareholder value. He said lawyers in his office had been "working around the clock" since Monday, indicating they were alerted to the case at the same time as the public.

Refco has said it faces no problems financing its business. Clients expressed concern but not panic about doing business with the firm. "It's business as usual but proceeding with caution," an official of a major New York bank said, insisting on not being identified because of a company policy against discussing clients. "We're continuing to trade with them and continuing any credit relationships."

Refco said in its regulatory filings that its clients included corporations, hedge funds, pension funds and professional traders and that open accounts numbered 200,000.

One hedge fund manager who clears Treasury trades through Refco said that he had no plans to take his business elsewhere. Speaking on condition of anonymity, the manager said that Refco provided capital and cleared trades for considerably less than its competitors and had done a good job of managing the risk it took on with its customers.

But there are some signs of concern. Refco's bonds have plunged in value, trading yesterday at $75.76, an indication that investors think the risk of a default has increased.

Refco currently has $642 million outstanding on a $800 million loan originally underwritten by Bank of America and Deutsche Bank. That loan has been syndicated. The banks are expected to meet later this week with the company, an executive briefed on the discussions said.

Banks lend money to corporations based on the soundness of their financial statements. Since Refco has confirmed that its statements as far back as 2002 cannot be relied upon, banks can call their loans or credit facilities. It does not appear at this time that they will do so.

"Nobody wants to cause them to seize up," said the official of the New York bank. "As soon as somebody shuts the door, then everybody has to shut the door."

Refco is cooperating with the inquiry by Mr. Garcia's office, as well as with inquiries by the Securities and Exchange Commission, the Commodity Futures Trading Commission and the New York Stock Exchange.

Refco's books showed a "multihundred-million-dollar receivable" or debt owed to the company from the private company controlled by Mr. Bennett, Refco Group Holding, or RGHI. But Mr. Bennett shifted that debt at the end of every quarter, the criminal complaint contends, in an attempt to mask the fact that it was a related-party transaction that would have to be disclosed in the firm's financial statements.

In one example of how the arrangement worked, Refco Capital Markets, a subsidiary of Refco, lent a Refco customer $335 million on Feb. 23, 2005, authorities say. That customer is believed to be Liberty Capital Management, a hedge fund based in Summit, N.J., a person briefed on the investigation said.

On the same day that Refco Capital Markets lent Liberty $335 million, the hedge fund lent RGHI, Mr. Bennett's firm, the same amount. Each loan had a repayment date of March 8, 2005. The loan from Liberty to Mr. Bennett's company had an interest rate that was 75 basis points higher than the original loan, so the customer would make a profit. Mr. Bennett guaranteed Liberty Capital that if he defaulted on the loan, Refco Group would pay the debt.

According to the complaint, Refco engaged in similar transactions over the quarters that ended in March 2005, November 2004 and August 2004. Refco lent as much as $545 million to the customer to offset the debt by Mr. Bennett's company.

"Those loans allowed RGHI to temporarily eliminate its debt to Refco as of the end of these quarterly reporting periods, replacing those debts with debts from the customer and allowing Mr. Bennett to hide the related-party nature of the continuing indebtedness by RGHI to Refco," the complaint says.

William Terrence Pigott, manager of Liberty Corner Capital Strategies, the entity believed to be involved in Mr. Bennett's transactions, runs a series of investment funds. Mr. Pigott set the funds up in 1999 after leaving Daiwa America, where he managed a portfolio of bond investments, according to a person with access to marketing documents for various Liberty Corner entities.

Mr. Pigott oversees two small hedge funds with $12 million under management as of April, this person said. Refco Securities is the prime broker for the funds. "Mr. Pigott vehemently denies any knowledge of concealed loans," said Kevin Marino, a lawyer who represents both Mr. Pigott and his firm. "He is anxious to fully cooperate with the authorities."

Mr. Bennett's personal ties to the hedge fund remain unclear.

Shares of Refco have now fallen 62 percent since the company's first disclosure on Monday.

In hindsight, investors might have been wary after an unusual disclosure in Refco's regulatory filings for its public offering.

In that filing, the company said its independent auditors found two significant deficiencies in the company's internal controls over financial reporting. The firm lacked an adequate finance staff to manage the documentation associated with being a public company and the firm lacked procedures for "closing its books" or preparing for the I.P.O. Refco had to use an outside firm to help it, which is rare.

Nonetheless, some of the largest investment banks felt confident enough about Refco in August that they sold shares worth $583 million to investors. As underwriters, they had an obligation to conduct an investigation into Refco to make sure that the company's representations to potential investors were accurate.

The complaint's contention that Mr. Bennett hid the $545 million loan provides some cover to the banks, which include Credit Suisse First Boston, Goldman Sachs, and Banc of America Securities. But the banks will still have to demonstrate that they did adequate due diligence before the offering to eliminate any liability arising from shareholder lawsuits, lawyers said.

"The underwriters would have the burden of showing they did reasonable due diligence," said Lewis D. Lowenfels, an expert in securities law at Tolins & Lowenfels in New York. "And reasonable due diligence entails, among other things, investigating Refco's current and past relationships with banks, creditors and competitors, communicating with key company officials, examining the company's regulatory problems and how they solved them, and examining any material litigation involving the company, its contracts and minutes of board meetings."

Gretchen Morgenson in New York and Jeff Bailey in Chicago contributed reporting for this article.

Lawyers jockey for lead role as Refco suits mount
Wed Oct 12, 2005 7:50 PM ET
By Bill Rigby

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NEW YORK, Oct 12 (Reuters) - At least nine law firms, including those of class-action heavyweights Bill Lerach and Melvyn Weiss, are already jostling for the spoils of suing scandal-hit broker Refco Inc. (RFX.N: Quote, Profile, Research) on behalf of shareholders.

Hundreds of millions of dollars in awards and fees are potentially at stake as shares of the commodity and futures broker crumble in the face of a criminal indictment of its ousted chief.

And in a new twist, law firms are even attacking each other publicly as the race to recruit shareholder clients gets under way.

Lawyers sensed blood as soon as Refco put its chief executive on leave on Monday, over debts a company he controlled owed Refco, sending its shares down 45 percent. On Tuesday, law firm Lerach Coughlin filed a fraud suit on behalf of shareholders against Refco in New York, charging the company misled investors in its initial public offering in August.

Three other law firms have since filed suits, all seeking class action status. A further five law firms have "announced" lawsuits against Refco, but do not make it clear whether they have actually filed them.

The prize is the right to represent the lead plaintiff -- which is determined by a judge if the case comes to court -- and therefore to win a hefty slice of any awards won in court through the contingency fee system.

The chances of winning a case against Refco got a boost on Wednesday as Phillip Bennett, the company's ousted chief, was charged with securities fraud by federal attorneys in New York.

According to prosecutors, when Refco went public two months ago in a $583 million float, Bennett and others concealed hundreds of millions of dollars in related party transactions, making the company look stronger than it was.

As the stakes heated up, Lerach Coughlin -- headed by self-styled corporate crusader Lerach -- took a swipe at rival Schatz & Nobel, accusing the firm of trying to poach clients.

"This firm has not even filed a complaint," Lerach Coughlin said in a statement. A press release put out by Schatz "appears to be an advertisement designed to solicit clients so that the firm can participate in this case," Lerach's firm said.

Lerach, along with former partner Melvyn Weiss, pioneered and dominated the business of shareholder lawsuits over the past two decades, eventually splitting their law firm into two last year. Weiss' firm, Milberg Weiss, also announced a class action suit against Refco on Wednesday.

Schatz's release does not claim to have filed its own suit against Refco, and a link on the law firm's Web site takes readers to a copy of the suit filed by Lerach's firm. The firm did not answer a call seeking comment.

Such enterprising methods surprised some legal veterans.

"I haven't heard of that happening before, but that doesn't mean it hasn't happened," said Joseph Grundfest, a professor at Stanford Law School with a special interest in shareholder suits. "But it is common for a large number of complaints to be filed and for there to be vigorous litigation among law firms and lead plaintiffs over who actually gets to control the case."

The shareholder which wins the contest to be lead plaintiff, decided by the judge, then appoints the lead counsel. The lead counsel law firm can get up to 30 percent of awards, under the "no win, no fee" contingency system.

© Reuters 2005. All Rights Reserved.

Refco chief charged with fraud
By Financial Times reporters
Published: October 12 2005 21:09 | Last updated: October 13 2005 01:17

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Phillip Bennett, the suspended chief executive of Refco, the futures broker, was on Wednesday charged with defrauding investors by using a hedge fund to disguise $430m of debts owed by him to Refco.

Michael Garcia, US attorney for the southern district of New York, said Mr Bennett had arranged a "scheme to hide this debt at the time of the audit each quarter".

Mr Bennett was on Wednesday night freed after posting a $50m bond. Prosecutors had opposed bail, arguing that he was a "flight risk" because he faced life in prison if convicted.

Refco's share price has more than halved since it revealed on Monday that Mr Bennett had been put on leave after repaying a $430m debt that had not been recorded as a related party transaction.

Mr Bennett repaid the $430m debt by taking out a loan secured against his Refco stake, his lawyer, Gary Naftalis, said.

The broker's shares fell another 22 per cent to $10.85 on Wednesday, compared with the $22 at which $583m of stock was sold in its initial public offering in August.

Refco's bonds are down about 30 per cent and the $390m of 2012 bonds were on Wednesday trading a just above 76 cents on the dollar, according to the NASD's Trace data service.

The company said on Monday it was financially sound with "ample liquidity". However, experts warned it was highly dependent on the continued confidence of its clients.

People close to Refco's internal review said that it was unclear how the $430m of debts, which dated back as far as 1998, had arisen. They could represent personal trading losses by Mr Bennett or sums owed by Refco's clients.

Refco incurred heavy losses in 1997 after a hedge fund run by Victor Niederhoffer was wiped out during the Asian financial crisis.

Refco's According to people familiar with Refco's internal inquiry, the fund involved in disguising the $430m debt was Liberty Corner Capital, which was paid a fee for telling Refco's auditors that it owed the debts.

About 20 staff were on Wednesday working at Liberty Corner's spartan office in Summit, an upmarket town in northern New Jersey. Terry Pigott, senior portfolio manager, declined to comment.

Liberty Corner Capital shares the offices with Liberty Corner Cash Management, an investment adviser, which in its registration with the Securities and Exchange Commission claims to have $19bn under management. A recent company press release named Sean McNamara as its founder and managing director.

October 16, 2005
Editorial, NY TIMES
Another One Bites the Dust

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Last week in the corporate accounting scandals, Phillip Bennett, the former chief executive at Refco, one of the world's largest futures and commodities brokerage firms, was charged with securities fraud, which carries a sentence of up to 20 years. Federal prosecutors say he played a shell game, using several companies to hide roughly $430 million in bad debt. Refco said the problem went back at least to 1998. Since Refco went public just two months ago, more than a few investors might have put up their money under false pretenses. Hidden liabilities equaled almost three-fourths of the $583 million the company raised in its stock offering.

Mr. Bennett, who is free on bail, has not been convicted, and his lawyer said in court that he would fight the charges. The company reports that he personally repaid the money with a loan against his Refco stock after the news surfaced. That is a good start at making amends, but it may be too late for the company. Refco is fighting for its life, with trading in its stock suspended at times last week and Standard & Poor's downgrading Refco's debt. As too many customers tried to pull out all their money at once, the company had a liquidity crisis, causing it to shutter several units.

Critics were quick to declare the end of the "imperial C.E.O." after the ouster of a few famous faces, and to bemoan the effects on decision-making and leadership. But the long sentences doled out to corporate criminals like Bernard Ebbers and John Rigas, combined with the costs imposed by the Sarbanes-Oxley Act, have led to a backlash against strict corporate governance and the aggressive prosecution of malfeasance. Whether Mr. Bennett proves to be a criminal or to just have terrible judgment, this case is a reminder of the need to keep a close eye on top executives.

REFCO MYSTERY MAN GOT $861M
By RODDY BOYD , NY POST

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Broken and disgraced trading firm Refco made an $861 million payment to a mystery "former shareholder," according to a government filing by the company.

Refco's filings give little indication of who the former shareholder might be, stating only the $861.7 million was for "payment to a former shareholder for sale of interest in a predecessor" to Refco.

The identity of Refco's former shareholder is the subject of speculation among aggrieved investors and the dozens of attorneys now circling the firm.

In the year leading up to Refco's August initial public offering, ex-CEO Phillip Bennett and two other executives took out $1.9 billion from the now bankrupt futures trader, according to Securities and Exchange Commission filings.

Bennett, whose accounting sham led to both his arrest and the unraveling of Refco, received a cash payment of $550 million. Tone Grant, a former Refco president and former majority owner of the firm along with Bennett, got $507 million.

Prior to the June 2004 investment by Thomas H. Lee ventures, Refco's ownership structure was fairly simple.

Grant and Bennett each held 45 percent stakes and the 10 percent balance was held by BAWAG PSK, the Austrian bank which extended the now controversial $430 million loan to Bennett. Lee bought BAWAG's stake for $220 million.

The agreement with Lee's firm also permitted Refco to pay an additional $120 million to Bennett and Grant, according to the filings.

The deal also allowed $108 million owed Refco from Bennett and Grant to be forgiven. The SEC filings don't indicate whether these payments were ever made.

A call to Refco's general counsel was not returned.

The issue of the behind-the-scenes dealings at Refco came to the fore after The Post reported that former chief financial officer Robert Trosten had received a $46 million exit package upon his October 2004 departure.

Trosten's move made little financial sense, given the potential millions of dollars he stood to make after the firm's long-planned August 2005 IPO.

In response to what is believed to be interest from securities regulators in his knowledge of Refco's finances, Trosten has been interviewing several high-profile securities defense attorneys, including Martha Stewart's defense lawyer Robert Morvillo.