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Information may change rapidly as the event progresses. | Refco (NYSE: RFX), once "Ray E. Friedman and Co.", is a New York-based financial services company, primarily known as a broker of commodities and futures contracts. Prior to its collapse in October, 2005, the firm had over $4 billion in approximately 200,000 customer accounts. The firm's balance sheet at the time of the collapse showed about about $75 billion in assets and a roughly equal amount in liabilities. Though these filing have since been disowned by the company, they are probably roughly accurate in showing the firm's level of leverage. Wikipedia does not have an article with this exact name. ...
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Refco entered crisis on Monday, October 10, 2005 when it announced that its chief executive officer and chairman, Phillip R. Bennett had hidden $430 million in bad debts from the company's auditors and investors, and had agreed to take a leave of absence. Jump to: navigation, search October 10 is the 283rd day of the year (284th in Leap years). ...
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Refco said that through an internal review over the preceding weekend it discovered a receivable owed to the company by an unnamed entity that turned out to be controlled by Mr. Bennett, in the amount of approximately US$430 million. Apparently, Bennett had been buying bad debts from Refco in order to prevent the company from needing to write them off, and was paying for the bad loans with money borrowed by Refco itself. A hedge fund called Liberty Corner Capital Strategy facilitated the "laundering" of the bad debts, though it is not yet clear if they knew they were hiding sham transactions. Liberty Corner has claimed that it believed it was borrowing from one Refco subsidiary and lending to another Refco sub, and not lending to an entity that Mr. Bennett secretly controlled. On October 20, they announced plans to sue Refco. Jump to: navigation, search The term hedge fund dates back to the first such fund founded by Alfred Winslow Jones in 1949. ...
The law requires that such financial connections between corporation and its own top officers be shown as what is known as a related-party transaction in various financial statements. As a result, Refco said, "its financial statements, as of, and for the periods ended, Feb. 28, 2002, Feb. 28, 2003, Feb. 28, 2004, Feb. 28, 2005, and May 31, 2005, taken as a whole, for each of Refco Inc., Refco Group Ltd. LLC and Refco Finance Inc. should no longer be relied upon."
This announcement triggered a number of investigations, and Mr. Bennett was arrested Tuesday evening, on allegations that he had hidden these transactions in order to improve the value of Refco's stock and options. As of October 19, trading of Refco's shares has been halted on the New York Stock Exchange, which is moving to permanently delist the shares. Before the halt, the shares were trading for more than $28 per share, and as of October 19, they had dropped (on the pink sheets) to $0.80 per share. New York Stock Exchange (June 2003) The New York Stock Exchange (NYSE) is the largest stock exchange in the world, although its trading volume was exceeded by that of NASDAQ (historic comparison graph {pdf}) during the 1990s. ...
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Refco, Inc. filed for chapter 11 for a number of its businesses, to seek protection from its creditors on Monday, October 17, 2005. At the time, it declared assets of around $49 billion, which would have made it the fourth largest bankruptcy filing in American history. However, the company subsequently submitted a revised document, claiming it had $16.5 billion in assets and $16.8 billion in liabilities. Refco also announced a tentative agreement to sell its regulated futures and commodities business, which isn't covered by the bankruptcy filing, to a group led by J.C. Flowers & Co. LLC for about $768 million. However, other bidders have emerged, including Interactive Brokers and Dubai Investments, the investment division of the country of Dubai, who have offered to buy the entire company. These offers have so far been rebuffed, and Flowers would receive a "break up" fee if Refco were to sell itself to one of these other parties. Chapter 11 of the Bankruptcy Code governs the process of reorganization under the bankruptcy laws of the United States. ...
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Though of much smaller size, the regulatory impact of the scandal will be larger than for probably any other corporate failure except for Enron. Refco had sold shares to the public in a public offering only two months before revealing the apparent fraud. Their auditors, Grant Thorton, and the investment banks that handled the IPO, Credit Suisse First Boston, Goldman Sachs, and Bank of America Corp., all supposedly completed due diligence on the company, and all missed the CEO's hiding $430 million in bad debts. Their largest private investor was Thomas H. Lee Partners, L.P., a highly regarded buyout fund, and the reputation of its managers has been similarly sullied. Enron Corporation Enron Corporation is an energy trading and communications company based in Houston, Texas that employed around 21,000 people in mid-2001 (before bankruptcy). ...
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The $430 million
Though no detailed report on Bennett's transactions has been made public, anonymous sources cited by the Wall Street Journal and other publications have sought to portray his debt as stemming from losses in 10 or more customer trading accounts, including Ross Capital, and the widely reported October 27, 1997, trading losses of hedge fund manager Victor Niederhoffer. It is unclear why Bennett would have done such a thing. Niederhoffer said on his Web site in response to these news articles that Refco wanted to take over the assets in his accounts and assume all the liabilities in order to meet capital requirements, and that he and Refco signed a formal agreement to that effect on Oct. 29, 1997, in the presence of two major law firms and under the close scrutiny of regulators. "There were no debts, loans, or any other financial obligations left open between us," Niederhoffer said. "Refco received considerable assets from us as part of our agreement. I don't know how much money Refco received for these assets, or how it accounted for the transaction, or whether it ended up with a profit or loss. If Refco did suffer a loss, I am confident that it was quite minimal relative to the $460 million receivable said to have been a key link in the firm’s debacle, or to the actual sums that the principals and key players of the firm took out many years later."
Ross Capital was the other firm named by the Wall Street Journal's anonymous sources to have been one of "as many as 10" to have had losses that somehow led to Bennett's $430 million debt. Ross Capital is run by Wolfgang Flottl, whose father used to run Bawag P.S.K. Group, an Austrian bank that lent Bennett the money to repay Refco. In 1999, Bawag purchased 10% of Refco in a private transaction, and had an outstanding loan of 75 million euros to Refco at the time the firm collapsed. On October 5, before news of the hidden loan was made public, Phillip Bennett applied for a 350 million euro loan, to be collateralized with his shares in Refco. The loan was granted on October 10, and Bennett used it to pay off the hidden $430 million. The Refco stock that collateralized the loan is now worthless. The Austrian National Bank and Financial Market Authority are investigating.
Older Scandals Refco has not enjoyed a clean reputation with regulators. The 1978 "cattle futures" trading scandal in which Hillary Clinton was allowed to trade large positions on inadequate capital, and possibly the allocation of profitable trading by others into her account, was played out in Refco accounts. Hillary Clinton Hillary Diane Rodham Clinton (born October 26, 1947), was First Lady of the United States from 1993 to 2001, as the wife of President Bill Clinton. ...
On May 16, 2005, the company disclosed that it had received a "Wells Notice," indicating it might face charges related to improper short selling at its Refco Securities unit and other matters. The company had been implicated in "naked" short sales on the stock of a company called Sedona Corp., disclosed that it was negotiating the SEC and hoped to reach a settlement that would likely include an injunction against future violations and "payment of a substantial civil penalty." Refco put $5 million in reserve in anticipation of the settlement. The company has also been sued by Sedona in connection with this trading.
External links
Further reading - “Refco: What It Does, Why It's in Trouble”, Associated Press, October 14, 2005.
- Flaherty, Michael: “Refco to Sell Futures Unit, Files for Bankruptcy”, Reuters, October 18, 2005.
- "Creditors Look For Their Share Of Refco Assets" Wall Street Journal, October 20, 2005
- "'Naked Shorting' Case Lurks in Refco's Past" Wall Street Journal, October 20, 2005
- "Thomas Lee May Delay Fund After Refco, Person Says," Bloomberg News, October 20, 2005
- "Bawag Says It Tried to Halt Refco Loans Hours After Transfer," Bloomberg News, October 20, 2005
- "Bawag Scrutiny Mounts, Putting CEO to the Test," Wall Street Journal, October 21, 2005
- "Refco's Debts Started With Several Clients," Wall Street Journal, October 21, 2005
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