Refco Accounting Scandal

Refco, Inc. a leading broker in futures and commodities fell into bankruptcy in just eight days in October. The industry giant held 200,000 client accounts in 14 countries. While Refco's customer accounts were protected, Refco shareholders bear the burden of the bankruptcy which was filed only two months after its IPO.

In the mid and late 1990's Bennett was the Chief Financial Officer at Refco and the firm suffered losses as a result of customers caught in adverse market movements, notably the Asian Currency Crisis. According to documents filed by prosecutors, CEO Phil Bennett allegedly accumulated debts as high as $540 million and owed Refco $430 million in October.

Bennett allegedly borrowed money from Refco, Inc. to pay the money back prior to the end of each quarterly report. This made Refco look like it had less debt that it actually did, and was misleading to investors who were involved in the August 2005 IPO for which $583 million was raised.

Bennett allegedly lent the money he borrowed from Refco to a hedge fund called Liberty Corner Capital Strategies. Liberty lent the money back to Refco which made the debt appear to be theirs, not Refco's.

On October 10th Refco announced that Bennett had repaid $430 in debt that he owed the firm, and two days later Bennett was arrested for securities fraud. Only eight days later the company filed for Chapter 11 bankruptcy.

Refco faced creditors, regulators and lawyers representing many firms who wanted to buy out the firm or be reimbursed for losses. After the bankruptcy, the Class action lawyers looked to potentially liable firms such as Refco's underwriters: Credit Suisse First Boston, Goldman Sachs and Bank of America. Refco's auditor Grant Thornton and even it's largest shareholder, Thomas Lee Partners also became Class action targets.

Designated self regulatory organizations (DSROs) and the Commodity Futures Trading Commission (CFTC) provide the audit and monitoring services that are intended to protect customer accounts. The industry term for customer accounts is segregated funds. These funds show how much capital a firm has available to back up the positions carried by the customers in the markets. Thanks to these mechanisms, customer funds went unharmed.

Man Group won a bankruptcy bidding for the assets, agreeing to pay $323 million for the business. Refco Inc. completed the sale of substantially all of the assets of its U.S. commodity-futures business to the U.K. financial-services firm.