Jan. 5 (Bloomberg) -- In October 1997, the word went out on the cavernous floor of the Chicago Mercantile Exchange: Refco Inc. was in trouble.
Through the futures pits, where sweating young traders bark orders to buy and sell contracts on pork bellies, cattle and currencies, people were buzzing that customers of the New York- based futures brokerage had begun hemorrhaging money on their trades, says Erik Schmidt, then a Merc trader. A chain reaction of devaluation, default and bankruptcy in East Asia was rocking world markets. Suddenly, it seemed Refco might be on the hook for its customers' bad bets.
As talk spread of Refco's doom, Tone Grant, then president of the firm, issued a statement on Oct. 30 insisting the brokerage was sound. ``There is no problem at Refco,'' Grant said.
Only there was. Its clients' trades during the 1997-1998 Asian market meltdown eventually cost Refco about $300 million. As the losses mounted, Grant was soon replaced by Refco's financial architect, presumptive savior and, prosecutors now allege, its ultimate destroyer: Phillip Bennett.
For the next seven years, Bennett illegally propped up Refco by hiding as much as $720 million of unrecoverable debts, prosecutors say. Unbeknownst to customers, regulators or investors, Bennett allegedly shuffled hundreds of millions of dollars between Refco's accounts and a New York-based affiliate he controlled.
Bennett, who'd been Refco's chief financial officer for 15 years before rising to chief executive officer in 1998, conducted his shell game more than a dozen times, prosecutors say.
Seeming Success
To the outside world, Refco and its CEO seemed to vault from one success to another. While allegedly concealing the precarious state of his firm's finances, Bennett, 57, built Refco into the largest independent futures brokerage in the U.S.
In 2004, Thomas Lee, one of Wall Street's biggest buyout artists, invested $507 million in Refco. In 2005, Bennett hired Bank of America Corp., Credit Suisse First Boston Inc. and Goldman Sachs Group Inc. to take his brokerage public in a $583 million initial public offering.
Last Aug. 10, British-born Bennett, who'd proved his mettle on the rugby fields of the University of Cambridge, assumed a place among the chieftains of Wall Street. That day, Refco stock, priced at $22 per share in the IPO, began trading on the New York Stock Exchange. The deal netted Bennett, with a 38 percent stake in the firm, $1 billion. To mark the event, Bennett himself rang the Big Board's opening bell on Sept. 9.
Empire in Ruins
A month later, Bennett's empire was in ruins. After a new controller discovered the CEO's covert debt and the firm went public with the news on Oct. 10, Refco unraveled in the space of seven days. Its stock plunged to 65 cents from $29, wiping out almost $3 billion of shareholder value.
As the shares cratered, Refco clients pulled $3.1 billion from the firm. Fatally wounded, Refco filed for bankruptcy on Oct. 17, owing creditors about $16.8 billion. It was the most spectacular implosion in the futures market since 233-year-old Barings Plc was felled in 1995 by a 25-year-old rogue trader named Nick Leeson.
Once hailed as Refco's rescuer, Bennett has now been charged with securities fraud, conspiracy and six other felonies in a 23- page indictment filed in U.S. District Court in Manhattan on Nov. 10. Bennett has pleaded not guilty. His lawyer, Gary Naftalis, declined to comment.
Free on a $50 million bail bond pending trial, Bennett has surrendered his British passport to the U.S. Attorney's Office in New York. He now wears an electronic monitor strapped to his ankle and is restricted to the New York/New Jersey area.
Park Avenue Penthouse
The executive has a penthouse on Park Avenue and a horse farm in Peapack-Gladstone, New Jersey, where the late Jacqueline Kennedy Onassis kept a country estate. The investigations into what went on at Refco -- and the legal battles over who will shoulder the blame and investors' losses -- have only just begun.
The seeds of Refco's destruction were planted more than three decades ago, when the firm's co-founder, Ray Friedman, began fostering a culture of bending, and sometimes breaking, the rules. Refco had the worst record in the U.S. futures industry.
Since 1983, when Bennett became CFO, regulators such as the U.S. Commodity Futures Trading Commission had punished Refco 140 times for keeping sloppy records, filing false trading reports, inadequately supervising its traders and other violations, according to enforcement records compiled by the Washington-based National Futures Association, a self-regulatory organization that governs the more than 4,200 firms involved in futures trading in the U.S.
Tangling With Regulators
A key Refco unit that Bennett himself had established, Refco Capital Corp., tangled with the CFTC more than a decade before the brokerage foundered.
In 1994, the CFTC fined Refco $1.2 million for secretly shuttling money from client accounts to cover Refco Capital's own debts -- a forerunner of the toxic fraud prosecutors say Bennett later perpetrated as CEO. Refco paid that fine, without admitting or denying guilt, and promised to keep its hands off the money in such segregated accounts, which, under U.S. securities law, can't be mingled with a firm's own capital.
Refco failed to clean up its act. In 1995, a Refco broker helped a Beverly Hills, California, money manager named S. Jay Goldinger defraud his clients by illegally dealing out profits and losses among customer accounts, according to the CFTC.
The next year, Refco Capital, which Bennett had set up to finance customers' trades, once again manipulated a client's account without that customer's knowledge. A federal judge later ruled that that move, while technically legal, was nonetheless ``disreputable.''
Over the Edge
``Refco was a firm that said, `Show us where the edge is,' and then they played just over it,'' says a former U.S. commodities exchange official who was involved in regulating Refco during the 1980s and 1990s.
Prosecutors in Bennett's criminal case have focused on financial transactions between Refco and another, offshore unit, Refco Capital Markets LLC. The world of futures, options and other derivatives, which are instruments linked to underlying stocks, bonds or commodities, is split between those that are traded on exchanges such as the Merc and those traded off such bourses, or over the counter.
In the U.S., brokers of exchange-traded futures are regulated by the CFTC. Domiciled in Bermuda and operated out of New York, Refco Capital Markets brokered over-the-counter derivative and currency trades and was therefore beyond the reach of U.S. regulators.
`Fertile Ground'
``These unregulated parts of the industry offer fertile ground for fraud, manipulation and other shenanigans,'' says Randall Dodd, director of the Derivatives Study Center, a Washington-based research and policy group.
More revelations may be at hand. The CFTC is still conducting its investigation of Refco and its finances. The U.S. Securities and Exchange Commission is in the midst of its own, separate probe.
Refco's implosion and the charges leveled against its CEO have stunned investors and industry colleagues. Under Bennett, Refco appeared to have put its troubled past behind it, says Gary DeWaal, general counsel for Fimat USA Inc., the New York-based securities unit of Paris-based Societe Generale SA. Former Refco employees are staggered.
``It was like you just told me my brother is an ax murderer,'' says Daniel Yovich, 42, a former Refco grain futures broker on the Chicago Board of Trade who quit Refco after the firm went bankrupt.
Thomas H. Lee Stake
The reverberations of Refco's failure have been felt throughout the financial world. Investors have lost billions of dollars. Bennett's biggest shareholder, Lee's Boston-based buyout firm, Thomas H. Lee Partners LP, saw the value of its 38 percent stake in Refco dive to about $19 million on Jan. 4 from $1.5 billion on Sept. 7 -- an 87 percent plunge.
The list of Refco's other stockholders reads like a who's who of money managers. Among them are Maverick Capital Ltd., the Dallas-based hedge fund firm run by Lee Ainslie; T. Rowe Price Group Inc., the Baltimore-based money manager founded in 1937; and New York-based TIAA-CREF, which manages $350 billion in assets.
Now come the lawyers. Refco shareholders have sued Bank of America, CSFB and Goldman Sachs, claiming those firms failed to scrutinize Refco properly when underwriting the firm's IPO.
Investors have also sued Lee's firm and Chicago-based Grant Thornton LLP, Refco's auditor, saying they should have spotted Bennett's alleged scheme. Three Thomas H. Lee funds, in turn, have sued Refco for fraud, alleging Bennett and other executives hid the debt to induce their investment.
Lack of Controls
Spokespeople for Bank of America, CSFB, Goldman Sachs and Thomas H. Lee declined to comment. Grant Thornton spokesman John Vita says the accounting firm told Refco that it lacked adequate financial controls before the brokerage went public.
In an era of high-profile corporate scandals, Refco's investment banks and auditors failed investors by not spotting the alleged fraud, says David Scott, a lawyer representing FrontPoint Financial Services Fund LP, a Greenwich, Connecticut- based hedge fund that owns 142,000 Refco shares.
FrontPoint is suing Refco's underwriters claiming they committed securities fraud by misrepresenting Refco's financial condition in the registration statement filed with the SEC.
``Given what happened with Enron and WorldCom, you'd think there would be a heightened sense of responsibility to make sure all the i's were dotted and t's crossed,'' Scott says.
If Refco's underwriters fail to prove they conducted adequate due diligence, they could face combined damages of as much as $2.7 billion, the market value lost after Refco disclosed the hidden debt, says Michael Perino, a securities law professor at St. John's University in New York.
Odd Man Out
Bennett, a numbers man who spent his days poring over spreadsheets in his 23rd-floor office in the World Financial Center in lower Manhattan, didn't fit in with the traders, brokers and salesmen at the heart of Refco.
As CEO, he seldom ventured onto the trading floors to slap backs or socialize, says Bradley Reifler, who joined Refco in 1982, a year after Bennett, and rose to become head of institutional sales and trading before leaving the firm in 2000.
``He hated salesmen; they were a necessary evil,'' says Reifler, 46, now CEO of Pali Capital Inc., a New York-based securities brokerage.
Reifler, Friedman's grandson, says he walked into Bennett's office one day to find Bennett crawling around on the floor, as if he were looking for a contact lens.
``What are you doing?'' Reifler says he asked Bennett.
``I'm looking for your customers, Brad,'' Bennett replied, according to Reifler.
Co-Founder Convicted
Bennett wasn't the first maverick to run Refco. Friedman, the firm's co-founder, was a felon. In 1955, Friedman, then a poultry wholesaler, was convicted of conspiracy to defraud the government by making false statements, according to U.S. Justice Department records. He drew a five-year prison sentence. Friedman served two years before he was paroled.
In 1966, he was pardoned by U.S. President Lyndon Johnson, according to government records. Three years later, Friedman and his stepson, Thomas Dittmer, opened Ray Friedman & Co., a commodities trading firm in Chicago.
In the trading pits of the Merc and the Board of Trade, Friedman and Dittmer soon developed a reputation for making high- stakes bets. They traded for themselves as well as for clients. When Dittmer made a killing, he flew his friends to Las Vegas to celebrate, says Martin Mayer, who wrote about Refco in his book ``Markets: Who Plays, Who Risks, Who Gains, Who Loses'' (W.W. Norton, 1988).
`Wing and a Prayer'
``They took big net positions and held on for the ride,'' says Richard Dennis, a fellow Chicago commodities trader who's now based in New York. ``It was outright speculation on a wing and a prayer.''
Friedman and Dittmer didn't always play by the rules. In 1983, the CFTC fined Dittmer $150,000 and the firm, by that time called Refco, $375,000 for violating trading limits designed to prevent people from cornering markets. That year, Friedman retired to Palm Beach, Florida, but he kept trading through his old firm. In 1992, the CFTC fined Refco $440,000 and Friedman $150,000 for breaking trading limits on pork belly futures.
Friedman died in 2004, at the age of 91. Dittmer, 63, stepped down as chairman of Refco in 1999 and retreated to the U.S. Virgin Islands. He didn't return telephone calls.
``They were market roughnecks, even by Chicago standards,'' Mayer says of the pair.
Cambridge Degree
It was into this milieu that Phillip Roger Bennett stepped in 1981, at the age of 33. After graduating from Cambridge with a degree in geography, Bennett had spent the 1970s in the commodity and commercial lending departments of Chase Manhattan Corp., working in New York, Toronto, Brussels and London.
As a credit and lending officer, he arranged loans for commodities investors. Unlike Friedman and Dittmer, Bennett was no trader. What he brought to the firm was a decade of experience bankrolling traders.
It was a valuable skill at Refco. Futures brokerages operate in a world of razor-thin profit margins. In fiscal 2005, for example, Refco financial statements put the firm's profit margin at 2.8 percent. Goldman Sachs, by comparison, reported a margin of about 22 percent in its most recent fiscal year. To stoke revenue and profit, Refco needed to find a way to encourage its customers to make bigger trades and thereby generate more commissions for the firm.
`Like a Used-Car Dealer'
That's where Bennett came in. In 1982, the year after he joined Refco, Bennett established Refco Capital, a customer finance unit. Extending credit to clients was a vital step toward increasing trading volume and thus profit, says Sol Waksman, president of Barclay Group, a research firm in Fairfield, Iowa.
At times, Refco was so eager to fatten its profit margins that Bennett's unit staked millions of dollars on traders with poor credit histories, a Refco broker says.
``Refco was like a used-car dealer: no money down, no credit, no problem,'' says the broker, who asked not to be named because he still works for the firm.
Bennett and Grant, who had also joined Refco in 1981, began transforming Refco from a firm that focused on trading for itself to one that executed transactions for clients, Mayer says. Bennett extended credit to those new customers to encourage them to trade.
``All I know is that I went to the bathroom one day, and when I came back, Tone and Phil had turned the whole business around,'' Mayer quoted Dittmer as saying in his book.
Dubai Client
Bennett's plan for Refco didn't always go smoothly. In January 1992, Eastern Trading Co., one of the largest gold and silver bullion traders in Dubai, opened a new account with Refco.
Bennett and Grant had traveled to Dubai in the early 1980s and met personally with Mohammad Ashraf-Mohammad Amin, the firm's founder, and his four sons, who were the firm's partners, according to a lawsuit that Eastern Trading later filed against Refco in 1997, after the relationship soured. Eastern Trading told Refco that it wanted to trade futures and options to hedge against price swings in precious metals.
In 1995, Zahid Ashraf, the firm's managing partner in charge of commodity trading, started using the Refco account to place speculative currency trades with Eastern's capital, according to an opinion summarizing the facts in the case written by a three- judge panel in the U.S. Seventh Circuit Court of Appeals in Chicago.
In March 1995, Zahid lost $22 million in three days on the British pound and other currencies.
`Much Larger Commissions'
``But as the increase in scale translated into much larger commissions for Refco, and Eastern was a substantial and reputable firm and Zahid its managing partner, Refco was content,'' U.S. Circuit Court Judge Richard Posner wrote for the appeals court on Oct. 10, 2000.
Posner, 66, is a senior lecturer in law at the University of Chicago and the author of books on subjects ranging from his specialty, law and economics, to intelligence reform and the Clinton impeachment.
By 1996, Zahid's losses were so steep that the Refco account no longer had enough money to secure Eastern Trading's credit line. Even so, Refco Capital continued to lend Zahid money to trade, according to the opinion.
From April to July 1996, the face value of Zahid's sterling futures and options trades ballooned to $4 billion. Finally, in July 1996, Refco liquidated Eastern Trading's account and recorded a debit balance of $28 million.
Undisclosed Loss
Rather than book that $28 million as a loss, Refco Capital shifted its own money into Eastern's depleted account, without the Dubai firm's knowledge, according to the opinion. Bennett's firm asked Eastern to write a promissory note committing the Dubai firm to repaying that sum to Refco. That way Refco wouldn't have to disclose the loss to the CFTC in its capital requirement reports.
Eastern Trading sued Refco in 1997, accusing the brokerage of fraud for not stopping Zahid or alerting it to his losses. In February 1999, a federal jury in Chicago ruled that Eastern was responsible for Zahid's money-losing trades and ordered the Dubai firm to pay Refco $14 million, the balance on the promissory note. Eastern appealed, and the Seventh Circuit upheld the verdict.
Commenting on Refco Capital's move to hide Eastern Trading's debit from regulators, Judge Posner wrote: ``Although the rigmarole may have been for the disreputable purpose of fooling the Commodity Futures Trading Commission, we do not think an appropriate sanction is a forfeiture of Refco's valid claim and a windfall to its defaulting customer.''
Bleeding Money
As Zahid's losses ballooned, trouble was brewing elsewhere at Refco. Goldinger, the Beverly Hills money manager, had also started trading through the brokerage. He, too, was bleeding money, this time on bets on U.S. Treasury futures on the Chicago Board of Trade. In 1995, Goldinger's firm, Capital Insight Brokerage Inc., lost $100 million on bad wagers on interest rates.
To prop up Capital Insights, Goldinger, now 52, embarked on a Ponzi-like scheme, according to SEC and CFTC enforcement records. He shifted any trading profits to the accounts of clients who asked for their money back while shunting losses to accounts that seemed dormant.
To do that, Goldinger directed a Refco broker, Constantine Mitsopoulos, to assign winning and losing trades to specific accounts after the close of trading each day. In one account, Goldinger recorded losses for four months straight and then recorded profits for two months in a row before the account was closed, according to CFTC enforcement records.
Without admitting or denying guilt, Refco paid a $6 million fine to the CFTC to settle the case in May 1999. Goldinger eventually pleaded guilty to fraud and served a year in a halfway house. Without admitting or denying guilt, Mitsopoulos paid a $1 million fine to the CFTC for record-keeping violations.
Food on Foot
Goldinger now runs a charity in Los Angeles called Food on Foot that feeds the homeless. In 2002, he received a Point of Light community service award from U.S. President George W. Bush. ``I didn't go out in style,'' Goldinger says. He declined to comment further on his case.
While Goldinger no longer follows the markets, he says he has learned of Refco's demise. ``I saw the headlines,'' he says. ``It's a sad day when anything like that happens.''
Theodore Eppenstein, a New York lawyer who sued Goldinger and Refco and recovered $46 million for 13 defrauded investors, says the Goldinger case shows Refco was willing to break the rules to keep a lucrative client like Goldinger, who generated more than $10 million in commissions annually.
``Goldinger was playing God,'' Eppenstein, 59, says of the scam. The best way to protect investors in a case such as this would have been for regulators to terminate the offending broker's trading privileges, he says. That didn't happen.
`Just Pay the Fine'
``Fines and cease-and-desist orders won't make a dent in their pocketbooks or their cultures,'' Eppenstein says of the scandal-plagued firms.
A former regulator at a U.S. commodities exchange says Refco considered fines a cost of doing business. The attitude was, ``You got a problem with regulators? Just pay the fine, and move on,'' the ex-regulator says.
By the late 1990s, a new catastrophe was looming half a world away. In July 1997, Thailand let its currency, the baht, plunge, setting in motion a train of Asian currency devaluations that steamrolled not only Refco and its clients but banks around the world.
As Asian markets reeled, eight Refco customers lost more than $300 million, leaving the firm on the hook for those losses, according to a person familiar with an internal review that Refco conducted this past October, after Bennett's hidden debt came to light.
Bennett Takes Over
On Oct. 1, 1998, Dittmer named Bennett CEO. ``Phil brings to the job a bulletproof track record of sound decision making and a recognized financial stature,'' Dittmer said in a statement that day. Grant didn't return telephone calls seeking comment.
Bennett moved rapidly to burnish Refco's sullied image. In January 1999, he hired Dennis Klejna, who had served as the CFTC's director of enforcement from 1983 to 1995, as general counsel to police the firm. Bennett then hired Joseph Murphy from HSBC Futures Americas, a unit of London-based HSBC Holdings Plc, to run Refco LLC, the firm's regulated U.S. futures brokerage.
Klejna and Murphy wouldn't have tolerated the kind of rule breaking that had marked Refco's past, says Scott Early, general counsel at the CBOT from 1983 to 1994 and now in private practice at Foley & Lardner LLP in Chicago. ``Joe and Dennis were brought in with a clear mandate that this firm was going to be run in compliance with the law,'' Early says.
New Hires
Bennett's new hires pleased his regulators in Washington. ``People were hopeful that the company was getting the message and getting out of this cycle of running into regulatory problems every year,'' says Geoffrey Aronow, director of enforcement at the CFTC from 1995 to 1999 and now a lawyer at Heller Ehrman White & McAuliffe LLP in Washington.
With Klejna at his side, Bennett settled the Goldinger case, ending a four-year investigation. Klejna and Murphy both declined to comment.
Bennett also began hunting for new sources of capital to strengthen Refco. In 1999, he cemented an alliance with Vienna- based Bawag P.S.K. Bank, which is controlled by Austria's trade unions. Bawag bought 10 percent of Refco for an undisclosed sum.
Bennett was eager to show the futures industry that Refco was on solid ground. ``Getting that capital infusion was the first step in the process,'' says Cynthia Zeltwanger, CEO of Fimat USA. In 2004, Bawag sold its Refco stake for $220 million.
Acquisition Spree
Bennett also embarked on a series of acquisitions -- 16 in all -- that would eventually transform Refco into the largest independent U.S. futures brokerage and the fourth-largest in the world.
In January 2000, Refco bought Chicago-based Lind-Waldock & Co., the largest U.S. discount retail futures broker, for an undisclosed sum. In 2005, Refco spent $208 million to acquire Cargill Investor Services, the captive broker of the agricultural giant Cargill Inc., based in Wayzata, Minnesota. From 2000 to 2005, Refco's U.S. customer accounts almost doubled to $4.1 billion.
Bennett also pushed into overseas markets by acquiring Trafalgar Commodities Ltd., a London energy trading firm, for an undisclosed price, and MacFutures Ltd., a London firm that runs so-called electronic trading arcades, where traders are seated at machines rather than hollering at each other in a pit. In addition, Refco bought brokerages in India and Taiwan. By 2005, Bennett's firm had operations in 14 countries.
Refco and its CEO were on a roll, and brokers were eager to sign up.
`Like Winning the Lottery'
``I thought it was like winning the lottery,'' says Yovich, the grain trader, describing how he felt when he joined Refco in March 2005. ``The leads were real solid: Customers were calling us and saying, `Will you be my broker?'''
Soon Refco caught the attention of a deep-pocketed investor: $12 billion Thomas H. Lee Partners. The buyout firm, founded in 1974 by its namesake, is perhaps best known for its 1992 purchase of Snapple for $135 million. Lee sold that company two years later to Quaker Oats Co. for $1.7 billion.
Lee took a big gamble on Refco, and the bet made Bennett and Grant rich. The pair held 90 percent of Refco's equity in an affiliate they controlled, New York-based Refco Group Holdings Inc. Lee's firm paid $507 million in cash for a 57 percent stake in Refco and then transferred an additional $550 million in cash to Refco Group Holdings.
After the deal closed, Grant bowed out of the affiliate, leaving Bennett in sole control. As part of the deal, Refco issued $600 million of bonds due in 2012 and borrowed $800 million from a group of banks led by Bank of America, which would later help underwrite Refco's IPO.
Tension Mounted
``Everyone seeing that deal understood that an outfit like Lee wouldn't put that kind of money into a company like this without taking it apart and putting it back together again,'' says David Hardy, CEO of London-based LCH.Clearnet Ltd., Europe's No. 1 derivatives clearing house.
The deal with Lee soon propelled Refco toward an IPO, and tension mounted inside the firm, says Yovich, the Refco grain trader. Compliance officers scrutinized brokers to ensure they obeyed all the rules, no matter how technical, he says.
Yovich says he was reprimanded for sending his clients an e- mail that excerpted information from a commodity exchange's Web site. A compliance officer upbraided Yovich, saying his message might violate copyright laws.
``They were so anal and uptight about following everything to the letter before the IPO, but here was the CEO who was running a shell game with half a billion dollars,'' Yovich says.
IPO Clock Ticking
As the clock ticked down to a Big Board IPO, Bennett kept shuffling money through the firm's accounts, according to his indictment. Since 1999, Bennett had executed a series of transactions to make it appear that debt owed by Refco Group Holdings had been paid. In reality, the money to settle those debts came from Refco, prosecutors say.
Just six months before Refco went public, on Feb. 23, 2005, Refco Capital Markets, the Bermuda-based, unregulated brokerage, loaned $345 million to Liberty Corner Capital Strategy LLC, a hedge fund firm based in Summit, New Jersey, and a Refco customer.
The same day, Liberty Corner loaned the $345 million to Refco Group Holdings and pocketed $2.6 million in interest for its trouble. Refco Group Holdings then paid the money to its corporate parent, Refco Inc.
On Feb. 28, when the company's financial reporting period ended, it appeared that Refco Group Holdings' debt had been paid. On March 8, the loan was unwound and the $345 million debt was again owed by Refco Group Holdings. Bennett repeated a similar transaction in August, the month of the IPO, according to prosecutors.
Opening Bell
Liberty Corner, a Refco customer since 1999, was involved in the transactions 10 times from 2002 to 2005, says Kevin Marino, the hedge fund firm's lawyer. He says Liberty Corner had no knowledge that the loans were possibly illegal.
``The transactions proposed by Refco appeared to be perfectly legitimate,'' Marino says. Federal prosecutors haven't targeted Liberty as part of Bennett's criminal case, he says.
Refco's new shareholders were none the wiser. On Sept. 9, Bennett, flanked by NYSE CEO John Thain, Thomas H. Lee Partners Co-president Scott Schoen, Refco Capital Markets President Santo Maggio, Murphy and Klejna, rang the Big Board's opening bell. Initially priced at $22, Refco stock soared 25 percent on its first day of trading, on its way to a high of $30.12 on Sept. 7.
A month later, Refco began to fall apart. Refco controller Peter James, who'd been hired in August, made a startling discovery. Bennett and Refco Group Holdings were actually responsible for the debt.
Bennett Confronted
On Oct. 6, Refco's three-member audit committee, led by Ronald O'Kelley, CEO of Atlantic Coast Venture Investments Inc. in Naples, Florida, confronted Bennett, and he acknowledged the hidden debt, according to a lawsuit Bawag filed against Refco as part of the bankruptcy proceedings. The board demanded that Bennett pay the debt immediately and asked him to take a leave of absence.
That same day, Bennett asked Bawag, his old backer, to lend Refco Group Holdings $420 million as a ``financing proposal,'' according to Bawag's lawsuit.
The Austrian bank says that neither Bennett nor Refco said it wanted the loan to pay off the hidden $430 million debt. As collateral, Bennett pledged his 48 million shares of Refco stock, then valued at $1.2 billion, and he agreed to pay an 875,000 euro ($1.1 million) fee.
Bombshell News
The loan was wired into an account at Refco Capital Markets at 6 a.m. New York time on Monday, Oct. 10. Less than two hours later, Refco went public with its bombshell news. Over the next 24 hours, Refco customers began to bolt, according to a former Refco broker, who says he lost 40 percent of the capital he managed within two weeks.
By then, Refco had filed a Chapter 11 petition to restructure 23 units, including Bermuda-based Refco Capital Markets. Bawag sued Refco for fraud on Nov. 16, and, the next day, Bawag CEO Johann Zwettler said he would resign by the end of the year to minimize the damage to the Austrian bank.
As of Jan. 4, the value of the Refco shares that Bennett had pledged as collateral on the loan had plunged to about $20 million. London-based Man Group Plc, the world's largest publicly traded hedge fund firm, bought Refco's U.S.-licensed futures brokerage, Refco LLC, on Nov. 26 for $319 million in cash and assumed debt.
On Dec. 19, Refco appointed Harrison J. Goldin, the former New York City comptroller who served as a court-appointed examiner in the Enron Corp. bankruptcy case, as CEO.
`Slept Through'
Refco now joins the list of companies felled by financial scandals since Enron collapsed in December 2001. ``Enron was the wake-up call, but with Refco, the underwriters, the accounting firms, the company officers and the SEC all slept through the second alarm,'' Eppenstein says.
Bennett's travails have only just begun. Since his arrest, he has spent his days at his lawyer's midtown Manhattan office, helping construct his defense, his lawyer, Naftalis, said in court. No trial date has been set.
Bennett's freedom -- and the fortune he made at Refco -- now hang in the balance. If convicted, he could spend the rest of his life in prison, prosecutors say. The U.S. Attorney's Office is also seeking disgorgement of $700 million from Bennett.
Last August, Bennett was the billionaire king of Refco, standing in the vanguard of the $20 trillion futures industry. Now he's just another criminal defendant, left with countless hours to ponder his case and the downfall of his firm. |
樓主: everok
發表於 2005-12-23 19:30:33
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