Refco, Name Tarnished, Has `Several Days' to Fight for Survival
Oct. 14 (Bloomberg) -- Refco Inc., whose former chief executive officer has been charged with covering up $430 million of debt, is running out of time to stay solvent as the government expands its investigation and the support of investors and customers drains away.
The fate of Refco, the biggest independent U.S. futures broker, may be decided within days, not weeks, said Robert Heim, a former U.S. Securities and Exchange Commission enforcement attorney and now a partner at Meyers & Heim LLP in New York.
``If Refco doesn't convince customers over the next several days that it's a financially sound institution, there is a very serious chance they could have to file for bankruptcy protection,'' Heim said.
U.S. government investigators are expanding coordinated probes of New York-based Refco, according to a person with direct knowledge of the investigations. They are trying to determine if there was more misconduct or potential fraud at the company under former CEO Phillip Bennett than has already been reported, said the person, who declined to be identified because details of the investigation aren't yet public.
Bennett, 57, who became CEO in 1998, was arrested three days ago and charged with securities fraud. Prosecutors said he hid debts in transactions dating back to that year.
The probes are being conducted by the U.S. Attorney in Manhattan, the SEC in Washington and the Commodity Futures Trading Commission, the Washington-based regulator of futures brokers.
Trades Investigated
Investigators have concluded that Refco transactions concealed uncollectible debts from hedge funds and other customers, the person said. In addition, they are probing whether the company, under Bennett, hid losses from trades on its own account, the person said.
John Nester, an SEC spokesman in Washington, and Alan Sobba, a spokesman for the futures trading commission, declined to comment. Herb Hadad, a spokesman for the U.S. Attorney in Manhattan, didn't return calls seeking comment. Refco spokesman Rob Solomon declined to comment, and Bennett and his lawyer, Jack Weinberg of Herrick, Feinstein LLP in New York, didn't return messages.
A Refco collapse would mean losses for shareholders such as Thomas H. Lee Partners LP, the Boston-based buyout firm that has a 40 percent stake. Public investors who purchased shares in the broker when it completed a $583 million initial stock sale in August also would lose.
In addition, the three banking institutions that led the stock sale --Charlotte, North Carolina-based Bank of America Corp., and Credit Suisse First Boston and Goldman Sachs Group Inc., both based in New York -- may face lawsuits from investors seeking to recover their losses, according to Heim.
'More Fire'
``A lot of people are fearful there may be more fire behind the smoke,'' said Pat Arbor, 69, former chairman of the Chicago Board of Trade and a principal at Chicago broker Shatkin Arbor Karlov & Co. ``It's very important to come forward in a public fashion with as much transparency as they can. That's not occurring.''
The New York Stock Exchange yesterday suspended trading in Refco shares indefinitely after the stock fell to $7.90 in pre- open trading. The stock has tumbled almost 75 percent since Oct. 7, the last trading day before Bennett's role in the alleged fraud was disclosed.
Refco also blocked client withdrawals yesterday from its currency-trading unit, Refco Capital Markets Ltd., saying it didn't have enough cash to stay in business.
Riskier Than Delphi
A Refco bond due in 2012 plunged 37 cents yesterday to 40 cents, pushing the yield to 30 percent from 14 percent, according to Trace, the bond price reporting system of the NASD. That means investors are betting Refco is riskier than Delphi Corp., the U.S. auto-parts maker that filed for bankruptcy last week.
The halt in NYSE trading and the plunge in the bonds is ``an indication that there's a very good chance that the capital could be wiped out,'' Arbor said. ``That could cripple Refco.''
Exchanges and regulators have wide influence over Refco's fate, according to current and former government officials. The NYSE can delist Refco and the futures trading commission can rescind Refco's registration as a futures broker, a move that would put most of the company out of business.
For now, the government would prefer to let the market work out a solution, according to the person familiar with the investigation. The person said that Goldman Sachs, which Refco has hired as a financial adviser, will likely explore selling the firm. Goldman Sachs spokesman Peter Rose declined to comment.
Refco also hired as advisers former SEC Chairman Arthur Levitt Jr. and former U.S. Comptroller of Currency Eugene Ludwig.
Rival Brokers Gain
Refco had $4.9 billion of transactions by Aug. 31, making it the eighth-biggest futures broker by that measure after banks such as Goldman Sachs and New York-based Citigroup Inc., the U.S.'s biggest financial services company. Rival brokers such as Chicago- based Peregrine Financial Group Inc. yesterday said they had won some of Refco's accounts.
Refco said the cash shortage at its Capital Markets unit doesn't affect the regulated brokerage. All brokers are required to maintain their net capital above certain thresholds and to keep customers' money in accounts separate from their own funds.
``As of this juncture, and it's admittedly early days in our sampling of the accounts, nothing has come to our attention on the regulated side indicating insufficiency of customer funds,'' said Reuben Jeffery, chairman of the Commodities Futures Trading Commission.
Refco may avoid bankruptcy because its trading partners, lenders and competitors also would be hurt, said Geoff Aronow, a former futures trading commission enforcement director and now a partner at law firm Heller Ehrman White & McAuliffe LLP in Washington.
`Refco Is King'
``It's not good for anyone in the market when something like this happens,'' Aronow said. ``The larger firms all have relationships they don't want to see disrupted.''
Some of the biggest Wall Street institutions use Refco as a broker in their own commodities trading, he said. Banks that underwrote its share offering still hold some of the stock.
Shares of the Chicago Mercantile Exchange Inc., where Refco is the largest customer by transaction volume, have fallen 7.5 percent since Oct. 7.
``This won't put Refco out of business,'' said Leon Bressert, 42, a former Refco broker in Chicago who's now with 1st Futures Broker in Fairfax, Virginia. ``It may lose business and it's going to be an uphill battle, but Refco isn't going away. In the futures industry, Refco is king.''
Refco traces its roots to Ray E. Friedman, a cattle trader who had a reputation as a gambler. He sold the firm to his stepson, Thomas Dittmer, according to Martin Mayer, who interviewed Refco's top executives for his book, ``Markets: Who Plays, Who Risks, Who Gains, Who Loses'' (Norton, 1988).
`Great Speculator'
``The company was the great speculator of the modern-day commodity exchanges,'' said Mayer, now a guest scholar at the Brookings Institution, a think tank in Washington.
Dittmer in 1981 recruited Bennett, a U.K. native, to be the firm's public face. The former rugby player at Cambridge University in Cambridge, England, had worked for a decade at Chase Manhattan Bank, now part of New York-based JPMorgan Chase & Co. Mayer said it helped that Bennett was English, ``which in American finance has always given you some cachet.''
In court two days ago, Bennett was forced to pledge his Park Avenue apartment in Manhattan, his country horse farm in New Jersey and $55 million in a bond and cash to stay out of jail.
Park Avenue Apartment
Dittmer retired in 1998. He now spends part of his time in the U.S. Virgin Islands, where his foundation helps sponsor an annual foot race called 8 Tuff Miles.
Refco has been among the brokers most often cited for regulatory infractions, according to the National Futures Association, the industry's self-regulatory body.
Since 1970, Refco has been cited in 22 of the association's arbitration awards and in 144 reparations cases with the futures trading commission, according to the association's Web site. By comparison, Calyon Financial Inc., ranked as the No. 6 broker by Futures Industry Magazine, has been involved in one reparations case and no arbitration awards since it was registered as a futures commission merchant in 1987.
Refco ``had a history of regulatory problems,'' Levitt said in an interview Oct. 12, before he was named as an adviser to the company. Levitt, 74, is a board member of Bloomberg LP, parent of Bloomberg News. ``The lawyers and the accountants and the underwriters and everybody else that should have smelled something going on simply didn't,'' Levitt said. |
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