Angry creditors chase missing $1bn given to Refco insiders

Joe Lauria - in New York
October 23, 2005
The Business

THE scandal surrounding Refco, the world’s largest publicly-traded hedge fund, continued to mushroom last week after it was revealed that company insiders pocketed more than $1bn (£560m, E830m) from the firm in the year before declaring what was the fourth largest bankruptcy in US history.

As the multi-pronged government probe widened, competition to buy Refco assets not under bankruptcy protection also intensified. The value of these assets has plunged 45% from $7.5bn to $4.1bn since the scandal erupted.

Hours after declaring bankruptcy last Sunday, Refco signed a tentative agreement to sell its regulated futures brokerage unit to a group of investors led by J. Christopher Flowers, a former Goldman Sachs executive. But on Thursday Interactive Brokers Group, America’s largest independent broker-dealer, topped Flowers with an offer of $768m for the futures unit.

Dubai Investments, the Middle East state’s investment arm, is pushing to buy the entire bankrupt company for $1bn. Calyon Financial, a Refco rival, is also joining the fray. Within days of refco’s bankruptcy dozens of investors, creditors and their attorneys flew to New York to stake their claims in bankruptcy court.

More than 40% of Refco clients have pulled their money out of its regulated futures-trading unit. Refco went public only last August in an initial public offering managed by Goldman Sachs. Refco had been in business for decades before going public, trading foreign currency, US treasuries and commodities, last year for 200,000 clients. Many will now almost certainly take legal action against the company.

It emerged that when Robert Trosten left his post as chief financial officer a year ago he received $45m, according to testimony earlier this year at an arbitration hearing.

Former chairman Phillip Bennett appears to have received $700m from proceeds the company gained from sale of assets to Thomas Lee Partners last year. British-born Bennett was arrested and charged with securities fraud by federal authorities on 12 October. He faces up to 20 years in jail and is being held on $50m bail. Bennett is accused of hiding $430m in debt.

The next day, Refco temporarily shut down Refco Capital Markets, an important unit, because liquidity dried up. Trading was stopped on the New York Stock Exchange at $7.90 a share and Refco’s bonds plunged.

Last Monday, Refco agreed to sell its regulated futures brokerage business to Flowers for $770m in cash or an option to retain a 20% in the company.

On Tuesday, Hubert Gorbach, Austria’s vice-chancellor, asked the central bank to open an investigation into Bawag, an Austrian bank with ties to Bennett. Bawag is listed as Refco’s top creditor in the bankruptcy filing, claiming $451.2m.

Bawag said on Thursday it tried to stop a E350m loan payment to Bennett on 10 October after seeing reports about Refco. But it was too late. Bennett used the Bawag loan to repay some of the debt he owed Refco. He offered Bawag his 34% stake in the company as collateral.

Labels: Phillip Bennett, Refco