US bankruptcy judge says Refco unit should liquidate By Dan Wilchins Reuters Tuesday, March 14, 2006; 10:17 PM NEW YORK (Reuters) - A U.S. federal bankruptcy court judge said on Tuesday that Refco's offshore broker-dealer unit should liquidate its assets separately from the rest of the company, but gave creditors and the company time to start working out a plan for doing so. U.S. Bankruptcy Judge Robert Drain also ordered the appointment of a trustee to oversee the liquidation of the Refco Capital Markets unit. The two rulings gives some customers of the Refco <RFXCQ.PK> unit more leverage in negotiating for a bigger share of the proceeds from a liquidation, and also puts more pressure on parties in the bankruptcy to craft a bankruptcy plan quickly, lawyers involved in the bankruptcy said. "I don't think this ruling presents any problems. Pressure for everyone to act quickly is good," Refco chief executive Harrison Goldin told Reuters after the ruling. The decision resolves one of the most difficult issues in Refco's bankruptcy: whether clients of the company's offshore broker/dealer unit were creditors on similar footing with unsecured creditors like bondholders, or whether they were entitled to special status. A group of the creditors sought to regain their assets by converting the Refco Capital Markets bankruptcy into a "stockbroker liquidation" under chapter 7 of the U.S. bankruptcy code. Such a liquidation would require the unit to sell assets and distribute proceeds first to parties deemed by the law to be clients. Judge Drain said a stockbroker liquidation is meant to protect customers of a stockbroker, and that Congress clearly intended to do so. Lawyers for New York-based Refco and the unsecured creditors committee said such a liquidation would unfairly favor a small group of customers. This group would include, for example, investors who held securities at the unit, but exclude clients who traded foreign exchange, Refco said. Judge Drain said that his preliminary ruling on the stockbroker liquidation will not take effect for at least 45 days, which is not enough time to negotiate a plan but is enough time to confirm that necessary steps are being taken. The extra time for parties to negotiate will prevent the forced sale of certain illiquid assets. Selling those assets too quickly could have eroded their value, Refco CEO Goldin had cautioned in an affidavit. Refco filed for Chapter 11 protection from creditors on October 17, one week after the firm said former chief executive Phillip Bennett had hidden $430 million of bad debt. The company is now selling assets to pay creditors that claim they are owed up to $16.8 billion. Before its troubles, Refco Inc. was one of the biggest market makers for commodities and financial futures, allowing funds and companies to trade contracts on commodities, bonds and currencies. Bennett has pleaded not guilty to eight counts of conspiracy, fraud, and other charges.