Thomas H. Lee Files Suit Against Former Refco Execs By PAUL DAVIES Staff Reporter of THE WALL STREET JOURNAL November 14, 2005 6:37 p.m. Thomas H. Lee Partners, a private-equity firm that invested in Refco Inc., filed a lawsuit against three former executives seeking to recover $245 million in losses that it allegedly sustained as a result of a plot designed to hide losses at the commodity-brokerage firm. The suit was filed in federal court in Manhattan against former Chief Executive Phillip R. Bennett, former Chief Executive and President Santo C. Maggio and former President Tone Grant. Thomas H. Lee Partners says it invested $507 million in Refco in June 2004 after spending $10 million and devoting thousands of man hours to conduct extensive due diligence performed by a number of paid advisers, including KPMG LLP, Grant Thorton, Weil Gotshal & Manges LLP, McKinsey & Co., Sandler O'Neill and Marsh & McLennan. Thomas Lee Partners is the largest shareholder in Refco, with a stake of more than 40%. The suit alleges Mr. Bennett and Mr. Maggio engaged in a massive accounting fraud that masked Refco's debts. "We are taking action against Bennett and Maggio as perpetrators of the sophisticated and long-concealed fraud that led to Refco's collapse, and against Grant who pocketed hundreds of millions of dollars from the Fund's investment in Refco," Scott Schoen, senior managing director at THL Partners, said in a prepared statement. The suit also alleges Mr. Bennett and Mr. Maggio failed to disclose the debts in both verbal and written discussions with THL Partners and its advisers. Attorneys for Messrs. Maggio and Grant couldn't immediately be reached for comment. A Refco spokeswoman declined to comment on the matter. Mr. Bennett was indicted last week by a federal grand jury in Manhattan on charges of hiding as much as $720 million in bad debts from auditors and investors. The eight felony counts, including conspiracy to commit securities fraud, securities fraud, false filings to the Securities and Exchange Commission and wire fraud, carry prison terms of five to 20 years each. His attorney, Gary Naftalis, said "We haven't had a chance to review it yet. We obviously will contest the case." The indictment alleges that, beginning in 1999, the debts were hidden by "renting" the balance sheet of a Refco customer to make it appear the customer owed Refco the money rather than Mr. Bennett -- a related-party transaction that probably would have raised questions by auditors and investors. The amount of allegedly hidden debt fluctuated, hitting $720 million in early 2004. Prosecutors say there was no Bennett-related debt on the books at the end of each annual and quarterly reporting period. The indictment came after Refco's board discovered Mr. Bennett's ties to the debt and forced him to repay a balance outstanding of $430 million. Mr. Bennett was placed on indefinite leave, along with Mr. Maggio, who is cooperating with prosecutors. Last week, a federal bankruptcy judge approved a $282 million cash bid for Refco for last viable business unit while, Man Group PLC won the bidding war to acquire Refco LLC, the last solvent subsidiary of Refco, and a handful of other subsidiaries and businesses. U.S. Bankruptcy Judge Robert Drain approved the deal in an attempt to stop the exodus of Refco's customers. Besides the $282 million in cash, Man Group subsidiary Man Financial will assume $37 million of Refco's debt and pay another $4 million in "other consideration."