Refco scandal exposes market faults, feeds unease for economy By Susan Diesenhouse Tribune staff reporter Published November 9, 2005 James Baer is a 36-year veteran of the financial services industry, but the situation at Refco Inc. has him baffled. Baer, 62, managing director of Uhlmann Price Securities LLC in Chicago, was the lead broker for a James Rogers investment fund in which he invested his own money and that of his family, friends and customers. In September, Rogers shifted the assets in the fund from Uhlmann to Refco. Soon after, things turned strange at Refco, and stranger for Rogers and other investors. On Oct. 10, Refco put Chief Executive Phillip Bennett, who would later be charged with securities fraud, on a leave of absence amid hints of a scandal. When Rogers tried to get his money back, he claims it had been shifted without authorization into an unregulated account that was soon frozen. A few days later Refco and its 23 unregulated affiliates filed for bankruptcy protection. If Rogers' claims--spelled out in a lawsuit--are true, experts say it would make it almost impossible to get an accurate accounting of assets in the regulated Refco affiliates that are being auctioned off Wednesday in one of the first major corporate cases to come under the nation's new bankruptcy code. "How do I explain the inexplicable?" Baer said. "I can't comprehend this. Explain to me how all this money was transferred to an unregulated Refco affiliate on Oct. 7, the Friday before a bank holiday [Columbus Day], and it isn't available to customers on Tuesday?" He's not the only one perplexed. Antonio Uribe, president of Colombia-based Bancafe International Bank Ltd. in Miami, said his bank has mistakenly been listed among Refco's top 50 creditors. "We can't borrow or lend in the U.S. because years ago institutions like ours were used as vehicles for tax avoidance," Uribe said. Because Bancafe has only about $190 million a day on deposit, he added, "a $176 million credit to Refco would have been difficult." Refco declined to comment. The Rogers lawsuit and three other complaints allege that a total of at least $1.1 billion was either improperly transferred between Refco affiliates or appeared on its books mysteriously. "There's nothing to show who owes what to whom," said Michael Greenberger, a former official at the Commodity Futures Trading Commission. "Regulators are playing blind man's bluff." These discrepancies may reflect sloppy bookkeeping or criminal mismanagement. But what troubles some observers is that, left uncorrected, such lapses shake confidence in the financial system and could eventually hurt capital markets, the economy, investors and consumers. These lawsuits "raise all sorts of questions that have to be answered," said Patrick Arbor, chairman of United Financial Holdings Inc. and a former chairman of the Chicago Board of Trade. "Day by day, my initial happy reaction that Refco's failure would not make huge ripples seems less plausible," said David Skeel, a law professor at the University of Pennsylvania. And selling a firm with such murky accounting could be risky, said Ryan Caldwell, co-manager of the Asset Strategy Fund of Kansas-based Waddell & Reed. "We have to learn whose money this was," he said. "The brokerage community has had its problems, but it has to be above reproach now. With the linkage of global markets, if risk isn't spread, problems become systemic." Greenberger, now a law professor at the University of Maryland, said, "There's more at work in Refco's failure than accounting problems, and it's in the financial community's interest to investigate." But, he said, that's unlikely because Refco's books are unreliable, and that would include its accounting at the time of its initial public offering in August when it raised $585 million. "If the markets take a hit, confidence in the U.S. economy softens," Greenberger said. "If the foreigners who hold U.S. debt stop lending, interest rates rise, and that touches everyone." Refco's case also highlights the weakness of the 2002 Sarbanes-Oxley law that requires CEOs to sign off on corporate financial statements to stem fraudulent accounting, said Robert Heim, a former enforcement official with the Securities and Exchange Commission. But Heim said auditors and underwriters also should be held responsible because "they're the gatekeepers to the capital markets." Lynn LoPucki, a law professor at UCLA, said another Refco victim is the nation's new bankruptcy code, which went into effect Oct. 17, the day Refco filed for Chapter 11 bankruptcy protection. "It's dead law," he said. The new law requires that a Chapter 11 trustee be requested to run a company if management fraud is suspected. But that hasn't been done, according to Jane Limprecht, a spokeswoman for the U.S. Trustees Office of the Justice Department. Some of the same managers in place during Bennett's tenure are still running Refco and overseeing the dispersal of its assets at auction, the company said. So Jim Baer will continue to worry. "Goldman Sachs took Refco public. Grant Thornton audited the books. Sarbanes-Oxley is supposed to make sure this doesn't happen," he said. "If the industry loses confidence in the system, there will be long-term ramifications."
My posting from Nov 10, 2005, at 2:19 am EST, explained possible hidden problems which could cause substantial losses to Refco futures customers, and to any recipient of their transferred accounts. Bloomberg now reports that Interactive Brokers today withdrew its bid to pay for transfer of said Refco accounts to IB. IB won't explain why, it says, because its decision is based on information it received through a confidential auction process. I suspect that IB's reasons might be that it independently came to recognize the type of risks which I also recognized in my aforementioned posting. I recommend people read my aforementioned posting, because it is actually relevant to the topic of how to select a broker, unlike most other postings in this thread, which involve irrelevant, off-topic personal attacks, or responses to them.
You don't quit do you ? Get on with your life and be grateful you aren't an employee tied up in this disgraceful mess.
Thank you for your advice that I stop educating people about due diligence in broker selection, Ex-CIS. I note that clicking on your alias reveals you just registered your alias on EliteTrader today, and that your advice to me was your very first post, and your only post. Why don't you tell us who you are, who pays your bills, what you do, and what motivated you to discourage me? Are you, as your post seems to suggest, a Refco employee?
I find it quite puzzling why you have time to launch onto yet another war footing yet unable to respond to my questions. could it be your just a no nothing prick?
Your questions are far more work than my simple question to ex-CIS. You are also incorrect to say that I have launched "onto yet another war footing". I have a right to expect that false statements about me, not related to the thread topic, be barred, and until my rights are respected, I will focus all of my efforts on responding to those false statements, and that is why I do not have time for your questions. If you read this entire thread, then you would see that many people are grateful for what they have learned from me. You would see that nobody has contributed more, in the areas of lessons learned from Refco, and due diligence in broker selection, than I have. So I beg to differ with your suggestion that I am a "no nothing prick".
Your claims have been highly erroneous, inflammatory, misrepresentative, and dubious at best. In particular, I seem to recall how you stated that I had client funds clearing REFCO and that I was negligent in my fiduciary duty for doing so. Your statement was made as FACT, yet totally unsubstantiated by anything that I had said. Then, ( in the face of making a libelous statement ) you backtrack and conveniently state that it was simply a misunderstanding, with no malice of intent. How convenient. Like I said, a judge, jury, and courtroom would laugh you right out due to all of your assumptions and suppositions. Purely speculative on your part, with no basis in fact and no merit whatsoever, and I think that most of the people on this thread have grown quite tired of it. Good day.
Apex, again you are lying. My statement was substantiated by my reliance upon your own statement, as follows: If I misunderstood your statement, it was your own fault due to your poor choice of words. My innocent misunderstanding was not libelous, because libel is always intentional. Baron specifically stated that this particular topic is off-limits in this thread, and yet, you have defied him by raising this issue. I am sure people are unwilling to read these off-topic personal attacks between us. You are at fault for initiating and perpetuating them, thereby choking off any worthwhile debate in this thread.
Thanks for the reply. So you can't back up your statement about "robbing its customers blind"? I have no further questions.
I'm sorry if I missed your explanation. I have read the thread since day one. I do not see any post that explains and substantiates your claims about "robbing its customers blind". Please point me to that specific explanation. And let me end my post noting that I came on here, asked a simple question. And it was you, who claims everyone is attacking you, that told me first to "go to hell" and then resorts to more immaturity by calling me a "moron". If you can't back up your claims then just say so. Resorting to name calling further erodes your any credibility you might have. And there's no reason you can't go offline, compose your "evidence" that proves your claims and post it here in the next day or so.