Refco Chief Bennett Takes Leave Futures Brokerage Finds CEO Shifted $430 Million To Entity He Controlled By PETER A. MCKAY, JONATHAN WEIL, RANDY SMITH and KARA SCANNELL Staff Reporters of THE WALL STREET JOURNAL October 10, 2005 7:57 p.m. One of the world's biggest commodities brokerages said its chief executive, Phillip R. Bennett, took an indefinite leave of absence after the firm discovered an investment firm he controlled had owed the company $430 million. Refco Inc. said as a result its financial statements since 2002 "should no longer be relied upon" and that it would delay filing its quarterly earnings release originally slated for next week. Refco said Mr. Bennett repaid the $430 million. The company said it reported the matter to the authorities, which couldn't be reached on the Columbus Day holiday. The disclosure came two months after Refco launched an initial public offering of stock that raised $583 million and may raise questions about the company's financial disclosure ahead of that offering and could raise liability issues if investors were to pursue action against it. Mr. Bennett held around 34% of the company before the IPO and remains one of its biggest shareholders. Shares of Refco yesterday plunged 45%, or $12.96, to $15.60 in New York Stock Exchange composite trading, well below the IPO price of $22. The company said the money initially had been reported to investors as "receivables" -- money owed by customers or other outsiders. But the company hadn't disclosed that it was Mr. Bennett's own firm that owed Refco the money. It said Mr. Bennett's firm had "assumed" the obligations from entities that owed the money to Refco, but didn't explain why he might have done that. It called the assets "certain historical obligations owed by unrelated third parties ... which may have been uncollectible," suggesting some may have been bad debts. The Bennett firm, Refco Global Holdings Inc., had been set up to hold his personal stake in Refco Inc. stock. WALL STREET JOURNAL VIDEO [art] S&P analyst Tom Foley discusses the downgrade in Refco's credit rating on concerns about corporate governance at the company. One person familiar with the matter said the debts in question were originally related to transactions with a hedge fund that had done business with Refco since the 1990s. Refco said the assets in question had been reported on its financial statements, but not as a so-called related-party transaction, as required to let investors know that they might not have been arm's length. Mr. Bennett referred a telephone call for comment to his lawyer, who declined comment. A spokesman for Grant Thornton LLP, Refco's outside auditor, said the accounting firm "recently learned" of the issues disclosed yesterday, "and we are monitoring them closely." The spokesman said Grant Thornton has been Refco's auditor for the past three years. Mr. Bennett took a leave at the request of Refco's board. Also taking a leave at the board's request was Santo C. Maggio â the head of the brokerage's securities arm, who company officials said knew of Mr. Bennett's dealings. The company promoted three longtime executives to fill both positions on a permanent basis. William Sexton â an executive vice president who in September had announced plans to retire â was appointed to stay on as CEO. Joseph J. Murphy will become president and take over one Mr. Maggio's posts as head of Refco Capital Markets. Peter McCarthy will take over Mr. Maggio's other title, as president of Refco Securities. Refco, a major player in the normally quiet business of commodities futures brokerage trading everything from cattle to gold. Active in 14 countries with 2,400 employees, it also trades futures on stocks and bonds and other financial instruments. Refco reported $1.3 billion in revenue in its latest quarter. According to people close the company, after its Aug. 10 IPO, Refco Controller and Chief Financial Officer Gerald M. Sherer was evaluating the company's books and raised concerns about the the assets in question to the company's board. Mr. Sherer had joined Refco early in the year from Deutsche Bank. These people said the board immediately confronted Mr. Bennett. Mr. Bennett offered to repay the money, and the board voted to ask Mr. Bennett to take a leave pending the result of an investigation to be conducted by its independent audit committee. That panel has hired forensic consultant FTI Consulting and hired the law firm of Latham & Watkins to conduct the probe. A Refco spokeswoman declined comment on this chain of events. Mr. Sexton and Scott Schoen, a Thomas H. Lee Partners executive who sits on Refco's board, said in an interview that no one knew Mr. Bennett's investment fund owed the company the money until late last week. Mr. Schoen is heading a new executive committee of Refco's board, which is investigating the matter. Thomas H. Lee, a private-equity firm, helped Refco go public, and it remains Refco's largest shareholder. Mr. Bennett had served as president and chief executive of the firm since 1998. He joined Refco in 1981 from Chase Manhattan Bank, where he held various positions involving credit and commercial lending in New York, Toronto, Brussels and London from 1970 to 1981, according to Refco. He is a graduate of Cambridge University. The firm has faced other controversy this year. Ahead of its IPO, the Securities and Exchange Commission investigated improper short sales of stock in software maker Sedona Corp. by the securities arm overseen by Mr. Maggio. According to regulatory filings at the time, one potential resolution that Refco proposed was to remove Mr. Maggio from any supervisory role for a year -- a scenario that became moot yesterday with his effective departure from the company.