Who's the winner in all this? Who will take their business? Who were the underwriters of the IPO? What's their liability?
It'll be interesting to see where this ends up. I think it was Donald Trump who once said (not that I make a habit of quoting him), "If you lose $1MM it's your problem. If you lose $100MM, it's the bank's problem". The WSJ article on lenders keeping their ties to Refco raises this issue. A bailout may be more palatable than a default b/c the bill is known beforehand, whereas the cost of fallout from letting this fail is not. Investors hate uncertainty -- could it stand to reason that lenders and counterparties feel the same way? Is there a free put here? I'm not betting on it, but the intellectual question does fascinate me.
Refco Loses Clients, Trade-Account Cash After Chief's Arrest Oct. 13 (Bloomberg) -- Refco Inc. customers are switching to other brokers and pulling money from their trading accounts following the arrest of suspended Chief Executive Officer Phillip Bennett on fraud charges. Jerome Israelov, a wheat trader at the Chicago Board of Trade who uses Refco to match his transactions, will today cut the funds he keeps on account at the broker by at least half, and he said many of his peers are doing the same. Competitors including Chicago-based Peregrine Financial Group Inc. said they have won clients that ditched Refco this week. Refco, the biggest independent U.S. futures broker, said on Oct. 10 that Bennett hid $430 million in unpaid debts dating to 1998, and that its accounts for the past three years couldn't be relied on. Back in 1994, Refco was fined $1.25 million for dipping into customer accounts to pay loans, borrowing as much as $123 million from the funds on an ``almost daily basis,'' the Commodity Futures Trading Commission said at the time. ``Whether or not funds are at risk or whatever, there's the attitude of, `why would I allow someone that has done this type of thing to receive income from me?''' said Russ Wasendorf Sr., chairman and CEO of Peregrine. ``The investor is simply saying, `listen, I am going to vote with my feet.''' Refco spokesman Rob Solomon said the company is cooperating with authorities. He declined to comment further. Exodus A client exodus may halt a three-year surge in revenue at Refco, after sales grew 60 percent and customer funds almost doubled. By Aug. 31, Refco had $4.9 billion in customer accounts, making it the eighth-biggest futures broker by that measure after banks such as Goldman Sachs Group Inc. and Citigroup Inc. ``I usually keep about $100,000 in my account, and I will reduce that to $30,000 or $40,000 or $50,000,'' Israelov said yesterday. He is one of dozens of independent traders, known as locals, who use Refco at futures exchanges in Chicago. ``There are other locals that are also reducing the amount of money they are keeping,'' he said. Refco in 1994 transferred customer funds from segregated accounts into non-segregated accounts without disclosing the transactions to customers, the CFTC said. Refco agreed to pay the fine, without admitting or denying the allegations. Futures brokers are required to keep customers' money in accounts separate from their own funds and to report daily to regulators on the amounts held. Because of those safeguards, that money is probably safe, Israelov and Wasendorf said. Futures are agreements to buy or sell assets at a set date and price. Hidden Millions ``It's my belief that customer funds are segregated and not at risk,'' Israelov said in a phone interview. ``But there's no reason to keep that kind of sponge in there.'' Traders often keep extra money in their accounts to save having to top them up should some transactions causes losses. The CFTC, which regulates the futures industry, has the power to freeze customer accounts should it believe the funds to be in jeopardy, Commission spokesman Alan Sobba said. He declined to comment on Refco. Bennett, 57, and unnamed accomplices ``hid from investors and regulators hundreds of millions of dollars that one of Bennett's companies owed to Refco,'' U.S. Attorney Michael Garcia said yesterday. By hiding the transactions, Bennett may have helped Refco appear more financially sound as it and underwriters including Credit Suisse First Boston prepared for a $583 million initial public offering in August. Criminal Complaint Refco shares have plunged 62 percent, to $10.85, this week since the company disclosed Bennett's role in hiding the debt. Thomas H. Lee Partners LP, the Boston-based buyout firm that invested in the company before the IPO, lost as much as $870 million. Thomas H. Lee's Equity Fund V bought a controlling stake in Refco at the equivalent of $8 a share in 2004. A six-page criminal complaint against Bennett lays out a scheme that the government claims began at least as early as 2004 and continued through this month. According to U.S. officials, Bennett used loans as large as $545 million to a customer to conceal debt owed to Refco by a separate company that he controlled, Refco Group Holdings Inc. ``These events are distressing,'' said John Damgard, president of the Washington-based Futures Industry Association, which represents brokers' interests. ``But no customer money has been affected.'' Bennett paid the debt back with accrued interest on Oct. 10, Refco said. Trigger Standard & Poor's and Moody's Investors Service both lowered their ratings on Refco's debt this week and said they were considering further downgrades. ``Our credit ratings are important to our liquidity,'' Refco said in a regulatory filing before its IPO. ``A reduction in our credit ratings could adversely affect our liquidity and competitive position, increase our borrowing costs, limit our access to the capital markets or trigger our obligations under bilateral provisions'' in some contracts. Traders say they aren't taking any chances. ``People don't want to do business with anyone who is fooling around with the numbers,'' said Ray Cahnman, chairman of trading company Transmarket Group in Chicago. Transmarket lost some of its futures traders last year to Refco. ``In this business, you've got to be pristine.'' To contact the reporter on this story: Ann Saphir in New York at asaphir@bloomberg.net. Last Updated: October 13, 2005 00:06 EDT
Bennett Considered a Flight Risk http://www.thestreet.com/_mktwrm/ma...247104.html?cm_ven=CBSM&cm_cat=FREE&cm_ite=NA
http://www.marketwatch.com/tools/qu...={48BA7E0E-367D-4D7B-AF1A-0A2F4F47B080}&symb= Press release from Refco damage control in full swing.
If I recall correctly, Volcker played a similar role with Andersen, and the firm still went under. Good for Refco / TH Lee, however, they are doing all the right things, by fully cooperating, by hiring well known figures for corporate governance. But at this time, when the market and the public is already jiggery about corporate scandals, the fire will be very tough to put out. Regardless, the Refco of old, with swagger of being the largest firm, is over.
11:35am 10/13/05 Wolf Haldenstein Adler Freeman & Herz LLP Commences Class Action Lawsuit on Behalf of Investors in Refco, Inc. - PR Newswire 5:39pm 10/12/05 Milberg Weiss Announces the Filing of a Class Action Suit against Refco Inc. and Certain of Its Officers and Directors on Behalf of Investors - BusinessWire 4:58pm 10/12/05 Pomerantz Haudek Block Grossman & Gross LLP Commences Securities Class Action Against Refco, Inc. -- RFX - PrimeZone 3:13pm 10/12/05 Warning Issued to Past and Current Shareholders of Refco, Inc. by the Law Firm of Lerach Coughlin Stoia Geller Rudman & Robbins LLP - PR Newswire 2:35pm 10/12/05 Wechsler Harwood LLP Files Securities Class Action Suit Against Refco, Inc. -- RFX - PrimeZone 12:45pm 10/12/05 Sarraf Gentile LLP Announces Class Action Against Refco, Inc. - Market Wire 2:33am 10/12/05 Securities Fraud Class Action Against Refco, Inc. is Filed by Scott+Scott, LLC - PR Newswire 10:29pm 10/11/05 Law Offices Of Charles J. Piven, P.A. Announces Class Action Lawsuit Against Refco, Inc. - Market Wire 10:19pm 10/11/05 / KILL - Law Offices Of Charles J. Piven, P.A. - Market Wire 7:38pm 10/11/05 Federman & Sherwood Announces That a Securities Class Action Lawsuit Was Filed Against Refco, Inc. - PR Newswire 6:10pm 10/11/05 Law Offices Of Charles J. Piven, P.A. Announces Class Action Lawsuit Against Refco, Inc. - Market Wire 4:22pm 10/11/05 Schatz & Nobel, P.C. Announces Class Action Lawsuit Against Refco, Inc. - PrimeZone 2:55pm 10/11/05 Lerach Coughlin Stoia Geller Rudman & Robbins LLP Files Class Action Suit against Refco, Inc. - BusinessWire Can you say 13 class action lawsuits in 3 days! :eek: