Discussion in 'Index Futures' started by milstar, Oct 10, 2005.

  1. milstar



    Some time before author stated in another thread ,that REFCO 50%
    of recommended brokers used
    Larry Willliams metod for clients.
    This person was sued from SEC
    for open profanacy ,today have www
    site registred in Australia .
    Stock tumbled today -45.38%


    Derivatives Dealer's Disastrous Day

    By W.D. Crotty (TMFWD40)
    October 10, 2005

    The stock of Refco (NYSE: RFX), one the largest global clearing firms for derivatives, is the largest percentage decliner on the NYSE in midafternoon trading. The stock, down roughly 40% today, is reeling from the news that the company's CEO has been asked by the board to take a leave of absence.

    The heart of Refco's problems is a $430 million receivable the company found in an internal review. That receivable is owed by an entity controlled by Phillip R. Bennett, Refco's now-on-leave CEO and board chairman.

    On the surface, the news seems positive. Bennett had assumed responsibility for obligations that may have been uncollectible by Refco. Today, Bennett repaid all the receivable in cash, including accrued interest. The company believes all customer funds on deposit are unaffected by these actions.

    The receivable was reflected on Refco's prior-period financials, but not as a related-party transaction. For that reason, the company's audit committee and independent accountants have determined that financial statements from Feb. 28, 2002 forward "should no longer be relied upon." Yikes, that is bad news, especially for a company in the financial services business!

    The company will likely delay its quarterly SEC filing, which was due on Oct. 17. It's not making any projections for when the revised SEC filing will be made or when its Audit Committee investigation might be completed.

    The really bad news is that the company hired an independent counsel and forensic auditors, intended to assist the Audit Committee in its investigation of these matters. It seems to me that the company found a problem here -- and isn't confident it's the only one.

    The company tried to put lipstick on this pig in two ways. First, it announced that the COO, who had previously tendered his resignation, will now be CEO. That's good news, in that a seasoned executive is in charge. But this is a major change for the company's top brass; musical chairs at that level can send shock waves through a business.

    Second, the company also used the announcement to report excellent results for the quarter ended Aug. 31. More importantly, it made this statement: "Regulated subsidiaries reported net capital of $665.8 million and excess regulatory capital of $279.3 million. These figures do not reflect the $433 million received today from Mr. Bennett to settle his outstanding receivable."

    As fellow Fool Dean Paton pointed out, when Refco went public in August, its shares were widely seen in a positive light by those who missed out on the rise in Chicago Mercantile Exchange (NYSE: CME) shares. Now, with Refco shares at a new low, investors have to decide whether they'll be catching a falling knife or seizing an opportunity if they buy in.

    The basic business looks sound, and the company's capital structure seems reasonable. Though we can't quite gauge the magnitude of Refco's problems, I think the sell-off looks overdone. Do you feel like betting against the market?

    Are you looking for great companies selling at bargain-basement prices? The Motley Fool Inside Value newsletter can help you find the best stocks the market shuns. Sign up today for a free 30-day trial.

    Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.
  2. I think they will limp for a long time to come. The business of fooling with finances and putting customer funds at risk (yes, I know they say that customers are unaffected) is like having an elephant skate on thin ice.

    Which fund manager or prop group general director will want to put his group's funds in a firm that obviously has shifted some funds around outside of its business? A very very imprudent one. I can tell you clearly and without any hesitation that if I had customer funds with any of Refco's divisions, I would be putting in a wire transfer right away. For this reason, I think they have really jeopardized the confidence of current and future customers.

    I wouldn't touch the stock.
  3. I'm tempted to load up on 17.50 or 20 November RFX calls. Their balance sheet is $430MM stronger today than it was yesterday and the market's reaction seems overdone. The reputational implications you mention are real, but the "shifting around of funds" was declared in their last filings - what they kept quiet about was the fact that it was a related party transaction. That highlights some failures of internal controls. Customer funds weren't at risk because of this one. The failure of controls may mean that customer funds are at risk because of other shenanigans they haven't found or disclosed yet, that's why the calls tempt me rather than the stock.
  4. I recognize that they say that they have been repaid with accrued interest. I know better though. Where was this debited in the past in their balance sheet? I didn't see an article showing that Refco took a charge of $430MM for bad debt.

    Also, these guys are traders. I know traders and know full well that we don't know the whole story. You are right in that customer funds are segreggated by requirement of the law. However, when you take a hit because of some under the table stuff and sh*t hits the fan, then segreggated funds no longer become segreggated. I have seen this in the past and I will live to see it again. This company is in some serious trouble because it is in the business of serving traders mainly (in the form of hedge funds, money managers, pro traders, etc). There are other firms providing the same service without this B.S. for customers to deal with. There was more volume yesterday than there was on their IPO. I have yet to come across a company that has survived such an event. On the other hand, this business is consistently surprising everyone.
  5. That was the whole point of farming it out to an off-balance-sheet entity. $430MM in doubtful customer debt require provision. $430MM in debt from an entity with a decent credit rating don't. Sharp practice, but assigning a good credit rating to that entity was correct. It paid cash on demand, with interest. This is a far cry from the likes of Worldcom.
  6. milstar



    Refco is "legacy" company ,which influenced most of e-mini trading . Ex-CEO have made great error.After he used clients funds ,he must not to start IPO . In case if RFX was not public noted ,multiple complaints for stock tumbling was saved .

    Author suspect ,that this case reflected situation , that SEC controlled stock and options market better suited for individual speculatos as CFTC controlled futures market
  7. I see your point.