Advisers in all night Refco talks
Refco held a second day of weekend meetings yesterday as a group of about 50 advisers gathered in New York in an effort to salvage the disgraced group’s regulated futures brokerage arm and determine the fate of its ailing operations.
The advisers had begun emergency meetings on Saturday that stretched late into the night to discuss possible buyers of Refco’s successful futures business and what units may have to file for bankruptcy or be dissolved altogether.
With changes to America’s Chapter 11 bankruptcy protection laws set to come into force at midnight New York time last night the advisers were still deciding the fate of some businesses as CityA.M. hit the streets this morning.
One conversation among the advisers over the weekend has been about whether a bankruptcy filing would complicate any deal for Refco or its subsidiaries. Saving Refco’s main futures and commodities trading operation is the major focus, sources say. The parent company, which has 2,400 employees and operates in 14 countries, also has a broker dealer and a prime brokerage unit, both of which were shut down last week.
The meetings came a week after Refco said it had put Chief Executive Officer Phillip Bennett on leave upon the discovery that a firm he controlled was involved in shuffling about $430m (£243m) in debt on and off Refco’s books to burnish the company’s financial statements.
British-born Bennett, who had led the company for seven years, was charged with securities fraud on Wednesday for hiding the bad debts in the form of a receivable to inflate the company’s financial standing as it went public. Refco raised $583m in an initial public offering in August with Bennett owning 34 percent of the company.
Refco shares are currently halted on the New York Stock Exchange. Pre-market trades on Friday indicated Refco’s stock last changed hands at $7.90, a 72 percent plunge over the week.
One possible outcome is that Refco may be split in two as Goldman Sachs Group, its financial adviser, seeks takeover offers.
Out in the open: The analysis
Just a week ago, Refco was a thriving broking business — one of the world’s biggest — employing nearly 2,400 people in 14 countries. After a successful initial public offering in August, Refco carried a market capitalisation of $3.6m (£2m). The shares were pushing toward $29 a piece, well above the flotation price of $22.
And then it collapsed. Last Monday, Refco revealed that its chairman and chief executive Phillip Bennett had taken a secret $430m loan from the company. By the end of this week, Refco could be under bankruptcy protection.
Few American financial firms have fallen so swiftly. Enron struggled on for nearly three months after disclosing large losses in October 2002. In the 1980s, Drexel Burnham Lambert stayed afloat for three years after Ivan Boesky’s illegal trading prompted the investigations that eventually ensnared Michael Milken and brought the firm down.
All the best scandals have their whistle blowers. At Enron, it was Sherron Watkins. Refco’s conscience, a bookkeeper in the control department, has yet to be named.
The details remain cloudy, but Refco admits that Bennett transferred responsibility for the loan to a third party at the end of quarterly and annual reporting periods, so disguising his link. No one is saying why Bennett needed the capital, but there are reports he needed to cover trading losses, perhaps incurred during the Asian financial crisis, dating back to 1998. Refco says the bulk of the loan is “irrecoverable”.
Bennett repaid the loan before Refco revealed its predicament to the market, but the company admitted accounts for the past four years can no longer be relied upon. Fearful of what may come next, clients began to withdraw their cash immediately, prompting a 21st-century bank run.
Faced with dwindling liquidity, Refco was forced on Thursday to freeze all business at its capital markets division for 15 days. Like Bennett’s “temporary” removal from the board of directors, the suspension of the capital markets business is more than likely to become permanent.
On Friday, Refco began winding down its main stock brokerage business, Refco Securities. Standard and Poor’s said Refco is highly likely to default on its rated debt.
With lightning speed, Bennett was arrested on charges of securities fraud; usually white-collar crime investigations last for weeks or months before charges are brought. Prosecutors say they acted after eavesdropping on a wiretapped conversation in which Bennett told a colleague of an imminent trip to Europe. After posting $50m in bail, Bennett was relieved of his passport and placed under house arrest; his alleged crimes are punishable by 20 years behind bars. His lawyers have vowed to fight the charges.
There was no mention of the loan when Refco floated on the NYSE just two months ago. British-based auditor Grant Thornton signed off on the accounts; CSFB, Goldman Sachs and Banc of America Securities were joint book running managers. Prosecutors will want to speak to all of them.
Meanwhile, shareholders have already banded together to file a number of class-action suits against the company and its advisers. New York law firm Shalov Stone Bonner has accused Grant Thornton of falsely stating that it performed its audit in accordance with generally accepted auditing standards. A former unit of Grant Thornton is already facing charges in the Italian courts arising from its role as auditor to disgraced Italian dairy company Parmalat.
Refco has retained the services of some big guns: former Securities and Exchange Commission boss Arthur Levitt is advising the board, while Goldman Sachs is also assisting. According to reports, Goldman is waiving its fee.
But Goldman has ruled out assuming any financial responsibility for Refco’s futures-trading operation, say sources, leaving Refco scrambling around for a saviour. JP Morgan is also believed to have walked away from a deal. Late last week, leading bankers and investors held a twohour conference call to discuss Refco’s plight. London-listed Man Group is believed to have expressed interest in Refco’s futures operation, while private equity firms may also be interested in elements of the business.
It was private equity firm Thomas H Lee Partners that brought Refco to the market, reducing its majority stake to 38 per cent at the IPO. Lee paid $8 for each Refco share in July 2004. Those shares were worth $7.90 last week.
