Refco boss charged in major securities fraud
WORLDCOM IN SCOPE US$430M fraud alleged at Wall Street futures brokerage
WASHINGTON •
In a new Wall Street scandal that threatens to rival WorldCom Inc.’ s massive fraud, the former chairman of the largest independent futures broker in the United States has been charged with securities fraud.
Phillip Bennett, the former chairman and chief executive of Refco Inc., was charged with securities fraud yesterday by the U.S. Justice Department after his company revealed he had hidden US$430-million in debts to the company within complex financial statements.
Mr. Bennett, 57, once worked for Chase Manhattan Bank in Toronto, London and New York before joining Refco in 1981. He appeared in a Manhattan court late yesterday.
According to the indictment, Mr. Bennett and unidentified accomplices “hid from investors and regulators hundreds of millions of dollars that one of Mr. Bennett’s companies owed to Refco,” said Michael Garcia, the U.S Attorney in New York.
“ When those related-party transactions were disclosed to the market, the stock price plummeted, leading to a loss to investors of over US$1-billion,” according to the U.S. federal complaint.
Shares in Refco have fallen 60% in the past three days to about US$10 after the New Yorkbased broker revealed a series of transactions that may have made it appear Refco was in better financial shape than it was.
Refco went public two months ago in an US$583-million initial public offering through underwriters that included Credit Suisse First Boston.
Mr. Bennett owned 34% of Refco when the shares went public.
Mr. Garcia said in New York that U. S. federal investigators have been working around the clock for the past two days and the investigation is continuing.
Refco said yesterday it is cooperating with investigations by the U.S. Securities and Exchange Commission, the New York Stock Exchange and the Commodity Futures Trading Commission.
The six-page complaint lays out a scheme allegedly begun at least as early as 2004 and continued through this month.
According to the charges, Mr. Bennett used loans of up to US$545-million to an unnamed customer to conceal debt owed to Refco by a company he controlled, Refco Group Holdings Inc.
Mr. Bennett on Feb. 23 loaned the customer US$335-million of Refco funds and set March 8 as the repayment date. On the same day, the customer loaned Refco Group Holdings US$335-million at a higher interest rate.
Refco Group Holdings, Mr. Bennett’s company, reduced its debt to Refco by the same amount, it is alleged.
The deals were reversed after the end of each of Refco’s fiscal quarters so that Mr. Bennett, and not the customer, was listed as owing the money, according to the Justice Department.
This has the makings of the biggest Wall Street scandal since Bernard Ebbers, the Canadianborn chairman of WorldCom, was sentenced to 25 years in prison for fraud in connection with the collapse of what was the second-largest telecommunications company in the United States.
The drop in Refco stock is estimated to have cost Thomas H. Lee Partners LP, the Bostonbased buyout firm that invested in the company before the IPO, as much as US$870-million.
Mr. Bennett, through Refco Group Holdings and as an individual, is Refco’s second-biggest shareholder after Thomas H. Lee Partners.
A graduate of Cambridge University, Mr. Bennett joined Refco in 1981 and served as president, chief executive and chairman since September, 1998.
Previously, he worked in credit and commercial lending for Chase Manhattan Bank in New York, Toronto, Brussels and London from 1970 to 1981, according to Refco filings with the SEC.
As a broker, Refco puts together buyers and sellers of exchangederivatives such as interest- rate futures and bonds.
It employs 2,400 people in 14 countries and has more than 200,000 accounts.
Refco said on Tuesday that Mr. Bennett would be removed as chairman and chief executive and said its financial statements since 2002 should not be relied upon.