Hedge Funds Win $1.2M Reimbursement for Refco Expenses
NEW YORK (AP) -- A group of hedge funds that fought to boost payments to stockholders in Refco Inc.'s bankruptcy proceedings won the right to collect $1.2 million in legal fees and expenses from the company, marking a final victory in their bid for a payoff from their Refco shares.
Judge Robert Drain of the U.S. Bankruptcy Court in Manhattan on Dec. 29 approved the reimbursement to Refco's ad hoc equity committee. The committee consists of King Street Capital Management LLC, QVT Financial LP, JMB Capital Partners LP, Mason Capital Management, Smith Management LLC and Triage Management LLC, which collectively owned about 30 percent of the company's stock.
The reimbursement includes $1.15 million in professional fees, $132,032 in expert-witness expenses and assorted other fees accrued during a protracted court battle during which the hedge funds won the right to 3 percent to 15 percent of two trusts in the case. Most of the hedge funds bought shares after Refco, a former commodity brokerage, tumbled into bankruptcy in October 2005.
The reimbursement comes as Refco's bankruptcy is winding down. Creditors recently won court approval to receive a fraction of the $16.8 billion they were owed under a Chapter 11 plan approved in late December. According to court documents, the company has $3.65 billion in cash that could be available for distribution to creditors.
Refco initially entered bankruptcy amid allegations that its chief executive Phillip Bennett, who has pleaded not guilty to fraud charges, had hidden $430 million in bad debt. The company exited bankruptcy proceedings late last month under a plan that calls for it to wind down its operations.
The equity group said it deserved to collect fees and expenses for its role in the case because it helped secure for most Refco stockholders the right to receive proceeds of two trusts -- the Litigation Trust and the Private Action Trust.
Specifically, any equity holder would get a pro rata share of 3 percent of the first $500 million, 7.5 percent of recoveries between $500 million and $1 billion, and 15 percent of recoveries over $1 billion. A previous plan, which the committee fought to amend, would have allowed them only 10 percent of a subset of Refco Inc.'s claims.
Paul Silverstein, a partner at Andrews Kurth LLP who represented the ad hoc equity committee, said it was far too soon to estimate how much those trusts would be worth, and he couldn't give a timeline for any resolution.
The committee said it considered the effort successful. "With more than $2 billion in claims filed against the parent estates that, if allowed, would be payable before equity receives a distribution, and given the almost $2 billion aggregate creditor shortfall, this was a truly remarkable achievement," the group said in court filings.
Stockholders typically see their investments wiped out in bankruptcy cases. But the ad hoc group, which previously included Lonestar Capital Management LLC, had argued that Refco was unique because of its more than 75 subsidiaries not in bankruptcy proceedings that were able to sell or liquidate. In addition, the group argued, Refco and its investors had grounds to sue former executives and financial advisers.
