Refco Meltdown fka RFC

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Refco's overseas businesses to file for bankrupty protection
By Robert Peston (Filed: 16/10/2005)


An orderly wind-up of Refco is beginning this weekend, involving many of its overseas businesses filing for bankruptcy protection. According to a banker with a close knowledge of the troubled US futures broker, its major regulated US operations - a futures business and a broker-dealer - will be kept afloat "for a while".

"There will be an attempt to sell the main operations in futures and broker-dealing," he said. There have been preliminary discussions with Man Group, the world's largest quoted hedge fund group, about buying part of it.

But he warned that there was a strong probability of even the major US operations filing for Chapter 11 bankruptcy protection within days.

There has been a collapse of confidence among banks and hedge funds in all of Refco's worldwide operations since it disclosed a massive alleged fraud just under a week ago.

"No one wants to trade with Refco," said a broker. On Thursday, it halted operations at its prime brokerage, which serves hedge funds, and the next day it said it was winding down securities trading.

Attempts by regulators to transfer Refco's extant deals to Goldman Sachs, so that the investment bank could ensure that all customers received either monies or securities they are owed, have failed.

A banker said that it was impossible for Goldman to take on responsibility for clearing and settling trades because it could have been taking on substantial liabilities. "How can a bank step in and perform this function when it has no knowledge of Refco's customers?" asked a banker.

The implosion of Refco is one of the most astonishing events to occur in financial markets. Just two months ago, it was floated in the US at a value of $2.8bn (£1.6bn). The public offering was massively overscribed and shares worth $583m were sold to investors.

Initially the shares performed strongly and the company's market value peaked at $3.9bn on September 7.

Then came calamity. Last Monday Refco said it had discovered that its accounts had been misleading for years, because they failed to disclose that its then chief executive, Phillip Bennett, owed it $430m. Bennett, who has repaid the $430m, has been forced out of the company and has been charged with securities fraud.

An English emigre and alumnus of Cambridge University, he has been confined to his Park Avenue apartment in New York on bail of $50m.

The precise reason that he acquired the liability to the company is unclear, as is the mechanism by which he disguised it over many years. However, the amount he owed Refco grew over several years. "It is not surprising that no one spotted the debt for a while because it started quite small and was covered up in a sophisticated way," said a banker.

Questions have been asked about why Bennett's debt was not detected by Refco's auditors, Grant Thornton, or an array of leading investment banks that advised the company at various times. These included CSFB, Banc of America Securities and Goldman Sachs.

Goldman is now advising Refco for free.





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