FinancialAdvisor's College Class (FACC)

[FinancialAdvisor]

Refco arm expected to file for bankruptcy

Refco arm expected to file for bankruptcy
By David Wighton in New York, Jeremy Grant in Washington and Stephen Schurr in London
FT.com
Updated: 2:10 a.m. ET Oct. 17, 2005

Chris Flowers, the former Goldman Sachs banker, on Sunday night emerged as the frontrunner to buy the futures trading arm of Refco, the stricken US brokerage group.

A consortium led by his New York-based investment fund, JC Flowers, was in advanced negotiations with Refco's advisers as they sought to salvage value from the dramatic collapse of the group.

Company officials spent the weekend in talks with advisers, potential purchasers and regulators, who are anxious to limit damage to the rest of the financial system.

Refco has been brought to its knees by the disclosure that its accounts disguised a $430m (£238m) debt owed by Phillip Bennett, its then chief executive, who was last week charged with securities fraud.

Although Mr Bennett repaid the debt last Monday, the revelation triggered panic among clients and funders. Refco's unregulated prime brokerage business was closed on Thursday after it ran out of cash and could be put into bankruptcy as early as today.

The company's regulated futures and securities brokerage businesses, which may also file for bankruptcy this week, have attracted a number of potential buyers according to people close to the company.

In addition to JC Flowers, there have been expressions of interest in the futures arm, the largest independent futures broker, from Man Group of the UK and a Dubai consortium.

A person close to Man Group said it had put in an offer but had made it clear it would have to be "ringfenced" leaving any potential problems with Refco.

Goldman Sachs has been heading the search for buyers but Refco has also taken on Greenhill, the independent investment bank, to avoid a conflict of interest because of Mr Flowers' relationship with Goldman.

Mr Flowers is best known for teaming with Ripplewood in the spectacularly profitable purchase and flotation of Shinsei, the Japanese bank.

Goldman, which has 50 people working on the case but is taking no fee, was one of the lead underwriters for Refco's initial public offering which raised $583m in August.

The underwriters, the company and its auditors, Grant Thornton, face legal action over the collapse Refco's share price since it announced that its accounts could not be relied upon.

Bawag, the Austrian bank that lent Mr Bennett the money to repay the debt, could also face losses. The bank yesterday confirmed that it had a €425m ($510m) exposure to Refco.

Mr Bennett lawyer said last week that he had raised a loan by pledging his entire 34 per cent stake in the company. That stake was valued at only $340m when trading in the stock was suspended indefinitely on Thursday.

Refco's bonds were trading a quarter of face value on Friday.


LINK: http://msnbc.msn.com/id/9721693/