The Jailhouse

[Ignutz]

Refco failed to execute trades
By Tom Becker

NEW YORK (Bloomberg) – Two former Refco Inc. employees said there were times the company failed to execute trades on behalf of customers because it had used the securities in client accounts to support other transactions.The employees, Adam Weis and Vera Kovar, were deposed by lawyers for Moscow-based hedge fund VR Global Partners, which has lawsuits pending against two Refco subsidiaries to recover $750 million it had deposited with the units.

The testimony was disclosed on the second day of hearings on a request by customers owed $1.7 billion, including VR Global, for a liquidation of Refco’s Bermuda-registered Refco Capital Markets Ltd. subsidiary. Refco, a committee for unsecured creditors, and a second customer group oppose such a move, saying it would lead to costly litigation and reduce recoveries in the bankruptcy case.

“On occasion Refco was short and could not make the delivery,” Kovar, who worked on VR’s transactions, said in her deposition. “If a counter-party didn’t deliver the security to us we could not deliver it because we didn’t have it.”
Lawyers for VR Global, Inter Financial Services Inc., and other pro-liquidation customers have accused Refco of misrepresenting how it would treat cash and securities in customer accounts.

Kovar said Refco failed to execute a trade on behalf of a client “once every three or four months.” She said the securities the customers had deposited in their accounts were not available to execute the trade because “I believe they were loaned out.”

The other former Refco employee, Weis, said in his deposition that VR Global executives, including President Richard Deitz, knew some trades were failing. He said they may not have understood Refco was loaning out their securities for its own benefit.Deitz “was aware securities in the account were unavailable because of fails,” Weis said. “I’m not sure he knew why they were failing.”

The deposition testimony was disclosed one day after Thomas Moloney, a lawyer for Inter Financial, accused Refco Capital of operating a “Ponzi scheme”. In a Ponzi scheme, people are promised high returns on their investments, with the money coming from new investors.

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