Oct. 13 (Bloomberg) -- Refco Inc., reeling from the disclosure that its chief executive officer hid unpaid debts, blocked clients from withdrawing funds and said one of its units doesn't have enough liquidity to keep doing business.
Refco, the biggest independent U.S. futures broker, named Arthur Levitt, former chairman of the Securities and Exchange Commission, and Eugene A. Ludwig, formerly U.S. Comptroller of the Currency, as special advisers to the board. It also hired Goldman Sachs Group Inc. as financial adviser.
The New York-based firm imposed a 15-day moratorium on withdrawals from Refco Capital Markets Ltd. and said the unit, ``which represents a material portion of the business of the Company, is no longer sufficient to continue operations.'' The company said activities at its regulated futures brokerage were unaffected.
The announcement came a day after U.S. authorities arrested Phillip Bennett, CEO until he was suspended by the company Oct. 10, and charged him with securities fraud. Bennett, 57, hid $430 million in unpaid debts dating to 1998, Refco said, adding that its accounts for the past three years couldn't be relied on.
Refco had $4.9 billion in customer accounts on Aug. 31, making it the eighth-biggest futures broker by that measure after banks such as Goldman and Citigroup Inc.
Trading of Refco stock was halted today prior to the announcement. The shares fell to $7.90 before markets opened from $10.85 yesterday, a decline of almost 75 percent from Oct. 7, the last trading day before Bennett's role in the alleged fraud was disclosed.
Criminal Complaint
Bennett and unidentified accomplices ``hid from investors and regulators hundreds of millions of dollars that one of Bennett's companies owed to Refco,'' U.S. Attorney Michael Garci said yesterday. Bennett may have helped Refco appear more financially sound as it and underwriters including Credit Suisse First Boston prepared for a $583 million initial public offering in August. Bennett faces life in prison if convicted.
A six-page criminal complaint against Bennett, who made $145 million from the IPO, lays out a scheme that the government claims began at least as early as 2004 and continued through this month.
According to U.S. officials, Bennett used loans as large as $545 million to a customer to conceal debt owed to Refco by a separate company that he controlled, Refco Group Holdings Inc.
Standard & Poor's and Moody's Investors Service both lowered their ratings on Refco's debt this week and said they were considering further downgrades.
To contact the reporter on this story: Gavin Serkin on gserkin@bloomberg.net
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