REFCO Fraud Charge

Fraud charge filed against former Refco CEO
By Adam Shell and Elliot Blair Smith, USA TODAY
Former Refco (RFX) CEO Phillip Bennett was charged Wednesday with one count of criminal securities fraud in a dramatic reversal of fortune that is proving far more costly than the approximately $545 million in trading losses he is accused of hiding from his firm.
U.S. Attorney Michael Garcia said authorities worked "around the clock" to bring the criminal charge against Bennett, 57, after the futures trading giant Refco disclosed Monday that an internal investigation had uncovered the alleged fraud at its expense.

The disclosure launched a sell-off of firm shares that erased 62% of its value in three days of heavy trading.

According to the criminal complaint, Bennett shifted trading debts for which he personally was responsible off the firm's books each quarter, improving the firm's appearances of profitability. He paid unidentified partners to take custody of the IOUs before moving them back, never disclosing his responsibility for them.

The trading losses date to the emerging markets crisis of 1997. Refco spokesman Rob Solomon said, "We're cooperating with authorities." An attorney for Bennett had no comment. On Monday, the executive repaid $430 million to the firm and took a leave of absence. He was arrested Tuesday evening, arraigned in federal court in New York and then released after posting a $50 million bond and $5 million in cash.

The criminal complaint says Bennett financed one bogus debt swap in February, just before the firm's fiscal year ended, by ordering a subsidiary, Refco Capital Markets, to lend an unidentified customer $335 million that was repaid two weeks later. At the time, that unit's chief was Santo Maggio, already under investigation by the Securities and Exchange Commission in an unrelated short-selling scheme. The firm put Maggio on leave Monday. He has not been charged with wrongdoing.

The SEC and Commodity Futures Trading Commission also are investigating Refco's finances.

John Vita, a spokesman for Refco's auditor, Grant Thornton, said the alleged transfers of Bennett's debts were "specifically hidden from us." Vita said, "If he is responsible for this deception, we believe this would support serious charges."

Last year, Bennett negotiated the sale of Refco to private equity firm Thomas H. Lee Partners, which took it public. The IPO had lifted the value of Bennett's personal stake from $382.5 million to about $1.4 billion.

Plaintiff's attorney Steve Schulman, whose firm filed the first shareholder lawsuit against Refco, said the criminal complaint "provides further corroboration, if any was needed, that there was a serious fraud and theft of shareholders' money."