Corporate Governance Issues at Refco Inc.

Refco's largest subsidiary, Refco LLC, a futures brokerage firm, was sold to Man Group Plc. (Man Group)⁶. Subsequently, more subsidiaries were sold to pay back creditors. In due course, Refco's auditors, its IPO underwriters, and even its law firm were dragged into the scandal. BAWAG⁷, an Austria-based bank, which not only helped Bennett cover up the fraud but also lent him money to repay his debt, faced several problems after the scandal broke. Refco's creditors and investors were also badly affected. The Refco scandal seemed to suggest that even the strictest regulation could not prevent determined fraudsters, who more often than not were the top executives of a firm, from perpetrating fraud.

The Refco Group began operations by carrying out clearing services⁸ in agricultural commodity futures. The firm was fairly successful and was able to earn good returns for its clients. In 1974, Friedman sold his stake in the Refco Group to Dittmer. Dittmer then assumed the role of CEO of the Refco Group (See Exhibit I for an overview of the US futures industry). In 1981, Bennett joined the firm as Chief Financial Officer (CFO). Though he had majored in geography from Cambridge University, Bennett had considerable experience in the commodities market. He had earlier worked for the commodity and commercial lending departments of Chase Manhattan Corp. at New York, Toronto, Brussels, and London...