Corporate Governance Issues at Refco Inc.
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Case Details:
Case Code : CGOV006
Case Length : 19 Pages
Period : 2005-2006
Organization : Refco Inc.
Pub Date : 2006
Teaching Note : Available
Countries : USA
Industry : Financial Services
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Introduction Contd...
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.
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Background Note
In 1969, Raymond Earl Friedman (Friedman), a poultry wholesaler, and his
stepson, Thomas Dittmer (Dittmer), a retired army man, formed a partnership
firm - Ray Friedman & Co. - in the commodity futures trading business, in
Chicago. Later, the firm was renamed the Refco Group Ltd., LLC (Refco Group)
where Refco stood for the initials of the company's original name.
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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... |
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