Corporate Governance Issues at Refco Inc.
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Case Code: CGOV006 Case Length: 19 Pages Period: 2005-2006 Pub Date: 2006 Teaching Note: Available |
Price: Rs.400 Organization: Refco Inc. Industry: Financial Services Countries: USA Themes: Corporate Scams |
Abstract Case Intro 1 Case Intro 2 Excerpts
"Enron was the wake-up call, but with Refco, the underwriters, the accounting firms, the company officers and the SEC all slept through the second alarm."
- Theodore Eppenstein, a New York lawyer who represented investors in a securities fraud case against Refco, in 2006.
"You got a problem with regulators? Just pay the fine, and move on."
- Former regulator at a U.S. commodities exchange, commenting on Refco's attitude toward regulation, in 2006.
"When you see something like this, it begs asking what failure in their system led to this. Why didn't anyone pick it up?
- Charles Elson, director of the Weinberg Center for Corporate Governance at University of Delaware, in 2005.
Introduction
In September 2006, Refco Inc. (Refco), a diversified financial services organization, reached a settlement on the distribution of proceeds from the sale of Refco Capital Markets (Refco Capital), its Bermuda-based subsidiary. Refco Capital was one of the several subsidiaries that were put on the block in order to pay the US$ 16.8 billion claim on Refco by its creditors after an accounting scandal pushed the company into bankruptcy in October 2005. Coming as it did after a rapid expansion in the early 2000s through several acquisitions, Refco's slide was as rapid as it was steep. In 2004, Thomas H. Lee Partners (Lee Partners), a leading venture capital firm, had invested in Refco.
In June 2005, Refco had acquired Cargill Investor Services, a rival firm, and in August 2005, it had successfully gone public with an issue of 26.5 million shares. In October 2005, the Refco board discovered that an entity secretly controlled by CEO Phillip Roger Bennett (Bennett) owed US$ 430 million to Refco and that Bennett had been concealing this information by manipulating the accounting records. The board asked Bennett to repay the loan immediately and to take leave of absence. On October 10, 2005, the board went public with the information, triggering a mass withdrawal of funds from Refco that left the firm in a precarious position. A week later, Refco filed for bankruptcy protection. As part of the bankruptcy court proceedings in November 2005, some subsidiaries of Refco were put up for sale.
Refco's largest subsidiary, Refco LLC, a futures brokerage firm, was sold to Man Group Plc. (Man Group). 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. BAWAG, 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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