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
Excerpts
The Bennett Era
In October 1998, Bennett replaced Grant as CEO. "Phil (Bennett) brings to the job a bulletproof track record of sound decision making and a recognized financial stature," said Dittmer at that time. In 1999, Dittmer resigned from his post and sold his stake in the firm to Grant and Bennett. Bennett assumed the title of Chairman in addition to the CEO title. At that point, Bennett and Grant each held a 50% stake in the firm through a New York-based company called Refco Group Holdings Inc. (RGHI). Bennett took many measures to clean up the Refco Group's image. In January 1999, he hired Dennis Klejna (Klejna), who had served as the enforcement director at Commodity Futures Trading Commission (CFTC) from 1983 to 1995, as the firm's general counsel...
Going Public
Lee Partners had acquired the Refco Group with the intention of eventually taking the firm public. Before the IPO, the Refco Group and its various subsidiaries were brought under one holding company called Refco Inc. (Refco). In April 2005, Refco filed papers with the US Securities and Exchange Commission (SEC) for an IPO of its common stock. Refco hired BAC, Credit Suisse First Boston Inc. (CSFB), and the Goldman Sachs Group Inc. (Goldman Sachs) to underwrite the IPO...
The Beginning of the End
Refco's dramatic unraveling began in October 2005 when the company's controller, Peter F. James (James), who had been hired in August 2005, discovered that the firm's accounts were not as clean as had been previously assumed. James had been hired by Refco's CFO, Gerald M. Sherer (Sherer), who had himself joined the company only in January 2005. Sherer had earlier alerted the Refco board to problems with Refco's internal controls (practices and systems) regarding record-keeping and fraud prevention...
Refco's Announcement and its Fallout
Bennett had allegedly been buying Refco's bad debt through RGHI, using money borrowed from Refco itself. As the loan from Refco was a related party transaction, he entered into off-setting transactions with one of the company's clients, Liberty Corner LLC (Liberty) in order to keep it off Refco's books...
The Investigations
Immediately after the accounting fraud was made public, investigators began their attempts to unravel several aspects of the fraud - whether Bennett had been assisted by Refco officials in carrying out the fraud, whether there had been an insider who made false journal entries, or whether the company had paid outside parties to provide confirmations of transactions to deceive auditors. In the weeks following the announcement, auditors, underwriters, lawyers, and former Bennett subordinates came under strict scrutiny by federal prosecutors. Refco's shareholders filed class action lawsuits against Refco, Lee Partners, Grant Thornton LLP (Grant Thornton) (Refco's auditors), CSFB, Goldman Sachs, and Mayer Brown...
What Really Happened
In the course of time, with information from people who were familiar with the internal review processes at Refco, a plausible reason for the scandal emerged. During the Asian Economic crisis (1997-98), several Refco customers had lost millions of dollars. As most of these loss-making transactions had been funded by Refco, the company's bad debts had ballooned...
Outlook
As of 2006, Refco, LLC, operated under the name of Man Financial-Refco Division. Bennett, who, in 2005, had been the billionaire CEO of Refco, the leading company in the US$ 20 trillion US futures industry, was reduced to being another criminal defendant. In addition to his freedom, the money he made through the sale of Refco stock was also under a cloud, as the US Attorney General's office was seeking to claim US$ 700 million from Bennett. In June 2006, BAWAG, which had been sued for helping Refco hide the losses, agreed to pay US$ 675 million to Refco's creditors in a complex settlement reached by federal prosecutors...
Exhibits
Exhibit I: US Futures Industry and Refco
Exhibit II: Refco's Problems with Regulators over the Years
Exhibit III: Global Futures and Options Volumes (In Million Dollars)
Exhibit IV: US FCMs Ranked by Segregated Funds as of October 2005
Exhibit V: Top Futures Exchanges Worldwide
Exhibit VI: Refco Stock Prices between October 05, 2005 and October 10, 2005
Exhibit VII: Refco Entities that Filed for Chapter 11 Protection
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