Refco

Refco was a New York City-based financial services company whose principal business was the brokerage and trading of commodities and futures contracts. Founded in 1969 by Raymond Earl Friedman as Ray E. Friedman and Co., the firm expanded into a broad financial-services group with regulated futures operations, securities activities, international businesses, and relationships with banks and hedge funds. Before its collapse, Refco was one of the largest futures brokers in the United States and was described as the largest broker on the Chicago Mercantile Exchange. Its customer base included approximately 200,000 accounts and more than $4 billion in customer assets shortly before the 2005 crisis. Refco also operated internationally, including through Refco Overseas, its European business. The company became a public corporation on August 11, 2005, when it sold 26.5 million shares at $22 per share. The offering initially appeared successful: the stock finished its first trading day more than 25 percent above the offering price, giving the company an implied market value of approximately $3.5 billion. Investors had been attracted by Refco's reported earnings growth during the years preceding the offering. The public-company period was brief, however. In October 2005, Refco disclosed that chairman and chief executive Phillip R. Bennett had concealed approximately $430 million in bad debts through transactions involving entities he secretly controlled. The arrangements were designed to make Refco's financial statements appear healthier at reporting dates and caused the company to state that several earlier financial statements could no longer be relied upon. The disclosure prompted regulatory and criminal investigations, a collapse in the share price, the suspension and subsequent delisting of Refco's stock, and Chapter 11 bankruptcy filings for several Refco businesses. The company initially reported assets of roughly $49 billion in its bankruptcy filing, but later revised its figures to approximately $16.5 billion in assets and $16.8 billion in liabilities. Refco's regulated futures and commodities operations were separated from the bankruptcy process and sold during the restructuring. A group led by J.C. Flowers initially pursued the business, but after the bankruptcy court rejected a proposed breakup-fee arrangement, Man Financial acquired the futures operations in November 2005. Refco's European operation was subsequently sold to Marathon Asset Management and relaunched as Marex Financial Limited. The collapse generated litigation involving shareholders, creditors, lenders, auditors, investment banks, former executives, and Bawag P.S.K., an Austrian bank closely associated with Refco. Investigators also examined alleged fake bonds held through offshore entities and earlier regulatory actions involving customer trading and short selling. Bennett ultimately pleaded guilty in 2008 to securities fraud and related charges and received a 16-year federal prison sentence. Other former Refco officials also pleaded guilty or were convicted. Refco's assets and identity were gradually dismantled through bankruptcy sales, litigation, and liquidation, leaving the company defunct rather than an operating financial brand.

Refco began in 1969 when Raymond Earl Friedman established Ray E. Friedman and Co. The business developed as a commodities and futures brokerage and later became a much larger financial-services organization. Its activities included futures execution and clearing, securities-related operations, and international brokerage. Refco's scale made it a significant participant in U.S. derivatives markets; before its collapse, it was identified as the largest broker on the Chicago Mercantile Exchange and maintained approximately 200,000 customer accounts. The company's growth was supported by its trading and brokerage operations as well as by relationships with financial institutions and investment vehicles. In the years before its initial public offering, Refco reported strong earnings growth, which helped attract investors. On August 11, 2005, it floated 26.5 million shares at $22 each. The stock rose sharply on its first day, temporarily valuing the company at approximately $3.5 billion. Refco's public-market history ended only two months later. On October 10, 2005, the company announced that chairman and chief executive Phillip R. Bennett had concealed a receivable of approximately $430 million owed by an entity he secretly controlled. The arrangement allegedly involved transferring or financing troubled debts through a hedge fund and other intermediaries so that the liabilities did not appear as related-party obligations at reporting dates. Refco consequently warned that financial statements for several prior fiscal periods should no longer be relied upon. The disclosure triggered investigations, criminal proceedings, shareholder litigation, and a rapid loss of market confidence. Bennett was arrested on October 12, and Refco sought Chapter 11 protection for several businesses on October 17. The company initially reported approximately $49 billion in assets, but later revised its filing to approximately $16.5 billion in assets and $16.8 billion in liabilities. Share trading was halted on October 19 and the company was delisted from the New York Stock Exchange. The regulated futures and commodities business was treated separately from the bankruptcy filing and became the focus of competing acquisition proposals. A J.C. Flowers-led bid was initially favored, but a bankruptcy judge rejected a proposed breakup-fee arrangement. Man Financial ultimately acquired the futures operations on November 10, 2005. Marathon Asset Management later acquired Refco Overseas, which was relaunched as Marex Financial Limited. The bankruptcy also produced extensive litigation. Shareholders filed class actions against Refco, Thomas H. Lee Partners, Grant Thornton, Credit Suisse First Boston, and Goldman Sachs. Creditors pursued claims against Bawag P.S.K. and examined alleged offshore transactions, including claims concerning as much as $525 million in counterfeit bonds. Refco had also faced numerous earlier regulatory actions. In 2001, the National Futures Association ordered Refco to pay $43 million to 13 investors after a broker used bogus order tickets to clear trades. In 2005, the company disclosed a Wells notice concerning alleged improper short selling at its Refco Securities unit, including activity involving Sedona Corp. The criminal consequences continued after the corporate collapse. Bennett pleaded guilty to 20 charges in 2008 and received a 16-year federal sentence. Former chief financial officer Robert Trosten pleaded guilty to five charges, while Refco official Tone N. Grant was convicted on five charges and later sentenced to ten years. The company’s art collection was auctioned by Christie's in 2006. Through asset sales, liquidation, and criminal and civil proceedings, Refco ceased to exist as an operating financial-services brand.

• 2008

  Bennett is sentenced

  [1]Refcoen.wikipedia.org

  Phillip Bennett receives a 16-year federal prison sentence after pleading guilty to securities fraud and related charges.

• 2005

  Refco becomes publicly traded

  [1]Refcoen.wikipedia.org

  Refco sells 26.5 million shares at $22 per share in an initial public offering on August 11.

• 2005

  Accounting scandal becomes public

  [1]Refcoen.wikipedia.org

  Refco discloses that approximately $430 million in bad debts had been concealed through transactions linked to its chief executive.

• 2005

  Chapter 11 bankruptcy and business sale

  [1]Refcoen.wikipedia.org

  Refco files for bankruptcy protection and later sells its principal futures operations to Man Financial.

• 2001

  National Futures Association orders customer compensation

  [1]Refcoen.wikipedia.org

  The NFA orders Refco to pay $43 million to 13 investors after a broker used bogus order tickets to clear trades.

• 1969

  Ray E. Friedman and Co. is founded

  [1]Refcoen.wikipedia.org

  Raymond Earl Friedman establishes the business that later becomes Refco.

A large, internationally active futures and commodities broker serving professional, institutional, and other financial-market customers.

• Brokerage

  Futures brokerage

  Refco's core business was the execution, brokerage, and related servicing of futures contracts for customers and institutional market participants. Its regulated futures operations became the principal asset targeted by buyers during the 2005 bankruptcy restructuring.

• Brokerage

  Commodities brokerage

  The company brokered commodities contracts alongside its futures activities. This business formed part of Refco's established market position in derivatives and was included in the operations separated for sale during bankruptcy.

• Securities services

  Securities brokerage and trading

  Refco also operated securities-related activities, including the Refco Securities unit. Those activities came under regulatory scrutiny in connection with alleged improper short selling and transactions involving Sedona Corp.

• International financial services

  International brokerage operations

  Refco maintained international operations, including Refco Overseas and a European business. Refco Overseas was sold during the post-bankruptcy process and later relaunched by Marathon Asset Management as Marex Financial Limited.

• 2006

  Alleged counterfeit bond holdings

  Information disclosed during the investigation indicated that Refco held offshore accounts containing as much as $525 million in allegedly fake bonds associated with Bawag P.S.K. and Liquid Opportunity.

  Source

• 2005

  Concealment of approximately $430 million in bad debts

  Refco disclosed that chief executive Phillip Bennett had used transactions involving Liberty Corner Capital Strategy and a secretly controlled offshore entity to conceal bad debts and make the company's financial position appear stronger at reporting dates.

  Source

• 2005

  Improper short-selling allegations

  Refco disclosed receiving a Wells notice concerning alleged improper short selling at Refco Securities and related matters, including activity involving Sedona Corp.

  Source

• 2001

  Bogus order-ticket case

  The National Futures Association ordered Refco to pay $43 million to 13 investors after a Refco broker used bogus order tickets to clear trades.

  Source

Read more

• 2005

  Public offeringOther

  Background

  Refco sought public capital after reporting substantial earnings growth in the years preceding its offering.

  Action taken

  The company sold 26.5 million shares at $22 per share on August 11, 2005.

  Aftermath

  The stock initially rose strongly, but the offering was followed by the October accounting disclosure, a collapse in the share price, and eventual delisting.

  Initial public offering proceeds implied by 26.5 million shares at $22 per share. 26.5 million shares sold at $22 per share (August 11, 2005)

  Source

• 2005

  Chapter 11 restructuringOther

  Background

  The concealed-debt disclosure caused a liquidity crisis, loss of investor confidence, and claims from creditors.

  Action taken

  Refco placed a number of its businesses into Chapter 11 protection and pursued the sale of its regulated futures and commodities operations.

  Aftermath

  Man Financial acquired the principal futures business, while the European operation was later sold and relaunched as Marex Financial Limited.

  Revised bankruptcy balance-sheet figures. Approximately $16.5 billion in assets and $16.8 billion in liabilities (2005 bankruptcy proceedings)

  • Man Financial — Acquired the majority of Refco's futures businesses on November 10, 2005.

  Source

1. 1Refcoen.wikipedia.org