Thursday, March 16, 2006
Futures and commodities dealer Refco Inc. collapsed in a little over a week after it was revealed in October 2005 that its CEO, Philip Bennett, was involved in certain debt transactions carried on the company's books as loans. Bennett repaid over $400 million with funds from a loan made by Austrian bank Bawag P.S.K. (Bank fuer Arbeit und Wirtschaft), but the improper disclosure and suspicions about the company caused it to fall into bankruptcy just a week after the disclosure of problems on its balance sheet. Bennett was arrested before leaving for a European trip, and remains under home confinement while he awaits trial on securities fraud charges. A Bloomberg.com article (here) discusses a potentially greater fraud at Refco as over $500 million in bonds seem to have disappeared since the bankruptcy filing, and the registration numbers for the bonds do not correspond to existing debt securities. To make matters even more suspicious, the bonds were held through Refco's Bermuda subsidiary, and the purported owners of the bonds are Bawag -- which bailed out Bennett -- and an off-shore hedge fund, Liquid Opportunity. They owned the through six Anguilla companies that were incorporated in 2004, a year before Refco went public with its stock offering.
Does any of this sound like a budding fraud case? In the Parmalat collapse, a faked fax for an account at an off-shore bank was the trigger for that company's demise, and the use of bank secrecy havens like Anguilla certainly does not bode well for getting to the bottom of transactions, at least without a cooperating witness. Deep Throat was certainly right when he said to follow the money, the only problem being the brick walls that exist when off-shore accounts are used and transactions involve multiple layers of corporate entities. Refco had been a public company for a bit less than three months before it dove into bankruptcy, which likely means some underwriters, investment bankers, and accountants (plus a couple lawyers) will be watching these developments very closely because of their potential liability to investors under the Securities Act of 1933. (ph)