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US: Refco Suspends Chief as Accounting Issues Emerge

by Vikas Bajaj and Floyd NorrisThe New York Times
October 10th, 2005

Refco Inc., a futures trading company that went public two months ago, ousted its chief executive today after discovering that a firm he controlled owed the company $430 million. Refco's shares fell 45 percent, reducing the company's market value by $1.65 billion.

The company said Phillip R. Bennett, the chairman and chief executive, was suspended today, although he had repaid the $430 million in cash the same day. Refco said it had hired forensics accountants to audit the matter and said it would delay its quarterly filing to the Securities and Exchange Commission, which is due this week.

Although the company said Mr. Bennett was on leave, it also announced his permanent successor, William M. Sexton, who was executive vice president and chief operating officer but had recently announced plans to leave the company.
It was unclear how badly Refco was damaged because the repayment of the $430 million improved its liquidity. But the company seemed unsure whether there were any other problems, and investors rushed to sell. Refco's stock fell $12.96 to close at $15.60 a share in extremely heavy trading on the New York Stock Exchange. The stock had been sold to the public for $22 a share in an August offering that realized $583 million, $275 million for the company and the rest for shareholders who sold, including Mr. Bennett, 57.

The company said a group controlled by Mr. Bennett apparently assumed debts owed to Refco by unrelated third parties, adding that some of the debts may have been uncollectible.

The $430 million in receivables was on Refco's balance sheet, the company said, but the company never disclosed it as a related-party transaction; such disclosure is customary and required when companies have significant business dealings with executives and other employees. It was for that reason the company said its auditors, from Grant Thornton, had withdrawn their certification of the company's financial statements.

A spokesman for Grant Thornton said the firm could not comment further because it was bound by confidentiality agreements.

When it went public, Refco's financial statement showed $7.2 billion in receivables, including almost $2 billion in receivables from customers. If the amount repaid by Mr. Bennett came from that latter category, it would have amounted to more than 20 percent of the receivables. The company declined to discuss details of the receivables.

Refco was controlled by Thomas H. Lee Partners, a private equity firm, before it went public, and Lee Partners still owns 38 percent of the stock. In a phone interview, Scott Schoen, co-president of Lee Partners, said that neither he nor Mr. Lee, who also sits on the board, had known about the receivables until recent days. The company said it had created an executive committee of the board and named Mr. Schoen chairman.

Asked how it was that the Lee firm had not known, Mr. Schoen said it had performed extensive work on the company and added that the auditors had also been unaware of the transactions. The auditors declined to comment, other than to say they recently learned of the facts disclosed today.

Mr. Sexton, the new chief executive, said he had not known about the receivables before recent days. He said that he had gotten along well with Mr. Bennett and that there had been no clashes that led to his decision to leave the company. Mr. Schoen said the board had been disappointed by Mr. Sexton's departure and had hurried to persuade him to stay after deciding to suspend Mr. Bennett.

Mr. Bennett, whose lawyer declined to comment, owns 34 percent of Refco, worth $672 million even after today's decline. In the initial offering, he sold stock worth $118 million at the time. Most of the rest of the $308 million worth of stock sold in the offering was sold by Lee Partners and its affiliates.

Receivables are money owed to a company by customers or others. For a company controlled by Mr. Bennett to become responsible for $430 million of them, it would either have to have been a substantial customer of Refco - something the company would have been required to disclose - or it would have had to make arrangements with customers. A chief executive dealing with customers in such areas, separately from the company, would also normally require disclosure, at least to the board and perhaps to the public.

When Refco went public in August, it disclosed that it was the subject of an S.E.C. investigation that started four years ago and dealt with short sales of stock in the Sedona Corporation, a software maker.

Refco said at the time that it expected a settlement of the suit with the S.E.C. that would bar Santo C. Maggio, who headed the company's securities unit, from supervising employees. But it said it expected Mr. Maggio to remain with Refco.
No settlement has been announced, however, and the company said today that Mr. Maggio had been suspended from his post. Mr. Schoen said Mr. Maggio was suspended because he had known about the receivables transactions involving Mr. Bennett, not because of the earlier issue that led to the S.E.C. investigation. Mr. Maggio's lawyer could not be reached for comment.

After Refco's disclosure today, Standard & Poor's lowered the company's credit rating to "B+" from "BB-" and placed it on credit watch with negative implications, indicating a further downgrade is possible. Both ratings are below investment grade.

Tom Foley, an analyst with the credit-ratings agency, said bondholders and banks that have lent Refco money could use the latest disclosure to force the company to repay its debt sooner than scheduled, putting the company in a financial bind. Also, he said, "this indicates possibility that there could be other accounting control issues."

Mr. Sexton, Refco's new chief executive, and Joseph Murphy, who was appointed president of Refco today, told employees in a memo that the accounting investigation would not affect the company's day-to-day operations.

As of Aug. 31, the company had $648.6 million in cash. Since then, it has used about $230 million to pay down a portion of its $1.4 billion in debt. The figures do not include the $430 million in cash that Refco received today.

Mr. Bennett, a Briton and graduate of Cambridge University, joined Refco in 1981 from Chase Manhattan and played a big part in transforming the firm - first as its chief financial officer and later as its chief executive - from a much smaller, privately held commodities broker based in Chicago to a global futures operation based in New York. Raymond Earl Friedman found Refco in 1969, and the company derives its name from his initials.

In its fiscal year ended February 2005, Refco reported $3.7 billion in total revenue and $176.3 million in profits, compared with $1.87 billion in revenue and $187.2 million in profits in 2004. At the end of trading on Friday, Refco had a market capitalization of $3.64 billion, a figure that fell to under $2 billion Monday.





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