- The esoteric world of derivatives was rocked by scandal
yesterday when leading futures brokerage Refco, which has substantial operations
in London and New York, said it had discovered that chief executive Phillip
Bennett owed the company $430m (£250m) and that none of its accounts
dating back to 2002 could be relied upon for their accuracy.
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- The disclosure is likely to increase calls for tighter
controls of the high risk and often arcane financial instruments that have
seen phenomenal growth over recent years in the City and on Wall Street.
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- Refco is one of the world's largest and most powerful
commodities dealers, but its interests also spread across most financial
assets, such as currencies and bonds. It specialises in derivative brokerage
services. Last year it was the biggest trader on the Chicago Mercantile
Exchange, the largest derivatives exchange in the United States.
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- In an opaque statement, Refco said that a company controlled
by Mr Bennett had assumed "certain historical obligations" owed
by third parties to Refco that "may have been uncollectable".
He did so without telling the Refco board.
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- Analysts said that one interpretation could be that Mr
Bennett had attempted to hide the bad debts. The firm said the amount did
appear as a receivable on prior financial statements and on the balance
sheet, but it as not shown as a related party transaction. The company
warned that its financial statements for the past four years could no longer
be relied upon. Mr Bennett, who has now repaid the money to the firm, has
been put on leave pending further investigation.
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- Shares in Refco fell by a third yesterday as investors
vented their anger. The company was floated in the US as recently as August,
when the firm raised $583m. Part of that ire and possibly legal action
is likely to be directed at the banks Credit Suisse First Boston, Goldman
Sachs and Bank of America, which led the share sale, and the accounting
firm Grant Thornton, which audited Refco's books. A year before the IPO,
the private equity firm Thomas H Lee led an investor group that ploughed
$507m of equity into Refco for a 57% stake.
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- The firm's chief operating officer, William Sexton, who
had previously been planning to leave the company, said he would now remain
with the firm as chief executive. "I am staying at Refco because I
believe in our employees, customers and franchise," he said. Another
executive, Santo Maggio, chief executive of Refco Securities and Refco
Capital Markets, has taken a leave of absence.
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- The company tried to reassure clients and said that all
of its customer funds on deposit are unaffected by the discovery. At the
end of August, Refco said it had cash and cash equivalents of $649m.
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- Investigative lawyers and forensic accountants have been
drafted in to investigate the books of the firm. Meanwhile, Refco has delayed
the filing of its next quarterly financial results. A spokeswoman said
the company doesn't know if a restatement will be required.
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- Refco has already had run-ins with American regulators
this year, with the securities and exchange commission threatening action
over alleged market manipulation in May. Last last month the company was
the target of a law suit from a French investor, claiming that Refco had
misled investors in its public filings and demanding compensation of £1.4bn.
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- What it is
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- Refco is a diversified financial services firm best known
for its futures brokerage - dealing with contracts to buy or sell specific
quantities of a commodity at a specified price in the future. It employs
2,400 people in 14 countries. Last year it was the biggest trader on the
Chicago Mercantile Exchange.
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- http://www.guardian.co.uk/business/story/0,3604,1589110,00.html
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