Refco Saga Continues

The Refco saga continued yesterday as Phillip R. Bennett, the former CEO of the company, settled with the SEC. The Commission initially filed a complaint in February of this year alleging that Mr. Bennett orchestrated a fraud that concealed millions of dollars of owed to Refco by a private company that he controlled. The debt came largely from trading losses and operating expenses that Refco had moved into the private company. For over seven years the debt was concealed with short term transactions at the end of accounting periods that shuffled the debt back and forth between the two companies. Shortly after an IPO, the fraudulent transactions came to light and Refco collapsed into bankruptcy and scandal. The SEC’s complaint alleged violations of the antifraud and reporting provisions of the securities laws. SEC v. Bennett, 08-cv-1631 (S.D.N.Y. Filed Feb. 19, 2008).

To settle with the SEC, Mr. Bennett consented to the entry of a permanent injunction prohibiting future violations of the antifraud and books and records provisions. Mr. Bennett also agreed to the entry of an order in a related administrative proceeding which bars him from associating with any broker, dealer, or investment advisor.

The SEC’s action, of course, is of little real consequence. In the related criminal case, Mr. Bennett pled guilty to all twenty counts of the indictment. Mr. Bennett cooperated with the plaintiffs in the related private actions in an effort to mitigate his sentence and avoid spending the remainder of his life in prison. The government opposed any cooperation credit, claiming that Mr. Bennett’s legal fees were paid for under an indemnification agreement from the company’s D&O carrier. Subsequently, Mr. Bennett was sentenced to sixteen years in prison and order to forfeit assets up to $2.4 billion.

Private suits arising out of the Refco scandal are still pending. One action was brought by Thomas H. Lee Equity Fund against Refco’s outside counsel Mayer Brown in New York. Others are pending in Chicago. These suits are discussed here.

SEC Files Two Settled Insider Trading Cases

The SEC continued its campaign against insider trading, filing two additional settled insider trading cases on Tuesday. The first named Lou L. Pai, the former Chairman and Chief Executive Officer of Enron Financial Services, as a defendant. According to the Commission’s complaint, after Mr. Pai left the company he learned from insiders that the subsidiary where he had been employed was experiencing certain financial and operational difficulties and contract losses. For the quarter however, the unit reported a profit of about $60 million based on falsified financials rather than the $40 million loss which should have been reported.

In May and June 2001 Mr. Pai sold over 338,000 shares of Enron. In addition, he exercised options he held and sold an additional 572,818 shares. At the time Mr. Pai sold his shares, the average share price was over $53. Subsequently, the share price fell to about $0.40 when the company filed for bankruptcy in December 2001.

To resolve the action, Mr. Pai consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions. In addition, he agreed to the entry of an order directing that he pay over $30 million in disgorgement, about $11.5 million in prejudgment interest and a $1.5 million penalty. Mr. Pai was given a $6 million credit based on his waiver of certain insurance coverage. SEC v. Pai, Civil Action No. H-08-2338 (S.D. Tex. Filed July 29, 2008).

A second settled insider trading action was filed against George Simchuk, the former General Director of Glamis de Mexico, a subsidiary of Glamis Gold, Inc. In that action, Mr. Simchuk, according to the complaint, traded in advance of the announcement that the company would acquire Western Silver, Inc. Defendant Simchuk led the due diligence team which worked on the acquisition. Nevertheless, prior to the public announcement, Mr. Simchuk purchased 6,000 shares of Western Silver. After the acquisition announcement, the share price of that company increased about 27%.

To resolve the case, Mr. Simchuk consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions. In addition, he agreed to the entry of an order requiring that he pay disgorgement of over $58,000, prejudgment interest of over $10,000 and a civil penalty equal to the amount of the disgorgement. SEC v. Simchuk, Civil Action No. 08-cv-6728 (S.D.N.Y. July 29, 2008).