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.