Scandal-hit Refco shuts second arm in a week
Saturday, 15 October 2005
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The crisis surrounding Refco intensified yesterday as the scandal-hit futures trading company closed down its second business amid rumours throughout the world's stock markets that it may face a credit crunch.
The New York-based company said it was winding down its largest business, Refco Securities, which trades shares and is a regulated entity. It closed its unregulated capital markets arm this week.
The US Securities and Exchange Commission stepped up the regulatory pressure yesterday by limiting the trading activities of Refco Securities and its clearing business, Refco Clearing, because of fears that the company may not have enough cash to support its transactions.
Refco's shares have been suspended and its bonds slumped in value this week, after the group announced its former chief executive and chairman, Phillip Bennett, had amassed $430m (£240m) in debts to the company and said its financial statements dating back to 2002 could not be relied on.
Mr Bennett has been charged with racking up more than $500m of losses which he allegedly hid from investors in Refco's flotation in August through a web of off-balance sheet transactions, in a way similar to the fraud orchestrated at Enron.
Mr Bennett, who was suspended on Monday, swiftly paid the money back and Refco said it had enough money to carry on trading, but sources in commodities markets have said several of its business partners and creditors have been severing their ties from the company.
Various parties are exposed to risk because of the Refco meltdown. US regulators are scrambling to work out whether there is any systemic risk caused by the Refco problems. Potentially at risk are the exchanges, such as the Chicago Mercantile Exchange, which guarantees the buyer's and seller's side of a transaction. There are also various firms including hedge funds which do business with Refco through private transactions. If Refco cannot make good on its side of the deal in these cases, the other side must do so.
Refco relies heavily on loans from companies with deep pockets, such as insurance companies. to fund trades worth billions of dollars a day. Several are thought to be pulling out of deals. Refco has hired Goldman Sachs, the investment bank which advised it on its flotation, to assess its options including finding a "white knight" buyer.
The company is the subject of a criminal investigation in New York and is being investigated by the Securities and Exchange Commission and the New York Stock Exchange. As it has a substantial business in London, it is likely the Financial Services Authority is investigating the company. The FSA would not comment yesterday, although it fined a branch of Refco before for breaching regulations in 2000.
There is widespread shock in the US that yet another widescale financial scandal can have taken place on its soil, after frauds at Enron, WorldCom and elsewhere prompted the creation of the Sarbanes-Oxley Act, which imposes stricter regulations on companies. The problems at Refco could signal trouble for Grant Thornton, its Chicago-based auditor.
