Accounting & Tax

Former Refco CFO Indicted

Robert Trosten is charged with assisting former Refco CEO in carrying out year-end transactions to hide related-party debt from the company's audit...
Stephen TaubOctober 25, 2006

The former chief financial officer of Refco Inc. was indicted on Tuesday for the role he played in a scheme to defraud investors that resulted in losses that exceeded $1 billion.

Robert C. Trosten was charged with assisting former Refco chief executive officer Phillip R. Bennett in hiding from Refco’s auditors and investors hundreds of millions of dollars of debt owed to Refco by a company controlled by Bennett, according to an announcement from Michael Garcia, the United States Attorney for the
Southern District of New York. Trosten was charged with conspiracy, securities fraud, and wire fraud. If convicted, he faces up to 45 years in prison and more than $5 million in fines.

According to the indictment, in August 2004, Thomas H. Lee Partners purchased a majority interest in Refco, a financial services company, for about $1.9 billion through a leveraged buyout. In connection with that transaction, Refco sold roughly $600 million of bonds.

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A year later, Refco raised $583 million in an initial public offering of its stock, and shortly afterward, the company announced that it had discovered that it was owed $430 million by an entity controlled by Bennett. The news knocked down Refco’s stock price, which was subsequently delisted by the New York Stock Exchange. Soon after the delisting, Refco and many of its subsidiaries filed for bankruptcy.

The indictment charges that Refco sustained hundreds of millions of dollars of losses through its own and its customers’ trading. To hide the losses, Bennett transferred them so they appeared as a debt owed to Refco by Refco Group Holdings (RGHI), the company controlled by Bennett.

Tuesday’s indictment also increased the number of charges against Bennett, who was first indicted in November 2005. Bennett is accused of directing a series of transactions every year from 1999 through 2005 to hide the Refco Group receivable from, among others, Refco’s auditors, by temporarily paying down the receivable from RGHI over Refco’s fiscal year-end and replacing it with a receivable from one or more other entities not related to Bennett. Shortly after each fiscal year-end or quarter-end, these transactions were unwound, returning the debt to RGHI, according to the U.S. Attorney.

Trosten has been charged with assisting Bennett in carrying out these year-end transactions, to hide the related-party debt and its origins from Refco’s auditors and investors. Bennett and Trosten also are charged with defrauding the purchasers of $600 million in notes issued by Refco in 2004 by hiding the existence and size of the RGHI receivable from the bondholders. Bennett is also charged with defrauding the purchasers of $583 million of Refco’s common stock in the IPO.

In addition, the pair is charged with conspiring to defraud Refco’s auditors and investors from the mid-1990s until October 2005. The indictment also alleges that Bennett’s actions enabled Trosten to receive a $48 million payment in August 2004 when the leveraged buyout was completed.