Accounting & Tax

Update: Ex-Refco CFO Pleads Not Guilty

Robert Trosten is out on $10 million bail after entering his plea in U.S. District Court.
Stephen TaubOctober 25, 2006

This article has been updated to include additional information.

Robert C. Trosten, the former chief financial officer of commodities brokerage Refco Inc., pleaded not guilty to charges that he and one-time Refco CEO Philip R. Bennett defrauded investors in an alleged scheme that triggered more than $1 billion in losses.

Trosten, who entered the plea in U.S. District Court in New York on Wednesday, was released on $10 million bail, reported the Associated Press. Bennett also pleaded not guilty to new charges that were part of the indictment that charged Trosten, which was issued ealier in the week. Bennett was already free on $50 million bail.

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Trosten was indicted on Tuesday for the allegedly assisting former 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.

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.