Refco Inc.’s suspended chairman and chief executive officer, Phillip Bennett, was charged with securities fraud in U.S District Court in Manhattan, according to The New York Times. In addition, the Securities and Exchange Commission has opened an informal investigation into the commodities brokerage, noted the Times, which cited a person briefed on the inquiry.
Bennett reportedly used a hedge fund to hide $430 million he owed the company from a series of transactions that may have been designed to make the company’s balance sheet appear stronger than it was in reality. The transactions date back to 1998, the same year that then-CFO Bennett was named CEO. They “consisted in major part of uncollectible historical obligations owed by unrelated third parties to the company” Refco stated, according to the Times. Bennett reportedly transferred the receivables to a company he owned, and then to another, unidentified company at the end of quarters.
Reportedly, Refco’s external auditors from Grant Thornton withdrew their certification of the company’s financials because the company did not disclose that the $430 million in receivables on its balance sheet were related-party transactions. According to the Financial Times, which cited two unnamed sources familiar with Refco’s internal inquiry, hedge fund Liberty Corner Capital was paid a fee for telling Grant Thornton that it owed the debts even though Bennett’s companies were liable.
Under normal circumstances, the Times observed, Refco would have been required to write off some or all of the $430 million, which would have cut into its profits and jeopardized its levels of required capital. The write-off would also be a major hit to Refco’s balance sheet, which had $500 million of equity, according to Reuters which cited Robert Bushman, a forensic accounting professor at University of North Carolina at Chapel Hill. Bennett repaid the $430 million in cash to the company on Monday, the same day he was suspended.
The Times also noted that Bennett has taken out large sums from Refco over the years, which might not have been possible if the company had taken write-offs on the receivables as required.
Refco — which dislosed Monday that it will restate its financials going back to 2002 — stated that it is cooperating fully with the SEC and other regulators after contacting them voluntarily about the matter, but made no mention of the informal probe.