Risk Management

Refco Examiner Cites Grant Thornton, E&Y

A bankruptcy examiner in the scandal eyes E&Y, Grant Thornton, and the law firm Mayer Brown as likely targets of the firm's debtors.
Roy HarrisJuly 12, 2007

The examiner appointed in the scandal-plagued 2005 bankruptcy of Refco Inc. named Grant Thornton LLP, Ernst & Young LLP, and the law firm of Mayer, Brown, Rowe & Maw as those most likely to face claims from Refco’s debtors.

Refco, a financial-services firm, swiftly collapsed in bankruptcy after a 2005 initial public offering and the payment of an $82.2-million dividend to previous Refco holders resulted in huge losses to its creditors. Man Financial, a large hedge fund, later bought the remnants of Refco.

The independent examiner, attorney Joshua Hochberg, concluded that “the Debtors’ estates could state claims for relief, sufficient to withstand a motion to dismiss, against certain of Refco’s prepetition professionals” who may have contributed to or failed to prevent harm to the debtors. Grant Thornton, Ernst & Young, and the Mayer Brown firm were listed as prospects for “professional negligence” claims, while claims for “aiding and abetting fraud and breaches of fiduciary duty” might be levied against Mayer Brown and, “although it is a close question, E&Y,” the examiner said.

The report said so-called “round trip loans” were used to shift bad debts and to create the appearance of more business than Refco was actually doing.

Claims could be asserted against others in connection with the $82.2-million dividend, the report said. And the examiner recommended further investigation to determine whether aiding-and-abetting claims might be filed against Grant Thornton and a third auditor, Arthur Andersen.

A Grant Thornton statement said that the firm’s “audit work met professional standards and statements by the examiner for the bankruptcy estate do not reflect the context or the facts as we know them to be.” According to an E&Y statement: “We believe our tax work fully complied with professional standards. We resigned in 2003, well before Refco’s 2005 public offering, after the company’s former management refused to allow us to meet with its outside auditors to discuss questions that came up during the course of our tax work.” A statement from Mayer Brown said the firm disagreed with the conclusions of the report.