Risk Management

Refco Suit Hits Grant Thornton, PwC, E&Y

Credit Suisse Securities, Banc of America, and Deutsche Bank Securities were also charged with aiding a fraud scheme in a $2 billion lawsuit.
Kate PlourdAugust 22, 2007

In a 158-page lawsuit seeking more than $2 billion in damages, trustees representing the failed commodities brokerage Refco Inc. have charged the company’s accounting, financial, and legal advisers with knowingly aiding a group of Refco insiders to plunder millions of dollars in company assets.

Filed in the circuit Court of Cook County, Ill., the Refco Litigation Trust named Grant Thorton LLP, Ernst & Young LLP, PricewaterhouseCoopers, Credit Suisse Securities, Banc of America, Deutsche Bank Securities and the prominent Chicago law firm Mayer, Brown, Rowe & Maw, as well as former Refco CEOs Tone Grant and Phillip Bennett, former finance chief Robert Trosten, and former senior executive Santo Maggio as defendants in the suit.

Refco filed for Chapter 11 bankcruptcy in 2005, a week after it disclosed that Bennett had hidden $430 million of debt and two months after its initial public offering. The company later collapsed in bankruptcy.

The lawsuit alleges that the degree of Refco’s fraud scheme could only have been accomplished with the “active assistance of Refco’s cadre of outside auditors, professionals and advisers.”

The lawsuit charges that Grant Thorton allegedly approved Refco’s financials despite knowing the extent of its fraud and, along with Mayer Brown and PricewaterhouseCoopers, edited disclosure documents filed with the Securities and Exchange Commission.

For its part, Grant Thornton wasn’t having any of it.”Refco perpetrated a fraud which both benefited themselves and ultimately brought about their own downfall. This suit, brought against almost all of its former advisers, is merely an attempt to avoid the consequences of its own actions and seek both scapegoats and deep pockets,” a Grant Thornton LLP spokesperson told CFO.com.

PricewaterhouseCooper spokesman David Nester told CFO.com that the accounting firm “hasn’t yet seen the complaint, but we are not aware of any valid basis under which the claim could be asserted against the firm.”

The suit also alleges that in order to hide trading losses and inflate expenses, Mayer Brown structured and documented fake loan transactions at the end of every relevant reporting and auditing period “like a street-corner shell game.” Mayer Brown stated that the firm is currently reviewing the litigation and is disappointed that it was named in the suit. The law firm will vigorously defend itself and “is confident of a positive resolution.”

The trustees also charge that Ernst & Young “willingly generated Refco’s false tax returns, while the three investment banks are charged with structuring and facilitating the “lucrative cashing-out” of insiders’ interests and knowing the harm posed to RCM and its customers.

Ernst & Young and Banc of America could not be reached for comment at presstime. Deutsche Bank and Credit Suisse would not comment on the pending litigation.

Trosten pleaded not guilty to fraud, conspiracy and other charges in October 2006. He, Bennett and Grant are currently awaiting trial on the charges. Trosten’s attorney, Robert Morvillo, was on vacation and could not be reached for comment and attorneys for Bennett and Grant could also not be reached.

This is the second lawsuit from Refco Litigation Trusts pursuing claims on behalf of the company and creditors. The Trust said it intends to “bring additional lawsuits, in addition to continuing to vigorously pursue the claims it has filed to date.”