Risk Management

Book Is Thrown at Lawyer for Refco

The outside counsel helped the now-defunct company perpetrate its massive fraud, the U.S. Attorney and the SEC assert.
Stephen TaubDecember 18, 2007

Both criminal and civil charges have been filed against a partner at law firm Mayer Brown for allegedly participating in the fraud several years ago by Refco Group, the one-time commodities brokerage giant.

Joseph Collins criminally conspired with several former Refco executives, including CEO Phillip Bennett, CFO Robert Trosten, and president Tone Grant, to commit securities fraud, wire fraud, bank fraud, and money laundering; make material misstatements to auditors; and make false filings with the Securities and Exchange Commission, according to Michael Garcia, the United States Attorney for the Southern District of New York.

Collins was also charged with substantive counts of securities fraud, making false SEC filings, wire fraud, and bank fraud.

Separately, the SEC charged Collins with aiding and abetting securities fraud violations at Refco, saying he helped the company withhold disclosing hundreds of millions of dollars in related-party indebtedness and transactions.

According to the criminal indictment, as a result of the fraud, Thomas H. Lee Partners purchased a majority interest in Refco for about $1.9 billion through a leveraged buyout in August 2004, having been deceived about the true financial health of the business.

The buyout was financed by approximately $500 million in cash from Thomas H. Lee Partners, $600 million in notes sold by Refco to private investors, and $800 million borrowed from a syndicate of banks.

In August 2005, as part of the same fraud, Refco, with the assistance of Collins, raised about $583 million from an initial public offering of its stock, also based on alleged false and misleading statements about Refco’s financial situation.

Within several months of the IPO, several aspects of the fraud were discovered and made public, causing Refco to go into bankruptcy and its stock to be delisted from the New York Stock Exchange. “Collins played an important role in the fraud,” Garcia said.

The attorney knowingly made affirmative misrepresentations, participated in material omissions, and told deceptive half-truths to help Bennett and others to achieve the ultimate objective of their shared scheme: to steal more than $2.4 billion from potential investors and lenders, according to the indictment.

“Collins’s status as a partner with a well-known law firm contributed to the successful deception of the fraud victims,” Garcia asserted.

Collins faces up to 30 years in prison one count and 20 years on two others, as well as fines of up to $5 million on the various counts.

“Financial and disclosure frauds are often possible only if an attorney, an accountant, or some other outside professional assists,” said Linda Chatman Thomsen, director of the SEC’s division of enforcement. “The Commission relies on these professionals to act as gatekeepers to our markets. We will aggressively pursue individuals who ignore their professional obligations and instead assist in their clients’ violation of the federal securities laws.”

The SEC’s complaint seeks civil money penalties against Collins.

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