Risk Management

Yet Another Guilty Plea in Refco Fraud

The former head of the company's securities subsidiary admits helping to disguise its value by hiding receivables.
Stephen TaubDecember 19, 2007

Another former executive of Refco Group, the defunct commodities brokerage, has pleaded guilty to criminal fraud charges.

Santo Maggio, who was CEO of the Refco Securities subsidiary, admitted conspiring with other one-time company leaders to commit securities fraud, wire fraud, and bank fraud; launder money; make material misstatements to auditors; and make false filings with the Securities and Exchange Commission. He also pleaded guilty to substantive charges of securities fraud and wire fraud.

On Tuesday, criminal and civil charges were filed against Joseph Collins, a partner at Refco’s outside law firm, Mayer Brown, for allegedly participating in the fraud several years ago.

In October 2005, only two months after Refco raised $583 million from an initial public offering, the company announced that an entity controlled by former CEO Phillip Bennett, Refco Group Holdings Inc. (RFGI), owed it $430 million. Refco’s stock promptly plummeted and subsequently was delisted by the New York Stock Exchange, and the company and many of its subsidiaries filed for bankruptcy on October 17, 2005.

Maggio, Bennett, and others directed a series of transactions every year from 1999 through 2005 to hide RFGI receivables from auditors by temporarily paying them down over Refco’s fiscal year-end and replacing them with receivables from one or more other entities not related to Bennet, according to U.S. Attorney Michael Garcia.

He also alleges that Maggio and Bennett fraudulently distorted Refco’s books and records by engaging in revenue-padding and expense-shifting transactions.

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, Garcia said. The buyout was financed by approximately $500 million in cash from Thomas H. Lee Partners, $600 million in notes sold to private investors, and an $800 million loan from a bank syndicate.

Maggio faces 20 years in prison on two separate counts and fines on various counts of up to $5 million or twice the gross gain from the securities fraud.