Risk Management

Refco Reversal: Ex-CFO Will Help Prosecutors

Robert Trosten cries as he accepts a plea agreement in the huge securities fraud case against the commodities broker.
Roy HarrisFebruary 21, 2008

In a tearful apology as he entered a guilty plea in a cooperation deal with federal prosecutors, former Refco Inc. CFO Robert C. Trosten emerged as a key player in the government’s securities fraud case against the commodities broker and its top executives

Trosten, who had
maintained his innocence since October 2006, pled guilty to bank fraud, wire fraud, money laundering, and conspiracy charges that carry a potential penalty of 85 years in prisong if he fails to cooperate fully, according to the Associated Press. Trosten remains free on $10 million bail, and is to be sentenced in New York by U.S. District Judge Naomi Reice Buchwald on Feb. 20, 2009.

Trosten’s attorney, Robert G. Morvillo, issued a statement for the 38-year-old ex-finance chief, according to the wire service, noting that his client has been only 28 when he joined Refco. “Despite his youth, relative inexperience and his substantial misjudgment in following the dictates of his superiors, Mr. Troten fully accepts responsibility for his role in this serious misconduct,” the statement read.

The main target of the government’s case has been former Refco CEO Phillip R. Bennett, 20 years Trosten’s senior, who last week pled guilty without a cooperation deal, the AP said. He faces up to 315 years in prison. The company’s former president, Tone N. Grant, has denied wrongdoing. According to other press reports, the three had been scheduled to go on trial in a few weeks.

Prosecutors have alleged that Bennett created a Refco scheme to hide information from auditors and investors about hundreds of millions of dollars in losses that Refco and customers suffered in the financial markets in the mid-1990s. At the time, Refco was private, and controlled in part by Bennett. The AP reported that the government’s case included claims that Trosten and Bennett conspired with others to hide the debt that was owed to Refco by another Bennett-controlled company.

Trosten admitted during his plea yesterday that he had participated in transactions that made it appear that Refco was owed income from a third-party customer, rather than from the Bennett-controlled entity.

However, the scheme came apart two months after Refco went public, in October 2005. That was when the company announced that it had uncovered the $430-million debt that the company was owed by another company, and it sent Refco stock into free-fall, forcing it into bankruptcy court.