Risk Management

Ex-Refco President Guilty of Securities Fraud

He misled purchasers of the company about its financial condition.
Stephen TaubApril 18, 2008

The former president of Refco Inc. was convicted in a Manhattan federal court on Thursday on charges relating to a massive $2.4 billion scheme to defraud investors.

Tone Grant was found guilty of conspiring to commit securities fraud, wire fraud, bank fraud, and money laundering. He was also convicted on substantive charges of securities fraud, wire fraud, bank fraud, and money laundering. Grant faces the possibility of spending the rest of his life in prison as well as fines of nearly $7 million. He’ll find out at his sentencing, scheduled for August 7. Grant’s attorney, Norm Eisen, was not available for comment at press time.

According to Michael Garcia, the U.S. Attorney for the Southern District of New York, in August 2004 Thomas H. Lee Partners shelled out $1.9 billion through a leveraged buyout for a majority interest in Refco. In connection with that transaction, Refco sold about $600 million of bonds and borrowed roughly $800 million from a syndicate of banks.

A year later, in August 2005, the company raised about $583 million in an initial public offering. Two months after that, according to Garcia, Refco disclosed it was owed about $430 million by an entity controlled by former Refco chief executive Phillip Bennett. The news sent the company’s share price tumbling, and the stock was delisted by the New York Stock Exchange. Refco and many of its subsidiaries filed for bankruptcy soon after.

According to Garcia, Grant and Bennett misled the Lee fund and the purchasers of the $600 million in notes and $800 million in bank debt about Refco’s true financial health.

Grant received $16 million in proceeds from the leveraged-buyout transaction, as well as the right to share in half of Bennett’s profits from any future sale of his Refco stock holdings up to $275 million.