The Refco Debacle: Reporter on the Hunt
By Allan Dodds Frank
Former chief executive officer and chairman, Phillip R. Bennett, in trenchcoat, departing the courthouse.
The embattled Tone Grant, former president of Refco.
By Allan Dodds Frank
From the beginning, the rapid collapse in October 2005 of Refco – then the nation’s largest independent futures broker – promised to be a mysterious mess for business investigative reporters and prosecutors.
Even now – two years later – as Refco has disappeared from the news, the tale continues with a cast of characters worthy of the phrase – international intrigue.
It’s got a
Ferrari-driving chief financial officer, buttoned-down
For those to whom
Refco means nothing, the firm began in
Friedman got a
presidential pardon from Lyndon Johnson thanks to his stepson, Thomas Dittmer
who had gained
I first dug into Refco
in 1992 as the business investigative correspondent for ABC News covering
Whitewater and other
explained her huge profits by claiming she had learned about trading
commodities by reading the Wall Street Journal. Later, she conceded a friend had helped.
In the late 1990s,
Refco went off my radar when the firm moved to
Bennett and Grant used their academic blueblood credentials to burnish a firm notorious as a swash-buckling bunch of fast traders. The new executives dressed up the company for sale to the venture capital firm Thomas H. Lee & Partners, which took Refco public in a $583 million stock offering in August 2005.
So imagine my surprise
on Monday morning October 11, 2005 when news broke that Refco was suspending
its CEO Phillip Bennett for failing to disclose he had borrowed $430 million,
even though that morning he had repaid the unauthorized loan. The following
day, the U.S. Attorney in
For Bennett, the wheels
had fallen off on
Bennett immediately promised
to pay back the money – and remarkably – he did. Over the weekend, he got
Bawag bank in
Investors on Wall Street immediately sensed disaster. Refco stock, from a high of $35 in September, collapsed to pennies a share and on October 19th, the company declared bankruptcy.
How could Thomas Lee partners, investment bankers, underwriters and all the people supposedly doing due diligence, as well as U.S. regulators, have missed what was going on inside Refco?
And, as is now
apparent, how could regulators in
That was the challenge for reporters after the initial month-long flurry on news surrounding the arrest of Bennett, the bankruptcy filing of Refco and the relatively rapid auction of its assets.
Bloomberg gave me the time to chase the story. I began reading the fine print in thousands of pages of Securities & Exchange Commission filing.
While I wondered what motivated Bawag, the Austrian bank, to give Bennett a week-end loan to pay Refco back, it made some sense since Bawag said it owned 10 percent of Refco.
For me, the most intriguing question came from the biggest number in several filings related to the initial public offering? On one line deep in the documents, there was an entry for a payout of $861.7 million. And there was a puzzling footnote that the payout had gone to a former shareholder in a predecessor firm.
I asked everyone about that transaction, that one line entry.
And every time someone with inside knowledge responded, it was to deny knowledge or to rule out yet another explanation that at one point or another I had thought was the right answer.
While pursuing this
one question, I noticed an amended bankruptcy filing listing seven creditors
– all located at the same address in
Pursuing that line of
questioning for months, I eventually discovered that yes – the paper companies in
Within two weeks,
Bawag admitted the bonds were part of their own cover-up of more than $1
billion in losses. The bank, as a result of its heritage as a labor union bank,
was the largest bank in
The Austrian press’s amplification of the Bloomberg story triggered a run on the bank and ultimately caused the Austrian Central Bank to orchestrate a billion dollar bailout of Bawag.
Since then, Austrian
prosecutors have filed fraud charges against the bank’s former president and
Wolfgang Flottl, the
As for the ending of this story, stay tuned; a trial is set for next fall. And oh yes, the last superseding indictment finally answered the $861.7 million question. The money went to Bawag – which secretly owned more than 40 percent of Refco.