The Refco Debacle: Reporter on the Hunt


 By Allan Dodds Frank


Bloomberg News

Former chief executive officer and chairman, Phillip R. Bennett, in trenchcoat, departing the courthouse.





Bloomberg News

The embattled Tone Grant, former president of Refco.



Bloomberg News

U.S. Attorney Michael Garcia announcing initial charges against alleged Refco miscreant Phillip Bennett. Principal prosecutor David Esseks at right.






By Allan Dodds Frank

      Bloomberg Television



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 Cambridge and Yale graduates leading the cover-up and allegedly stealing hundreds of millions on this side of the Atlantic. In the Caribbean, there’s the flamboyant art-collecting Austrian who married former President Eisenhower’s daughter and lost hundreds of millions of dollars for Bawag, a bank his father once ran in Vienna. And in Austria, that bank – owned by the country’s equivalent of the AFL-CIO – teamed up with Refco in a twin conspiracy to cover each other’s losses.


For those to whom Refco means nothing, the firm began in Chicago in the late 1960s as the Raymond E. Friedman Company, named after its founder, an Iowa egg broker once convicted of selling rotten poultry to the military.


Friedman got a presidential pardon from Lyndon Johnson thanks to his stepson, Thomas Dittmer who had gained Washington access as a military social liaison to the White House. Friedman installed Dittmer as the boss and the firm began a long colorful climb from the commodities pits of Chicago to Wall Street. Along the way, Refco racked up a long regulatory record as a serial offender of commodities trading laws.


I first dug into Refco in 1992 as the business investigative correspondent for ABC News covering Whitewater and other Clinton financial matters. Refco was the commodities firm that handled Hillary Clinton’s $1,000 investment in 1978 in cattle futures.  Against all odds, that account generated nearly $100,000 in profit  within a year.


Hillary initially 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. Many of Clinton’s trades were overseen by James Blair, then an outside counsel for Tyson Foods, the Arkansas poultry firm that was one of Refco’s biggest customers.


In the late 1990s, Refco went off my radar when the firm moved to New York as part of an effort to convince regulators it had cleaned up its act. The move was led by Dittmer’s hand-picked successors: Phillip Bennett, a slick English graduate of Cambridge, and Tone (pronounced Tony) Grant, a former star quarterback at Yale.


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 Manhattan filed criminal charges against Bennett, who was arraigned on Wednesday. On October 19, Refco filed for bankruptcy.


For Bennett, the wheels had fallen off on Friday October 8, 2005, when the board of Refco learned that the company’s new controller had discovered $430 million was missing as a result of a series of transactions the controller did not understand.


Bennett immediately promised to pay back the money – and remarkably – he did. Over the weekend, he got Bawag bank in Austria to wire Refco the money he owed. The loan was a scam to hide hundreds of millions of dollars in losses Refco had suffered over the years. And it was a cover-up prosecutors now say was executed by Bennett and his co-defendant Grant quarterly for years whenever Refco’s books had to be examined by auditors.


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 Austria have missed what was going on at Bawag bank? What clues were there on the public record on both sides of the Atlantic?


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 Anguilla – that claimed to be owed more than $500 million by Refco. As a regular at the bankruptcy hearings, I also realized that even though more than 100 lawyers attended, no one representing these companies had ever appeared.


Pursuing that line of questioning for months, I eventually discovered that yes –  the paper companies in Anguilla did have Refco accounts and they supposedly held bonds, except that the bond identification numbers were fake. The bonds, it turns out, were held in the Anguilla accounts for the benefit of Bawag, the Austrian bank, and were part of that bank’s cover-up.


By March 15, 2006, Otis Bilodeau – my Bloomberg colleague in Washington  and I were able to publish a story about U.S. investigators examining the fake bonds and Bawag’s relationship with Refco. The story set off a firestorm in Austria and the following day I was interviewed by Austrian national television for a story about my story that led their national news.


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 Austria by number of depositors and fourth largest by deposits.


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 New York resident once married to Anne Eisenhower. 


In New York, the U.S. Attorney’s Office has issued its second superseding indictment, the latest disclosing that Refco and Bawag aided and abetted each other’s fraud. The indictment also charges that Bennett and Grant managed to convince banks not to close the Refco accounts even though the firm was so broke that it often failed to settle more than $100 million in trades for its customers on many occasions.


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.


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