Corporate Governance Issues at Refco Inc.
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Case Details:
Case Code : CGOV006
Case Length : 19 Pages
Period : 2005-2006
Organization : Refco Inc.
Pub Date : 2006
Teaching Note : Available
Countries : USA
Industry : Financial Services
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"Enron was the wake-up call, but with Refco, the
underwriters, the accounting firms, the company officers and the SEC all slept
through the second alarm."1
- Theodore Eppenstein, a New York lawyer who represented
investors in a securities fraud case against Refco, in 2006.
"You got a problem with regulators? Just pay the fine, and
move on."2
- Former regulator at a U.S. commodities exchange,
commenting on Refco's attitude toward regulation, in 2006.
"When you see something like
this, it begs asking what failure in their system led to this. Why
didn't anyone pick it up?
- Charles Elson, director of the Weinberg Center
for Corporate Governance at University of Delaware, in 2005.
Introduction
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In September 2006, Refco Inc. (Refco), a diversified financial services
organization, reached a settlement on the distribution of proceeds from the sale
of Refco Capital Markets (Refco Capital)3,
its Bermuda-based subsidiary. Refco Capital was one of the several subsidiaries
that were put on the block in order to pay the US$ 16.8 billion claim on Refco
by its creditors after an accounting scandal pushed the company into bankruptcy
in October 2005.
Coming as it did after a rapid expansion in the early 2000s through several
acquisitions, Refco's slide was as rapid as it was steep. In 2004, Thomas H. Lee
Partners (Lee Partners)4, a leading
venture capital firm, had invested in Refco.
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In June 2005, Refco had acquired Cargill Investor Services5,
a rival firm, and in August 2005, it had successfully gone public with an
issue of 26.5 million shares.
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In October 2005, the Refco board discovered that an entity secretly
controlled by CEO Phillip Roger Bennett (Bennett) owed US$ 430 million to
Refco and that Bennett had been concealing this information by manipulating
the accounting records. The board asked Bennett to repay the loan
immediately and to take leave of absence.
On October 10, 2005, the board went public with the information, triggering
a mass withdrawal of funds from Refco that left the firm in a precarious
position. A week later, Refco filed for bankruptcy protection. As part of
the bankruptcy court proceedings in November 2005, some subsidiaries of
Refco were put up for sale. |
Corporate Governance Issues at Refco Inc.
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