Fraud scandal forces Refco to close securities, capital markets units

Fraud scandal forces Refco to close securities, capital markets units

Refco, the US futures and securities broker reeling from the fraud scandal in which its former CEO is accused of hiding bad debts from investors and shareholders, says it is winding down its regulated broker-dealer division, Refco Securities, and has also halted operations at its capital markets business because the unit has run out of cash.

Earlier this week Refco's former chief executive officer Phillip Bennett was charged with securities fraud after he allegedly hid bad debts totalling around $430m at an unregulated subsidiary that he controlled. The debt was repaid but investigations into the incident led to Bennett's arrest.

It is alleged that British-born Bennett wanted to make Refco look stronger ahead of the broker's listing on the New York Stock Exchange in August. He has been released from gaol on a $50 million bond and is now confined to his Park Avenue penthouse in New York.

Refco said yesterday that it had halted operations and frozen accounts at its Refco Capital Markets unit for 15 days because the liquidity within the unit "is no longer sufficient to continue operations".

Following this initial announcement Nyse suspended trading in Refco shares indefinitely after the stock fell over 25% to $7.90. Refco's share price has fallen almost 75% since the alleged fraud was disclosed.

Although claiming that business at its Refco Securities broker-dealer unit had been "substantially unaffected" by the fraud scandal, the broker now says the unit is only engaging in transactions required to liquidate outstanding positions.

The US Securities and Exchange Commission has also said that it has restricted the ability of two Refco units to make withdrawals of equity capital or unsecured loans or advances.

The Chicago Mercantile Exchange has also issued a statement saying that the broker's futures commission merchant arm, called Refco LLC, was meeting all of its obligations to the exchange and remains in good standing. But the CME's risk committee has restricted the regulated unit from withdrawing capital and Refco will be required to submit weekly reports on capital and segregated customer funds to the exchange.

The US Commodity Futures Trading Commission has also said it is in the process of re-confirming that Refco LLC's customer funds on deposit remain uncompromised and that the capital requirements of the unit are being met.

In a desperate bid to keep the business afloat, Refco has brought in former SEC chairman Arthur Levitt and former US Comptroller of the Currency Eugene Ludwig as special advisers to its board and has also retained Goldman Sachs as its financial adviser.

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