Refco CEO charged with fraud

Phillip Bennett, until last week chairman and chief executive of brokerage firm Refco, has been charged with fraud after Refco accountants discovered debts of $430 million.

Bennett was arrested yesterday and charged in a Manhattan court. He was subsequently released on a bail of $50 million. At the bail hearing, prosecutors reportedly described him as a 'flight risk', saying he was planning to leave the country for Europe.

Bennett took an indefinite leave of absence on Monday after Refco discovered a company he controlled owed Refco $430 million. The company said it had failed to record repeated transfers of uncollectable obligations from itself to Bennett's company, and, as a result, its accounts since 2002 should now be regarded as unreliable. Bennett has since repaid the $430 million.

Refco shares have fallen by more than 50% since Friday. The US Securities and Exchange Commission started an informal investigation earlier this week.

Investors in Refco lodged several class-action suits against the company and its officers yesterday. The suits claim Refco misled its investors by producing misleading statements, and that various Refco officers knew the company's internal controls were faulty before its initial public offering in August this year.

Refco is pursuing its own investigation of Bennett's actions. According to a Financial Times report yesterday, the investigators have identified the hedge fund Liberty Corner Capital as Bennett's cutout in the debt shuffle. Liberty Corner was allegedly paid a fee for claiming that it, rather than Bennett's company, owed Refco the debts, thus concealing Bennett's involvement. However, it is still not known whether Liberty Corner knew it was helping to hide Bennett's activities from his own company.

The origin and nature of the debts is still uncertain. Refco has revealed that the debts go back as far as 1998 in some cases, raising the possibility that they were acquired, either by Bennett himself or by Refco clients, during the Russian or Asian financial crises of that year. Bennett became chief executive in 1998, having been chief financial officer.

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