Refco's Bennett Falls Hard

Updated from 3:09 p.m. EDT

In three short days, Phillip Bennett, the ousted CEO of embattled brokerage RefcoRFX, has gone from Master of the Universe to criminal defendant in a fraud that has stunned Wall Street and ravaged the company's stock.

With lightning speed, federal prosecutors arrested Bennett and charged him Wednesday with orchestrating a brazen scheme to paper over hundreds of millions of dollars in sour debts at the New York company, which sold a $583 million initial offering to the public just two months ago.

In charging Bennett with one count of securities fraud, prosecutors alleged that the 57-year-old executive secreted more than $400 million in bad debts owed to Refco to a separate company he controlled. The debt -- run up by Refco customers over seven years and unlikely to be repaid -- showed up on Refco's balance sheet as a cleaned-up receivable, its connection to Bennett masked by accounting sleight-of-hand involving yet another unaffiliated party.

The company has said Bennett paid the money back with interest. But the damage to the newly public company's credibility has been huge, prompting credit downgrades and a three-day rout that cut the value of Refco's stock by two-thirds, erasing $2 billion in market cap. After closing at $28.56 last Friday, Refco's stock closed Wednesday at $10.85, down another 22% on Wednesday alone.

A criminal complaint brought by the U.S. attorney for the southern district of New York focuses on a series of transactions that took place from 2004 through this month. Refco, in ousting Bennett on Monday, has said the suspicious transactions go back to 1998.

Bennett's moves, as described in the complaint, were designed to disguise that his company, Refco Group Holdings Inc., was occasionally responsible for more than $500 million in debt to Refco Inc. -- a circumstance that under normal accounting rules would require it be labeled as a related-party transaction.