Refco on the Brink

Updated from 4:32 p.m. EDT

Refco(RFX), the New York derivatives brokerage engulfed in an accounting scandal, teetered Thursday as it closed a major subsidiary and faced deepening concerns about its ability to pay its debts.

Bond rating agency Standard & Poor's said Thursday afternoon there's "substantial doubt" about the company's liquidity. S&P and Moody's, which were heavily criticized in 2002 for failing to detect accounting fraud at Enron, both downgraded Refco's credit rating further into junk status.

Earlier, Refco retained Goldman Sachs, one of the underwriters of its August public offering, as financial adviser, presumably to explore an asset sale. It also hired former Securities and Exchange Commission chief Arthur Levitt and ex-comptroller of the currency Eugene Ludwig as special advisers to its board.

"The survival of Refco is really 50/50," said Kevin Starke, an analyst at Weeden & Co.

The news came a day after Phillip Bennett, the ousted CEO accused in a criminal plot that pounded the brokerage's stock, was arrested. Shares in Refco were halted all day Thursday. They've lost about 72% this week based on the last premarket quote of $7.90.

Refco's bonds lost about half their value in secondary market trading Thursday. Shares of various commodities-related companies were also caught in a downdraft that looked partially attributable to Refco's problems.

The New York firm said Thursday that capital accounts at its Refco LLC futures merchant and Refco Securities LLC broker dealer "have been substantially unaffected by the events of this week." But the liquidity at its offshore securities and foreign exchange broker, Refco Capital Markets Ltd., "is no longer sufficient to continue operations."

Refco imposed a 15-day moratorium on all activities of Refco Capital Markets Ltd. "to protect the value of the enterprise." The company said that unit "represents a material portion of the business of the company."

Starke said it's impossible to tell from the company's filings how big the capital markets unit is because its results are consolidated with its prime brokerage operation.