Refco Creditors Cry Foul
Matthew Goldstein
12/29/05 - 04:13 PM EST
Another group is crying foul over missing assets in the
Refco(RFXCQ - Cramer's Take - Stockpickr) collapse.
There's a twist in the latest case. The aggrieved party isn't some hedge fund that saw its money locked up when the scandal-tarred commodities brokerage blew up in October. It's Refco creditors, who want to know why a fund managed and marketed by the brokerage was able to move its money to safety just as the scandal was erupting.
Lawyers representing Refco's creditors charge that about $312 million in an index fund formerly managed and marketed by Refco was improperly moved from the brokerage to a new account now with
Lehman Brothers(LEH - Cramer's Take - Stockpickr), according to regulatory filings and people familiar with the situation.
The bankruptcy judge overseeing the Refco matter has frozen the transferred assets, effectively prohibiting investors from redeeming any of their money in the
S&P Managed Futures Index Fund until the dispute is sorted out.
The S&P Managed Futures Index Fund, sold to investors under the brand name Sphinx Managed Futures Fund, is designed to track the performance of the S&P Managed Futures Index, which was set up to mirror the performance of commodity-focused hedge funds. The nearly three-year-old fund is managed by an affiliated entity of what used to be Refco.
Judge Robert Drain issued the freeze order on Dec. 15 in a closed-door proceeding with lawyers from Milbank Tweed Hadley & McCloy, the big New York law firm that's representing Refco's many creditors. In a rare move, all the court filings in the action have been sealed by the court and are not available to the public. The judge also has agreed to hold all future hearings in the case out of the public eye.
The secrecy surrounding the action is unusual for a civil proceeding. In court papers, lawyers from Milbank Tweed contend the secrecy is needed to prevent "irreparable harm'' to the creditors and third parties.
But legal experts say the confidentiality surrounding the action could be an indication that federal prosecutors are looking into allegations raised by the broker's creditors. The federal prosecutors investigating the accounting fraud that led to Refco's collapse are exempt from the judge's sealing order.
Lawyers from Milbank Tweed and Skadden Arps Slate Meagher & Flom, which represents Refco, did not return telephone calls. A Lehman spokesman declined to comment.
Despite all the secrecy, some of the details of the pending court action were disclosed in a Dec. 23 regulatory filing by the S&P Managed Futures Index Fund. In the filing, the fund said the creditors are seeking recovery of the $312 million, claiming it was a "preferential transfer.''
The fund's investment adviser, PlusFunds Group, a New York firm that manages $2.5 billion in assets for hedge funds, helped arrange the transfer of the $312 million from Refco to Lehman.
PlusFunds, which recently announced that its three top officers would resign at the end of they year, declined to comment. Paul Aaronson, PlusFunds' outgoing president, referred all questions to the firm's spokesman.
The court docket for the litigation reveals that on Dec. 23, PlusFunds and the Refco creditors signed a 10-page stipulation in the case. The stipulation is filed under a court protective order.
The timing of the money transfer certainly appears to have been fortuitous, given the quick collapse of Refco.
A person familiar with the Refco bankruptcy says the money transfer occurred on Oct. 11, a day after the brokerage disclosed that CEO Phillip Bennett allegedly had hatched a scheme to keep hundreds of millions of dollars in customer trading losses off the firm's book.
The money was moved out of an account at Refco Capital Markets, the brokerage's offshore, unregulated subsidiary. Two days after the money was transferred, Refco froze all customer accounts at Refco Capital Markets, preventing anyone from redeeming their money.
On Oct. 17, Refco's parent company filed for bankruptcy, an action that has led to a spate of customer lawsuits, seeking to reclaim some of the $1.8 billion in deposits that still remain frozen at Refco Capital Markets.
Up until he was forced out of Refco, Bennett had served as principal of the Refco affiliate that managed the S&P Managed Futures Index Fund. Bennett was succeeded by Richard Butt, a former top Refco executive and the current president of alternative investments for Man Financial Refco.
Man, the big London-based hedge fund conglomerate, bought most of the assets of Refco in a bankruptcy auction.
Butt could not be reached for comment. But in an Oct. 17 letter to investors, he said "less than 3%'' of the Sphinx fund's assets were exposed to Refco Capital Markets. He went on to say that the freeze on customer accounts at Refco would not "have a material impact upon the operations of the fund or the Sphinx fund, or either's ability to satisfy a request for redemption.''
