New Focus in Refco Inquiry

Another hedge fund manager is being drawn into the Refco(RFXCQ) scandal.

Federal investigators and lawyers looking into the accounting fraud that led to the brokerage's collapse have been asking questions about a defunct investment fund managed by Eric M. Flanagan, called Delta Flyer Fund LLC. They want to know what role the fund might have played in an alleged scheme by ousted Refco CEO Phillip Bennett to hide bad debts at the fallen New York derivatives house, according to people familiar with the investigation and court papers in the Refco bankruptcy.

Delta Flyer was incorporated in Delaware by Flanagan in April 2000, according to corporation records. The fund was dissolved on Aug. 25, 2005, just two weeks after Refco's $583 million IPO and two months before the scandal erupted.

The corporate records list Flanagan as the "initial manager.''

Investigators believe Bennett may have used the Delta Flyer fund as part of a scheme to conceal hundreds of millions of dollars of bad debts rung up by customers of the now-bankrupt commodities brokerage during the late 1990s, sources say.

Delta Flyer's name was inspired by the fictional shuttle craft used on the "Star Trek" spinoff "Voyager," which first aired in 1999, says a person familiar with the investigation.

Flanagan, who currently manages EMF Financial Products, a New York-based commodities and futures trading hedge fund complex, declined to comment. EMF, which operates three separate hedge funds with an estimated $400 million in assets, used to be a prime brokerage customer of Refco.

Flanagan's attorney, Dan Waldman, a partner with Arnold & Porter in Washington, D.C., says, "Documents were provided to the regulators and Delta is cooperating with the ongoing investigation.''

At this point, there's no indication that Flanagan, whose offices used to be based in Summit, N.J., did anything wrong. Bennett, before moving to an estate in Gladstone, N.J., lived in Summit.

Sources say Delta Flyer, a small partnership that invested in private equity deals, engaged in three loan deals with entities it believed were affiliated with Refco. The last transaction was in 2003. Sources say Delta believed the transactions were legitimate and proper.

Last October, federal prosecutors charged Bennett with hiding $430 million in uncollectible debts and trading obligations owed by Refco customers in a separate company under his control. In a subsequent indictment, prosecutors alleged that Bennett may have hid as much as $720 million in bad debts.