Refco Sends $82 Million to Old Owners

It's been a spectacular debut for Refco, despite the brokerage's pre-IPO warning that a key management figure at the brokerage could be facing a stiff penalty from regulators because of Refco's role in a stock manipulation scheme.

The firm says Santo Maggio, president and chief executive officer of Refco Securities, is likely to accept a settlement that would prohibit him from serving in a supervisory role for one year. The firm says the suspension, however, won't prevent Maggio from continuing "to work for us and Refco Securities in his current capacities."

As for Refco, the firm says it has established a $5 million legal reserve to cover the cost of a potential settlement with the Securities and Exchange Commission. In addition to a fine, Refco will likely have to retain an independent consultant "to review and make recommendations with respect to various business practices and procedures.''

The regulatory mess stems from a 2003 SEC enforcement action against Rhino Advisors, a defunct investment firm that regulators charged with manipulating shares of Sedona, a tiny Pennsylvania software company, following a $3 million private stock placement in 2001.

Regulators charged that Rhino illegally shorted the stock on behalf of one of its clients, Swiss-based Amro International, which had purchased a $3 million convertible note from Sedona in a deal negotiated by Rhino. Federal prosecutors in New York subsequently charged the principals of Rhino, Thomas Badian and Andreas Badian, with conspiracy to commit securities fraud.

The federal investigation of Rhino Advisors was one of the first enforcement actions involving PIPEs, short for private investment in public equity. The SEC probe of Refco is focusing on the role of two former Refco brokers, who handled an account and short sales for Amro.

A short sale is a market bet that the price of a security will fall. A trader borrows shares, and if the stock does fall, he makes a profit by purchasing replacement shares at a lower price and using them to repay his lender.

In the Rhino Advisors action, the SEC charged that the investment advisory firm shorted shares of Sedona on behalf of Amro, even though the $3 million PIPE deal prevented such activity. Amro, which wasn't charged by the SEC, benefited from Rhino's action because it got a ready supply of stock to cover earlier short bets it had made.

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