Refco and the IPO Motive

One of the hardest questions to answer in the Refco(RFX Quote) scandal is why Phillip R. Bennett, a Cambridge-educated master trader seemingly assured of a lucrative Wall Street career, would want to cook the books at a company he helped build.

Federal prosecutors, in charging the former Refco CEO with securities fraud, suggest Bennett's main motive in hiding some $430 million in uncollectible debts was the brokerage's initial public offering in August.

But Bennett's alleged deception goes back as far as 1998, years before Thomas H. Lee Partners sank $507 million into Refco and set the stage for its $583 million IPO.

Unless Bennett is a soothsayer, it's hard to imagine he could have known the Boston-based buyout firm would knock on his door in 2004. But an examination of the record suggests that some type of public sale of Refco stock was on Bennett's mind when his plot allegedly began to form.

Indeed, as early as 1999, a year after Bennett allegedly began the scheme to burnish Refco's balance sheet, there was a talk on Wall Street about a Refco IPO. The speculation was spurred, in part, by the decision of Austria's Bank Fur Abeit und Wirtchaft, or Bawag, to take a 10% equity stake in the New York brokerage that year.

Bawag sold its interest when Thomas H. Lee Partners entered the picture in 2004. The bank surfaced again this week when it acknowledged it lent Bennett the money to pay off his $430 million debt to Refco. Bawag's involvement in the Refco mess has led to calls for an investigation from some Austrian politicians.

The possibility of an IPO got more momentum when Thomas Dittmer, Refco's longtime chairman, stepped down in December 1999 and turned over the reins to Bennett. Until then, Dittmer, having invested about $100 million, had a 51% equity stake in Refco, a firm he had led for 20 years. The other equity owners were Bennett, former Refco president Tone Grant, and Bawag.