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New Focus in Refco Inquiry

Eric Flanagan's Delta Flyer fund is probed for links to Phillip Bennett's alleged loan-hiding scheme.

Another hedge fund manager is being drawn into the




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.

The debt-hiding scheme allegedly made Refco appear financially healthier to both regulators and potential suitors, including Thomas H. Lee Partners, which engineered the $1.4 billion buyout of Refco in July 2004.

Prosecutors allege the scheme orchestrated by Bennett involved a series of circular loans between a company he owned and controlled -- Refco Group Holdings Inc. -- and another hedge fund, since identified as Liberty Corner Capital Strategies, which is also based in Summit.

In the early days of the scandal, investigators suspected that other hedge funds may have been employed in the debt-hiding scheme besides Liberty Corner. Sources say investigators began zeroing in on Delta Flyer within days of Refco's collapse.

Indeed, a recent fee application submitted by a forensic accounting firm in the Refco bankruptcy refers to "loan documents referencing 'Liberty Corner' and 'Delta Flyer.'" The fee application submitted by Milbank Tweed Hadley & McCoy, which represents Refco's many creditors in the bankruptcy proceeding, says lawyers at the firm spent time searching for "owners of companies at 47 Maple Street and 30 Maple Street in Summit, N.J."

Liberty Corner, which is in the process of winding down its operations, was located on a first-floor office at 47 Maple St. in Summit. EMF Financial and Delta Flyer had shared a second floor office at 30 Maple St. In June of 2003 Flanagan moved EMF's operations to New York City.

For the moment, little is known about the loans involving Delta Flyer. As for Liberty Corner, prosecutors have depicted the fund as a repository used by Bennett to hide hundreds of millions of dollars in problem debt.

In the November indictment against Bennett, prosecutors allege a web of crisscrossing loans were used to make it appear that Liberty Corner owed hundreds of millions to Refco, when in fact it was Bennett's Refco Group Holdings Inc. that owed the money.

In the arrangement, a Refco subsidiary would loan money, say $250 million, to Liberty Corner. On the same day, Liberty Corner would loan the same amount of money to Refco Group Holdings, the entity controlled by Bennett. Liberty Corner charged a higher interest rate on the second loan, allowing it to profit from the arrangement.

On Refco's books, the transaction appeared as a debt owed by Liberty Corner, even though Bennett's company had effectively paid off the debt for the hedge fund.

Kevin Marino, a lawyer for Liberty Corner, has maintained all along that his client did nothing wrong and believed the transactions were legitimate because they had been set up by lawyers with Mayer Brown Rowe & Maw, one of the nation's largest law firms.

In fact, a letter from Mayer Brown to Liberty Corner, which outlined the parameters of the transactions, made reference to a transaction with an entity named "Delta,'' according to people who have seen the document.