Updated from 2:29 p.m. EST
former corporate secretary, a close confidant of ousted CEO Phillip Bennett, is emerging as a critical figure in the accounting scandal that led to the brokerage's collapse,
Philip Silverman, an accountant who has held a number of top jobs at Refco for nearly a decade, was put on leave last month, say two people familiar with the investigation by federal prosecutors and securities regulators. His leave began around the same time Refco announced it had ousted Bennett and former president Santo Maggio.
The firm booted Bennett and Maggio on Oct. 10 after discovering that Bennett allegedly had been cooking Refco's books for years by hiding hundreds of millions of dollars in uncollectable debts owed to Refco. Maggio allegedly had knowledge of the debt-hiding scheme.
Silverman also may have information about the scheme, which federal prosecutors say made Refco appear financially stronger than it really was and enabled the brokerage to become an attractive IPO candidate.
Last week, a federal grand jury indicted Bennett on eight counts of securities fraud and conspiracy to commit securities fraud. Prosecutors allege Bennett orchestrated a seven-year plot to hide more than $700 million in trading losses rung up by Refco customers in a separate company he controlled, Refco Group Holdings Inc.
Silverman, besides his official duties at Refco, is said to be close to Bennett. He served as the corporate secretary for Refco Group Holdings, the Bennett-owned company at the center of the scandal. One person familiar with the investigation described Silverman, 51, as acting as "Bennett's personal accountant" at times.
Silverman, reached Wednesday morning at his New Jersey home, declined to discuss the scandal, saying, "I'm sorry, can't comment."
Meanwhile, Maggio is cooperating with the investigation, sources say.
Two weeks ago, the
reported that an unidentified employee, who may have done the bookkeeping that allowed Bennett to conceal the customer trading losses, had been put on leave by the brokerage. Sources say Silverman is the unnamed employee referred to in that story.
In his years at Refco, Silverman wore many corporate hats, including serving as an executive with Refco Alternative Investments, a subsidiary that specialized in selling derivatives and other products. Regulatory filings leading up to Refco's $583 million initial public offering in August also list Silverman as the brokerage's corporate secretary -- the same position he had with Refco Group Holdings.
Corporate secretary is an important administrative post in a big company. The Society of Corporate Secretaries and Governance Professionals says the post is a "focal point for communication" between the board, senior management and shareholders. The association also says a corporate secretary often serves as "confidant and counselor" to a CEO, especially on matters involving corporate governance.
In a small company such as Refco Group Holdings, which has only a single shareholder, Bennett, Silverman's day-to-day responsibilities were probably minimal. But Silverman, who has been a CPA since 1982, might have been privy to information about any transactions the company was involved in, sources say.
Silverman, for instance, appears as a signatory on a December 2004 merger agreement between Refco Group Holdings and DF Capital Inc., another small company that was wholly owned by Bennett. It's not clear if DF Capital is related to the accounting scheme, but investigators are interested in the merger between the two Bennett-controlled companies because it occurred just four months before Refco filed its IPO registration statement.
Corporate records, however, show that DF Capital received an unknown amount of financing from Austria's Bank Fur Abeit und Wirtchaft, which at one time owned 10% of Refco. The records show that Bawag began providing financing to DF Capital in November 2003 and the loans continued up until August 2004. BAWAG is the same bank Bennett turned to -- just days before his scheme came to light -- to secure a $430 million loan to pay off the debts he'd allegedly been hiding.
Bawag's last-ditch loan to Bennett has become the subject of an investigation by Austrian bank regulators. On Wednesday, the Austrian bank sued Bennett and Refco, claiming it was duped into providing the loan. But Austrian authorities, according to the
, have made a preliminary determination that Bawag made major errors in approving the loan and the approval process for the $430 million loan was "extremely faulty.''
Silverman's knowledge of these and other transactions involving Refco Group Holdings could be crucial to the investigation. Prosecutors allege that Bennett relied on a series of circular loans with a Refco hedge fund customer to mask that Refco Group Holdings was being used as a dumping group for old customer trading losses and other bad debts.
In the arrangement, a Refco subsidiary would lend money -- in one transaction, $720 million -- to the hedge fund, New Jersey-based Liberty Corner Capital Strategies. On the same day, Liberty Corner would lend 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.
The charges in the indictment deal only with transactions dating back to early 2004, when Bennett and Refco first began talking to Thomas H. Lee Partners about investing in the brokerage as the first step toward an IPO. The Boston-based buyout firm ultimately sunk $507 million into Refco in June 2004.
Earlier this week, Thomas H. Lee sued Bennett, Maggio and former Refco President Tone Grant, seeking to recoup the $245 million it lost in the wake of the scandal. Refco filed for bankruptcy just two months after its IPO led by
Credit Suisse First Boston
Bank of America
The circular transactions with Liberty Corner and Refco Group Holdings, however, predate the events outlined in the indictment. Kevin Marino, a lawyer for Liberty Corner, says the transactions began in 2002. And before Liberty Corner, Bennett, say sources, had arranged similar loan deals with at least four other unidentified hedge funds.
Bennett allegedly began hiding the customer trading losses in 1997, in order to avoid forcing Refco to declare the losses as uncollectable. If Refco had taken that step, it might have found itself in trouble with regulators because the firm already was thinly capitalized before its IPO.
A big hit to the firm's net capital might have resulted in a reduced credit rating, making it more costly for Refco to borrow money and finance its operations. It also would have made Refco less attractive to deep-pocketed investors like Thomas H. Lee Partners.