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Following the Bouncing Receivables at Refco

An examination of SEC filings in the runup to its August IPO shows some curious evolution.

One of the many unresolved issues in the



scandal is the evolution of the company's corporate disclosures in the months leading up to its August public offering.

Refco made a series of

Securities and Exchange Commission

filings ahead of the $583 million IPO, detailing its finances for prospective investors. While the registration statements, archived on the SEC's Web site on form S, are the typical mix of accounting esoterica and corporate boilerplate, clues buried within them raise questions about the due diligence carried out by underwriters and lawyers before Refco went public.

For instance, in Refco's initial registration statement filed April 8, there's a one-sentence disclosure about a so-called "related-party transaction" between Refco and Phillip Bennett, the firm's former CEO. Recall that it was the mislabeling of a transaction with a Bennett-controlled company that set off the events that led to Refco's Chapter 11 bankruptcy filing on Oct. 17.

In the April 8 filing, Refco -- without any explanation -- notes that a Bennett-controlled company made a $105.3 million payment to it on Feb. 29, 2004, closing out a debt from a year earlier.

The company making the payment was Refco Group Holdings Inc., the same entity federal prosecutors allege Bennett used to hide some $430 million in uncollectable obligations run up by Refco's customers since 1997.

In light of recent events, the $105 million payment by Bennett is drawing interest from regulators and prosecutors probing the fraud at Refco, sources say. Investigators want to determine whether the payment was related to Bennett's alleged scheme to burnish the brokerage's balance sheet and inflate its earnings prior to the IPO.

For investors considering investing in Refco's stock offering, it's debatable whether the payment should have served as a warning sign that something was amiss at the brokerage. One reason is that other problems were detailed in the filings. Elsewhere in its SEC reports, for instance, Refco noted that it was facing a possible fine by securities regulators over its involvement in a stock manipulation scheme. It also mentioned a warning from auditor Grant Thornton that its finance department was understaffed.

What's interesting about the $105 million payment, however, is that it stops appearing in the related-party section of Refco's filings after the first mention. An investor trying to trace the payment in seven subsequent filings would have been hard-pressed to locate it at all. In fact, it's reflected in those filings as part of an asset labeled "receivables from equity members" on the 2003 balance sheet.

To shareholder rights advocates, the disappearing disclosure is disturbing.

"It's very troubling,'' says Nell Minnow, editor of the Corporate Library, a business ethics research and advocacy group. "It either meets the current standards for disclosure, which means we may have a problem, or it doesn't meet the standard, and people may have a legitimate claim.''

In light of the ongoing investigation, it's not surprising that officials with

Credit Suisse First Boston

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Bank of America

(BAC) - Get Free Report


Goldman Sachs

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, the lead underwriters on the IPO, won't comment on the matter. Also not talking are attorneys with Cravath Swaine & Moore, Mayer Brown Rowe & Maw, and Weil Gotshal & Manges, the three big law firms that each had a hand in Refco's IPO.

To be sure, there might be a good explanation for why the $105 million payment was omitted from the related-party section of subsequent filings. People familiar with the IPO process suggest the reference might have been dropped because it was an outstanding payment from 2003 that had been paid off.

But there appears to be more to the story of this mysterious payment.

has learned from a person familiar with the situation at Refco that Bennett's $105 million payment might have beene connected to another related-party transaction between Refco and Bawag Overseas, an affiliate of Austria's Bank Fur Abeit und Wirtchaft, which at one time had a 10% equity stake in Refco. 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.

The April registration statement notes that Refco had a $175.2 million deposit with the Bawag subsidiary in 2003, and a $210.2 million deposit in 2004. The deposits also were included as "receivables from equity members,'' and the filing said they were liquidated shortly after each year-end.

Interestingly, the subsequent registration statements omit the reference to the $175 million deposit in 2003, though they continue to list the $210 million deposit. Again, it would take a diligent investor to notice that the original $175 million deposit had been folded into Refco's receivables from equity members, which, along with the $105 million payment from Bennett, totaled $280 million on the 2003 balance sheet.

In all its filings, Refco's 2004 balance sheet shows $210 million in receivables from equity members, which represents the money it had on deposit that year with Bawag.

By 2005, Refco was reporting a zero balance on its receivables from equity members line. The $210 million decline from 2004 almost equals a simultaneously reported $216 million gain in "receivables from customers'' line of Refco's May 2005 balance sheet.

On Oct. 10, when Refco disclosed the alleged fraud and booted Bennett out the door, it said the $430 million the former CEO had been hiding was reported on the May balance sheet as a "receivable'' but not identified as a related-party transaction. Refco, however, has never actually said where the receivable appeared on its balance sheet.

Perhaps these transactions have nothing to do with the series of circular $335 million loans that Bennett had Refco make to Liberty Corner Capital Strategies, a New Jersey hedge fund. Maybe these transactions were perfectly legitimate business arrangements, and further investigation will show that.

But it's clear that investigators still have a lot of work to do before they get to the bottom the Refco mess.