They take care of their own at
Investors in the derivatives brokerage's $583 million initial public offering, however, went hungry when it came time for the New York firm to pay a special $82.2 million dividend on Aug. 18. The New York-based broker disclosed Friday that the dividend, which was paid out a week after the IPO, went to shareholders of record before the stock offering.
One of the biggest beneficiaries of the additional payout was
Thomas H. Lee Partners
, the Boston-based buyout firm that has a 40% post-IPO equity stake in Refco. Before the IPO, Thomas Lee had a 49% stake in Refco, which it acquired in return for a $507 million investment in the brokerage last August.
Another recipient was Refco Chairman and CEO Phillip Bennett, who owns 33% of the brokerage's stock following the offering.
Officials with Refco and Thomas Lee did not return phone calls.
Refco paid the special dividend with the proceeds it received from a decision by the underwriters of the IPO to exercise an option to purchase an additional 3.75 million shares. The lead underwriters,
Credit Suisse First Boston
Bank of America
, exercised the option on Aug. 16, five days after the IPO was completed.
The additional shares picked up by the Wall Street banks were sold by Refco, not Thomas Lee and the other original shareholders.
The company said in a filing before the IPO that it would pay the former owners an unspecified sum to "meet their estimated income tax obligations for the period from Jan. 1, 2005, to the date of the reincorporation" of the company.
News of the bonus payment to Refco's pre-IPO investors didn't do much to deter the stock's performance in the aftermarket, however. In midday trading Friday, shares of Refco were up 16 cents to $26.97. The stock is up 23%, since its debut on the
New York Stock Exchange
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
, a defunct investment firm that regulators charged with manipulating shares of
, 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
, 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.