Updated from 5:15 p.m. EST
In an odd bit of synergy, a federal grand jury indicted former
CEO Phillip Bennett on Thursday, just hours after the bankrupt company auctioned off its regulated futures brokerage and trading business.
The indictment comes a month after federal authorities arrested Bennett and charged him with trying to hide at least $430 million in outstanding debts that were owed to the firm.
It was Refco's disclosure of Bennett's alleged wrongdoing that led to the collapse of Refco and its bankruptcy filing, just two short months after staging a successful $583 million IPO in August.
The eight-count indictment accuses Bennett of conspiracy to commit securities fraud, wire fraud and with making false statements to securities regulators. The charges are similar to one federal prosecutors in New York brought last month, but adds a few new details to the circular loan transactions Bennett used to hide the debt.
Prosecutors now say that the value of the end-of-quarter loans Bennett used to hide the debt ranged from $420 million to as high as $720 million. Previously, prosecutors had only alluded to the fact that the total amount of debt Bennett was hiding exceeded $430 million.
Federal authorities also have upped the ante in going after Bennett by seeking to force him to forfeit $700 million that they say represents the "proceeds" from his fraudulent activities.
Gary Naftalis, Bennett's attorney, says he and his client "look forward to our day in court."
While Bennett was the only one charged, the indictment alleges that others were also involved. The 23-page document makes reference to Bennett conspiring with "others known and unknown to the grand jury."
The late-afternoon indictment came on a day of frenzied activity surrounding what remains of Refco. Earlier, Refco announced that it had
reached a deal to sell it futures business to Man Financial, the London-based hedge fund, for $282 million in cash. Man emerged as the high bidder in a 21-hour closed-door auction that didn't conclude until 7 a.m. Thursday.
In the deal, which still must be approved by the bankruptcy judge overseeing the Refco bankruptcy, Man also will assume $37 million in outstanding liabilities of Refco.
The $282 million in cash will go toward paying down the estimated $16 billion in claims Refco owes to its bankers, bond holders and other creditors. Refco also has about $750 million in "regulated capital'' in the futures business that also can be used to pay creditors.
The indictment of Bennett, however, doesn't mean the investigation by federal prosecutors and the
Securities and Exchange Commission
is over. If anything, there are signs the investigation is expanding and focusing in the role of Refco's attorneys, auditors and financial advisers.
Earlier this week,
Credit Suisse First Boston
Bank of America
, two of the lead underwriters on the IPO, confirmed they had received subpoenas from the SEC and inquiries from other regulators.
, the third lead underwriter, declined to comment on whether or not it too had received a regulatory subpoena.
The investigation also is focusing on the role played by other Refco advisers, including its auditor, Grant Thornton, and one of its longtime law firms, Mayer Brown Rowe and Maw.
Lawyers for Mayer Brown approved some of the loan documents that prosecutors allege were used by Bennett to further the fraud. The Chicago-based law firm says it did nothing wrong, but it has retained a John Villa, a Washington, D.C. regulatory and criminal defense attorney to represent it.
also has learned that at least two Mayer Brown attorneys, including a senior partner in Mayer Brown's Chicago office, have retained white-collar criminal defense lawyers in New York to represent them. A source says one of the Mayer Brown attorneys who has retained a lawyer had a hand in drafting the loan documents that were used in the allegedly fraudulent transaction.
Prosecutors allege the loans were used to make it appear that Liberty Corner Capital Strategies, a hedge fund customer of Refco, owed hundreds of millions to the brokerage, when in fact it was a company controlled by Bennett that owed the money.
In the arrangement, a Refco subsidiary would loan money, say $720 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.
Authorities have not confirmed the identity of Liberty Corner, a New Jersey hedge fund. But an attorney for Liberty Corner has said on a number of occasions that his client did nothing wrong. The lawyer say Liberty Corner believed the loans were legitimate because the documents had been drafted and approved by Mayer Brown.
Prosecutors say Bennett began the scheme to hide "losses sustained by Refco" on its own and those incurred by its customers. The losses go back as far as 1997, sources say. Authorities say that by transferring the accumulated losses to a company he controlled, Bennett sought to keep what he was doing from Refco's auditors and investors.
previously has reported that a large part of the trading losses Bennett tried to conceal stemmed from the Asian financial crisis in 1997. A number of Refco's hedge fund customers were hit hard by the crisis.
Back in the late 1990s, Refco was a thinly capitalized firm. If it had to declare the losses as uncollectable trading obligations, the brokerage might have found trouble with regulators and its credit-rating reduced.