Updated from 3:09 p.m. EDT

In three short days, Phillip Bennett, the ousted CEO of embattled brokerage Refco ( RFX), has gone from Master of the Universe to criminal defendant in a fraud that has stunned Wall Street and ravaged the company's stock.

With lightning speed, federal prosecutors arrested Bennett and charged him Wednesday with orchestrating a brazen scheme to paper over hundreds of millions of dollars in sour debts at the New York company, which sold a $583 million initial offering to the public just two months ago.

In charging Bennett with one count of securities fraud, prosecutors alleged that the 57-year-old executive secreted more than $400 million in bad debts owed to Refco to a separate company he controlled. The debt -- run up by Refco customers over seven years and unlikely to be repaid -- showed up on Refco's balance sheet as a cleaned-up receivable, its connection to Bennett masked by accounting sleight-of-hand involving yet another unaffiliated party.

The company has said Bennett paid the money back with interest. But the damage to the newly public company's credibility has been huge, prompting credit downgrades and a three-day rout that cut the value of Refco's stock by two-thirds, erasing $2 billion in market cap. After closing at $28.56 last Friday, Refco's stock closed Wednesday at $10.85, down another 22% on Wednesday alone.

A criminal complaint brought by the U.S. attorney for the southern district of New York focuses on a series of transactions that took place from 2004 through this month. Refco, in ousting Bennett on Monday, has said the suspicious transactions go back to 1998.

Bennett's moves, as described in the complaint, were designed to disguise that his company, Refco Group Holdings Inc., was occasionally responsible for more than $500 million in debt to Refco Inc. -- a circumstance that under normal accounting rules would require it be labeled as a related-party transaction.

Much of the six-page complaint focuses on a $300 million transaction that occurred in February, a few months before Refco filed for its initial offering. In the transaction, Refco loaned a customer $335 million, which was supposed to be repaid on March 8. That customer, allegedly, then turned around and loaned Bennett's Refco Group Holdings $335 million, charging Bennett a higher interest rate than it was paying Refco.

Bennett allegedly then used that $335 million to pay off his existing debt to Refco. Prosecutors say "the result of these transactions was to substitute" one debt for the other.

On Monday, prosecutors say, when Refco ousted Bennett and said he had made the company whole, about 350 million in euros were being wired into an account in the name of Bennett and Refco Group Holdings. The transfer came from an unnamed foreign bank.

When asked if there were going to be more arrests, Michael J. Garcia, the U.S. attorney, had no comment, but he acknowledged that the investigation is ongoing.

Gary Naftalis, Bennett's lawyer, could not be reached for comment. A Refco spokesman says the company is continuing to cooperate with the investigation.

Meanwhile, Liberty Corner Advisors, a New Jersey money-management firm, is emerging as a critical player in the $430 million accounting scandal that devastated Refco and forced Bennett's ouster, a regulatory source said.

Regulators believe the Summit, N.J.-based investment advisory firm, which claims to manage $15 billion in assets, was used by Bennett to conceal his role in assuming eight years of bad debt owed to Refco by customers, a person familiar with the situation said.

Liberty Corner's involvement in the growing financial scandal was first reported by The Wall Street Journal. Refco put Bennett on indefinite leave Monday after the debt transfer was discovered by company accountants.

In a press release Tuesday, Refco disclosed sketchy details of the scheme Bennett allegedly employed to hide the transfer of the bad debt to a private company he controlled. Refco didn't identify Bennett's company, which TheStreet.com has learned is Refco Group Holdings Inc., or the "third party customer account" that served as straw man in the alleged plot.

Officials with Liberty Corner, which was founded in 1999 by Terry Pigott, a former executive vice president of asset management at Daiwa Securities, said the entity referenced is Liberty Corner Capital Strategies, "which is solely owned by Terry Pigott."

In an interview with The Wall Street Journal, Pigott denied any knowledge of the alleged scheme.

It's not the first time Liberty Corner has been linked to a financial scandal.

Earlier this year, Liberty Corner Cash Management, an affiliated entity, was fired by Ohio Treasurer Jennette Bradley from a lucrative money-management job. The firm had close ties to a political associate of Joe Deters, the state's former treasurer who got embroiled in pay-for-play scandal. A spokesman for Bradley confirmed Liberty Corner's firing, which was first reported in February by The Cleveland Plain Dealer.

Nobody from Liberty Advisors or Liberty Cash Management was charged in the episode, or accused of any wrongdoing.

Liberty Corner was caught up in the scandal because it employed Deters' former chief of staff and campaign manager as its lobbyist in Ohio and got a number of money management jobs from Deters' office.

The scandal ultimately led to the conviction of three of Deters' political associates, including Matthew Borges, the former chief of staff who worked as Liberty Corner's lobbyist.

So far, Refco has done little to clarify the scandal to investors. As a result, it has been difficult not to draw the conclusion that Bennett's debt transference was a scheme to burnish the company's balance sheet ahead of its IPO.

The company has sought to distance itself from Bennett, claiming only one other executive knew his company was responsible for a $430 million receivable on Refco's balance sheet.

The opaque language Refco has used in press releases to explain the situation hasn't provided much confidence either.

"These obligations were transferred periodically to the entity controlled by Mr. Bennett, and the company's books and records then reflected a receivable from that entity, rather than a receivable from the originating accounts," Refco said. Why Bennett would effect such a transfer was not explained. Generally speaking, a company like Refco, in which Bennett owns a 33% stake, wants to show as few nonperforming loans as possible on its balance sheet.

Bennett's lawyer, Jack Weinberg, declined to comment.

Bennett pocketed more than $118 million in the firm's August initial public offering and also raked in tens of millions of dollars extra from a special post-IPO dividend paid by Refco.

Several other securities industry stocks fell in a weak market Wednesday. Shares of Chicago Mercantile Exchange ( CME) lost 3.8%, while Goldman Sachs ( GS) lost 1.6%, Bear Stearns ( BSC) lost 1.8% and Lehman ( LEH) shed 2.2%.
Staff Reporter Michael Marino contributed to this report.

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