Updated from 4:32 p.m. EDT

Refco ( RFX), the New York derivatives brokerage engulfed in an accounting scandal, teetered Thursday as it closed a major subsidiary and faced deepening concerns about its ability to pay its debts.

Bond rating agency Standard & Poor's said Thursday afternoon there's "substantial doubt" about the company's liquidity. S&P and Moody's, which were heavily criticized in 2002 for failing to detect accounting fraud at Enron, both downgraded Refco's credit rating further into junk status.

Earlier, Refco retained Goldman Sachs, one of the underwriters of its August public offering, as financial adviser, presumably to explore an asset sale. It also hired former Securities and Exchange Commission chief Arthur Levitt and ex-comptroller of the currency Eugene Ludwig as special advisers to its board.

"The survival of Refco is really 50/50," said Kevin Starke, an analyst at Weeden & Co.

The news came a day after Phillip Bennett, the ousted CEO accused in a criminal plot that pounded the brokerage's stock, was arrested. Shares in Refco were halted all day Thursday. They've lost about 72% this week based on the last premarket quote of $7.90.

Refco's bonds lost about half their value in secondary market trading Thursday. Shares of various commodities-related companies were also caught in a downdraft that looked partially attributable to Refco's problems.

The New York firm said Thursday that capital accounts at its Refco LLC futures merchant and Refco Securities LLC broker dealer "have been substantially unaffected by the events of this week." But the liquidity at its offshore securities and foreign exchange broker, Refco Capital Markets Ltd., "is no longer sufficient to continue operations."

Refco imposed a 15-day moratorium on all activities of Refco Capital Markets Ltd. "to protect the value of the enterprise." The company said that unit "represents a material portion of the business of the company."

Starke said it's impossible to tell from the company's filings how big the capital markets unit is because its results are consolidated with its prime brokerage operation.

"It is plausible that almost two-thirds of its operation is shut down. But they don't make it clear," he said.

A company spokesman couldn't provide the division's annual revenue.

Federal prosecutors arrested Bennett on Wednesday and charged him 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.

Bennett put up $5 million in cash to bail himself out and was reportedly ordered to find five cosigners for a $50 million bond. Government lawyers say Bennett was recorded telling a friend he planned to travel to Austria this week, a claim his attorney said was misrepresented in court.

The lawyer, Gary Naftalis, said prosecutors "jumped the gun" in arresting his client just one day after the scandal came to light. He said there is no justification for the allegations.

In charging Bennett with one count of securities fraud, prosecutors alleged that the 57-year-old executive secreted $430 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.

Refco has said Bennett repaid the money with interest, reportedly by pledging stock as collateral for a bank loan. Still, Standard & Poor's expressed concerns about the company's liquidity.

"Although Mr. Bennett repaid the $430 million receivable in cash, the funds may not be available to Refco, which is a holding company that relied on its operating subsidiaries to upstream dividends to meet debt service requirements," S&P said.

"Based on Refco's public announcements and the regulator's goal of safeguarding customer accounts, Standard & Poor's believes that there is substantial doubt concerning the liquidity of Refco. The company's operating subsidiaries either may not have sufficient liquidity or capital to upstream cash to Refco, or may be prohibited from doing so by regulators."

Moody's said the risk of default had "risen sharply" and warned of damage to the company's franchise value and earnings capacity.

Regulators at the New York Stock Exchange plan to keep Refco halted while they evaluate the company's listing status.

"The trading halt will continue until this evaluation is complete," the exchange said. "Trading may or may not resume as the NYSE may, at any time, suspend a security if it believes continued dealings in the security on the NYSE are not advisable."

Traders who spoke to TheStreet.com said the brokerage's big role in various futures markets could give its travails a broader scope.

"Because Refco is so involved in the commodity business, I would not be surprised to see the collapse of the company drag down commodity prices either," said one futures trader. "Commodities have been such a big play the last year or so and some people actually bought Refco's stock as a commodity play because they are such an integral part of the business."

Starke said it's unlikely Refco's customers would stage a mass defection.

"Refco is so influential in the derivatives and futures market it is hard to imagine that clearing customers would just relocate their business somewhere else," he said.

In a statement, the Chicago Mercantile Exchange noted that it prevents customer funds at clearing members like Refco LLC from being comingled with the parent's money. Such funds aren't subject to creditor claims.

While Refco LLC "has met and continues to meet all of its obligations to CME and remains in good standing," the exchange said it has restricted the subsidiary from withdrawing capial without its permission. The company will be required to give weekly updates on its capital levels, the CME said.

Bennett's moves, as described in a complaint filed Wednesday by the U.S. attorney for the southern district of New York, 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. A Refco spokesman says the company is continuing to cooperate with the investigation.

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

Refco has 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. Nor did it name the "third-party customer account" that served as the straw man in the alleged plot.

The account is believed to be Liberty Corner Capital Strategies, a vehicle solely owned by Liberty Corner founder Terry Pigott, a former executive vice president of asset management at Daiwa Securities. Both Pigott and Liberty Corner have denied any knowledge of the alleged Bennett subterfuge.

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.

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.
Senior writer Matthew Goldstein contributed to this story.