Updated from 8:32 a.m. EDT

Refco ( RFX), the scandal-tarred derivatives brokerage, confirmed Monday that it is in advanced negotiations with hedge fund J.C. Flowers to acquire most of its futures trading and clearing operation.

"The company expects that it will reach a memorandum of understanding with J.C. Flowers & Co. Group shortly and will execute definitive agreements soon thereafter," Refco said Monday. But it gave no assurance that such a deal for Refco LLC will be completed.

Refco, struggling to stay alive after CEO Phillip Bennett was arrested last week and charged in a $430 million accounting fraud, was reportedly talking to potential suitors for the futures operation.

Goldman Sachs ( GM), one of the three lead underwriters on Refco's $583 million IPO in August, advised the New York-based brokerage in the negotiations.

In the aftermath of the accounting scandal, Refco has shuttered its offshore capital markets group and its U.S.-regulated securities brokerage.

It's possible Refco could seek bankruptcy protection for its remaining operations if it can sell the futures business, which is one of the biggest in the nation.

Shares of Refco, which have fallen from a post IPO high of nearly $30 a share to $7.90, remain halted on the New York Stock Exchange.

Goldman Sachs is feverishly trying to find a buyer to help Thomas H. Lee Partners, a Boston-based buyout firm, exit the mess. A year ago, Thomas H. Lee sank $507 million into Refco in exchange for a 49% equity stake. In Refco's $583 million IPO, the buyout firm raked in about $165 million, but it still owns 40% of the company's stock.

Last Wednesday, federal prosecutors in New York charged Bennett with one count of securities fraud in the scandal. They 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.

The scheme, according to prosecutors and sources, began with a series of $335 million loans made by Refco Capital Markets to Liberty Corner Capital Strategies, a Summit, N.J., hedge fund that's part of a $15 billion conglomerate managed by Terrence Pigott, a former executive vice president of asset management at Daiwa Securities. Liberty Corner then turned around and lent Bennett's Refco Group Holdings $335 million, charging Bennett a higher interest rate than it was paying Refco.

The curious transactions permitted Liberty Corner to pocket a quick profit. Meanwhile, prosecutors say that Refco Group Holdings used the transactions as cover to "temporarily eliminate its debt to Refco" at the end of each quarter and "hide the related-party nature" of its debt to Refco.

Refco Group is a private entity that Bennett used to control his considerable equity stake in Refco Inc.

Prosecutors and the company have not identified the debts that Bennett's Refco Group Holdings acquired or said why he was trying to conceal them from investors in the initial public offering. The company, however, has said much of that $430 million in debt were "historical obligations," which it had deemed as hard to collect.

Most of the debts, sources say, were trading losses incurred either by Refco's customers or Refco itself in trying to hedge its exposure to trades made on behalf of its customers.

Meanwhile, new information has emerged about the foreign bank that provided Bennett with the cash to pay the outstanding debt before he was ousted from the firm last Monday. Sources say Bank für Arbeit und Wirtschaft, or BAWAG, one of Austria's largest banks, lent Bennett the money to pay down the $430 million obligation.

BAWAG has not confirmed it was the source of the loan to Bennett, but the bank said this weekend that it has a $510 million exposure to Refco. The bank said it has "collateral'' to collect on it, if the outstanding debt is not repaid.

Federal prosecutors allege that Bennett came up with the $430 million by borrowing money from a foreign bank and posting his 34% equity stake in Refco as collateral. At his bail hearing, authorities also claimed that Bennett, prior to his arrest, had been planning to travel to Austria.

It's not surprising that Bennett would turn to BAWAG for help, since Refco had a prior relationship with the Austrian lender. A subsidiary of BAWAG was a 10% equity investor in Refco when the company was still privately-owned. The bank's interest in Refco was bought out by Thomas H. Lee Partners, when it invested in the brokerage last year.

Bennett was released from custody last Wednesday after posting a $50 million bond. In light of the government's claim that Bennett poses a flight risk, he's been ordered by a federal magistrate judge to wear an electronic ankle bracelet and remain at his Manhattan home.

The investigation into the accounting scandal continues, however.

Santo Maggio, the former president and chief executive of Refco Securities and Refco Capital Markets, who was ousted along with Bennett, has retained white-collar defense attorney Paul Schectman. Refco has said that Maggio had some knowledge of the transactions involving Bennett.

Refco Securities and Refco Capital Markets are the two divisions the firm said last week it was shuttering.

Even before the accounting scandal, Maggio was in hot water with securities regulators for his failure to supervise two Refco brokers, who allegedly had a hand in helping an offshore hedge fund manipulate shares sold in 2001 private stock placement.

A source says regulators also are interested in speaking with Robert Trosten, Refco's former chief financial officer, who suddenly resigned a year ago to pursue other interests. The timing of Trosten's resignation is curious, because by leaving Refco he forfeited a chance to cash in on its upcoming IPO.

Trosten, who now lives in Florida, could not be reached for comment.

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