Updated from 2:20 p.m. EDT

The maneuvering around Refco's ( RFX) tattered remnants played as sideshow Tuesday to bigger questions about the newly public company's stunning collapse.

Yes, Refco Inc.'s Chapter 11 filing and an agreement to unload its futures operation to a consortium led by hedge fund J.C. Flowers are making headlines around Wall Street. Its new chairman, former J. Aron chief Mark Winkelman, announced earlier that Refco "has a tremendously bright future ahead of it."

But the real story remains how a cadre of well-paid accountants, Wall Street bankers and corporate lawyers failed to notice that CEO Phillip Bennett was allegedly cooking the books for the better part of a decade.

"When you have auditors and investment banks that still live as if they were Masters of the Universe and throw common decency and standards to the wind, we will continue to have these kind of problems,'' says Michael Stead, the manager of River Aire Investment, a hedge fund with no position in the stock. "They have not learned their lessons.''

Whether the J.C. Flowers group can turn things around matters very little to anyone unlucky enough to own a stock that was halted for trading at $7.90 last Thursday and recently opened on the pink sheets for about a dollar. It matters less to anyone who owned the stock three weeks ago at $30.

If Refco's futures business fails, there are plenty of other commodities and derivatives brokerages that are eager to take its place. In fact, in the week since the scandal broke, the firm is believed to have lost 20% of its customers. For instance, late Tuesday, IDS Managed Futures, an investment fund, disclosed that it had "terminated" Refco as its future broker in light of the situation and hired Lehman Brothers. ( LEH)

Sale or not, more customers will head for the exits. Even as Refco was announcing the deal and placing its parent company into bankruptcy, one of the firm's competitors, Interactive Brokers, published a full-page ad in The Wall Street Journal urging Refco's customers to defect.

What is clear is that investigations by federal prosecutors and the Securities and Exchange Commission are moving ahead, even as Refco's creditors, bondholders and shareholders prepare to battle in bankruptcy court over the remains of the once high-flying firm.

In the days since federal prosecutors charged Bennett with one count securities fraud, others at Refco have begun scrambling for attorneys with expertise in white-collar crimes.

Robert Morvillo, the lawyer who represented Martha Stewart in her obstruction-of-justice trial, is in the process of being retained by Robert Trosten, Refco's former chief financial officer. Ira Lee Sorkin, another well-known defense attorney, is representing another Refco employee.

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

Prosecutors allege Bennett secreted some $430 million in bad debts owed to Refco to a separate company he controlled. The debt -- mostly trading losses run-up by Refco customers over the past seven years -- showed up on Refco's balance sheet as a cleaned-up receivable, its connection to Bennett masked by accounting sleight-of-hand involving a series of loans to Liberty Corner Capital Strategies, a New Jersey hedge fund.

Bennett's subterfuge allegedly included a series of $335 million loans made by Refco Capital Markets to Liberty Corner. The hedge fund then turned around and lent Bennett's Refco Group Holdings $335 million, charging Bennett a higher interest rate than it was paying Refco.

A source says investigators want to speak to ex-CFO Trosten, who 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, didn't return several phone calls. The New York Post reported Tuesday that Trosten didn't go away empty-handed. The newspaper says the former CFO got a $46 million severance package.

But the investigation extends beyond Refco and no doubt will look at the role played by the brokerage's professional advisers.

Investigators are still trying to untangle the role of Liberty Corner Capital Strategies in the series of circular transactions that prosecutors say Bennett used to cover his tracks.

In an interview Monday with TheStreet.com, Kevin Marino, the attorney for Liberty Corner, said the Summit, N.J., hedge fund did nothing wrong and believed the series of transactions were legitimate.

Liberty Corner, which is affiliated with a $15 billion money-management conglomerate set up by William Terrence Pigott, believed the transactions were kosher because they were reviewed by one of the nation's largest law firms, Mayer, Brown, Rowe & Maw. He says all of the loan documents used in the transactions were drafted by lawyers at the Chicago-based law firm.

Mayer Brown is one of the law firms that worked for Refco in the broker's $583 million IPO in August. A Mayer Brown spokeswoman, Sheila Turner, described the firm's role in the IPO as limited. Regarding the loans, Turner said Mayer Brown is still gathering information on the matter.

"Based on our investigation to date, it appears that lawyers in our firm from time to time documented loans for Refco, and some of these loans appear to have been loans involving Liberty Corner Capital that have now been called into question," Turner said. "At this point in time, we are unable to provide further information."

In a subsequent interview, Marino shed new light on the transactions and suggested other parties were aware of them.

He says Liberty Corner, which had been a prime brokerage customer of Refco's, was first approached about entering into the transaction in 2002. He says Peter McCarthy, the current president of the firm's securities division, asked if Liberty Corner would be interested in the deals. At the time McCarthy, who did not return several phone calls, was Liberty's Corner's principal contact at Refco.

In the criminal complaint filed against Bennett, prosecutors only focused on loans between Refco and Liberty Corner since February of this year. However, Refco has said its financial statements became unreliable in 2002.

What made the deal attractive to Liberty Corner was the ability to pocket a quick profit by turning around and re-lending the money it received from Refco Capital Markets at a higher interest rate. The deal was similar to the kind of arbitrage that Liberty Corner's sister fund, Liberty Corner Cash Management, does all the time.

Better yet, Bennett signed a letter of guaranty assuring that Refco Group Ltd., the pre-IPO name of the holding company for the brokerage, would repay Liberty Corner if Refco Group defaulted.

Marino said Liberty Corner had no idea that the company it was re-lending the money to, Refco Group Holdings, was a private entity that Bennett used to control his considerable equity stake in Refco Inc. Liberty Corner, he says, thought it was dealing with two different Refco entities.

Once Liberty Corner agreed to go along with the deals, Marino says McCarthy introduced his client to Maggio and lawyers from Mayer Brown, who hammered out the specific terms.

Of course, not everyone is buying Liberty Corner's version of the events.

One Wall Street analyst, who didn't want to be identified, says the transaction looks suspicious on its face. Even if Liberty Corner didn't know Bennett controlled Refco Group, the movement of so much cash between two similarly named entities should have set off alarm bells.

In fact, investors in the August IPO were on notice that Refco had done at least one prior transaction with Bennett's Refco Group, though the brokerage provided few details.

In the prospectus for its August IPO, Refco listed an obligation owed by Refco Group Holdings as a "related-party transaction." In the filing, the company said that in February 2004, Refco Group Holdings made a payment of $105.3 million to the brokerage to close out a debt from the prior February.

Presumably, Refco's auditor, Grant Thornton, and the IPO underwriters, Goldman Sachs ( GS), Credit Suisse First Boston ( CSR) and Bank of America ( BAC), know the story behind that $105 million debt owed by Bennett's company. But for now, no one is talking.

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