Updated from 5:29 a.m. EDT

Refco Inc. ( RFX), the scandal-tarred derivatives brokerage, filed for chapter 11 bankruptcy protection after cutting a deal to sell its primary business to a group led by hedge fund J.C. Flowers.

The filing, a nightmare scenario for investors who have been unable to trade the stock since Thursday, covers Refco Inc. but not the regulated subsidiaries Refco LLC and Refco Securities. The company agreed to sell Refco LLC to a consortium led by J.C. Flowers for $768 million, although it expects the bankruptcy court to entertain competing offers.

Refco, which came public two months ago, has been struggling to retain customers and stay solvent since CEO Phillip Bennett was arrested last week and charged in a $430 million accounting fraud. The company previously shuttered its offshore capital markets group and was unwinding trades at Refco Securities.

Along with J.C. Flowers, the investor group buying Refco LLC includes Enstar, Silver Point Capital, MatlinPatterson Global Advisers, and Texas Pacific Group. Refco was advised in the transaction by Manhattan investment boutique Greenhill & Co.

"In accordance with the terms of its engagement, the services of Goldman Sachs ( GM) terminated on Oct. 17, 2005, upon the bankruptcy filing," Refco said. Goldman was one of the three lead underwriters on Refco's $583 million IPO.

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.

Refco named Mark Winkelman, formerly head of commodities trading firm J. Aron, chairman, and Jacob Goldfield vice chairman.

"We believe that Refco has a tremendously bright future ahead of it," Winkelman said. "Refco's unique platform offers clients a compelling value proposition, and we are providing Refco with a stable and well-capitalized shareholder base that will permit it to continue providing superior service to clients. We expect to close this transaction as soon as possible and we will begin our partnership with Refco employees immediately."

The sale of Refco LLC is a consolation for Thomas H. Lee Partners, a Boston-based buyout firm. 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.

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