Updated from 2:35 p.m. EDT

Federal authorities are looking into the possibility that a second hedge fund was used by former Refco ( RFX) CEO Phillip Bennett to mask his connection to hundreds of millions of dollars of debt at the scandal-plagued brokerage, TheStreet.com has learned.

People familiar with the investigation say there are indications that Summit, N.J.-based Liberty Corner Capital wasn't the only hedge fund Bennett deployed in his plot, which resulted in a Chapter 11 filing for Refco Inc. last week.

The identity of the second hedge fund wasn't known.

The new revelation suggests the already convoluted scheme is even wider in scope than previously believed. Bennett is currently free on a $50 million bond. He was charged with securities fraud a week ago for allegedly hiding from Refco's accountants his connection to $430 million in debt at the New York-based derivatives shop.

On Thursday, Kevin Marino, an attorney for Liberty Corner Capital, said that neither Liberty Corner nor its founder, William Terrance Pigott, are targets of the federal criminal investigation into Refco.

Nevertheless, for the past week, Liberty Corner Capital has existed under a cloud of suspicion. While federal prosecutors never publicly named it in the scandal, sources have described it as a kind of bank account exploited by Bennett when Refco's accountants tried to get a fix on the balance-sheet receivable at the heart of the subterfuge.

Refco has since identified the receivable as uncollectible debt that was run up at the company by unnamed customers over a seven-year period. According to the complaint, a private company controlled by Bennett took over the debt in an apparent effort to burnish Refco's balance sheet. "He transferred the money to Liberty Corner prior to accounting audits, prosecutors say.

In the criminal complaint, federal prosecutors focused on several transactions that took place since 2004, in the months leading up to Refco's $583 million IPO this August. But Refco itself has said the alleged fraud began sometime in 1998.

The starting date is interesting -- it's the same year that Tone Grant, Refco's longtime president, left the company.

Prosecutors allege that the private company used by Bennett to hide hundreds of millions of dollars in bad debts owed by Refco customers is Refco Group Holdings, an entity originally co-owned by Bennett and Grant.

It was through Refco Group Holdings that Bennett and Grant held their 90% equity stake in Refco. After Grant left Refco, he continued to own a minority equity stake in Refco and cashed out his remaining ownership interest when Boston-based buyout firm Thomas H. Lee Partners invested in the brokerage last year.

It's not known at what point Bennett became the sole owner of Refco Group Holdings. Repeated telephone calls over the past week to Grant's office in Chicago have not been returned. Bennett's lawyer, Gary Naftalis, did not return a phone call.

Marino's office, meanwhile, issued a press release Thursday, asserting that his client believes the series of end-of-the-quarter financial transactions it did with Refco were legitimate because they had been set up by lawyers with Mayer Brown Rowe & Maw, one of the nation's largest law firms. The hedge fund says it intends to file a lawsuit against Refco seeking to recover "damages caused by the deception."

On Monday, TheStreet.com first reported that Mayer Brown, a longtime corporate adviser to Refco, had prepared all the loan documentation for the transactions with Bennett's Refco Group.

A Mayer Brown spokeswoman said Thursday that the firm's "lawyers had no reason at any point to believe that these loans were being used for any improper purpose by Refco -- or individuals within Refco. Under no circumstances would the firm's lawyers have documented these loans if they knew that they were being used for any improper purpose."

The law firm said it is "cooperating fully'' with the investigation and "it would be inappropriate for us to make any further comment."

Mayer Brown is one of the law firms that worked for Refco in the broker's $583 million IPO in August. The law firm is not representing Refco in its bankruptcy reorganization.

Marino previously told TheStreet.com that Liberty Corner Capital, which had been a prime brokerage customer of Refco's for many years, was first approached about doing the deals in 2002. He says Peter McCarthy, the current president of Refco's securities division, asked if Liberty Corner would be interested in the transactions. At the time, McCarthy, who has not returned several phone calls, was Liberty's Corner Capital's principal contact at Refco.

Marino said Liberty Corner had no idea that the company it was relending the money to, Refco Group Holdings, was a private entity that Bennett had used to control his considerable equity stake in Refco Inc. Liberty Corner Capital 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 Santo Maggio, the former head of Refco Securities and Refco Capital Markets, as well as the lawyers from Mayer Brown. Paul Shechtman, the lawyer for Maggio, who was ousted from Refco last week along with Bennett, could not be reached for comment.

The scheme allegedly set up by Bennett apparently was good enough to deceive Refco's auditor Grant Thornton, the financial gurus at Thomas H. Lee Partners, and the three investment firms that took Refco public, Bank of America ( BAC), Credit Suisse First Boston ( CSR) and Goldman Sachs ( GS).

Critics, however, say the due diligence done by those firms was faulty. A number of shareholder suits have named Grant Thornton and the underwriters as defendants. Legal experts suspect it's only a matter of time before Mayer Brown is also added as a defendant in the shareholder suits.

In recent days, Grant Thornton has been aggressively defending itself. The firm has said it was the one that ultimately detected the fraud and brought it to Refco's attention. The audit firm says it uncovered the apparent wrongdoing during a routine review of the company's finances in September.

Grant Thornton has not explained what circumstances had changed at Refco that enabled its auditors to discover the fraud in September.