Securities and Exchange Commission (SEC) has filed a $54m civil
suit against former CEO of Refco, Philip Bennett days after he
pleaded guilty to charges leveled against him and his
involvement in the downfall of the FCM. Interested observers
are considering Bennetts eventual fate with interest with
sentence lengths being estimated anywhere between six and 30
Bennett pleaded guilty to criminal charges regarding his
involvement hiding hundreds of millions of dollars in shell
companies which he owned that did business with Refco. Those
companies helped Bennett move large amounts of debt from Refco
off its books and boosted Refcos valuation. The discovery
by a Refco staff auditor ultimately led to the quick downfall
of the firm in late 2005, just two months after the firm raised
$670m in an initial public offering. The scandal and bankruptcy
is estimated to have cost shareholders more than $2.4bn.
Bennett has pled guilty to a 20-count indictment which includes
charges of conspiracy, securities fraud, bank fraud and false
filings with SEC.
SECs complaint alleges that Bennett, through his actions,
violated a number of Securities and Exchange Acts. It also
alleges that Bennett instituted practices that artificially
inflated Refcos reported financial results in 2005.
The practices involved Refco recording fictitious
interest income from sham foreign exchange transactions. The
inflation of financial results was undertaken by Bennett to
make Refco more attractive to potential investors, SEC
said in a statement.
Bennett admitted that he hid the fraudulent activity from key
members of Refcos staff, auditors, investors and Thomas
H. Lee Partners, the private equity firm which paid $507m for a
57% stake in Refco in 2004.
A UK-based regulatory lawyer told FO Week that it was likely
that Bennett had cut a deal in return for a lenient sentence.
I think there are two possible outcomes. Either the
courts give a very harsh initial public sentence of 25
30 years, which is later reduced quite significantly on appeal
in a pre-arranged deal. Or he gets between ten 15 years
and serves six or seven, he said. I think the US
justice system will want to try to make an example of Bennett.
Post Enron white collar fraud has been treated more
harshly. He added though that Bennett would not have
pleaded guilty unless there were benefits in doing so.
Bennett is not stupid. If there was no return he would
have just fought it out and looked to have walked free, which
is why I dont see him serving more than half a dozen
years. And probably he would have bargained for a minimal
security prison with other white collar inmates.
If Bennett had not pleaded guilty the 20 charges would have
carried a 315-year sentence.
One source who knew Bennett well said the big question
surrounding Bennetts involvement is how he got in so deep
in the first place, accusing him of becoming a megalomaniac.
Why didnt he just pay off the debt? It went to his
head and he thought he could never be beaten, he said.
He was known as some kind of magician who had built Refco
up from a small commodities house to this massive futures
brokerage. There was a time when he could do no wrong.
Meanwhile Bennetts chief financial officer, Robert
Trosten, pleaded guilty days after Bennett pleaded similarly.
Trosten pled guilty on February 20 to five counts of fraud and
conspiracy charges a month before he was due to stand trial for
his involvement in the scandal, which brought down one of the
worlds largest futures brokers. He is also expected to
testify for the government against former Refco president Tone
Grant and ex-Refco outside attorney Joseph Collins who are also
charged in the case. Both maintain they are innocent.
Grants trial is set for March 17. Collins trial date is
Sandy Maggio, former Refco executive vice president, pled
guilty to criminal charges in December and agreed to pay $23m.
Maggio is considered another key witness and is believed to be
cooperating with prosecutors in the case.
The scandal also exposed Bawag Bank, the Vienna-based bank that
paid $675m in 2006 in order to avoid SEC prosecution. Bennett
is due to be sentenced in May and is being held by a $50m bond
which requires Bennett to remain at his home.