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Gold9472
10-15-2005, 01:23 AM
World's hedge funds face crisis as Refco suspends trading

http://www.guardian.co.uk/frontpage/story/0,16518,1592055,00.html

· Leading global broker admits 'liquidity problem'
· Billions of pounds could be tied up in frozen deals

Jill Treanor
Friday October 14, 2005
The Guardian

A crisis in the world's hedge fund industry was in prospect last night after one of the world's largest derivatives brokers was forced to freeze trades potentially worth billions of pounds.

The move by Refco, which acts for many leading speculative investors both on Wall Street and in the City, followed the discovery of accounts irregularities at the firm earlier this week and the issue of fraud charges against its former chief executive Phillip Bennett.

Mr Bennett has been charged with defrauding investors by using a hedge fund to hide $430m (£250m) of debts owed to the firm. A British banker who has lived in the US since 1978, Mr Bennett has been released on bail of $50m secured on a house in New Jersey, a Park Avenue penthouse apartment, $5m in cash and funds raised by six co-signers of the bail bond.

The implications of the 15-day trading moratorium on the company's Refco Capital Markets subsidiary may be felt across the world financial system, depending upon the size of the funds caught up inside Refco and the types of institutions which are unable to remove their money from the operation. By locking the clients in, Refco, which has debts of $642m, is preventing a possible mass exodus of funds which could further jeopardise its trading position. While the company gave no details of the size of the funds it had tied up in its capital markets arm, it described the operation as representing a "material portion" of its business.

Shares in the company, which floated on the New York stock market only two months ago to much fanfare, fell further on the concerns about the subsidiary. The company has lost three quarters of its stock market value in less than a week and expectations are mounting that investors may take legal action against the investment banks which brought the company to market - Goldman Sachs, Bank of America and Credit Suisse First Boston.

In an attempt to restore investor confidence, Refco announced yesterday that it had appointed Arthur Levitt, a respected former US regulator, to its board along with Eugene Ludwig, another well-known one-time regulator. Mr Ludwig is a former US comptroller of the currency and was used by Allied Irish Banks to investigate its subsidiary Allfirst when John Rusnak conducted illicit trading. Mr Levitt is a former chairman of the securities and exchange commission.

While Refco stressed that the regulatory capital of its futures brokerage arm and securities business, both regulated entities, was unaffected by the events of the past week it admitted its unregulated capital markets subsidiary was suffering from a lack of liquidity.

"The company has therefore imposed a 15-day moratorium on all activities of Refco Capital Markets to protect the value of the enterprise," the company said.

The capital markets arm is an offshore broker for stocks, bonds and currencies and is the subsidiary that 57-year-old Mr Bennett allegedly used to help hide the debts. He is accused of moving debts in and out of the subsidiary to hide the fact that it was counting debts as revenues which it was in reality unlikely to receive.

Santo Maggio, the head of the Refco Capital Markets arm, was put on leave at the same time as Mr Bennett, who owned 34% of the company at the time of its flotation.

While US Attorney Michael Garcia has said Mr Bennett "hid from investors and regulators the debt of hundreds and millions of dollars that one of Bennett's companies owed to Refco," his lawyer, Gary Naftalis, said: "There was no justification whatsoever for the arrest of Mr Bennett."

Backstory
On August 16, Refco proudly announced the completion of its flotation in New York. At an issue price of $22 a share (£12.50), the company was valued at $3.4bn. The cream of Wall Street's investment banks - and the odd European wannabe - handled the share sale: names such as Goldman Sachs, Deutsche Bank, JP Morgan, Merrill Lynch, Bank of America and Credit Suisse First Boston. Refco says it is the world's largest futures broker with 450 traders in offices around the world. As evidence of its market power, the firm announced this year that in the three months to the end of February, Refco's volume in the foreign exchange market alone was $111bn.