Refco board removes CEO over money owed company

Internal review by futures broker finds $430 million debt

October 11, 2005|By BLOOMBERG NEWS

NEW YORK -- Refco Inc., the largest independent U.S. futures broker, removed Phillip R. Bennett as chairman and chief executive yesterday after an internal review found that he owed the company $430 million.

Shares of Refco plunged 45 percent, wiping out all of the stock's gains since an initial public offering two months ago. The disclosure is a black eye for Boston-based buyout firm Thomas H. Lee Partners LP, which sold some of its Refco stake in the IPO and remains the largest shareholder.

Bennett, 57, who took a leave of absence at the request of the board, didn't disclose that the amount was payable by a separate company he controls, according to a Refco statement. He repaid the entire amount, plus accrued interest, in cash yesterday.

Refco said investors could no longer rely on its financial statements because they failed to identify the debt owed by Bennett as a related-party transaction.

Events at Refco will "naturally give rise to regulatory inquiries and shareholder litigation," said Jacob S. Frenkel, a former Securities and Exchange Commission enforcement attorney now in private practice with Shulman Rogers in Rockville, Md. "Experience tells us that the long arm of litigation will reach to the company, the individuals and the accountants. You would expect to see the SEC and the Department of Justice knocking on doors."

Bennett, a British graduate from Cambridge University, joined Refco in 1981 from Chase Manhattan Bank, says the IPO prospectus. He owned 33 percent of Refco shares after the Aug. 11 IPO.

Bennett wasn't included yesterday on a list of executive managers posted on Refco's Web site, and he didn't return a telephone call left at his home in Gladstone, N.J.

Jack Weinberg, an attorney with Herrick, Feinstein LLP in New York, called to say he is representing Bennett and declined to comment further.

Thomas H. Lee controlled 49 million shares, or 38 percent of the outstanding stock as of Aug. 30, according to SEC filings.

"We're still trying to find out when and at what amount the receivable was assumed by a company controlled by Bennett," Scott Schoen, co-president of Thomas H. Lee, said in an interview. "When we discovered that this receivable had been assumed, we took steps to begin an investigation and to get the obligation paid back."

Schoen declined to say whether the accounts showed the amount as being owed to Refco by customers or broker-dealers.

Refco took advantage of a 31 percent surge in trading in futures worldwide last year to raise $583 million in its IPO, joining markets such New York Mercantile Exchange in tapping investors. Credit Suisse First Boston, Goldman Sachs Group Inc. and Bank of America Corp.'s securities unit led the share sale.

Refco believes an entity controlled by Bennett assumed "certain historical obligations owed by unrelated third parties to the company which may have been uncollectible," Refco said in the statement.

Standard & Poor's cut its rating yesterday on Refco's $400 million of senior subordinated debt due 2012 by one level to B+, four short of investment grade. The rating on an $800 million term loan and a senior revolving credit facility of $75 million was cut to B-, six steps below investment grade.

The company has determined that its financial statements for 2002 through 2005 "shouldn't be relied on due to the failure to disclose the affiliated transaction," said Marcia Horowitz, a Refco spokeswoman. "Pending completion of the investigation, the company doesn't know if a restatement will be required."

Horowitz declined to provide further details about Bennett's leave.

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