LAWFUEL – Legal Newswire – MICHAEL J. GARCIA, the United States Attorney for the Southern District of New York, announced today the guilty plea of
PHILLIP R. BENNETT, the former Chief Executive Officer and 50-
percent owner of Refco, to a $2.4 billion fraud. BENNETT had
been charged in connection with his role in the collapse of the
former financial services company, and pleaded guilty to all
twenty counts in the superseding Indictment (the “Indictment”)
against him. According to the Indictment and statements made
during today’s guilty plea proceedings:
Refco was a large, Manhattan-based financial services
company that offered securities, derivatives and commodities
brokerage services to investors. From as early as the mid-1990s,
Refco, which was then privately held and controlled in part by
BENNETT, sustained hundreds of millions of dollars of losses
through its own and its customers’ trading. In order to hide the
existence of those losses, BENNETT transferred many of them to
appear as a debt owed to Refco by Refco Group Holdings, Inc.
(“RGHI”), the holding company that controlled Refco and was in
turn controlled by BENNETT.
BENNETT and others directed a series of transactions
every year from at least 1999 through 2005 to hide the RGHI
receivable from, among others, Refco’s auditors, by temporarily
paying down the receivable from RGHI over Refco’s fiscal year-end
and replacing it with a receivable from one or more other
entities not related to BENNETT. Thus, at every fiscal year-end
and, later, at every fiscal quarter-end, BENNETT directed
transactions that turned the debt owed to Refco from RGHI into a
debt owed to Refco by a Refco customer. Shortly after each
fiscal year- or quarter-end, these transactions were unwound,
returning the debt to RGHI.
The massive debt owed by BENNETT’s holding company to
Refco was increased not only by losses sustained through its
customers’ trading but also through proprietary trading losses
accumulated over several years, operating expenses shifted out of
Refco Group and into RGHI, and fake foreign exchange and U.S.
Treasury security trades carried out for the purpose of
increasing Refco’s stated income.
In particular, BENNETT hid from others, and contributed
to the RGHI debt to Refco, among others, the following losses:
• At least $90 million in losses sustained by a customer
in trading on the Chicago Mercantile Exchange in 1997;
• At least $185 million in losses sustained by a group of
customers trading in Asian markets in 1997;
• At least $40 million in losses from Refco’s own trading
in Russian bonds in 1998.
In addition, BENNETT caused the following expenseshifting
and revenue-padding transactions, among others:
• At least approximately $40 million of computer expenses
moved out of Refco and into BENNETT’s holding company
between 1999 and 2002;
• At least approximately $38 million in artificial income
from inflated interest rates charged on the debt owed
by BENNETT’s holding company to Refco;
• At least approximately $13 million in profits from fake
U.S. Treasury notes between Refco and BENNETT’s holding
company; and
• At least approximately $10 million in profits from fake
foreign exchange trades between Refco and BENNETT’s
holding company.
In August 2004, Thomas H. Lee Partners, L.P., purchased
a majority interest in Refco, financed by an approximately $1.9
billion leveraged buyout transaction. In connection with that
transaction, Refco sold approximately $600 million of notes to
the public and borrowed approximately $800 million from a
syndicate of banks. In August 2005, Refco conducted an initial
public offering of approximately $583 million of Refco’s common
stock.
On October 10, 2005, Refco issued a press release
announcing, in substance, that it had discovered that it was owed
a debt of approximately $430 million by an entity controlled by
BENNETT. Following release of this information, the market price
of Refco stock plummeted, and Refco’s stock was subsequently
delisted by the New York Stock Exchange. Refco Inc. and many of
its subsidiaries filed petitions in bankruptcy on October 17,
2005.
BENNETT pleaded guilty to charges of conspiracy,
securities fraud, making false filings with the SEC, wire fraud,
making false statements to Refco’s auditors, bank fraud and money
laundering. The following chart summarizes the charges to which
BENNETT pleaded guilty and the corresponding maximum penalties:
Count Charge Penalty
1 Conspiracy To Commit Securities Fraud, Wire
Fraud, Bank Fraud, To Make Material Misstatements To Auditors, And To Make False Filings With The SEC
5 yrs prison, fine of the greater of $250,000 or twice the gross gain or loss from the offense, 3 yrs
supervised release
2,
3 Securities Fraud 20 yrs prison, fine of
the greater of $5 million or twice the gross gain or loss from the offense, 3 yrs supervised release
4 False Filing with the SEC
– Securities Exchange Act
of 1934
20 yrs prison, fine of
the greater of $5
million or twice the
gross gain or loss from
the offense, 3 yrs
supervised release
5, 6 False Filing with the SEC
— Securities Act of 1933
5 yrs prison, fine of the greater of $250,00
or twice the gross gain or loss from the
offense, 3 yrs supervised release
-4-
7, 8, 9, 10, 11, 12, 13
Wire Fraud 20 yrs prison, fine of
the greater of $250,000
of twice the gross gain
or loss from the
offense, 3 yrs
supervised release
14 Material Misstatements to
Auditors 20 yrs prison, fine of
the greater of $5 million or twice the
gross gain or loss from
the offense, 3 yrs supervised release
15 Bank Fraud 30 yrs prison, fine of
the greater of $1 million or twice the
gross gain or loss from the offense, 5 yrs supervised release
16, 17,
18, 19, 20
Money Laundering 10 yrs prison, fine of
the greater of $250,000 or twice the
gross gain or loss from
the offense, 3 yrs supervised release,
BENNETT, 59, resides in Gladstone, New Jersey.
BENNETT is scheduled to be sentenced on May 20, 2008 at
4 p.m. BENNETT remains free on bail pending sentencing.
Mr. GARCIA, a member of the President’s Corporate Fraud
Task Force, praised the efforts of the United States Postal
Inspection Service, and thanked the Securities and Exchange
Commission and the Commodity Futures Trading Commission for their
assistance in the investigation of this case. The Criminal
Investigators of the United States Attorney’s Office also
investigated the case.
Assistant United States Attorneys NEIL M. BAROFSKY,
CHRISTOPHER L. GARCIA and RUA KELLY are in charge of the
prosecution.
08-42 ###
