Refco's Grant Accused of Helping Defraud Investors

By David Glovin
Bloomberg.com
January 16, 2007

The former president of Refco Inc., the bankrupt futures trading firm, was indicted for helping the chief executive hide hundreds of millions in losses in a 2004 leveraged buyout.

Tone Grant's indictment came as federal prosecutors in New York added new bank-fraud charges against Refco Chief Executive Officer Phillip Bennett and former Chief Financial Officer Robert Trosten. Bennett and Trosten were previously charged with securities fraud.

The charges against Grant -- and the new counts against Bennett and Trosten -- widen a case that was first brought in October 2005 after Refco announced it had discovered the firm was owed about $430 million by an entity controlled by Bennett. Refco filed for bankruptcy protection days later, owing $16.8 billion.

``Mr. Grant is innocent and will vigorously fight these charges,'' said his lawyer, Norm Eisen, of Zuckerman Spaeder in Washington.

Grant, a former Yale University quarterback, lives in Chicago and will appear in Manhattan federal court Jan. 19 to be formally charged.

Prosecutors said Grant, 62, received $16 million in a leveraged buyout of Refco that was led by private equity fund Thomas H. Lee Partners LP. Bennett, Grant and Trosten misled investors about the ``true financial health of Refco'' by hiding hundreds of millions in losses, U.S. Attorney Michael Garcia said in a statement today.

New Counts

The bank-fraud charges added to the indictment of Bennett, 58, and Tossten, 37, carry a maximum 30-year prison sentence. Bennett and Trosten, of Sarasota, Florida, already faced 20-year prison sentences on charges of wire fraud and securities fraud. Grant is charged with conspiracy, securities fraud, bank fraud, money laundering and wire fraud.

Prosecutors say Bennett and Grant hid losses by making them appear as debt owed to Refco by a holding company they controlled, Refco Group Holdings Inc., or RGHI.

``Bennett and, at certain times, Grant and Trosten, directed a series of transactions every year from 1999 to 2005 to hide the RGHI receivables from, among others, Refco's auditors,'' Garcia said in the statement.

In August 2004, buyout firm Thomas H. Lee Partners LP bought a majority interest in then-privately held Refco for about $1.9 billion through a leveraged buyout. In connection with the deal, Refco sold about $600 million in bonds and borrowed about $800 million from several banks. A year later, Refco raised about $583 million in an initial public offering of stock.

The Alleged Scheme

According to the new indictment, Grant, Bennett and Trosten defrauded the banks and Lee, the purchasers of the $600 million in notes, about Refco's financial health.

The indictment says Bennett and Grant used customer funds to cover Refco losses, leaving the company ``perpetually short of cash.'' Refco was sometimes $100 million a day short of funds needed to settle customer transactions, the indictment says.

``Refco purposely selected, on a rotating basis, institutions with whom it would fail to make settlement, and attempted to stagger its failures to make settlement with each institution so as not to arouse suspicion,'' the indictment says.

Bennett disclosed on Oct. 10, 2005, that he owed Refco $430 million and was arrested the next day. Refco put out a press release disclosing the debt, and customers began withdrawing funds from their accounts. Refco eventually froze some accounts and later claimed the cash and securities in those accounts was company, not customer, property.

Refco filed the 15th-biggest bankruptcy in U.S. history on Oct. 17, 2005. The company said its financial statements from 2002 through 2005 couldn't be relied upon. Refco owes creditors about $16.8 billion.

Refco previously said that it hadn't engaged in trading for its own account. According to the indictment, Refco in 1998 lost at least $40 million on its investment in Russian bonds after the Russian government defaulted.

The case is U.S. v. Bennett, 05-cr-1192, U.S. District Court, Southern District of New York (Manhattan).

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