Corporate Governance Issues at Refco Inc.

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Case Details:

Case Code : CGOV006
Case Length : 19 Pages
Period : 2005-2006
Organization : Refco Inc.
Pub Date : 2006
Teaching Note : Available
Countries : USA
Industry : Financial Services

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"Enron was the wake-up call, but with Refco, the underwriters, the accounting firms, the company officers and the SEC all slept through the second alarm."1

- Theodore Eppenstein, a New York lawyer who represented investors in a securities fraud case against Refco, in 2006.

"You got a problem with regulators? Just pay the fine, and move on."2

- Former regulator at a U.S. commodities exchange, commenting on Refco's attitude toward regulation, in 2006.

 "When you see something like this, it begs asking what failure in their system led to this. Why didn't anyone pick it up?

- Charles Elson, director of the Weinberg Center for Corporate Governance at University of Delaware, in 2005.


In September 2006, Refco Inc. (Refco), a diversified financial services organization, reached a settlement on the distribution of proceeds from the sale of Refco Capital Markets (Refco Capital)3, its Bermuda-based subsidiary. Refco Capital was one of the several subsidiaries that were put on the block in order to pay the US$ 16.8 billion claim on Refco by its creditors after an accounting scandal pushed the company into bankruptcy in October 2005.

Coming as it did after a rapid expansion in the early 2000s through several acquisitions, Refco's slide was as rapid as it was steep. In 2004, Thomas H. Lee Partners (Lee Partners)4, a leading venture capital firm, had invested in Refco.

In June 2005, Refco had acquired Cargill Investor Services5, a rival firm, and in August 2005, it had successfully gone public with an issue of 26.5 million shares.

In October 2005, the Refco board discovered that an entity secretly controlled by CEO Phillip Roger Bennett (Bennett) owed US$ 430 million to Refco and that Bennett had been concealing this information by manipulating the accounting records. The board asked Bennett to repay the loan immediately and to take leave of absence.

On October 10, 2005, the board went public with the information, triggering a mass withdrawal of funds from Refco that left the firm in a precarious position. A week later, Refco filed for bankruptcy protection. As part of the bankruptcy court proceedings in November 2005, some subsidiaries of Refco were put up for sale.

Corporate Governance Issues at Refco Inc. - Next Page>>

1]  "Refco's collapse reveals decades of quarrels with regulators," January 05, 2006.

2] "Refco's collapse reveals decades of quarrels with regulators," January 05, 2006.

3] Refco Capital was a controlled foreign corporation (CFC) domiciled in Bermuda and operated out of New York. It brokered over-the-counter derivative and currency trades.

4] Lee Partners, a buyout firm, was founded in 1974 by Thomas H. Lee, and is best known for its 1992 purchase of Snapple for US$ 135 million. Two years later Lee sold Snapple to Quaker Oats Co. for $1.7 billion. As of 2005, Lee was one of Wall Street's biggest buyout firms and was worth around US$ 12 billion.

5] Cargill Investor Services is the captive broker of the agricultural giant Cargill Inc., based in Wayzata, Minnesota.


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