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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Please note:

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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Introduction Contd...

Refco's largest subsidiary, Refco LLC, a futures brokerage firm, was sold to Man Group Plc. (Man Group)6. Subsequently, more subsidiaries were sold to pay back creditors. In due course, Refco's auditors, its IPO underwriters, and even its law firm were dragged into the scandal. BAWAG7, an Austria-based bank, which not only helped Bennett cover up the fraud but also lent him money to repay his debt, faced several problems after the scandal broke. Refco's creditors and investors were also badly affected. The Refco scandal seemed to suggest that even the strictest regulation could not prevent determined fraudsters, who more often than not were the top executives of a firm, from perpetrating fraud.

Background Note

In 1969, Raymond Earl Friedman (Friedman), a poultry wholesaler, and his stepson, Thomas Dittmer (Dittmer), a retired army man, formed a partnership firm - Ray Friedman & Co. - in the commodity futures trading business, in Chicago. Later, the firm was renamed the Refco Group Ltd., LLC (Refco Group) where Refco stood for the initials of the company's original name.

The Refco Group began operations by carrying out clearing services8 in agricultural commodity futures. The firm was fairly successful and was able to earn good returns for its clients. In 1974, Friedman sold his stake in the Refco Group to Dittmer. Dittmer then assumed the role of CEO of the Refco Group (See Exhibit I for an overview of the US futures industry). In 1981, Bennett joined the firm as Chief Financial Officer (CFO). Though he had majored in geography from Cambridge University, Bennett had considerable experience in the commodities market. He had earlier worked for the commodity and commercial lending departments of Chase Manhattan Corp. at New York, Toronto, Brussels, and London...

Excerpts >>

6]  The Man Group Plc., a London, UK-based company, is one of the world's largest futures contract brokers and a leading global provider of alternative investment products. It has been operational for over 200 years and as of 2006, it had a presence in 15 countries across the world.

7] BAWAG or Bank für Arbeit und Wirtschaft is an Austrian bank founded in 1922 by Karl Renner, Austria's first Chancellor after World War I. On October 1, 2005, it merged with Österreichische Postsparkasse (P.S.K.), a postal bank, to form BAWAG P.S.K. BAWAG was controlled by Austria's 13 trade unions. It was Austria's fourth largest bank in terms of value of assets (as of 2005).

8] Clearing, in the context of futures trading, involves settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery, and reporting trading data.


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