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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The Bennett Era

In October 1998, Bennett replaced Grant as CEO. "Phil (Bennett) brings to the job a bulletproof track record of sound decision making and a recognized financial stature," said Dittmer at that time. In 1999, Dittmer resigned from his post and sold his stake in the firm to Grant and Bennett. Bennett assumed the title of Chairman in addition to the CEO title. At that point, Bennett and Grant each held a 50% stake in the firm through a New York-based company called Refco Group Holdings Inc. (RGHI). Bennett took many measures to clean up the Refco Group's image. In January 1999, he hired Dennis Klejna (Klejna), who had served as the enforcement director at Commodity Futures Trading Commission (CFTC) from 1983 to 1995, as the firm's general counsel...

Going Public

Lee Partners had acquired the Refco Group with the intention of eventually taking the firm public. Before the IPO, the Refco Group and its various subsidiaries were brought under one holding company called Refco Inc. (Refco). In April 2005, Refco filed papers with the US Securities and Exchange Commission (SEC) for an IPO of its common stock. Refco hired BAC, Credit Suisse First Boston Inc. (CSFB), and the Goldman Sachs Group Inc. (Goldman Sachs) to underwrite the IPO...

The Beginning of the End

Refco's dramatic unraveling began in October 2005 when the company's controller, Peter F. James (James), who had been hired in August 2005, discovered that the firm's accounts were not as clean as had been previously assumed.

James had been hired by Refco's CFO, Gerald M. Sherer (Sherer), who had himself joined the company only in January 2005. Sherer had earlier alerted the Refco board to problems with Refco's internal controls (practices and systems) regarding record-keeping and fraud prevention...

Refco's Announcement and its Fallout

Bennett had allegedly been buying Refco's bad debt through RGHI, using money borrowed from Refco itself. As the loan from Refco was a related party transaction, he entered into off-setting transactions with one of the company's clients, Liberty Corner LLC (Liberty) in order to keep it off Refco's books...

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