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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Excerpts Contd...

The Investigations

Immediately after the accounting fraud was made public, investigators began their attempts to unravel several aspects of the fraud - whether Bennett had been assisted by Refco officials in carrying out the fraud, whether there had been an insider who made false journal entries, or whether the company had paid outside parties to provide confirmations of transactions to deceive auditors. In the weeks following the announcement, auditors, underwriters, lawyers, and former Bennett subordinates came under strict scrutiny by federal prosecutors. Refco's shareholders filed class action lawsuits against Refco, Lee Partners, Grant Thornton LLP (Grant Thornton) (Refco's auditors), CSFB, Goldman Sachs, and Mayer Brown...

What Really Happened

In the course of time, with information from people who were familiar with the internal review processes at Refco, a plausible reason for the scandal emerged. During the Asian Economic crisis (1997-98), several Refco customers had lost millions of dollars. As most of these loss-making transactions had been funded by Refco, the company's bad debts had ballooned...


As of 2006, Refco, LLC, operated under the name of Man Financial-Refco Division. Bennett, who, in 2005, had been the billionaire CEO of Refco, the leading company in the US$ 20 trillion US futures industry, was reduced to being another criminal defendant. In addition to his freedom, the money he made through the sale of Refco stock was also under a cloud, as the US Attorney General's office was seeking to claim US$ 700 million from Bennett. In June 2006, BAWAG, which had been sued for helping Refco hide the losses, agreed to pay US$ 675 million to Refco's creditors in a complex settlement reached by federal prosecutors...


Exhibit I: US Futures Industry and Refco
Exhibit II: Refco's Problems with Regulators over the Years
Exhibit III: Global Futures and Options Volumes (In Million Dollars)
Exhibit IV: US FCMs Ranked by Segregated Funds as of October 2005
Exhibit V: Top Futures Exchanges Worldwide
Exhibit VI: Refco Stock Prices between October 05, 2005 and October 10, 2005
Exhibit VII: Refco Entities that Filed for Chapter 11 Protection


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