Prominent futures trader Refco was coming apart last week after chief executive Phillip Bennett was suspended because he allegedly used a hedge fund to disguise $430m he owed the company - something that wasn't disclosed during the firm's IPO in August which raised $580m.
On Tuesday, Mr. Bennett was arrested on charges of securities fraud and is thought to be under electronic surveillance at his New York apartment. On Thursday, the New York Stock Exchange halted trading in Refco shares, which had fallen more than 70% since Monday. Refco's debt ended the week trading at 34 cents on the dollar. Credit-rating firm Standard & Poor's said the company was "highly likely" to default on its rated debt.
The Securities and Exchange Commission has opened an informal inquiry after the company admitted the $430m had not been disclosed as a related party transaction, and put its accounts for the last four years under review. A class-action lawsuit was filed in New York alleging Mr Bennett misled investors ahead of the August flotation.
Mr Bennett repaid the $430m to the company on Monday, having seemingly borrowed the money from a foreign bank on security which may include his 38% of Refco stock.
Refco, which traded more than $10 trillion on the futures markets last year and holds more than $4bn in client funds, says it has adequate liquidity to continue operations, and its regulators in Chicago and New York say it remains able to honour its trades. Some other Refco securities trading units however have suspended activity or are 'unwinding' their positions.
The Federal Reserve Bank of New York is not thought to see systemic risk in the situation. Large securities firms and banks are candidates to take over part or all of Refco's operations, but they are all probably counter-parties to Refco trades, and in many cases may be potential creditors and/or litigants against Refco.
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