Plenty Of Action In Refco Bankruptcy Process

by Glen Shapiro, LawAndTax-News.com, New York

10 February 2006

Refco, the collapsed futures trading house, is fighting in a New York court to prevent its Capital Markets unit from being forced into Chapter 7 liquidation by some of the unit's creditors.

Judge Robert D. Drain of the US Bankruptcy Court of the Southern District of New York, who has been master-minding Refco's bankruptcy process, will hear arguments on the matter on 14th February.

A group of creditors, including VR Partners Global hedge fund, argue that they are entitled to reclaim their assets, which they stand a better chance of achieving in a court-supervised Chapter 7 process than while Refco continues to manage its remaining subsidiaries in Chapter 11.

A number of other creditors, including Bank of America and Wells Fargo, representing investors for whom they acted in providing finance to the unit, filed briefs opposing the conversion, as has Refco itself, saying that all creditors should be treated equally.

"There is no policy or practical reason warranting conversion to Chapter 7," says Refco. "Recharacterizing Refco Capital Markets as an inadvertent stockbroker would unfairly and inequitably advance the interests of a small group of clients to the detriment of clients who traded in commodities, foreign currency, and even those who traded in securities but do not meet the stringent definition of 'customer'."

Refco completed the sale of its main futures business to the UK's Man Group in December. Judge Robert Drain ruled that Refco's assets would be transferred free and clear of all claims and liens. Clients held $6.5 billion in futures accounts at Refco on 30th September, but this figure had dwindled to barely $2bn by the time of the sale. Man Group agreed to buy the main assets of the business for $323 million, but Refco valued the deal at more than $1 billion because it allows Refco to retain its net regulatory capital and make those assets available to creditors.

Refco was the fourth-largest US broker before it emerged on 10th October that a former chief executive, Phillip Bennett, had failed to report $430 million in debt. The company filed for bankruptcy protection within a week as clients withdrew more than $3 billion.

Refco owes $16.8 billion to creditors in the bankruptcy, but still has more than 20 affiliated businesses whose valuations are difficult to ascertain, of which the Capital Markets unit is one of the most valuable.

Meanwhile, in a class action brought against Refco's underwriters and directors, the New York Court appointed PIMCO and RH Capital Associates as lead plaintiffs, choosing them out of twelve applicants. The court also confirmed law firms Bernstein Litowitz Berger & Grossmann and Grant & Eisenhofer as lead counsel in the case.

Judge Drain has also set 16th February for the auction for certain assets of Refco FX Associates LLC. Refco says that under the auction process, all Refco FX customer positions and orders traded on the FX Trading Station platform would be transferred intact; in addition, the 15,000+ existing Refco FX retail account holders would continue to be able to trade based on 100% of the funds as reflected in their trading accounts, and they would be able to carry out normal account procedures including withdrawing and depositing funds, as usual.

Refco FX says it has entered into a agreement to sell the assets to Forex Trading LLC and Forex Capital Markets LLC (“FXCM”), a Futures Commission Merchant registered with the CFTC and a member of the National Futures Association. FXCM has bid $110 million for assets, including the RefcoFX retail accounts.

It is not known whether there are other "qualified bidders" for the assets; if not, FXCM will win the auction, and completion of the deal is expected in March.

"We are pleased that we were able to reach an agreement and obtain the Court's approval of the revised bidding timeline. We look forward to holding a robust auction for these assets," said Harrison J Goldin, Refco's chief executive officer. Mr Goldin also reiterated that any alternative bid would also need to include the assumption of Refco FX customer liabilities, providing a satisfactory outcome for Refco FX customers.

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