Refco Litigation Trusts File Suit Against Advisers

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

22 August 2007

It emerged on Tuesday that the Refco Litigation Trusts have filed a lawsuit in Chicago charging that Refco Inc.'s legal, accounting and financial advisers knowingly assisted Refco insiders in "looting" Refco's assets.

Refco filed for Chapter 11 protection from creditors on October 17th, one week after the firm said former chief executive Phillip Bennett had hidden $430 million of bad debt.

The lawsuit, filed in the Circuit Court of Cook County, Illinois, named Mayer, Brown, Rowe & Maw LLP, Grant Thornton LLP, Ernst & Young LLP, PricewaterhouseCoopers, Credit Suisse Securities (USA), Banc of America, Deutsche Bank Securities, certain loan participants, and the Refco insiders as defendants.

The lawsuit is seeking over $2 billion in damages and penalties for what it claims is the defendants' role in committing and aiding the Refco insider fraud, and for alleged breaches of fiduciary duty.

The two Refco Litigation Trusts were created under the Refco Plan of Liquidation, which became effective on December 26, 2006. Marc S. Kirschner, the former Chapter 11 Trustee for Refco Capital Markets LLC, serves as Trustee for the Trusts. The primary purpose of the Trusts is to pursue all Refco estate claims and claims of certain electing creditors against third parties, with recoveries to be distributed in accordance with the terms of the Refco Plan of Liquidation.

According to a statement released this week by the Refco Litigation Trusts:

"The lawsuit provides a thorough description of the more than seven year conspiracy to conceal Refco's trading losses, true operating expenses, marginal performance and theft of assets belonging to Refco's unregulated broker-dealer, Refco Capital Markets, Ltd. ("RCM"). The lawsuit alleges that Refco's fraudulent scheme "only could have worked with the active assistance of Refco's cadre of outside auditors, professionals and advisers" - a veritable "who's who" of some of the most trusted names in corporate finance, law and accounting, whose reputations and substantial assistance aided the Refco insiders in stripping out billions of dollars in Refco assets."

It continued:

"As alleged in the complaint, the fraud occurred in three phases: first, the insiders, with the active assistance of its professional advisors, created the illusion that Refco was a successful and financially sound company; second, the defendants worked to maintain that illusion, employing various financial chicanery to fool the outside world; and third, the professional defendants orchestrated a massive cash-out, whereby they aided the insiders in cashing-out, while at the same time lining their own pockets with substantial professional fees. The purpose of the entire scheme, the lawsuit alleges, was to allow the Refco's insiders to sell their interests at fraudulently inflated prices."

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