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Refco's Auction Won By Man Group

by Glen Shapiro,, New York

11 November 2005

Refco's court-supervized auction in New York this week continued all of Wednesday night, with Man Group appearing to be the winners on Thursday morning. Interactive Brokers Group had gone into the action as front-runner with a bid of $858m for the firm's regulated futures-trading arm.

Man said that the purchase price amounts to $282m in cash, the assumption of an estimated $37m of liabilities and some other minor assets worth at $4m. It's unclear why these figures are below the level of bids going in to the auction.

Refco asked the Manhattan bankruptcy court for permission to structure the sale of the futures unit under Chapter 7 of the bankruptcy code, normally reserved for liquidations. The firm hopes that this move will encourage federal regulators to accept liability waivers being offered to buyers, since it results in a sale of the firm's assets rather than its equity.

The Commodity Futures Trading Commission had objected to some aspects of the terms outlined for the auction of Refco's commodities and futures arm. In a court filing last week, CFTC attorneys wrote: "While we do not intend to suggest anything negative about the conduct of the firm, no person or company is above the law. The commercial sale of a business cannot be premised on a grant of immunity from ordinary law enforcement."

The auction process was disrupted by a consortium of Refco creditors who filed an objection to the proposed time-scale for the announcement of a winner, asking for more time to evaluate the deal. This may account for the failure of the court to announce a winner yesterday morning, as originally planned.

Amid a torrent of Refco-related class actions and individual suits hitting the courts this week and last, several stand out:

  • 10 Refco customers with $640 million in accounts have sued the company to retrieve their money and a further 35 with a total of $1.2 billion in accounts have filed objections or demands in the company's bankruptcy case. Refco has requested the court to place these actions on hold until a procedure can be established for handling them.
  • Refco itself threatened legal action against the 45 creditors in what it called an attempt to simplify what Refco attorney J. Gregory Milmoe has called the key legal hurdle in the bankruptcy fight: whether Refco properly determined which customers' cash belonged in regulated accounts, which carry greater protection.
  • Two of the three lead underwriters on Refco's initial public offering of stock in August, Bank of America Corp. and Credit Suisse Group's Credit Suisse First Boston, received subpoenas from federal authorities examining the collapse of Refco.
  • A French court froze the assets of Refco's European securities unit, to protect the interests of French businessman Gerard Sillam, who claims in court documents he is entitled to fees of $800 million for his help in developing that business.
  • Bermuda-based Capital Management Select Fund filed a suit on Monday against Refco demanding the return of about $110 million in cash and securities, which were held as collateral in an account at Refco. The securities were said to be held as collateral for loans made by Refco Capital to its customers to settle trades.
  • A committee representing creditors, including banks and Refco clients, submitted a motion last week to the Court requesting leave to subpoena records from an array of Refco officers including ex-CEO Philip Bennett, his predecessor as CEO, Tone Grant, ex-Chief Financial Officer Robert Trosten, each of the company's seven board members, and Thomas H. Lee Partners, a private-equity firm and Refco's largest shareholder.
  • Two Rogers funds, Rogers Materials Fund and Rogers International Raw Materials Fund filed a $362 million claim on October 24 requesting an immediate return of their cash and securities from Refco Capital Markets. The funds allege that their assets were improperly transferred from segregated accounts to now-bankrupt Refco Capital Markets, so that Rogers is no more than one amongst many creditors in bankruptcy proceedings. Refco denies that it improperly transferred the Rogers funds’ assets from its regulated futures arm to the prime brokerage unit.

There may also be unwelcome attention from government for any buyer of a Refco unit: US Treasury Secretary John W. Snow, chairman of the President's Working Group on Financial Markets, wrote last week to Rep. Michael G. Oxley, (R., Ohio), chairman of the House Financial Services Committee: "The PWG will continue to monitor the very recent events concerning Refco and its affiliates as the facts unfold to determine whether or not any measures may be needed to address any additional issues that the situation raises."

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