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Six Bids For Refco Unit, But Liabilities Crowd In

by Glen Shapiro,, New York

07 November 2005

Formal bids for the futures unit of collapsed financial group Refco were due in to the Manhattan Federal Bankruptcy Court on Friday, and it's thought that six bids were made. A court-supervised auction will take place this week among the approved bidders.

Although Refco's futures arm isn't covered by the group's bankruptcy filing, the Court has control over it as an asset which can help to repay the parent group's many creditors. A bid of $858m came from competitor Interactive Brokers Group LLC, and another from J.C. Flowers, which had earlier dropped out of contention after a bankruptcy judge refused to accept a deal it had done directly with Refco. Man Group is also likely to be among the group of bidders, having signed a confidentiality agreement with Refco on Thursday.

Tradelink LLC however pulled out of the auction over liability concerns. Walt Weissman, Tradelink's co-founder, said: "More and more, the risks of not understanding the future liabilities became an impediment to our bid." He called it a 'messy proposition'.

Any investor might well be worried by the potential legal and taxation liabilities. Apart from investigations launched by the SEC and Federal prosecutors, the Commodity Futures Trading Commission has objected to some aspects of the terms outlined for the auction of Refco's commodities and futures arm.

In a filing in the US Bankruptcy Court in Manhattan, 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 company has however said in a statement that it didn't intend to create such protections in the way it set up the auction.

A committee representing creditors, including banks and Refco clients, submitted a motion on Friday 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. Creditors also sought documents from a unit of Bawag PSK Group, the Austrian bank that has close ties to Refco, as well as Grant Thornton LLP, Refco's auditor.

The motion will be heard on November 18th, but federal prosecutors who had arrested Mr. Bennett on charges of securities fraud may argue that any documents turned over to other parties may hinder their probe.

Another problem for any buyer of Refco or part of it will be the swarm of litigation lawyers buzzing around the company's partly bankrupt remains. Class actions of all descriptions have either been launched or are in preparation, and many individual suits have been aimed at Refco's assets.

As just one example, 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."

It will be a brave company that takes on such a maelstrom of legal torments without very strong immunities, which the bankruptcy court may not be prepared to give.

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