Ex-CEO of Refco Faces Charges
The former chief executive of commodities brokerage Refco Inc. was charged with securities fraud Wednesday for hiding up to $545 million in bad debt from federal regulators and investors, a federal prosecutor said.
Phillip R. Bennett, 57, of Gladstone, N.J., was arrested Tuesday night and charged in a criminal complaint unsealed in U.S. District Court in Manhattan, said U.S. Atty. Michael Garcia.
A day earlier, Refco announced that $430 million in debt to the company, funneled through a firm controlled by the ousted chairman and chief executive, was hidden through a number of secret transfers to disguise that much of the debt may have been uncollectable.
Assistant U.S. Atty. David Esseks opposed granting bail, calling Bennett a flight risk. Bennett is a British citizen with a half-billion dollars in assets who told a colleague in a taped conversation Monday that he was going to Europe within two days, Esseks said.
U.S. Magistrate Judge Douglas F. Eaton granted bail, saying Bennett could go free today after pledging a Manhattan apartment and his New Jersey home as collateral and agreeing to electronic monitoring, a $50-million bond with $5 million in cash.
Shares of Refco fell $3, or 22%, to $10.85. The stock traded at nearly $30 last week.
Esseks said prosecutors had developed a “straightforward and truly extraordinary case” that involved a “staggering” loss of money for investors that could result in a life sentence if he were convicted.
But defense attorney Gary P. Naftalis said his client had already pledged his shares in Refco to secure a bank loan that repaid the $430-million loan with interest Monday.
“He received no personal profits from this,” Naftalis said.
The lawyer said prosecutors rushed their case, noting that Esseks conceded that he did not know Bennett had pledged all of his Refco stock to secure the loan.
Garcia said prosecutors and U.S. postal inspectors worked around the clock since Monday to develop evidence that Bennett “had played an active role” in hiding the debt from the public and securities regulators.
Garcia said the failure to disclose “an incredibly important fact” came as the public invested hundreds of millions of dollars in August when Refco, the largest retail commodities broker-dealer in the nation, issued stock in an initial public offering.
On Monday, Refco said its earnings statements dating back to 2002 “should no longer be relied upon,” and would delay filing its next quarterly report, originally scheduled for next week.
Bennett was put on leave that day by Refco’s board, and Chief Operating Officer William Sexton was tapped as the new CEO.
The criminal charge accused Bennett of hiding hundreds of millions of dollars of related party transactions between Refco and a company controlled by Bennett from investors from 2004 until this month. Garcia said the amount that was hidden rose as high as $545 million at one point.
Because Bennett allegedly hid bad debt in a separate company and caused Refco’s revenue figures to be inflated, prosecutors accused Bennett of causing Refco to file a false and fraudulent registration statement with the Securities and Exchange Commission.
