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Refco Freezes Customers’ Accounts in Unit for 15 Days

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From Associated Press

Commodities broker Refco Inc., struggling with daily revelations in an accounting scandal, said Thursday that it would freeze customers’ accounts in one of its subsidiaries for 15 days because the unit might not have enough cash on hand to operate normally.

The news, coming one day after Refco’s former chief executive was indicted on federal securities fraud charges, prompted the New York Stock Exchange to halt trading in Refco’s stock, which may become a permanent delisting if the company doesn’t give investors more information on its finances.

In addition, the company’s credit ratings were slashed, with Standard & Poor’s warning that there was “substantial doubt” about the entire company’s liquidity. And analysts said that although its other subsidiaries appeared to be running normally, Refco’s customers -- which include hedge funds involved in Refco’s main derivatives and futures trading -- might decide to move their accounts elsewhere.

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“Refco’s main business is really its prime brokerage for futures trading,” said Denise Valentine, senior analyst at Celent, a financial consulting group. “Most of its business and customers are probably unaffected by this freeze. But it’s going to cast a long shadow over the entire company.”

The frozen accounts are held by Refco Capital Markets Ltd., an unregulated offshore broker for stocks, bonds and currencies that former CEO Phillip Bennett allegedly used to help hide as much as $545 million in bad debts. The Justice Department on Wednesday charged Bennett with allegedly causing Refco to file fraudulent statements to securities regulators because of his activities. He is free on a $50-million bond.

In a statement, Refco said it would put a 15-day moratorium on all the unit’s transactions -- effectively preventing customers from withdrawing money from their accounts -- “to protect the value of the enterprise.”

A spokesman for Refco did not know how many accounts or how much money would be frozen. Although Refco’s regulatory filings do not list revenue from each subsidiary, the company’s statement said Refco Capital Markets “represents a material portion of the business of the company.”

Other subsidiaries have enough liquidity to keep operating normally, the company said. Those regulated subsidiaries deal in futures commissions, derivatives and commodities and are considered the company’s main line of business.

The wave of bad news prompted the Chicago Mercantile Exchange, the nation’s largest futures exchange, to issue a statement saying that Refco, a major customer of the Merc, remained in good standing there, and that the Merc had a framework of oversight and regulation to protect investors.

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Shares of Chicago Mercantile Exchange Holdings Inc. fell $8.60 to $310.40. Refco fell $2.95 to $7.90 before trading in its shares was halted ahead of the company’s announcement.

Refco’s bond and credit ratings suffered new downgrades on the news. “Standard & Poor’s believes that there is substantial doubt concerning the liquidity of Refco,” the credit-rating firm said. S&P; lowered Refco’s counterpart credit rating from B-plus to B-minus, and Refco’s own corporate bonds were lowered from B-minus to CCC. All the new ratings put Refco’s debt firmly within “junk” status.

The capital markets subsidiary is at the center of the accounting troubles at Refco. Bennett is accused of moving uncollectable debts in and out of that subsidiary and other entities to hide that the company was counting debts as revenue, even though it realistically was unlikely to collect on those debts.

Refco announced the irregularities Monday, placing Bennett on leave after he repaid $430 million with interest to the firm. Santo Maggio, head of Refco Capital Markets and Refco Securities, also was placed on leave.

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