Refco Tries to Hold On to Cash, Customers in Aftermath of Scandal

Weighed down by an accounting scandal, a former chief executive under indictment and the possibility of serious trouble with the Securities and Exchange Commission, commodities broker Refco Inc. appears to be struggling to hold on to as many customers -- and as much cash -- as possible.

There was more evidence Friday that the $545-million accounting scandal in a Refco subsidiary that led to the arrest of ex-CEO Phillip Bennett was spilling out into the company’s other businesses. Credit-rating firm Standard & Poor’s said the situation was getting so bad that the company was likely to default on its debt payments because of a lack of cash.

Refco said Friday that it would begin “winding down” its stock, bond and credit portfolios within its Refco Securities subsidiary, selling all its holdings to pay off its customers and, hopefully, preserve some of its capital to potentially use it to help keep the company going.

Combined with the company’s previous move to freeze customer accounts in its Refco Capital Markets subsidiary, an offshore broker-dealer, analysts said, Refco was busy trying to keep customers from fleeing the company and taking their money with them.

“It’s the classic run on the bank,” said Bill Harris, head of forensic advisory services at CBIZ Accounting. “Customers see that other customers are leaving, and they lose confidence in Refco’s ability to produce their money when they need it.”

Compounding the problem, the SEC on Friday barred Refco Securities and another Refco subsidiary, Refco Clearing, from moving more than 30% of excess net capital to any shareholder, employee, partner or affiliate for the next 20 days.

Twenty days could be too long to wait for the nation’s largest independent futures broker, which went from one of Wall Street’s rising stars to scandal and a looming cash crisis in the space of five days.

On Monday, Refco said Bennett would go on leave after paying the company $430 million, plus interest, to account for bad debts hidden in another entity under Bennett’s control.

The stock has lost more than 70% of its value since Oct. 7, and traded at $7.90 on Thursday before the New York Stock Exchange halted trading as it considered whether Refco should be delisted because of the scandal.