Refco – the latest disaster.
Is it the tip of the iceberg that could sink the world financial system?

The India’s Affiliate of Refco says it is insulated from the developments at the parent company. Refco Singapore on the other hand says customers have cut futures and withdrawn funds.

A week ago Refco was one of the world’s biggest futures and commodity brokers with 2,400 employees in 14 countries and a market value of $3.6 bn following its highly successful IPO in August.

A week later Refco has become a disaster that could dent the world’s financial system. Its trading has been suspended indefinitely. Its bonds are trading at a quarter of their face value. Large parts of its operations have been suspended.

It is not the size of the losses – $ 511m allegedly hidden in a hedge fund run by the firms Chief Executive Phillip Bennett nor the stature of the company which is less than a household name in the arcane work of futures broking. It is the fact that a business could so recently have gone through intense scrutiny of a market listing supervised by no less than a White Knight of Wall Street, than the Goldman Sachs with no trace of the alleged fraud.

Even more worrying is the fact that a hedge fund was used for alleged deception. These businesses which appear to defy the law of the financial gravity by going up and up are able to evade the requirements of disclosures and transparency despite rigorous laws such as the Sarbane-Oxley Act.
Offshore based and seldom listed in the market these outfits can make their owners huge sums of moneys or as in the case of Refco hide enormous liabilities. The issue is how many Refcos are hiding out there?

GOLDMAN Sachs, CSFB and other US investment banking giants are facing a multimillion-dollar lawsuit from America's leading class-action attorney over their work as flotation advisers to Refco, the derivatives broker on the brink of collapse. Melvyn Weiss, head of New York law firm Milberg Weiss, confirmed that he will file new court actions this week on behalf of investors who have seen their Refco shares collapse amid claims of large-scale fraud. Weiss, who piloted massive shareholder compensation claims against Wall Street firms in the wake of the dot-com crash, said that leading
banks had acted negligently in underwriting and advising on Refco's float on the New York Stock Exchange in August, which raised $583 million. He also plans to sue banks that managed bond issues for Refco.

The banks are expected to deny responsibility for Refco's troubles, which arose last week after it emerged that Phillip Bennett, its British-born chief executive, owed the firm hitherto undeclared debts of at least $430m. Bennett, 57, has been charged with securities fraud and put under house arrest. Bennett denies wrongdoing.

The irony is that in this case Bennett has repaid the money to Refco. But this has not helped restore confidence. Its shares have been suspended after plunging by 72 per cent and its bond prices have fallen to levels usually associated with insolvency. Analysts have warned that the firm is in breach of its lending terms and could face bankruptcy if creditors demand immediate repayment.

Refco itself announced on Friday that it was suspending trading activity at its broker-dealer business, which accounts for more than half its total revenues. It has also frozen accounts at its capital markets unit, closing down billions of dollars' worth of deals and raising fears of a systemic collapse.

Man Group, the British hedge fund company and a major rival, as well as private equity groups, are reported to be interested in buying Refco's futures business. An agreement is being concluded to sell a part to J.C Flowers & Co.