Securities Fraud—Refco

Phillip R. Bennett, the ousted CEO of Refco Inc., has been charged with securities fraud on allegations that he concealed nearly $545 million in bad debts from federal regulators and investors.^[1] Mr. Bennett is accused of hiding the existence of hundreds of millions of dollars of related-party transactions between Refco and a company controlled by Bennett from investors; at one point that sum reached as high as $545 million.^[2] In effect, “he kept his debts to the company hidden through a fairly simple scheme under which he essentially rented the balance sheet of one of Refco’s customers, so that it would appear that the customer owed Refco the money, rather than Mr. Bennett.”^[3] The moves made the debts appear to be receivable, which represented higher revenue than was actually brought in.^[4]

Mr. Bennett is charged with one count of securities fraud, and was released on a $50 million bond with $5 million in cash.^[5] Assistant US Attorney David Esseks called Mr. Bennett a flight risk, citing his British citizenship, $500 million in assets, and evidence of a taped conversation in which Mr. Bennett told a colleague that he was going to Europe within a couple of days.^[6] US Magistrate Judge Douglas F. Eaton, however, allowed Mr. Bennett to go free as long as a Manhattan apartment and his New Jersey home were pledged as collateral, and as long as he agreed to electronic monitoring.^[7]

Mr. Bennett is being charged under 15 U.S.C. § 78m(a), which states that every issuer of a registered security must file certified annual reports with the SEC. If that report is false, fraudulent, or misleading, the punishment is a fine of not more than $5,000,000, imprisonment for up to 20 years, or both.^[8]

The investigation is still ongoing.

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[1] Larry Neumeister, Ex-Refco CEO Charged with Securities Fraud, Associated Press, Oct. 13, 2005, available here [hereinafter AP].
[2] Id.
[3] Kara Scannell et al., Refco’s Bennett Arrested, Accused of Fraud, Wall St. J. Oct. 13, 2005, at C1, C3, available here (subscription only).
[4] AP, supra note 1.
[5] Id.
[6] Id.
[7] Id.
[8] 15 U.S.C. § 78ff(a).