Monday, October 24, 2005


Tangled Financials Hid Refco Fraud

As details of the Refco scandal emerge, the behind the scenes action is even more unbelievable. "Peter F. James had been working at Refco less than two months when he noticed something this summer that teams of accountants had apparently missed for years. Mr. James, a recently hired employee in the controller's office, wondered why a larger-than-normal interest payment had been made to Refco on an outstanding loan made by the company."

"In August he started to ask questions, eventually taking his concerns to the chief financial officer, Gerald M. Sherer. The answers would lead to the departure of the chief executive and the rapid unraveling of the company that prompted its filing for bankruptcy protection last week."

"The oversize interest payment that Mr. James noticed had its roots in a bad receivable, money due to Refco, from clients adversely affected by the Asian financial crisis of the late 1990's, according to a person briefed on the investigation."

"A person briefed on the investigation said. 'This isn't a needle in a haystack,' this person said. 'It's a needle in a pile of needles.'"

"Now, questions are mounting over why others, among them, the company's auditor and the underwriters that took Refco public in August, never discovered what Mr. James did."

"The collapse of Refco has been a black eye particularly for Thomas H. Lee Partners, the private equity firm that bought a majority stake in Refco in August 2004. 'Either Tom Lee and partners are victims of fraud or they dropped the ball in terms of due diligence,' said William Atwood, executive director of the Illinois State Board of Investment, which has put $35 million into the latest Lee fund. 'Today, we don't know which it is.'"

"The Lee partners are likely to face tough questions at their annual meeting with investors in Boston next month. One question the investors may have is Lee's ability to invest in complex financial companies, given its losses in Refco and the $440 million it lost on Conseco, an insurance holding company that filed for bankruptcy protection."

"Mario Giannini said he thought there was no pattern in the Conseco and Refco blowups, but that the coincidence did raise 'an interesting question' about what sort of risks are involved in the buyouts of financial services companies."

I am a limited partner with the Roger's Raw Material's fund. Because of a mail mishap, I just found out today that Refco holds 63% of the funds assets. Hopefully, this will all work out and the fund won't go under. Luckily, I only invested the minimum fund amount. I won't go bankrupt.
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