Bennett, Philllip - Refco CEO Commodities Fraud...

Phillip Bennett

THE CON: A judge described Bennett's fraud as “staggeringly arrogant;” on top of borrowing $430 million from Refco, he hid the debt from auditors before the company's initial public offering.

THE DAMAGE: $1.5 billion

THE OUTCOME: When word of the hidden debt leaked Refco stock plummeted and investors lost as much as $1.5 billion in market value. Bennett handed over $2.4 billion in assets and, in 2008, began a 16-year prison sentence.

CEO who borrowed a cool $430 million

Phillip R. Bennett became CEO of Refco in 1997, in the wake of the Asian debt crisis. As one of the world's largest futures brokerage firms, Refco felt the ripple effects of flagging economies and currencies in Southeast Asia. Rather than let clients in on Refco's losses, Bennett chose the path of decetiful cover-up.

In the years leading up to Refco’s initial public offering in 2005, Bennett made a series of secret (and illegal) transfers of cash. To cover trading losses, he borrowed $430 million from Refco and moved it over to Refco Group Holdings, Inc. – which, despite its name, was owned by Bennett and unrelated to Refco. The debt was then disguised through short-term loans to third parties (like a bank in Austria) at the tail end of each fiscal period. After an audit, the loans were reversed. Bennett took pains to make Refco appear stronger than it was; he filed financial statements in which he recorded non-existent interest and income from fictitious transactions.

Shifting numbers around on the books seemed to work; after Refco's initial public offering in August of 2005, the shares sold well above offering price and increased 25% in the first trading session. By the end of the summer, Refco had $4.9 billion in customer accounts; altogether, investors bought $583 million worth of stock.

Then, just two months after the initial public offering, the debt was discovered. The Refco board imposed a two-week moratorium on its capital markets business and announced a plan to investigate financial statements from the previous three years. Within a week, Refco shares dropped 45 percent, costing banks, bondholders and shareholders more than $1 billion.

Criminal charges were filed against three Refco executives and the outside attorney accused of helping to orchestrate the scam. The Austrian bank that played the role of “third party” in the phony loan deals agreed to pay $675 million to avoid criminal prosecution.

For his part, Bennett pleaded guilty to 20 counts of fraud. He was sentenced to 16 years in prison in 2008.

http://www.thehallofinfamy.org/inductees.php?action=detail&artist=phillip_bennett