Refco Inc. began shutting down its main business on Friday, as fraud charges against the former chief executive threatened to topple the largest U.S. independent commodities brokerage.
New York-based Refco’s bond prices plunged to levels often associated with insolvency while trading in shares of the recently-listed company had been suspended after the stock plunged 72 percent this week.
“I don’t see how they’re going to survive this,” said Michael Greenberger, a professor at the University of Maryland School of Law in Baltimore, who previously worked at the Commodity Futures Trading Commission.
In the latest development in the deepening crisis, Refco Securities LLC, a broker-dealer that accounts for more than half of Refco’s gross revenues, said it was unwinding clients’ and its own positions. The move signals the unit is essentially going out of business, making it the second Refco unit to stop operating this week.
As turmoil at the firm grew, concerned employees started to look for new jobs.
“They are clogging the exits,” said a trader at the Chicago Mercantile Exchange, adding that his company had received numerous inquiries for jobs from Refco employees.
Refco’s difficulties are a black eye for the futures industry, which has gained new respectability in recent years as its products have grown more widely traded, experts said.
The broker’s troubles erupted on Monday when its CEO and chairman, Phillip Bennett, was put on leave after a firm he controlled was found to owe Refco $430 million.
The broker has also said its financial statements could not be trusted, and it was further probing its books.
On Thursday Refco Capital Markets, a prime broker that served the hedge fund community, halted activities and froze all its accounts, saying it did not have enough cash to go on.
“The customers and counterparties have apparently lost confidence in the creditworthiness of the company,” said Tom Foley, an analyst at Standard & Poor’s, which cut the company’s debt ratings deeper into junk status on Friday.
Refco’s troubles could help boost competitors like investment banks as customers flock to more stable brokers, sources said.
But Refco’s difficulties are unlikely to spill over to the broader financial system, St. Louis Federal Reserve President William Poole said on Friday.
“From what I know of that situation, markets are handling it very well,” Poole said, indicating that he did not see this as a situation that warranted official intervention.
The Fed has on rare occasions orchestrated bail outs of ailing financial institutions to ensure wider market stability.
Investigations spread
Bennett repaid the money on Monday with interest but the discovery sparked a series of investigations, leading to his arrest on Tuesday night and charges on Wednesday.
British-born Bennett, 57, who has led the company for seven years, is accused of hiding at least $430 million in bad debts to inflate the company’s financial standing as it went public. Refco raised $583 million in an initial public offering in August with Bennett owning 34 percent of the company.
Refco’s auditors Grant Thornton LLP said what was happening at the company “appears to be a purposeful deception that required participation by senior management.”
Another senior Refco executive, Santo Maggio, knew of the hidden debts and has been suspended by the company. No legal action has been taken against him.
The company is being investigated by several regulators including the U.S. securities watchdog, the Securities and Exchange Commission. The Public Company Accounting Oversight Board has opened an inquiry into Grant Thornton’s audits of Refco, according to a person familiar with the matter.
As the fallout from the company’s disclosures spread, Refco’s bank lenders gathered for a conference call on Friday morning to discuss Refco’s $648 million of loans, according to Loan Pricing Corp, Reuters’ syndicated loan unit.
The SEC said it has restricted the ability of two Refco units, including Refco Securities, to make withdrawals of equity capital or unsecured loans or advances.
Bonds issued by Refco dropped 12 cents on the dollar to 28 cents on Friday, according to MarketAxess, indicating investors believe a bankruptcy filing is highly possible.
Share trading in Refco, which only went public two months ago at $22 a share, was suspended on Thursday with the New York Stock Exchange saying it needed more information to determine if the company should still be listed.
Before trading halted, it shares had dived to $10.85 on the New York Stock Exchange from $28.56 last Friday. They fell to $7.90 in pre-market trade before Thursday’s suspension.