The former chief executive of Refco Inc., one of the world’s biggest commodities brokerages, engaged in a conspiracy that caused Refco to sell $583 million in stock to the public based on “false and fraudulent” statements of its finances, an indictment charged Thursday.
The indictment returned in U.S. District Court in Manhattan accused Phillip R. Bennett and others of conspiring to commit securities fraud when they hid from auditors and investors losses that Refco and its customers had incurred in the financial markets.
The indictment came the same day British commodities broker Man Group PLC announced it had won a bidding war to acquire Refco for $282 million in cash.
Refco, which went public in August, filed for bankruptcy on Oct. 17, a week after it announced that a $430 million debt to the company owed by a firm controlled by the ousted chairman and CEO had been concealed.
Bennett took responsibility for the money, securing a loan to pay it back just before the company placed him on indefinite leave Oct. 10.
The indictment said Bennett and others from at least as early as the late 1990s concealed losses in the financial markets by causing Refco to make false and fraudulent filings with the Securities and Exchange Commission.
It said Refco in the 1990s had extended credit to customers so they could trade securities and commodities in accounts held at Refco.
When customers were unable to make payments on hundreds of millions of dollars of market losses in their Refco accounts, Refco liquidated the positions and assumed the resulting losses in the accounts, the indictment said.
Rather than write off the losses, Bennett caused the losses to be transferred to a privately-held Delaware corporation he controlled so that Refco’s financial books would show that the private corporation owed Refco the money, the indictment said.
It said Bennett began in 1999 directing others to hide the money owed to Refco from Refco’s auditors through a series of transactions.
A lawyer for Bennett did not immediately return a telephone call for comment.
Bennett remains free on a $50 million bond, which was amended Thursday to let his wife, daughter and a son co-sign his bond, rather than six financially responsible persons as had previously been required.
U.S. District Magistrate Judge Frank Maas wrote that Bennett was entitled to be free under the least restrictive conditions that will ensure his presence in court since he is not considered a danger to the community. Maas noted that Bennett had been unable to obtain even a single co-signer to his bond outside his immediate family.
Refco was forced into bankruptcy proceedings after revealing questionable accounting, which caused the company’s customers to flee, resulting in a crippling loss of assets.
Refco has some 2,400 employees in 14 countries. It reported earnings of $176.3 million for the fiscal year ended last February, down from $187.2 million a year earlier.
When the transactions were disclosed to the public, the stock price plummeted, leading to investor losses of more than $1 billion, the government has alleged.