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Apr
24
Written by:
Chuck Gallagher
4/24/2008 11:24 PM
In an article written by Matthew Goldstein in TheStreet.com he states:
In three short days, Phillip Bennett, the ousted CEO of embattled brokerage Refco(RFX - Cramer's Take - Stockpickr), has gone from Master of the Universe to criminal defendant in a fraud that has stunned Wall Street and ravaged the company's stock.
With lightning speed, federal prosecutors arrested Bennett and charged him Wednesday with orchestrating a brazen scheme to paper over hundreds of millions of dollars in sour debts at the New York company, which sold a $583 million initial offering to the public just two months ago.
Refco was a New York-based financial services company, primarily known as a broker of commodities and futures contracts. It was founded in 1969 as "Ray E. Friedman and Co." Prior to its collapse in October, 2005, the firm had over $4 billion in approximately 200,000 customer accounts, and it was the largest broker on the Chicago Mercantile Exchange. The firm's balance sheet at the time of the collapse showed about $75 billion in assets and a roughly equal amount in liabilities. Though these filings have since been disowned by the company, they are probably roughly accurate in showing the firm's level of leverage.
Refco became a public company on August 11, 2005 with the sale of 26.5 million shares to the public at $22. It closed the day over 25% higher than that, valuing the entire company at about $3.5 billion. Investors had been attracted to Refco's history of profit growth -- it had reported 33% average annual gains in earnings over the four years prior to its initial public offering.
Well, those comments were made some three years ago in 2005. On April 17, 2008 Tone N. Grant, one of the former owners of Refco, Inc., was convicted on charges relating to a massive, $2.4 billion scheme to defraud investors. Instead of pleading guilty he rolled the dice and lost.
 From as early as the mid-1990s, Refco, which was then privately held and owned in part by GRANT and PHILLIP R. BENNETT, sustained hundreds of millions of dollars of losses through its own and its customers’ trading. In order to hide the existence of those losses, GRANT and BENNETT transferred many of them to appear as a debt owed to Refco by Refco Group Holdings, Inc. (RGHI), the holding company that controlled Refco and was in turn controlled in part by Bennett and GRANT.
Former CEO Phillip Bennett, of Gladstone, N.J., and former chief financial officer, Robert Trosten, of Sarasota, Fla., both pleaded guilty in February and await sentencing. Grant's sentencing is scheduled for August 8, 2008.
Comments:
Bennett took the most logical route - he accepted responsibility and accountability for his actions. His comments are as follows:
"I knew failing to disclose these filings was wrong," Bennett told the New York court as he cried. "I know I was wrong. I deeply regret it."
He added: "I take full responsibility for my actions and would like to apologise to my family and all those who were harmed by my conduct."
Now do not mistake responsibility and accountability for no consequences. As a business ethics and white collar crime speaker, I know (from personal experience) and say often: Every choice has a consequence. We cannot avoid the consequences. However, if you wish to minimize the consequences then taking responsibility for one's actions is a great first step.
Bennett will be sentenced to federal prison and, my guess is, for a substantial period of time. But, he did make it easy for the government to get their conviction and for that ease, they will likely bargain somewhat on the prison sentence.
On the other hand, Grant took the more difficult path and went for a jury trial. Now, from time to time, I wonder what goes through someone's head when they do that. First, if the government goes after you they intend to win and, looking at the track record, they usually do. It's like playing the tables in Vegas with your life when you go to trial. The cards are stacked against you.
Grant played his hand and, as one could have predicted, lost! His sentence? Well, that's to come, but I bet that it has the potential for being greater than Bennett's - although since Bennett was former chairman and CEO - who knows.
Next step...lets see what happens at sentencing. The sentence these two receive will send a message to white collar criminals in two ways: (1) just how tough is the court on fraud of this nature, and (2) is there any actual value in pleading vs. going to trial? Time will tell...
White collar crime speaker - Chuck Gallagher - signing off...
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