Fraud Case Study: Refco Inc.

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Timeline:
Refco Inc. announced on October 10, 2005 that it’s CEO and chairman, Phillip R. Bennett had hidden information about $430 million in bad debts from the company's auditors and investors, and that now he had agreed to take a leave of absence.
It was discovered through an internal review over the preceding weekend that a receivable was owed to the company by an unnamed entity that eventually turned out to be controlled by Mr Bennett, as much as approximately US$430 million. It was later known that, Bennett had been buying bad debts from Refco so that it would need to write them off, and he was paying for the bad loans with money borrowed by Refco itself.
How he managed to pull this off is, at the end of every quarter he had arranged for a certain Refco subsidiary to lend money to a hedge fund called Liberty Corner Capital Strategy. Liberty then lent the money back to Refco Group Holdings. It was an independent offshore company secretly owned by Phillip Bennett himself and had no direct legal or official connection to Refco. This company would then pay money again back to Refco, and would make Liberty look like a borrower when financial statements were prepared and reported. It is still not perfectly clear if Liberty Co. really was guilty of hiding scam transactions for Bennett or not. Later on, senior
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Phillip Bennett was arrested on October 12 and charged with number of counts of securities fraud for using interstate commerce and securities exchanges to lie and not to be ethically truthful to his investors. After his arrest, his lawyer said that Bennett planned to appeal against the charges. Trading of Refco's shares was halted on the New York Stock Exchange on October 19, which later resulted into Refco getting delisted from NYSE. Before the halt, Refco shares were trading for more than $28 per share, while as of October 19, they had dropped (on the pink sheets) to as low as $0.80 per

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