List of Refco Victims Is a Long One

[HenryTo]

A list of victims and "winners" in the Refco scandal. Of particular interest is the short sale by SAC Capital, a hedge fund founded by Steve Cohen - who is featured in the third volume of the three-series "Market Wizards" books by Jack Schwager. That was an amazing trade.
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List of Refco Victims Is a Long One

New York Retirement Fund
Threatens Legal Action;
Winners May End Up Losers
By AARON LUCCHETTI, TOM LAURICELLA and KARA SCANNELL
Staff Reporters of THE WALL STREET JOURNAL
October 15, 2005

The list of those who stand to lose money or face from the rapid implosion of Refco Inc. is long. The winners are rarer birds, and they could still see their fortunes reversed.

Over a shorter span of days than some firms spend on a corporate retreat, the futures-brokerage firm has gone from a growth story to the latest poster child for fraud. Its bonds have plunged, and its shares remain halted on the New York Stock Exchange.

One potential victim is already threatening action: The New York State Common Retirement Fund, a pension fund for state employees that has a $21 million exposure to Refco. New York State Comptroller Alan Hevesi said the fund "is one of the victims of this apparent fraud by the Refco CEO, along with the other investors. We have a history of taking forceful action in response to misbehavior. Our lawyers are studying the issues."

A handful of firms -- including some that were involved with Refco's initial public offering -- have collected fees in recent months from the company but could also share in any legal misfortunes.

As a lead underwriter, Goldman Sachs Group Inc. made several million dollars in investment-banking fees from the IPO and was appointed Thursday to be Refco's adviser again during the crisis. But should shareholders who have seen more than 70% of their equity value disappear this week pursue legal action that holds the IPO was fraudulent, Goldman's legal costs could easily dwarf its underwriting earnings.

Thomas H. Lee Partners LP, a Boston-based private-equity firm, and others spent just more than $500 million for a 57% stake. Just 14 months later in Refco's IPO, the investor group sold about eight million shares for more than $170 million, reducing its stake to 38%. Lee and the other investors paid about $8 apiece for their shares. The stock went public at $22 and rose higher than $30 over ensuing weeks. But Refco shares last traded at $7.90, ostensibly erasing most of Lee's IPO profit.

The money behind that investment came out of a Lee fund that has already returned money to investors through sales or stock offerings of other businesses. Lee, like all private-equity managers, also receives a management fee of 1% to 2% on its funds and takes 20% of profits on a deal. Thus, the biggest hit to Lee could end up being to its reputation. A call to Thomas Lee, the eponymous chief of the firm, wasn't returned.

A few active traders may also cash in, including SAC Capital Management, a Greenwich, Conn., hedge-fund firm. SAC bet on a decline in the stock by borrowing shares of the company soon after its IPO and then sold them with the hope of buying the shares back later at a lower price -- a so-called short sale -- according to a person familiar with the strategy. It still had about 100,000 shares sold short at the beginning of this week, a trade that earned about $1 million, according to the person.

Chief among the sufferers is anyone holding Refco's high-yield, or junk, bonds: Those securities were quoted late Friday at around 35 cents on the dollar -- more than 60% below where they began the week and a level usually associated with default.

The fate of the company's 200,000 customer accounts and 2,400 employees still hangs in the balance.

And should Refco fail to make a comeback, Grant Thornton, the company's auditor; and Credit Suisse Group, Deutsche Bank AG and Bank of America Corp., its bank lenders, stand to lose millions of dollars as well as some reputation points. And they, too, could face legal costs if other Refco shareholders take action against the company.

Other shareholders include money-management firms that altogether only have about a 20% stake -- Refco's now-charged chief executive officer, Phillip Bennett, as well as Mr. Lee, together control nearly 80% -- so the damage to average shareholders is likely to be minimal. But some of the biggest names in the fund business have been nicked.

TIAA-CREF, through its giant stock pension fund and its mutual-fund arm, owned 968,455 shares as of the end of September, according to the latest regulatory filings. At that time, the holding amounted to less than 0.02% of TIAA-CREF's $113 billion stock pension fund and a similarly small percentage at its mutual funds. A spokeswoman declined to comment, noting that the investment was "de minimus," compared with TIAA-CREF's size.

T. Rowe Price Associates Inc. acquired Refco shares at the IPO and in subsequent weeks. Its $14 billion Mid-Cap Growth Fund eventually had 0.5% of its portfolio in the stock, according to Brian Lewbart, a spokesman. But as the revelations of wrongdoing emerged this week, T. Rowe eliminated the entire position before Refco shares hit bottom, he added, and the effect on fund shareholders was small.

OppenheimerFunds, meanwhile, held more than 200,000 shares, according to filings, which would have been valued at about $6 million before Refco's collapse. A spokeswoman for OppenheimerFunds declined to comment.

It is unclear what other mutual-fund companies may have held positions in Refco of any significance. Most haven't yet submitted their quarter-end filings that reveal holdings.

While Putnam Investments mutual funds didn't report holding Refco stock, the company itself, which holds a stake in Lee, the private-equity firm, made a direct investment alongside the Lee group in 2004. After the IPO, Putnam still held nearly 300,0000 shares, and an additional 486,453 shares were held by two of Putnam's internal investment vehicles for employees.

Write to Aaron Lucchetti at aaron.lucchetti@wsj.com, Tom Lauricella at tom.lauricella@wsj.com and Kara Scannell at kara.scannell@wsj.com

[HenryTo]

Great stuff, Bill.

The NY Times article is particularly interesting. Looks like one of the creditors that got burned is none other than Jim Rogers. Compared to Soros and Buffett, I think he is somewhat overrated. My guess is that Jim Rogers doesn't have a hand in this, but when one has his name on a fund, one should really at least monitor what the fund is doing.

Quote: Among the largest creditors in Refco's bankruptcy filing are two commodities index funds affiliated with Jim Rogers.

The Rogers Raw Materials Fund is Refco's fourth-largest creditor, with $287.4 million owed, and the Rogers International Raw Materials Fund submitted a claim of $75 million. Refco Securities was selling units in the international fund, according to a prospectus filed with regulators last month; the minimum investment in the fund was $10,000.

Mr. Rogers did not return calls seeking comment.

[nodoodahs]

[nodoodahs]

John Mauldin pointed this out, there is never just one c_ckroach - if you see one, there will be hundreds inside the walls. Refco has a long history of chicanary going back at least to 1979.

I am betting that, once the dust has settled, there will be enough disclosure in the prospectus and filings to protect the auditors and underwriters, and that it will be obvious to all that only those who didn't read the material with a critical eye will have been fooled.

Note, this story also relates to the most successful futures trader in history* and the U.S. Democratic Party's nominee for the 2008 Presidential campaign, Hillary Rodham Clinton.

* Yes, I know her career in futures trading was short-lived, but to make a 10,000% profit in only ten trades, over just a few months, is quite an investing achievement!

http://www.washingtonpost.com/wp-srv/politics/special/whitewater/stories/wwtr940527.htm

The records the White House released yesterday were part of an investigative file from 1979, when the exchange charged Bone and Refco with violations of its record keeping and margin requirement rules. Bone was suspended for three years; Refco paid a $250,000 fine, then the largest in the exchange's history. Internal memos from that investigation cover transactions from the same period in June in which Clinton was trading, but not the same trades. In one instance, the Merc found Bone and a fellow broker were ordering 1,000 cattle contracts at a time – far over the limit allowed at the time – and then allocating them to other customers.

One internal Merc memo said "there is reason to believe" that a majority of Bone's accounts were traded without the clients' permission. Blair said that Bone at times traded his personal account without permission.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.