U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20460 / February 19, 2008
Accounting and Auditing Enforcement Release No. 2788 / February 19, 2008
U.S. Securities and Exchange Commission v. Phillip R. Bennett, 08 CV 1631 (GEL) (S.D.N.Y. filed February 19, 2008)
SEC Charges Former Refco CEO Phillip R. Bennett With Orchestrating Refco Fraud
The U.S. Securities and Exchange Commission (the Commission) today filed a civil injunctive action in the United States District Court for the Southern District of New York against Phillip R. Bennett, the former chairman and chief executive officer of Refco Inc. and its corporate predecessor, Refco Group Ltd. (together, Refco). The Commission's complaint alleges that Bennett orchestrated a scheme that periodically concealed hundreds of millions of dollars owed to Refco by a private entity that Bennett controlled. The public revelation of Bennett's scheme in October 2005, two months after the company's initial public offering of common stock, caused hundreds of millions of dollars in losses to Refco shareholders. The complaint also alleges that Bennett directed practices that artificially inflated Refco's financial results. As a result, the complaint alleges, Bennett violated Section 17(a) of the Securities Act of 1933 (Securities Act), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act), and Exchange Act Rules 10b-5, 13b2-1, and 15d 14, and aided and abetted Refco's violations of Sections 13(b)(2)(A), 13(b)(2)(B), and 15(d) of the Exchange Act and Exchange Act Rules 15d-2 and 15d-13.
According to the complaint, from at least 1998 to October 2005, Bennett's scheme periodically concealed debt owed to Refco by Refco Group Holdings, Inc. (RGHI), a non-Refco entity that Bennett controlled. The debt was primarily the result of trading losses and operating expenses that Refco transferred over time to RGHI. Refco utilized a series of short-term loans that temporarily transferred the debt to third parties immediately prior to the ends of Refco fiscal periods. A few days after the fiscal periods ended, the transactions were reversed, and the debt was transferred back to RGHI. The Commission's complaint alleges that Bennett directed the fiscal period-end transactions and took certain actions to implement them, including executing many of the documents used in those transactions.
The Commission's complaint also alleges that Bennett instituted practices that artificially inflated Refco's reported financial results in 2005. The practices involved Refco recording fictitious interest income and income from sham foreign exchange transactions. The inflation of financial results was undertaken by Bennett to make Refco more attractive to potential investors.
The Commission's complaint further alleges that, in 2005, Refco filed with the Commission and provided to investors registration statements and periodic reports that contained materially false and misleading misstatements and omissions. The filings failed to disclose the debt and the period end transactions, and some of the filings reported income that had been fraudulently inflated. Bennett signed the registrations statements and periodic filings while knowing, or reckless in not knowing, that the filings were materially false and misleading. Moreover, Bennett explicitly certified the accuracy of the disclosures and financial statements in the periodic filings.
The complaint seeks a permanent injunction enjoining Bennett from violating Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Exchange Act Rules 10b-5, 13b2-1, and 15d 14, and from aiding and abetting violations of Sections 13(b)(2)(A), 13(b)(2)(B), and 15(d) of the Exchange Act and Exchange Act Rules 15d-2 and 15d-13. The complaint also seeks payment by Bennett of unjust enrichment that he received as a result of his actions, with prejudgment interest thereon, and imposition of civil money penalties against him pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act.
In a related action, the U.S. Attorney's Office for the Southern District of New York announced February 15, 2008, that Bennett has pleaded guilty to all twenty counts of a superseding indictment previously returned against him and charging him with conspiracy, securities fraud, making false filings with the Commission, wire fraud, making false statements to Refco's auditors, bank fraud, and money laundering, for his actions in connection with the Refco fraud.
The Commission acknowledges the assistance and cooperation of the Office of the United States Attorney for the Southern District of New York, the United States Postal Inspection Service, and the Commodity Futures Trading Commission.
The Commission's investigation is continuing.