Refco Auditor: Led in Uncovering Fraud

Nov. 16, 2005 (Associated Press) Refco Inc.’s auditor, Grant Thornton LLP, told a bankruptcy judge it played a crucial role in uncovering the securities fraud that precipitated the collapse of the nation’s largest independent commodities brokerage.

The disclosure came in a response Grant Thornton filed late Monday to allegations by Refco’s unsecured creditors committee that the accounting firm failed to discover the fraud despite the presence of obvious red flags. The creditors have since demanded what Grant Thornton called carloads of Refco-related records.

Refco sought Chapter 11 bankruptcy-court protection on Oct. 17 amid a run on its customer accounts precipitated by Refco’s disclosure that its chief executive at the time had hidden $430 million in bad debt. The executive, Phillip Bennett, was fired and charged with securities fraud. Refco has since begun to sell its assets to pay off its creditors.

Grant Thornton, which had been Refco’s auditor since 2003, said it triggered the inquiries that uncovered the fraud. It said it raised questions with Refco’s top executives in September about a transaction the company had made involving Liberty Corner Capital Strategies, a New Jersey hedge fund. U.S. prosecutors allege that Bennett used that fund to hide the bad debt.

The questions mostly went unanswered, Grant Thornton said in papers filed with the U.S. Bankruptcy Court in Manhattan. Shortly after Grant Thornton raised these questions — which were never adequately addressed by management — the debtors issued press releases disclosing management fraud, the resignation of its CEO and president, and the repayment of the hidden receivable, it said.

Grant Thornton said it then insisted that Refco also issue a public statement that no further reliance could be placed on the prior financial statements audited by Grant. That, it said, effectively withdrew the opinions the auditor had issued on all earlier Refco financial statements.

Since the fraud was disclosed, more than 18 federal lawsuits have been filed against former Refco executives and the investment firms that were responsible for Refco’s initial public offering in August, according to court papers. In addition, U.S. prosecutors, the Securities and Exchange Commission, and the Commodities Futures Exchange Commission are conducting investigations.

Grant Thornton, which is a defendant in five Refco-related lawsuits, said it is cooperating with investigators. But it said the Refco creditors committee’s request for documents — covering everything from pocket diaries to instruction manuals, salary records and certified public accountant exam scores — was breathtaking in its scope.

Bankruptcy law, Grant Thornton said, doesn’t permit such a blunderbuss fishing expedition. It asked U.S. Bankruptcy Judge Robert Drain to block the creditors’ requests for documents, saying their effort was intended mainly to bolster litigation claims against Grant Thornton.

The creditors committee also has sought records from other institutions that played a role either in Refco’s IPO or its affairs before its bankruptcy filing. That includes the buyout firm Thomas H. Lee Partners and the Austrian bank Bawag PSK.

The Lee firm on Monday asked Drain to modify some terms of the creditors’ request for documents, but otherwise didn’t object. Bawag also asked for modifications, saying it should have at least 120 days to respond to the creditors’ request for documents.