A Scorecard on Refco: What It Does and Why It's in Trouble
NEW YORK (AP) -- The scandal at Refco Inc. has dominated the news this week, but it's still confusing to many market-watchers. In part, that's because Refco operates in a portion of the market many investors never see, and also, because it's hard to tell the different "Refco" entities apart without a scorecard.
So here's the scorecard -- an explanation of the various parts of Refco, what each does and where each stands in the wake of the mess at the company, in which Refco Chief Executive Philip R. Bennett has been charged with concealing the fact that an entity he controlled owed Refco hundreds of millions of dollars. The company says its financial statements back to 2002 should no longer be relied upon.
As it says in its Securities and Exchange Commission filings, Refco Inc. -- the parent company, the entity whose shares are publicly traded -- has two main businesses: derivatives brokerage and clearing, and prime brokerage/capital markets.
The derivatives segment provides trading services for customers for derivatives contracts tied to interest rates, foreign currencies, commodities futures and many other items -- they're widely traded in by both speculators and those seeking to hedge risk.
Refco is one of the biggest players in this market; in fiscal 2005, which ended in February, the derivatives segment generated $971.4 million in revenue, out of the company's total of $1.3 billion. It also generated $134.5 million in operating income.
The prime brokerage/capital markets segment provides trade execution and processing, clearing, securities lending and other services in the fixed-income and foreign-exchange markets. In fiscal 2005, it produced $404.1 million in revenue and $137.5 million in operating income.
Refco's three major operating units are Refco LLC, Refco Securities LLC and Refco Capital Markets Ltd. Refco LLC is a registered futures commission merchant, regulated by the Commodity Futures Trading Commission, and thus far appears to be the least hurt by this week's troubles. Refco said Thursday that Refco LLC's capital has been "substantially unaffected" by the week's events and that business there "is being conducted in the ordinary course."
The other two have more serious problems, as the week's revelations have shaken the market's confidence in Refco and apparently caused some trading partners to stop doing business with the company.
Refco said Refco Securities, a broker-dealer regulated by the Securities and Exchange Commission, is unwinding its proprietary and client positions, in seeming contradiction to the company's assurances Thursday that the business was all right. Refco Capital Markets, an unregulated business based in Bermuda which provides prime-brokerage services to hedge funds, has been shut down for 15 days over concerns that it doesn't have adequate liquidity.
One additional entity with "Refco" in its name isn't a Refco Inc. subsidiary, but may be the source of all the company's problems. Refco Group Holdings Inc., which is controlled by Bennett, is the entity that the company says assumed $430 million in uncollectible debts that other parties had owed Refco.
Federal prosecutors say Bennett committed fraud by hiding from investors the fact that he owed Refco the money. While the debts were carried on Refco's books as a receivable, they weren't disclosed as a related-party transaction, as required, and prosecutors say Bennett engineered a series of quarter-end transactions designed to make it seem like the money was owed to Refco by someone else.
