( DJ ) 10/14 02:47PM =DJ Refco, What It Does And Why It's In Trouble: An Explainer
By Michael Rapoport
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The scandal at Refco Inc. (RFX) has dominated the news
this week, but it's still confusing to many market-watchers. In part, that's
because Refco operates in a part of the market many investors never see, in
part 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.
-By Michael Rapoport, Dow Jones Newswires; 201-938-5976;
michael.rapoport@dowjones.com
(END) Dow Jones Newswires
10-14-05 1447ET
Copyright (c) 2005 Dow Jones & Company, Inc.
