Those of us who have been following the Refco case are familiar with the allegations that have brought the big securities trader to its knees in bankruptcy — Refco’s former CEO, Phillip R. Bennett, hid ties to the bad debt to improve Refco’s balance sheet and mislead investors. The theory of the case against Mr. Bennett is that he assumed about $430 million in bad debts of Refco — some of which arose years ago — that let Refco avoid reducing net income and wiping out nearly all of the company’s profits for the past three years. The alleged purpose of hiding the losses was to facilitate Refco’s recent IPO and an earlier deal in which Thomas H. Lee Partners LP acquired a controlling interest in Refco. For his part, Mr. Bennett has denied wrongdoing, and his lawyer has said that his client will fight the charges.
Despite the superficial allure of criminal charges against crafty businessmen, I remain skeptical of criminal cases against anyone until I truly understand them, and the post-Enron era of the government playing to the public’s resentment of wealthy business executives has only reinfored my skepticism. So, I continue to look for a coherent explanation of the details behind the government’s above-described theory of the case against Mr. Bennett, and this NY Times article comes closest to date of actually breaking down the transactions on which the government’s indictment of Mr. Bennett is based. However, even the Times’ explanation is not clear:

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Colorful Houston oilman Oscar Wyatt — who was once described as a businessman who would not be afraid of dealing with the Devil himself — was arrested yesterday morning in Houston and charged in New York with bribing Iraqi officials in a scheme to corrupt the United Nations oil-for-food program. Earlier posts on Mr. Wyatt’s connection to the scandal are here and here and a copy of the indictment — which is so poorly written as to be nearly incomprehensible — is here. Mr. Wyatt has been released after posting bail of $2.5 million.
The indictment against Mr. Wyatt is an expansion of another federal case that was brought in April against David B. Chalmers Jr., president of Houston-based Bay Oil USA Inc. The indictment against Mr. Wyatt also names two Swiss business executives — Cathy Miguel and Mohameed Saidji, who are accused of conspiring with Wyatt. Under the indictment, the 81 year old Mr. Wyatt faces a potential jail term of at least 60 years and the threat that the Justice Department will attempt to freeze a substantial amount of his assets.

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As KPMG LLP attempts to survive as a going concern after cutting a deal with the federal government to avoid a criminal indictment in connection with its controversial tax shelter practice, the firm served up 10 additional criminal defendants for the Justice Department to indict, including the firm’s former chief financial officer and its former Associate General Counsel. Here are the previous posts on the KPMG tax shelter saga.
Federal prosecutors had a federal grand jury in New York yesterday charge the 10 defendants and the nine previous ones in a superceding indictment (copy here, courtesy of the TaxProf blog) with at least 39 counts of tax evasion and a single count of conspiracy to defraud the Internal Revenue Service. Three of the defendants are also charged with obstructing government investigations, and 17 of the 19 defendants are former KPMG tax professionals.

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As predicted here last week, Refco Inc. filed a chapter 11 case yesterday and announced late in the evening that an investment consortium led by private-equity fund J.C. Flowers & Co. LLC and Texas Pacific Group would seek Bankruptcy Court approval of a bid to buy Refco’s key regulated futures-trading unit
The regulated futures business that the consortium wants is a key component of Refco. Before the run on bank with regard to Refco’s business over the past week, the firm was one of the most active trading firms in the commodities and financial futures markets. Over the past week, Refco customers — typically hedge funds, individuals and institutions — had removed at least 20% of the assets from Refco’s futures brokerage business, which previously had about $4.1 billion in customer assets under management. That’s a big run on the bank in anyone’s book.

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As accounting firm Grant Thornton, LLP reviews its liability insurance limits in connection with its audits of Refco, a couple of interesting facts are emerging.
Turns out that Refco hired Grant Thornton in 2002 to replace Arthur Andersen as the company’s auditor as Andersen was collapsing under the pressure of its criminal indictment in connection with the Enron case. Moreover, the lead partner on Grant Thornton’s audits of Refco is Mark Ramler, who also had been the lead partner on Andersen’s audits of Refco.
Despite that juicy grist for the plaintiffs’ lawyers mill, Grant Thornton apparently discovered the questionable arrangement that has led to the current run on the bank with regard to Refco.

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Daniel L. Gordon, Merrill Lynch’s former chief energy trader, was sentenced Friday to 3 1/2 years in prison after admitting that he had stolen $43 million from the brokerage firm. Although the prosecution was only requesting a couple of years in the pokey, the judge decided that the longer sentence was called for in light of the nature and size of the theft.
I’m all right with that. But how on earth does one reconcile that sentence with the comparable sentences handed down to these two (here and here) former Merrill Lynch executives, neither of whom profited a lick from the transaction that is the basis of their alleged crime?
And when you get done trying to figure that one out, try reconciling Mr. Gordon’s three year sentence with the 24 year sentence that is being endured by Jamie Olis, who also did not receive a dime from the transaction that is the basis of his alleged crime.
Let’s see. Embezzle $43 million and, if you get caught, cop a plea and serve 3 1/2 years. Or, do your job, don’t embezzle a cent, defend your innocence against criminal charges even when your employer serves you up as a sacrificial lamb so that the employer can avoid criminal charges, and then endure either as long, or much longer, a sentence if you are convicted.
H’mm. Doesn’t seem like much of a choice to me. Something is seriously out of whack here.

As noted in this earlier post, an old fashioned run on the bank resulting from a lack of trust in the marketplace — as opposed to losses attributable to a relatively small number of shady business deals — is what really caused the demise of Enron. The revelations over the past week relating to Refco, Inc. — the largest independent futures-brokerage firm in the U.S. — has generated a similar lack of trust in the marketplace that has thrown Refco into its own Enronesque experience.
Although no where near the size of Enron, Refco is still a pretty darn big outfit. It has over $4 billion in approximately 200,000 customer accounts, and Refco’s futures-brokerage business is as big as the derivatives desks of most major Wall Street firms. The company is well-known for trading commodities, currencies, bonds and derivatives transactions with a wide-range of trading partners and counterparties, including hedge funds and customers attempting to hedge risk. Nevertheless, Refco — as with many such trading firms — is highly-leveraged, as its most recent public filings reflect about $75 billion in assets and a roughly equal amount in liabilities.

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It’s not as sexy as some of the Enron-related criminal trials, but the trial of two former Duke Energy natural gas traders began in Houston federal court yesterday.
Former Duke traders Timothy Kramer and Todd Reid face racketeering, conspiracy, wire and mail fraud, money laundering and falsifying corporate books charges in connection with an alleged scheme to book phony electricity and natural-gas trades to boost trading volumes and inflate profits in a trading book that was the basis of their annual bonuses (you can download a copy of the indictment here). A third former Duke Energy trader defendant — Brian Lavielle — previously copped a plea and will presumably testify against Messrs. Kramer and Reid during the trial.

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Well, Eliot Spitzer has had better days at the office than yesterday.
First, Mr. Spitzer finally chose not to retry (persecute ?) former Bank of America Corp. broker Theodore Sihpol III, who was acquitted on 29 of 34 criminal charges relating to alleged improper trading of mutual funds in June and settled related civil charges with the Securities and Exchange Commission yesterday. The Lord of Regulation had announced a short time ago that that he planned to retry Mr. Sihpol on the charges. Here are the earlier posts on the Sihpol case.

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This Criminal Crime Reporter article reports on the talk that one of Richard Scrushy’s attorneys — Jim Jenkins of Atlanta, Ga. — gave at the at the recent National Association of Criminal Defense Lawyers – Georgetown University White Collar Crime conference. The article provides a fascinating glimpse of the behind-the-scenes story of how the Scrushy defense team developed and implemented its defense of Mr. Scrushy against the government’s charges. Previous posts on the Scrushy case may be reviewed here, here, here and here.
Hat tip to Ellen Podgor for the link to the piece on Mr. Jenkins’ talk, which she notes was “the most popular event” at the conference. I can see why, as the article relates numerous solid observations regarding defending a complex business case, the most important of which is to communicate with integrity a simple and straightforward theory of the case to the jury, and to remind the jury of that theory throughout the trial. Cases such as the Scrushy case are nearly impossible to win in the court of public opinion, but — even with the overwhelming odds in favor of the prosecution in such cases — they can be won in the courtroom.