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.

As noted earlier, Refco disclosed last week that its chairman and CEO, Phillip R. Bennett, assumed responsibility over time for paying Refco $430 million of uncollectible debts that Refco customers owed the company, including some debts that were incurred in the late 1990s. The ostensible purpose of the debt assumption was to allow Refco to show greater profitability by avoiding write-offs.
Mr. Bennett’s obligation to Refco was allegedly hidden from Grant Thornton through a series of transactions between a Refco subsidiary and a hedge fund — Liberty Corner Capital Strategy LLC — that essentially allowed the Refco to rent Liberty Corner’s balance sheet for use in Refco’s regulatory filings. Grant Thornton apparently raised questions with Refco in late September about the arrangement during a routine quarterly review, and Refco executives then notified Grant Thornton that the company had hired its own outside advisers to investigate. That investigation resulted in Refco board meeting earlier this month at which Refco directors confronted Mr. Bennett with the Liberty Corner arrangement. Although Mr. Bennett repaid the debt after being confronted, the Refco board placed him on leave. Mr. Bennett was arrested and charged with securities fraud shortly thereafter.
By the way, it’s interesting to note that the Sarbanes-Oxley legislation, which was supposed to protect investors from this sort of thing, did not deter Mr. Bennett from concocting this arrangement. Assuming that the arrangement is in fact illegal and was hidden, it is an unfortunate fact of life that people lie sometimes — and do so pretty well — and no amount of oversight or legislation will change that cold, hard truth about humanity.