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.

Goldman Sachs is apparently all over the place with regard to current matters having to do with Refco. The brokerage firm had helped lead Refco’s recent initial public offering that failed to disclose Refco’s CEO’s assumption of $430 million in debts to the firm, and last week had offered its services to the firm as a “pro bono” crisis adviser. J.C. Flowers — one of the companies heading the consortium to buy Refco’s regulated futures business — is run by a former Goldman Sachs partner.
Federal prosecutors have accused Refco’s former CEO, Phillip R. Bennett, of securities fraud for allegedly hiding his ties to the bad debt to improve Refco’s balance sheet and mislead investors in advance of Refco’s IPO this past August. The prosecutors theory of the case is that Mr. Bennett’s assumption of the bad debts let Refco avoid reducing net income and wiping out nearly all of Refco’s profits for the past three years, which would have killed Refco’s IPO and an earlier deal in which Thomas H. Lee Partners LP acquired a controlling interest in Refco. Mr. Bennett has denied wrongdoing, and his lawyer has said that he will fight the charges.
Meanwhile, Liberty Corner Capital Strategies, the New Jersey hedge fund that was involved in the questionable transactions with Refco and Mr. Bennett, disclosed yesterday that Mayer, Brown, Rowe & Maw drafted some of the loan documents relating to the transaction. Liberty Corner’s counsel asserted that Mayer Brown’s involvement in the deal is one reason why Liberty Corner’s management did not question the legitimacy of the arrangement.
Defense counsel for Mayer Brown, meet defense counsel for Grant Thornton.