I don't know what happened to Jim Rogers... The Refco Bankruptcy and its Impact on Retail Forex Trading
"New York-based Refco Inc. was a large and well-known forex and commodities brokerage house that was one of the main futures brokers on the Chicago Mercantile Exchange. In 2005, the broker was forced into filing Chapter 11 bankruptcy from creditors in the wake of an announcement about fraudulent practices involving their CEO Philip Bennett hiding the company’s bad debts. This fraud was facilitated by loans from Bawag P.S.K, the fourth largest bank in Austria.
Interestingly, this blow came just after an Initial Public Offering of stock for Refco was made, raising suspicions that the forex broker’s management had been guilty of dressing its books to make the IPO more successful. The IPO shares were offered to the public at an initial price of $22 per share through a number of investment bankers that included Credit Suisse First Boston, Goldman Sachs, and Bank of America that were all supposed to have reviewed the broker’s finances as part of their due diligence.
Refco’s shares were traded publicly for just two months, and even hit a high of $30.12 on September 7th of 2005, before the fraud was disclosed barely a month later on October 10th. The announcement understandably panicked investors, sending the 26.5 million shares of the newly-public company crashing to just $0.80 a share.
Although the forex broker had previously boasted of annual earnings of 33% per year before being taken public, it was basically forced into declaring bankruptcy just two months later.
How the Bankruptcy Affected Refco’s Accounts
Phillip Bennett was the CEO of Refco. In October of 2005, Bennett was accused of padding the company’s finances by hiding $430 million in bad debts of a wholly-owned and unregulated subsidiary which he controlled by the name of Refco Capital Markets.
Refco’s forex brokerage arm, Refco FX, LLC, was holding over 17,000 retail customer brokerage accounts at the time that Refco declared bankruptcy shortly thereafter. In the bankruptcy proceedings, Bank of America and other large creditors managed to convince the bankruptcy court that Refco’s customers were actually unsecured creditors because of Refco’s failure to segregate its customer accounts from their own general funds, despite telling customers that it had done so.
This legal maneuver resulted in the unsecured customer accounts being considered as creditors only after the secured customers in the distribution of whatever funds were left to be distributed. Although FXCM made a reasonable offer in late 2005 to purchase the RefcoFX accounts, it was rejected and most of the broker’s 17,000 customers eventually received little or no compensation for the balances in their brokerage accounts at the time they were frozen by the bankruptcy."