Oh well - the scammers are crumbling. <ggggg>
Refco Sold for a Song
By Matthew Goldstein
Senior Writer
11/10/2005 1:21 PM EST
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Updated from 11:51 a.m. EST
Man Financial, one of the world's largest hedge funds, won the Refco (RCXCQ:OTC - commentary - research - Cramer's Take) sweepstakes Thursday, paying $282 million in cash for what's left of the scandal-tarred commodities and derivatives brokerage.
The London-based hedge fund emerged as the winning bidder for Refco's regulated futures brokerage and trading business, following an all-day auction held at the offices of Refco's bankruptcy attorneys, Skadden, Arps, Slate, Meagher & Flom.
The $282 million purchase price is a steal compared to the $1 billion figure that many on Wall Street had been predicting that Refco's futures trading, brokerage and clearing business could fetch. Man is also picking up $37 million in outstanding liabilities of Refco.
A person close to Refco, which filed for bankruptcy protection last month, says the $1 billion figure was always misleading. Included in that figure was the cost of buying the broker's "regulatory capital,'' which is one person estimated at about $750 million. Some of that capital can also go toward paying off Refco's creditors.
At the last minute, the deal was restructured to exclude the cost of acquiring Refco's regulatory capital, in part because Man is so well-capitalized already. If the deal hadn't been restructured it effectively would have been valued at $1 billion.
Refco's creditors have $16 billion in outstanding claims against the company. Many of the creditors are customers in accounts that have been frozen by the bankruptcy proceeding. Some of those accounts were held at Refco Capital Markets, an unregulated offshore division of Refco that serviced many hedge fund clients.
It's worth noting that in a bankruptcy proceeding, Refco's lawyers and financial advisers get paid before the creditors. As for the long list of creditors, the first in line to get paid are the owners of Refco's outstanding bank loans and corporate bonds, estimated at a little over $1 billion. Last in line are Refco's beleaguered shareholders.
A hearing on the Man purchase before the bankruptcy judge overseeing the proceeding has been scheduled for later Thursday. A number of creditors have filed objections to the sale. It's likely the number of angry creditors will grow once word spreads that the sale is bringing in much less money than originally thought.
For Man, the acquisition of Refco's future business is a big win. The hedge fund group already has a sizable futures brokerage and clearing business and this will increase its dominance in the industry.
"The transaction will be value-enhancing to our shareholders and gives us the opportunity to integrate Refco's high quality staff into our existing brokerage business.
In the weeks since Refco's collapsed amid an accounting scandal involving its former CEO, scores of customers have fled the firm, taking their money with them. By some estimates the value of customer assets with the futures business has been halved since the scandal broke and stands at little over $3 billion.
If more customers withdraw their money before the deal is approved, the final purchase price could be reduced.
Man beat out bids from at least three other firms: Interactive Brokers, hedge fund J.C. Flowers, and group of investors led by the Dubai government. Going into the auction, Connecticut-based Interactive Brokers had submitted one of the top bids for Refco's futures business, offering to pay $858 million.
The official confirmation of the sale of Refco's future business comes on the same day the federal prosecutors must decide whether to indict former Refco CEO Phillip Bennett on securities fraud charges. A month ago, prosecutors arrested Bennett after Refco alleged he had been hiding at least $430 million in outstanding debts owed to the company since 1998.
The disclosure of Bennett's alleged wrongdoing led to the collapse of Refco and the bankruptcy filing, just two months after the firm went public in an IPO led by Credit Suisse First Boston (CSR:NYSE - commentary - research - Cramer's Take), Bank of America (BAC:NYSE - commentary - research - Cramer's Take) and Goldman Sachs (GS:NYSE - commentary - research - Cramer's Take). The apparent fraud at Refco has led to a wide-ranging investigation involving the Justice Department, the Securities and Exchange Commission and the Commodity Futures Trading Commission.
Earlier this week, CSFB and Bank of America confirmed they had received subpoenas from the SEC and inquiries from other regulators. Goldman Sachs declined to comment on whether or not it too had received a regulatory subpoena.
The investigation also is focusing on the role played by other Refco advisers, including its auditor, Grant Thornton, and one of its longtime law firms, Mayer Brown Rowe and Maw.
Lawyers for Mayer Brown approved some of the loan documents that prosecutors allege were used by Bennett to further the fraud. The Chicago-based law firm says it did nothing wrong, but it has retained a Washington, D.C. regulatory attorney to represent it. Also, TheStreet.com has learned that at least two Mayer Brown attorneys have retained white-collar criminal defense lawyers in New York.
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