Refco collapse casts shadow on `point man'
Broker `with pedigree' faces fraud charges
By Greg Burns
Tribune senior correspondent
Published February 18, 2007
Refco was among the wildest players in the rough-and-tumble commodity game when it hired a frontman whose prep-school pedigree, tailored suits and cool detachment set him apart from the blustery traders he oversaw.
Tone Grant, an Ivy League football star and former Marine Corps officer, lent a clean-cut image to the renegade Chicago brokerage that made Hillary Clinton rich in the cattle market of the late 1970s.
Now Refco's longtime point man is under indictment, accused of hiding its vast losses while he and other insiders hatched a scheme to unload the company on unwitting investors. Its collapse in an accounting scandal within weeks of its initial public offering erased more than $1 billion in market value, prompting the nation's fourth-largest bankruptcy.
The 63-year-old Grant pleaded not guilty last month to conspiracy, fraud and money laundering. Attorney Norm Eisen of Zuckerman Spaeder said his client is "completely innocent and will vigorously fight these charges when he gets his day in court." The trial is slated for Oct. 9. Grant declined to comment.
A 54-page indictment accuses Grant of lying to the public and auditors about Refco's catastrophic trading losses, then keeping silent for almost a decade about the financial shell game that followed. Supporters say Grant had nothing to tell because he washed his hands of the firm long before the events at issue.
Many who know Grant say silence comes easily to him.
In Chicago's tight-knit futures community, full of boisterous personalities, Grant is remembered for his reserve. Peers who met him regularly at downtown business lunches or served with him on industry boards recall his immaculate attire and aloof demeanor, but little about his personal life.
Some knew he was an athlete, a quarterback at Yale University who developed a close friendship with classmate and pro football star Calvin Hill.
Some knew he served in the Marines, seeing combat in Vietnam after graduating from Vanderbilt University Law School.
He was known as a tough guy during his years at Refco. Grant trumpeted the aggressive layoffs that he engineered after acquiring smaller rivals. When an industry trade publication compared the firm to the "Rambo" movie character in a cover story, Refco ordered extra copies.
Even in his 50s, Grant pursued the rugged sport of endurance race car driving, putting himself through grueling hours behind the wheel of speeding Porsches and BMWs.
Grant's friends express disbelief at the charges against him, recalling a "straight shooter" who was "serious," "smart" and unlikely in their view to ever go wrong.
His indictment stunned at least some fellow Yale alums. "Everybody I've talked to who knows Tone is shocked, because that's not Tone," said Hill, the ex-Dallas Cowboys running back who described Grant as one of his best friends.
"He was a quiet fellow, but intensely competitive," said Stephen Kehas, Grant's classmate at the private Phillips Academy in Andover, Mass., as well as at Yale. "I would never put Tone in the category of being even susceptible to the temptations of a company like Refco."
Refco's reputation
Yet Refco had such a bad reputation, no one could be entirely surprised that the executive who served as its public face for 15 years got caught in the fallout from its abrupt failure.
"It was dirty, and it was well-known Refco was dirty," said John "Sean" Coffey, a New York class-action lawyer who has filed a related shareholder lawsuit. "They had a long, long list of violations."
Refco was the subject of 142 regulatory actions, the most of any futures trading outfit, according to a Bloomberg News analysis. The Commodity Futures Trading Commission came after it repeatedly, in some of its most prominent administrative cases of the 1980s and 1990s.
Fellow trading executives say Refco flouted industry standards like no other firm, tossing aside the rulebooks, taking on the diciest accounts and fighting back against regulators that tried to intervene.
Refco traces its origins to a one-time poultry wholesaler who served time in prison for selling substandard chickens to the military. Ray Friedman eventually won a pardon and with his stepson, Thomas Dittmer, opened the forerunner of Refco around 1969.
Friedman and Dittmer were brash risk takers who thrived in the meat and grain pits of Chicago's commodity exchanges, trading on their own while also handling customer accounts.
In 1978 and '79, they oversaw broker Robert "Red" Bone, who helped Clinton, then the first lady of Arkansas and now a U.S. senator from New York running for the 2008 Democratic presidential nomination, turn a $1,000 investment into a $98,000 nest egg. Merc officials who later accused Bone of violating order-entry procedures expressed concern that he could have been allocating profits to favored customers and losses to others. Clinton was not accused of breaking rules.
Refco's poultry and cattle adventures predated Grant's tenure. The firm's future figurehead grew up in a more sheltered environment outside Washington, D.C., attending Landon School and the Andover boarding school. Grant was the first in his family who went to college.
His parents instilled the "right combination" of humility and ambition, Hill said. "He was not to the manor born. In many respects, he's like a lot of kids who went to Yale on the strengths of their own achievements. He was very competitive, but not a guy who beat his chest. He's a guy you're going to pick for your team."
After Yale, Grant went to law school, then the Marines, earning two Vietnam service medals and a combat action ribbon, among other honors.
He was discharged in 1972 as a captain and moved from California's Camp Pendleton to a Silicon Valley law firm active in venture capital, according to regulatory records. Three years later, Grant went to a fast-growing Nashville bank. In a press release 20 years afterward, he described advising global finance ministers, restructuring the debt of Zaire and negotiating with Iranian bankers during the hostage crisis.
In November 1981, at age 37, he joined Refco. Trouble followed.
In 1983, the Commodity Futures Trading Commission imposed a six-figure fine against Dittmer and the firm for alleged trading infractions. By that time, Dittmer had recruited another banker with a blue-chip background, Phillip Bennett, who together with Grant would oversee most of Refco's day-to-day operations for the next 15 years.
"They were part of the next generation, hungry and ambitious," said attorney John Troelstrup, Chicago Mercantile Exchange compliance chief during Grant's early years at Refco.
The trading game paid off for Grant, and although friends say the money didn't much matter to him, Troelstrup remembers a change.
"When Tone started to do well financially, he let it show," Troelstrup said. "He always drove a flashy car, his clothes were always the latest style. He talked about the things he was purchasing."
As Refco's president, Grant focused on expanding through acquisitions, including a deal for Continental Grain's trading arm in 1984. Wholesale layoffs were part of the strategy, and the hot-blooded traders surrounding Grant came to view him as a no-nonsense technocrat.
In a 1985 New York Times account of the "hardheaded way" Refco dealt with workers, Grant made no apologies. "We believe in cutting overhead," he said. In another story, he noted, "One very able person can do the work of several others"--a judgment delivered, as the newspaper put it, "rather coldly."
Chicago trading executive Mike Manning recalls running for election to a Board of Trade directorship years ago and asking who he should see to obtain Refco's support. "My guys said definitely talk to Tone Grant. He runs that place," Manning recalled. "He was clearly the guy in charge."
Author Martin Mayer met with Refco executives at length in the 1980s for a book on trading, and Grant made a strong impression. "He was a very handsome, rather elegant young man, an East Coast figure," said Mayer. "He felt himself superior to a lot of the types in the pits."
Yet while the Cambridge-educated Bennett struck Mayer as "a real English snob," Grant came across as a wannabe, he said. "The surface I saw in Grant was put on. Tone had the feel of a pirate about him."
Infractions no barrier
Although Refco's disciplinary infractions kept piling up throughout Grant's tenure, the abysmal record posed no barrier to leadership roles in the futures industry. By the 1990s, Grant had become an elder statesman of sorts.
He served on the board of the National Futures Association, the industry's self-regulatory organization. At its meetings, Grant mostly kept his mouth shut, said NFA President Dan Roth: "I don't think he ever said a word. He had a pretty good poker face. He listened."
On the Futures Industry Association board, fellow director Jack Wing remembers Grant urging the trade group to resist government involvement in the business: "He was a careful, cautious, lawyerlike person. He clearly had thought things through."
Besides his election to industry boards, Grant received honors stemming from his past as a standout athlete. In 1991, he won a National Collegiate Athletic Association award for making "significant contributions to society."
Andover and Yale appointed him to alumni committees. Carm Cozza, his coach at Yale and a longtime friend, remembers Grant providing video equipment, finding summer jobs for athletes and helping needy youth pursue sports while routinely refusing public recognition. In 1996, Grant and Hill were among a handful of former "star" players who spoke at Cozza's retirement dinner before an audience of 700. "Whenever anyone was in need, he was right there," Cozza said.
In the next year, Grant's seemingly charmed life was shaken as Refco took a series of hard blows in the marketplace.
During the Asian debt crisis of May 1997, the firm was stuck with customer losses totaling $185 million as of year-end, according to the indictment. Then, in October, a single customer lost more than $90 million.
Acknowledging such a huge reverse could have led customers and counter-parties to abandon Refco, so Grant and others lied, the indictment alleges, telling the public and their auditors the firm had taken no such hit.
Although the indictment refers to him only as "Customer 1," and he has disputed his involvement, the facts fit the case of Victor Niederhoffer. The famed hedge fund manager went belly up in a matter of hours when the Dow Jones industrial average plunged 554 points. Two days after, Grant flatly denied that Niederhoffer had left Refco on the hook, telling the Tribune, "It's not true. We have no problem. We certainly have no losses."
In fact, the indictment alleges, a massive scam was afoot. Those losses and others were systematically transferred to a separate holding company controlled by Bennett and Grant, as were operating expenses of the firm. Customer funds were used to cover the shortfall.
By hiding the losses and expenses, the illicit transfers made the troubled firm appear sound, the indictment says.
Exits amid growing trouble
Over the years, more manipulation ensued, making Refco look like a big success on paper even as its fraud expanded to include a large Austrian bank with balance-sheet secrets of its own, the indictment alleges.
The accounting sleight of hand coincided with yet another major regulatory case, in which Refco agreed to pay $7 million to settle charges it had helped a Beverly Hills broker cheat his clients.
Around this time, Grant and Dittmer both exited. The indictment is silent on the details of Dittmer's separation but states that Bennett bought out Grant's stake for $4 million and agreed to share half his profits from an eventual sale.
Cashing out under favorable circumstances was the ultimate goal of Refco executives, long before they pulled it off, said Coffey, the class-action lawyer.
In 2004, the private-equity firm Thomas H. Lee Partners bought a 57 percent stake for $507 million in a leveraged buyout valued at $1.9 billion. Grant's share was $16 million.
A year later, on Aug. 10, Refco followed up with its public offering, raising an additional $583 million. On Oct. 10, Refco disclosed accounting problems uncovered in an internal audit, and the stock crashed.
Bennett was arrested right away. He and Refco Chief Financial Officer Robert Trosten have pleaded not guilty to conspiracy, fraud and money laundering charges. Yet even as a federal judge ordered Bennett confined to the New York area with a monitoring device around his ankle, no charges were brought against Grant.
Days after Refco collapsed, the New York Times reported, Grant transferred the ownership of a Manhattan apartment to a neighbor. A day later, he similarly transferred his Chicago condo at 680 N. Lake Shore Drive to his wife, Kathi. Supporters say the timing of those transfers was coincidental.
Over the next year, Grant refused to produce documents sought by Refco creditors in civil litigation.
Foreshadowing a potential criminal defense, Grant claimed he held nothing relevant, since his duties at Refco ended when his employment was "terminated" in 1998 and he had filled no "managerial or consulting role" since then. Yet his ownership interest extended through 2004.
After leaving his post as president, Grant briefly headed a Refco-affiliated asset management venture called Forstmann-Leff International. In a press release announcing the move, Grant mused, "Throughout my life, I've enjoyed a diversity of roles, be it as an athlete, an attorney or a financial advisor."
On Jan. 16, Grant became a criminal defendant, when federal prosecutors added him to the case against Bennett and Trosten.
In recent years, Hill and others said, Grant has been enjoying his 10 grandchildren, quietly performing acts of charity and maintaining a network of Yale-affiliated contacts. As the indictment loomed, Grant called around to reassure his friends.
Cozza said Grant wouldn't go into details, but told him, "I want you to know I'm innocent. I've done nothing wrong."
Hill said he got the impression that Grant has no regrets about his conduct: "I think he feels he can look in the mirror and say, `I'm fine. I've done the right things."'
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Tone Grant
Tone is pronounced "Tony.")
Born: Jan. 26, 1944
Education: Bachelor's degree in political science, Yale University, 1966; law degree, Vanderbilt University, 1969.
Military: 1969-72, U.S. Marine Corps, Vietnam and Camp Pendleton, Calif.
Career: 1972-75, San Francisco law firm Cooley Godward; 1975-1981, Tennessee Valley Bancorp; 1981-98, Refco Inc.
Personal: Lives in Chicago. Separated from wife Kathi. Ten grandchildren.
Indicted: Charged Jan. 16 with five criminal counts, including conspiracy, securities fraud, wire fraud, bank fraud and money laundering. Pleaded not guilty.
Sources: Chicago Tribune, U.S. Marine Corps, National Futures Association
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gburns@tribune.com
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