-->(Voraus-Info: Am Freitag war der Markt f.d. Aktie wieder ausgesetzt, nachdem
am Donnerstag an Trading Halt über 3/4 der Marktöffnungs-Zeit verhängt war )

World's hedge funds face crisis as Refco suspends trading

· Leading global broker admits 'liquidity problem'

· Billions of pounds could be tied up in frozen deals

Jill Treanor
Friday October 14, 2005

Guardian

A crisis in the world's hedge fund industry was in prospect last night after one of the world's largest derivatives brokers was forced to freeze trades potentially worth billions of pounds.
The move by Refco, which acts for many leading speculative investors both on Wall Street and in the City, followed the discovery of accounts irregularities at the firm earlier this week and the issue of fraud charges against its former chief executive Phillip Bennett.

Mr Bennett has been charged with defrauding investors by using a hedge fund to hide $430m (£250m) of debts owed to the firm. A British banker who has lived in the US since 1978, Mr Bennett has been released on bail of $50m secured on a house in New Jersey, a Park Avenue penthouse apartment, $5m in cash and funds raised by six co-signers of the bail bond.

The implications of the 15-day trading moratorium on the company's Refco Capital Markets subsidiary may be felt across the world financial system, depending upon the size of the funds caught up inside Refco and the types of institutions which are unable to remove their money from the operation. By locking the clients in, Refco, which has debts of $642m, is preventing a possible mass exodus of funds which could further jeopardise its trading position. While the company gave no details of the size of the funds it had tied up in its capital markets arm, it described the operation as representing a"material portion" of its business.

Shares in the company, which floated on the New York stock market only two months ago to much fanfare, fell further on the concerns about the subsidiary. The company has lost three quarters of its stock market value in less than a week and expectations are mounting that investors may take legal action against the investment banks which brought the company to market - Goldman Sachs, Bank of America and Credit Suisse First Boston.

In an attempt to restore investor confidence, Refco announced yesterday that it had appointed Arthur Levitt, a respected former US regulator, to its board along with Eugene Ludwig, another well-known one-time regulator. Mr Ludwig is a former US comptroller of the currency and was used by Allied Irish Banks to investigate its subsidiary Allfirst when John Rusnak conducted illicit trading. Mr Levitt is a former chairman of the securities and exchange commission.

While Refco stressed that the regulatory capital of its futures brokerage arm and securities business, both regulated entities, was unaffected by the events of the past week it admitted its unregulated capital markets subsidiary was suffering from a lack of liquidity.

"The company has therefore imposed a 15-day moratorium on all activities of Refco Capital Markets to protect the value of the enterprise," the company said.

The capital markets arm is an offshore broker for stocks, bonds and currencies and is the subsidiary that 57-year-old Mr Bennett allegedly used to help hide the debts. He is accused of moving debts in and out of the subsidiary to hide the fact that it was counting debts as revenues which it was in reality unlikely to receive.

Santo Maggio, the head of the Refco Capital Markets arm, was put on leave at the same time as Mr Bennett, who owned 34% of the company at the time of its flotation.

While US Attorney Michael Garcia has said Mr Bennett"hid from investors and regulators the debt of hundreds and millions of dollars that one of Bennett's companies owed to Refco," his lawyer, Gary Naftalis, said:"There was no justification whatsoever for the arrest of Mr Bennett."

Backstory

On August 16, Refco proudly announced the completion of its flotation in New York. At an issue price of $22 a share (£12.50), the company was valued at $3.4bn. The cream of Wall Street's investment banks - and the odd European wannabe - handled the share sale: names such as Goldman Sachs, Deutsche Bank, JP Morgan, Merrill Lynch, Bank of America and Credit Suisse First Boston. Refco says it is the world's largest futures broker with 450 traders in offices around the world. As evidence of its market power, the firm announced this year that in the three months to the end of February, Refco's volume in the foreign exchange market alone was $111bn.

-->Thursday, October 13, 2005, 5:56:00 PM EST

Refco Sends Tremor Through Financial World
Author: Jim Sinclair

Refco’s position as the largest independent derivative dealer with
billions of dollars in customers’ money, declared a moratorium on
withdrawing assets or funds today. That’s analogous to a run on the bank
with your once friendly banker slamming the front door in your face.

This is a very serious situation, not so much because of the run but
rather because the missing money has been replaced. What makes this
aspect of the situation so serious - and why Refco must be rescued - is
because it is the principle of many over-the-counter, unregulated,
unfunded, unlisted and non-Clearing House guaranteed derivatives. If
Refco folds up its tent, then the financial world folds. You can take
that to a real bank.

Every time you rescue a financial entity, you pour more fuel on the fire
that will ultimately consume the dollar. We are so battered by economic
misconduct and flagrant abuses in the business world these days that
there are few if any rescue options for what is approaching in the
financial world.

Even with “stabilization” activities in world dollar markets today, the
US dollar did not make the desired technical breakout but in fact closed
on its low - portending perhaps what’s in store for tomorrow.

Larceny 102 (Of course Not Related to Today's Drama)

In Larceny 101 I have already discussed:

How you would start an OTC derivative market for widgets or electricity
futures.
How you create false profits in Widgets Inc.
Then using those false earnings, how you attract major Wall Street
brokers to issue equity and debt to bring in billions to your company.

Again utilizing the miracle of OTC derivatives, you back the majority of
that money to 2000 straw partnerships of rented names, then to Pakistan
and Middle East accounts controlled by the perpetrators.
When the auditor catches on, you incinerate all your OTC derivative
records.
The public company then declares bankruptcy.

Larceny 102

Larceny 102 is a lesson in how to extract funds from a controlled fund
into another account and then hide the act for years until somebody drops
a dime on the Fed because they do not like you. This method is known as
“Rolling Forward” by the means of"Switch Trading."

Because you can unethically write the OTC derivative at any price you
want (since there are no regulations) it is easy to construct a balanced
trade both long and short of the same item as an offsetting loss and gain
maturing in the present year and a future year constructed at the exact
same time. The more exotic the OTC derivatives are, the more difficult if
not impossible it is for an auditor to put it all together.

Step #1: The trade is initiated both on the buy and the sell by the same
source at the same moment.

Step #2: When you put in a transaction, the result is a loss into the
account of the captured hedge fund and a profit into your own
(camouflaged) account.

Step #3: Since you have established the profit in your account with the
offsetting loss in the captured hedge fund account, you could now extract
say $500 million from the fund and direct it to yourself. If the fund was
doing quite well, you might simply give yourself a bonus of the fund’s
profit. However, let’s assume the fund activity, profit or loss, is no
factor. You now have a $500 million profit in your account and a loss for
the fund of the same amount.

Step #4: You now set up another trade but for the fund itself. You
arrange this by writing the OTC derivative, offsetting long and short so
that you create a simultaneous $500 million profit in the fund account,
say for 2003, and the loss side matures in 2004. You do the same thing
again for 2005 and 2006. This is how you “Forward Roll” the loss in the
fund, breaking it even on a continuing basis maybe forever or until you
tick someone off who knows what you're doing.

Clearly, you don’t just do this in one transaction but perhaps for 10,000
transactions, with some winning and some losing, but the balance
accomplishing what you want to do. The end result of these shenanigans is
to take $500 million out of one pot and put it into your own pot, hiding
the loss forever.

The more exotic you construct the derivative, the less chance there is
that anyone can detect the evil deed.

Step #5: This cannot be accomplished by one person but requires others to
assist in the construction. Step five is when you make someone in the
transaction chain very angry. That person then trades immunity in
exchange for blowing the whistle on you.

Step #6: You hire the best attorneys on the planet to get you out of
trouble, having stolen enough to afford them.

Step #6: You now have a religious awakening, praying reverently that
other similar transactions remain unnoticed.

Tremor = Erdbeben / Erzittern