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Be Refco Case Study

Refco was a large futures brokerage firm that collapsed in 2005 due to a major accounting fraud scandal. The CEO, Mr. Bennett, had been hiding over $400 million in bad debts through manipulating accounting records and using company funds to purchase the debts. When this was discovered, it led to a loss of investor trust and bankruptcy for Refco as investors withdrew their funds. The scandal highlighted the importance of transparency, ethics, and investor protection through regulation.

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1K views13 pages

Be Refco Case Study

Refco was a large futures brokerage firm that collapsed in 2005 due to a major accounting fraud scandal. The CEO, Mr. Bennett, had been hiding over $400 million in bad debts through manipulating accounting records and using company funds to purchase the debts. When this was discovered, it led to a loss of investor trust and bankruptcy for Refco as investors withdrew their funds. The scandal highlighted the importance of transparency, ethics, and investor protection through regulation.

Uploaded by

'Rohan Nikam
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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CORPORATE GOVERNANCE ISSUES AT REFCO INC.

INTRODUCTION
Refco was a New York based financial services company, primarily known as a broker of commodities and futures contracts. It was founded in 1969 as Ray E.freidman and co. prior to its collapse in oct,2005. Refco was the largest independent futures brokerage firm in the world.

CASE SUMMARY
The case details the growth of Refco from a small commodities futures trading firm to a company offering brokerage services in futures, securities, and capital markets. The case describes the accounting fraud by Refco's CEO Mr. Bennett . In Oct 10,2005,refco enter into crisis when it announce that its chief executive officer and chairman Philip Bennett had hidden US$ 430 million in bad debts and Bennett has been concealing this information by manipulating accounting record.

When a board went public with information, a mass of withdrawal of funds from Refco that left a Refco in bankruptcy position because of this some subsidiaries of Refco were put for a sale. BAWAG an Australian based bank which help Bennett to cover up the fraud. Refco shareholder filed a lawsuit against company. Bennett had been sued for fraud US$700 million and BAWAG US$675 million.

ISSUES:
1. Analyze the corporate governance at Refco. Inc. 2. To understand the importance of investor trust. 3. Examine the importance of business ethics. 4. Examine importance to know more about protection laws and their limitations.

Analyze the corporate governance issues at Refco. Inc.


It was discovered that a receivable owed to Refco by an unnamed entity turned out to be controlled by CEO Mr. Bennett, in the amount of approximately US$ 430 million. By buying such entity, there was breach of corporate governance as on the one hand there was lack of disclosure, on the other hand, though that entity was related person to Refco, that fact was not brought to the knowledge of the other Directors and as a loss making concern, it was detrimental to the interest of Refco.

CONTINUED :
Mr. Bennett had been buying bad debts from Refco in order to prevent the company from needing them to be writtenoff. That much was to be paid to REFCO. Interestingly, that amount was borrowed by him from Refco itself. Buying out such bad debts by him or through a concern controlled by him itself was bad as there was no disclosure. At the same time, using the funds of the company for such purpose was not only unethical but also dishonest. Mr. Bennett also made at the end of every quarter for a Refco subsidiary to lend money to a fund, which then lend the money an independent offshore company secretly owned by Benet with no legal or official connection to Refco.

IMPORTANCE OF INVESTOR/ CUSTOMER TRUST


An investor is a person or entity that purchases assets with the objective of receiving a financial return. Bennett faced several problems, after the scandal broke Refcos creditors and investors badly affected because , when it comes to establishing business and building strong relationships with investors trust is main key. After the accounting fraud was made public and an insider who made false journal entries, the consequence of this situation is, the announcement, auditors, underwriters, lawyers and former Bennett subordinates came under strict scrutiny by federal prosecutors.

CONTINUED
CONSEQUENCE: Each business owner has/ his own business successful and whats important to business? But the real glue to every business is building the trust relationship with investors/ customers. without it business will fall apart. Refcos shareholders filed class action lawsuit against Refco lee partners, Grant Thornton. Building trust is about being real and human. But here, the Refco can create trustworthy. without the key of trust, investors reacted negatively. As financial leader, the CFO is usually the companys public face on all issues concerning financial performance.CFO is uniquely among investors. Likewise, investors look to CFO an honest and objective portrayal of the companys health and development.

The importance of business Ethics


In the case Mr. Bennett had been buying bad debts from Refco in order to prevent the company from needing them to be written off. That much was to be paid to REFCO. Interestingly, that amount was borrowed by him from Refco itself. Buying out such bad debts by him or through a concern controlled by him itself was bad as there was no disclosure. Using the funds of the company for such purpose was not only Unethical but also dishonest. On the one hand it amounted to misappropriation of profits and on the other it was wrongful presentation of profits and also the assets that is advancing funds to buy its defunct assets.

CONTINUED
Having a moral thoughts leads to more effective business but Mr. Bennett didnt follow up the principles of ethics due to his fraudness and occurred a huge loss in a company and hence the company is in the position of bankruptcy. short term gain and long term pain and vice versaPeople normally like to take a shortcut to success way not realizing that gain lead a long term pain. Same Mr. Bennett had done in a company to achieve a long a term goal. Companies known for high ethical standards usually have an ethical code stating that they treat everyone with dignity, dont present misleading information and strictly follow rules and regulation.

Importance to know more about investor protection laws and their limitations
The Refco scandal cost many investors plenty of money. In rapidly changing national and global business environment, it has become necessary that regulation of corporate entities is in tune with the emerging economic trends, encourage good corporate governance and enable protection of the interests of the investors and other stakeholders. Further, due to continuous increase in the complexities of business operation, the forms of corporate organizations are constantly changing, . As a result, there is a need for the law who protect investors. In INDIA there is Securities Contracts (Regulation) Act, 1956, Securities and Exchange Board of India Act, 1992 and Depositories Act, 1996 have been introduced by Securities and Exchange Board of India (SEBI), with a view to protect the interests of investors in the securities markets as well as to maintain the standards of corporate governance in the country.

CONTINUED
Limitations: The Refco scandal seemed to suggest that even the strictest regulation could not prevent determined fraudsters, who more often than not were the top executives of a firm, from perpetrating fraud. Effectiveness of corporate governance system cannot merely be legislated by law neither can any system of corporate governance be static. Failure to implement good governance procedures has a cost in terms of a significant risk premium when competing for scarce capital in today's public markets. As competition increases, the environment in which firms operate also changes and in such a dynamic environment the systems of corporate governance also need to evolve.

Conclusion
There is no transparency in decision making of Mr. bennett as he manipulated accounting records which leads to heavy loss of the company. Refco creditors and investors were also badly affected. They were once fairly reputable and even boasted 33% earnings per year and issued millions of shares of stock while their CEO was committing a huge fraud for which he is now serving time. The Refco bankruptcy has taught everyone involved in trading forex a severe lesson.

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