The stock of Refco
The heart of Refco's problems is a $430 million receivable the company found in an internal review. That receivable is owed by an entity controlled by Phillip R. Bennett, Refco's now-on-leave CEO and board chairman.
On the surface, the news seems positive. Bennett had assumed responsibility for obligations that may have been uncollectible by Refco. Today, Bennett repaid all the receivable in cash, including accrued interest. The company believes all customer funds on deposit are unaffected by these actions.
The receivable was reflected on Refco's prior-period financials, but not as a related-party transaction. For that reason, the company's audit committee and independent accountants have determined that financial statements from Feb. 28, 2002 forward "should no longer be relied upon." Yikes, that is bad news, especially for a company in the financial services business!
The company will likely delay its quarterly SEC filing, which was due on Oct. 17. It's not making any projections for when the revised SEC filing will be made or when its Audit Committee investigation might be completed.
The really bad news is that the company hired an independent counsel and forensic auditors, intended to assist the Audit Committee in its investigation of these matters. It seems to me that the company found a problem here -- and isn't confident it's the only one.
The company tried to put lipstick on this pig in two ways. First, it announced that the COO, who had previously tendered his resignation, will now be CEO. That's good news, in that a seasoned executive is in charge. But this is a major change for the company's top brass; musical chairs at that level can send shock waves through a business.
Second, the company also used the announcement to report excellent results for the quarter ended Aug. 31. More importantly, it made this statement: "Regulated subsidiaries reported net capital of $665.8 million and excess regulatory capital of $279.3 million. These figures do not reflect the $433 million received today from Mr. Bennett to settle his outstanding receivable."
As fellow Fool Dean Paton pointed out, when Refco went public in August, its shares were widely seen in a positive light by those who missed out on the rise in Chicago Mercantile Exchange
The basic business looks sound, and the company's capital structure seems reasonable. Though we can't quite gauge the magnitude of Refco's problems, I think the sell-off looks overdone. Do you feel like betting against the market?
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