NEW YORK, Aug. 21, 2007 (PRIME NEWSWIRE) -- The Refco Litigation Trusts announced today that they have filed a lawsuit in Chicago charging that Refco Inc.'s legal, accounting and financial advisers knowingly assisted corrupt Refco insiders in looting Refco's assets. The lawsuit, filed in the Circuit Court of Cook County, Illinois, names Mayer, Brown, Rowe & Maw LLP ("Mayer Brown"), Grant Thornton LLP ("Grant Thornton"), Ernst & Young LLP ("Ernst & Young"), PricewaterhouseCoopers ("PWC"), Credit Suisse Securities (USA), Banc of America, Deutsche Bank Securities, certain loan participants, and the corrupt Refco insiders as defendants. The lawsuit seeks over $2 billion in damages and penalties for the defendants' role in committing and aiding in the corrupt Refco insiders' fraud and breaches of fiduciary duty.
The lawsuit provides a thorough description of the more than seven year conspiracy to conceal Refco's trading losses, true operating expenses, marginal performance and theft of assets belonging to Refco's unregulated broker-dealer, Refco Capital Markets, Ltd. ("RCM"). The lawsuit alleges that Refco's fraudulent scheme "only could have worked with the active assistance of Refco's cadre of outside auditors, professionals and advisers" -- a veritable "who's who" of some of the most trusted names in corporate finance, law and accounting, whose reputations and substantial assistance aided the Refco insiders in stripping out billions of dollars in Refco assets.
As alleged in the complaint, the fraud occurred in three phases: first, the corrupt insiders, with the active assistance of its professional advisors, created the illusion that Refco was a successful and financially sound company; second, the defendants worked to maintain that illusion, employing various financial chicanery to fool the outside world; and third, the professional defendants orchestrated a massive cash-out, whereby they aided the insiders in cashing-out, while at the same time lining their own pockets with substantial professional fees. The purpose of the entire scheme, the lawsuit alleges, was to allow the Refco's insiders to sell their interests at fraudulently inflated prices.
Specifically, the lawsuit alleges that:
* Grant Thornton blessed Refco's financial statements "despite knowing the nature and massive extent of the fraud;" * Mayer Brown structured and documented fraudulent "round trip" loan transactions at the end of every relevant reporting and auditing period (and the unwinding of those transactions days later) that were "like a street-corner shell game" solely designed to conceal trading losses and inflated expenses; * Ernst & Young "willingly generated Refco's false tax returns," had complete knowledge of the scheme and "actively assisted" the Refco insiders in hiding Refco's "bad debts," acknowledging internally that it could be "an accessory to some type of fraud;" * PWC wrongfully validated deficient internal controls and, with knowledge of the fraudulent round trip loan transactions, participated in the falsification of Refco's registration statements; * The investment banker defendants "structured and facilitated the lucrative cashing-out" of the insiders' interests knowing of the extraordinary harm caused to RCM and its customers. The lawsuit alleges that the investment banks "never trusted the Refco Insiders," "could not recreate management's projected free cash flows," and knew RCM's customer securities and cash were being used by Refco without the ability to repay RCM and that this fact was not disclosed in Refco's public offering documents; * One of the underwriter defendants, during its purported financial "due diligence," commented internally that it viewed Refco's Chief Financial Officer as a "pathological liar," yet it proceeded with an LBO and an IPO because of the enormous investment banking fees; * Grant Thornton, Mayer Brown and PWC participated in "conscious editing of SEC disclosure documents to conceal" a massive related- party receivable owed to Refco by a company controlled by Refco's insiders; * Participants in the round trip loan transactions were well aware that they were involved in a scheme to prop up Refco's financial condition by making multi-hundred million dollar loans to a Refco related-party using Refco's own money to fund the loan. The "loan" amounted to no more than a book-entry, for which the participant received a payment for agreeing to be a part of the scheme; and * The Refco insiders stole securities and cash that were entrusted to RCM by its customers, without documentation, with no ability, intent, posting of collateral or obligation to repay those diverted assets, and with no compensation to RCM, leaving RCM with over $2 billion in uncollectible IOUs.
Marc S. Kirschner, Trustee of the Refco Litigation Trusts, said, "This is the second lawsuit filed by the Refco Litigation Trusts, which have a broad mandate to pursue claims on behalf of Refco and its creditors and are committed to achieving a full and speedy recovery of the massive damages caused to Refco by numerous parties. The Trusts intend to bring additional lawsuits, in addition to continuing to vigorously pursue the claims it has filed to date, to seek redress for the harm caused to Refco and its creditors."
The complaint was filed by Quinn Emanuel Urquhart Oliver & Hedges and Grippo & Elden LLC.
About the Refco Litigation Trusts
The two Refco Litigation Trusts were created under the Refco Plan of Liquidation, which became effective on December 26, 2006. Marc S. Kirschner, the former Chapter 11 Trustee for Refco Capital Markets LLC, serves as Trustee for the Trusts. The primary purpose of the Trusts is to pursue all Refco estate claims and claims of certain electing creditors against third parties, with recoveries to be distributed in accordance with the terms of the Refco Plan of Liquidation. The Trusts have $25 million of funding to support their pursuit of such claims. Since February 2007, the Trusts have been engaged in a comprehensive investigation of potential claims against third parties. On August 8, 2007, the Trusts filed a lawsuit against the private equity firm Thomas H. Lee Partners, L.P., Thomas Lee personally, several Thomas H. Lee representatives who served as officers and directors of Refco and related parties. That lawsuit, filed in the U.S. District Court for the Southern District of New York, seeks hundreds of millions of dollars in damages and penalties from the defendants for common law claims arising from breach of fiduciary duty, unjust enrichment and receipt of illegal dividends, as well as bankruptcy claims for fraudulent conveyances and preferences.