NEW YORK, Oct. 9, 2007 (PRIME NEWSWIRE) -- The Refco Litigation Trusts today announced that a number of large customers of Refco Capital Markets, Ltd. ("RCM") have filed two lawsuits against, among others, Thomas H. Lee Partners, L.P. ("TH Lee"), Thomas H. Lee personally, and several TH Lee representatives who served as officers and directors of Refco. The lawsuits, filed in the United States District Court for the Southern District of New York, allege violations of federal securities laws by TH Lee and related entities, the TH Lee directors, as well as a number of other former officers and directors of Refco Inc. Violations of federal securities laws by Grant Thornton, the former auditor of RCM and Refco, are also alleged in one of the two lawsuits. Pursuant to the Refco Plan of Reorganization, the proceeds of these customer claims have been assigned to the Refco Creditors' Trust.
Both lawsuits allege that certain Refco officers engaged in a fraudulent scheme in which they converted securities owned by the plaintiffs, which were supposed to have been held in the custody of RCM on behalf of the plaintiffs. The lawsuits allege that, without the customers' knowledge, authorization or consent, the Refco officers directed Refco employees to sell securities belonging to the plaintiffs. The proceeds from these sales were then siphoned out of RCM and used for other purposes at Refco, allowing the defendants to create and maintain a false and misleading appearance of financial health and strength at Refco, which in turn enabled the defendants to reap large cash benefits. The lawsuits allege that the fraudulent scheme "required the participation of, and had to have been apparent to, all of the Defendants . . . Indeed, during the relevant period, the amounts stolen from RCM customer accounts dwarfed Refco's total capital."
The lawsuits allege that the fraudulent scheme began prior to TH Lee's leveraged buyout of Refco in June 2004, and continued throughout the period in which TH Lee controlled and directed Refco and its affairs. The lawsuits seek hundreds of millions of dollars in damages and interest for claims relating to violation of Section 10(b) and Section 20(a) of the Exchange Act.
Grant Thornton, one of the lawsuits filed alleges, would undoubtedly have uncovered the frauds at Refco if the firm had properly performed its audit function in accordance with Generally Accepted Auditing Standards. Instead, Grant Thornton "compromised its independence and made the conscious decision to conceal the massive ongoing fraud in order to keep its marquee client happy." The Complaint states, "This is not a case of an auditor overlooking a few details. Grant Thornton completely abandoned its obligations of independence, learned first-hand of the fraud, and then perpetrated that fraud by providing clean audit opinions, which it knew to be false in light of Refco's grotesque accounting manipulations."
The customers in the lawsuit against Grant Thornton relied on the RCM and Refco financial statements, and Grant Thornton's audit opinions with respect to those financial statements, in determining to do business with, and entrust their securities to, RCM. As a result of that reliance, the defendants were able to perpetrate their fraudulent scheme by illegally selling customer securities without the customers' knowledge.
Marc S. Kirschner, Trustee of the Refco Litigation Trusts, said, "The Refco Litigation Trusts, as previously announced, also filed suit against TH Lee, Thomas H. Lee personally, several TH Lee representatives who served as officers and directors of Refco, and related parties, pertaining to their role in the fraud and subsequent Chapter 11 filing by Refco. That lawsuit is seeking hundreds of millions of dollars in damages and penalties from TH Lee and the related parties 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."
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. In February 2007, the Trusts retained the law firms Milbank, Tweed, Hadley, & McCloy, LLP and Quinn Emanuel Urquhart Oliver & Hedges, LLP to assist in their work and, since then, have been engaged in a comprehensive investigation of potential claims against third parties. The Trusts have filed three lawsuits against third parties involved in the Refco frauds.