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One of the Largest Brokerage Firms to Close for Lack of Cash

By Jenny Anderson

Refco, one of the world’s largest futures and commodities brokerage firms, said Thursday that it would cease operating one of its two main businesses because of a lack of cash.

The announcement, coupled with another cut in its credit ratings, sent Refco’s bonds into a tailspin, a sign that creditors believed the company would default.

Refco imposed a 15-day moratorium on the activities of its capital markets business, an unregulated entity that offers securities services like stock lending and foreign exchange and fixed-income transactions, informing customers that they could liquidate their accounts but not get the funds in them for 15 days.

The moratorium appears to have been prompted by an exodus of client accounts.

“Customers were withdrawing their accounts and liquidating what they could and moving cash out,” said Tom Foley, a credit analyst with Standard & Poor’s, which downgraded the company’s debt twice this week.

The announcement of the moratorium, and the general uncertainty around the company, caused some clients of the firm’s regulated futures brokerage business to pull their money out as well.

The firm remains in a precarious financial position. On Monday, the company announced that its chief executive, Phillip R. Bennett, and Santo C. Maggio, head of capital markets group, would be on leave indefinitely as the company investigated a $435 million debt owed to it by a company controlled by Bennett. The company has said its financial statements back to 2002 cannot be relied upon.

Bennett, 57, repaid the money on Monday, but was arrested on Tuesday night and charged with securities fraud, accused of hiding the debt at the end of every quarter from investors and regulators.

As some clients run for the exits, Refco is faced with two pressing problems: trying to persuade its creditors, led by Bank of America, Credit Suisse First Boston and Deutsche Bank, not to force the company to repay its loans; and trying to persuade clients that it has enough money and stability to continue operating.

Refco said that its regulatory capital at Refco LLC, the regulated futures commission merchant, and Refco Securities, its regulated broker dealer, have been “substantially unaffected by the events of the week.”

The chairman of the Commodity Futures Trading Commission, Reuben Jeffery III, sought to quell concerns by saying that there were sufficient customer funds in the regulated entity.

“In our sampling of the accounts, nothing has come to our attention on the regulated side indicating insufficiency of customer funds,” he said.

But others say no such confidence can be placed in Refco itself.

“This hasn’t happened since Drexel Burnham Lambert,” said Foley, referring to the investment bank that shut its doors virtually overnight after creditors shied from lending it money. “It looks like Refco will default on its debt, at least technically.”