Securities and Exchange Commission (SEC) has filed a $54m civil suit against former CEO of Refco, Philip Bennett days after he pleaded guilty to charges leveled against him and his involvement in the downfall of the FCM. Interested observers are considering Bennett’s eventual fate with interest with sentence lengths being estimated anywhere between six and 30 years.

Bennett pleaded guilty to criminal charges regarding his involvement hiding hundreds of millions of dollars in shell companies which he owned that did business with Refco. Those companies helped Bennett move large amounts of debt from Refco off its books and boosted Refco’s valuation. The discovery by a Refco staff auditor ultimately led to the quick downfall of the firm in late 2005, just two months after the firm raised $670m in an initial public offering. The scandal and bankruptcy is estimated to have cost shareholders more than $2.4bn. Bennett has pled guilty to a 20-count indictment which includes charges of conspiracy, securities fraud, bank fraud and false filings with SEC.

SEC’s complaint alleges that Bennett, through his actions, violated a number of Securities and Exchange Acts. It also alleges that Bennett instituted practices that artificially inflated Refco’s reported financial results in 2005. “The practices involved Refco recording fictitious interest income from sham foreign exchange transactions. The inflation of financial results was undertaken by Bennett to make Refco more attractive to potential investors,” SEC said in a statement.
Bennett admitted that he hid the fraudulent activity from key members of Refco’s staff, auditors, investors and Thomas H. Lee Partners, the private equity firm which paid $507m for a 57% stake in Refco in 2004.

A UK-based regulatory lawyer told FO Week that it was likely that Bennett had cut a deal in return for a lenient sentence. “I think there are two possible outcomes. Either the courts give a very harsh initial public sentence of 25 – 30 years, which is later reduced quite significantly on appeal in a pre-arranged deal. Or he gets between ten – 15 years and serves six or seven,” he said. “I think the US justice system will want to try to make an example of Bennett. Post Enron white collar fraud has been treated more harshly.” He added though that Bennett would not have pleaded guilty unless there were benefits in doing so. “Bennett is not stupid. If there was no return he would have just fought it out and looked to have walked free, which is why I don’t see him serving more than half a dozen years. And probably he would have bargained for a minimal security prison with other white collar inmates.”

If Bennett had not pleaded guilty the 20 charges would have carried a 315-year sentence.

One source who knew Bennett well said the big question surrounding Bennett’s involvement is how he got in so deep in the first place, accusing him of becoming a megalomaniac. “Why didn’t he just pay off the debt? It went to his head and he thought he could never be beaten,” he said. “He was known as some kind of magician who had built Refco up from a small commodities house to this massive futures brokerage. There was a time when he could do no wrong.”

Meanwhile Bennett’s chief financial officer, Robert Trosten, pleaded guilty days after Bennett pleaded similarly.
Trosten pled guilty on February 20 to five counts of fraud and conspiracy charges a month before he was due to stand trial for his involvement in the scandal, which brought down one of the world’s largest futures brokers. He is also expected to testify for the government against former Refco president Tone Grant and ex-Refco outside attorney Joseph Collins who are also charged in the case. Both maintain they are innocent. Grant’s trial is set for March 17. Collins trial date is unknown.

Sandy Maggio, former Refco executive vice president, pled guilty to criminal charges in December and agreed to pay $23m. Maggio is considered another key witness and is believed to be cooperating with prosecutors in the case.
The scandal also exposed Bawag Bank, the Vienna-based bank that paid $675m in 2006 in order to avoid SEC prosecution. Bennett is due to be sentenced in May and is being held by a $50m bond which requires Bennett to remain at his home.