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Strategies & Market Trends : Anthony @ Equity Investigations, Dear Anthony,

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From: train_wreck4/10/2008 12:04:14 PM
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Ex-Refco exec tells of commodities fraud

By Leslie Gevirtz, Reuters
NEW YORK — A former Refco executive, who said he helped hide multimillion-dollar commodity trading losses from clients, testified Monday that his bosses said "we're all in this together."
Santo Maggio, a top deputy to former Refco Chief Executive Phillip Bennett and former President Tone Grant, told how the trio deceived banks, foreign exchange traders, hedge fund executives and even top managers at investor George Soros' funds, six years before the 2005 collapse of one of the world's largest commodity brokers.

Bennett pleaded guilty in February to fraud and other charges stemming from the collapse, but Grant chose to stand trial.

Maggio, who was president of the Refco Capital Markets unit, pleaded guilty in December and agreed to cooperate with federal authorities in their investigation of Refco.

In a second day on the stand in U.S. District Court in lower Manhattan, Maggio described how the company was perennially short of cash after meltdowns in the late 1990s sank clients Refco had financed.

With money tight, Maggio routinely had to pick which obligation Refco would fail on.

"If we were down $100 million," he told the jury, he would look for a client that had a $100 million that needed to be delivered and "we would fail on his $100 million...

"Basically, we were behind all the time," Maggio said, his voice quavering. "It would be like musical chairs...There were a number of excuses you would make...the bank screwed up, my computers are out. There was a list of excuses for people at the back office."

When he complained of the stress of lying to his friends on Wall Street, constantly picking which accounts to shortchange, he says both Bennett and Grant reassured him, saying, "We're all in this together. We will come up with a plan."

Rumors spread that Refco was in trouble and Soros Fund Management, its largest client, called Maggio to say it was withdrawing its assets, which totaled about $260 million at the time.

Maggio arranged for a meeting in 1999 between Soros fund top executives and Bennett, Grant and himself. At the meeting, he testified, the Refco executives lied about not suffering any significant losses and offered to provide monthly financial statements to the fund. They urged the Soros Fund executives to call the head of the Chicago Mercantile Exchange clearinghouse, to verify that Refco had always met its settlement duties.

After checking with the CME, the Soros Fund agreed to keep its assets at Refco for the time being.

"We dodged a bullet. We dodged a missile," Maggio said.

In later testimony, Maggio admitted that he had lied under oath in various litigation and to the U.S. Securities and Exchange Commission.

Refco, once a global clearing house for derivatives that served more than 200,000 customers, collapsed into bankruptcy shortly after it went public in 2005.

Copyright 2008 Reuters Limited.
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