LawFuel.com US Attorney News – Preet Bharara, the United States Attorney for the Southern District of New York, announced that JOSEPH P. COLLINS, formerly the principal outside attorney for the now defunct financial services company, Refco Group Inc. (“Refco”), was sentenced today in Manhattan federal court to one year and one day in prison for conspiracy, securities fraud, filing false statements with the SEC, and wire fraud, in connection with his role in the fraud underlying the collapse of Refco.
The accounting fraud at Refco, once the nation’s largest independent
commodities firm, cost investors and lenders more than $2.4 billion in losses. COLLINS was convicted in November 2012, after a four-week jury trial before Chief U.S. District Judge Loretta A. Preska, who imposed today’s sentence.
Manhattan U.S. Attorney Preet Bharara stated: “Joseph Collins was a lawyer deeply and corruptly enmeshed in coordinating and concealing the massive accounting fraud that ultimately led to Refco’s collapse. By aiding and abetting the commodities firm’s executives, Collins not
only shirked his duties as an officer of the court and violated the ethical obligations of his profession – he broke the law.”
According to the Superseding Indictment filed in Manhattan federal court, other court documents, and the evidence presented at trial:
In August 2004 Thomas H. Lee Partners, L.P., purchased a majority interest in Refco through a $2.4 billion leveraged buyout (“LBO”) transaction. The buyout was financed with approximately $500 million in cash from Thomas H. Lee Partners, $600 million in notes that
Refco sold to private investors, and approximately $800 million borrowed from a syndicate of banks.
In August 2005, Refco conducted an initial public offering (“IPO”) of its stock, which was then listed on the New York Stock Exchange. Both the LBO and the IPO were constructed and orchestrated in the context of a massive fraud scheme engineered by Phillip R. Bennett, former Chief Executive Officer and 50% owner of Refco, and others, with the knowing
assistance of COLLINS.
Only months after the IPO, Refco went into bankruptcy and its stock was delisted from the New York Stock Exchange.
During the relevant time period, COLLINS, then a partner at the law firm Mayer, Brown, Rowe & Maw LLP, was the primary outside counsel for Refco and Bennett. COLLINS participated in, among other things, Bennett’s scheme to falsify Refco’s financial statements by hiding from Refco’s investors and auditors an enormous debt owed to Refco by a holding
company partially owned by Bennett. This debt had ballooned to more than $1 billion by January 2004. On at least 17 different occasions from February 2000 through October 2005, COLLINS, and lawyers at his firm working at his direction, drafted documents that arranged for
the routing – through various third parties – of more than $5.5 billion in loans from Refco to Bennett’s company.
As COLLINS knew, the loans were made shortly before, and reversed shortly after, Refco’s fiscal year-ends and quarter-ends. During those brief periods, Bennett used the loans to pay down the debt his company owed to Refco, only to have the debt return once these “round-trip” loan transactions were reversed. These loans had the effect of concealing the size of Refco’s related-party debt by making it appear that the debt owed by Bennett’s company was significantly smaller than it really was.
COLLINS falsely represented to Thomas H. Lee Partners and others that all material contracts and related-party transactions had been disclosed, knowing that was untrue. In fact,
documents relating to the round-trip loan transactions, including documents in which Refco guaranteed to third parties the performance of Bennett’s company – in amounts totaling billions of dollars – were never provided to Thomas H. Lee Partners. COLLINS also made affirmative
misrepresentations and drafted contract terms that misled others into believing that Bennett’s holding company owed Refco no more than approximately $108 million, which COLLINS knowingly and falsely misrepresented would be repaid by the time the LBO transaction closed.
In fact, COLLINS knew that Bennett’s holding company actually owed Refco at least $1 billion and that, even after the LBO, it would continue to owe Refco at least $300 million. COLLINS also agreed with Bennett to conceal the terms of a 2002 agreement giving the Austrian bank BAWAG an approximately 47% economic interest in Refco, and further agreed to
conceal Bennett’s plan to buy out BAWAG’s interest by using more than $500 million from the proceeds of the LBO. COLLINS directed others not to disclose information relating to Bennett’s
buyout of BAWAG’s interest, and lied to Thomas H. Lee Partners by representing that all material contracts and related-party transactions concerning Refco had been disclosed, knowing
full well that these agreements and arrangements had not been disclosed. To that end, COLLINS created fraudulent corporate documents for Refco that he provided to Thomas H. Lee Partners in order to conceal from the firm BAWAG’s true economic interest in Refco and Refco’s true
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In addition to the prison term, Chief Judge Preska sentenced COLLINS, 62, of Winnetka, Illinois, to two years of supervised release. COLLINS was originally found guilty in 2009 on charges of conspiracy to commit securities fraud, wire fraud, bank fraud, and money laundering, but that conviction was reversed by the United States Court Appeals for the Second Circuit in
To date, several former executives of Refco have been convicted for their participation in the $2.4 billion fraud described above:
Bennett, 64, of Gladstone, New Jersey, pled guilty in February 2008 to all 20 charges filed against him. He was sentenced on July 3, 2008, to 16 years in prison by U.S. District Judge Naomi Reice Buchwald;
Tone N. Grant, 69, of Chicago, Illinois – one of the former owners of Refco – was convicted at trial in April 2008 on all five counts in the Indictment against him. Grant was sentenced on August 7, 2008, to 10 years in prison by Judge Buchwald;
Robert C. Trosten, 44, of Sarasota, Florida – the former Chief Financial Officer of Refco – pled guilty in February 2008 before Judge Buchwald to five counts charged against him
in the Indictment against him. Trosten has not yet been sentenced; and
Santo C. Maggio, formerly of Naples, Florida – the former Executive Vice President of Refco and the former President and Chief Executive Officer of Refco Securities LLC, a Refco subsidiary – pled guilty in December 2007 before U.S. Magistrate Judge Ronald L. Ellis to a four-count Information. Maggio died last year before being sentenced.
Mr. Bharara praised the work of the United States Postal Inspection Service and the Criminal Investigators of the United States Attorney’s Office, which jointly investigated this
case. He also thanked the Securities and Exchange Commission and the Commodity Futures Trading Commission for their assistance in the case.
Assistant United States Attorneys Harry A. Chernoff, Michael A. Levy, and Edward A., Imperatore are in charge of the prosecution.