LEV L. DASSIN, the Acting United States Attorney for
the Southern District of New York, announced that JOSEPH P.
COLLINS, formerly the principal outside attorney for defunct
financial services company Refco, was found guilty today in
Manhattan federal court after a nine-week jury trial on one count
of conspiracy, two counts of securities fraud, and two counts of
wire fraud in connection with his role in the fraud underlying
Trial commenced before United States District Judge
LEONARD B. SAND and, when he became ill, concluded before United
States District Judge ROBERT P. PATTERSON, JR.
As established by the evidence at trial:
In August 2004 Thomas H. Lee Partners, L.P., purchased
a majority interest in Refco through a $1.9 billion leveraged
buyout (“LBO”) transaction. The buyout was financed with
approximately $500 million in cash from Thomas H. Lee Partners,
$600 million in notes 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, and Refco’s stock was then listed on the New York
Stock Exchange. Both the LBO and the IPO took place as a result
of a massive fraud scheme to steal more than $2.4 billion from
potential investors and lenders on the part of 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.
Among other things, COLLINS participated in BENNETT’s
scheme to falsify Refco’s financial statements by hiding from
Refco’s 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. Specifically, on at least
17 different occasions from February 2000 through October 2005,
COLLINS (and lawyers at his firm working at his direction)
drafted or caused to be prepared documents arranging for the
routing, through various third parties, of more than $5.5 billion
dollars in loans from Refco to BENNETT’s company. As COLLINS
knew, and as reflected in the documents, the loans were made
shortly before, and reversed shortly after, Refco’s fiscal yearand
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. This had the effect of concealing the size of
Refco’s related-party debt in that they made it appear that the
debt owed by BENNETT’s company was significantly smaller than it
really was. Furthermore, COLLINS falsely represented to Thomas
H. Lee Partners and others that, among other things, all material
contracts and related party transactions had been disclosed,
while knowing that documents relating to the Round Trip Loan
Transactions, including documents through which Refco guaranteed
to the 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, BENNETT’s holding company 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. COLLINS further
agreed to conceal BENNETT’s plan to buy out BAWAG’s interest by
using more than approximately $500 million of the proceeds from
the LBO. The reason for the concealment was that Thomas H. Lee
Partners would not pay as much for Refco if it knew the terms of
the agreements. The evidence further showed that 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 when COLLINS
knew, because he had directed others to conceal the information,
that these agreements and arrangements had not been disclosed.
COLLINS created fraudulent corporate documents for Refco that he
provided to Thomas H. Lee Partners in order to conceal from
Thomas H. Lee Partners BAWAG’s true economic interest in Refco.
He also misled Thomas H. Lee Partners and its representatives
into believing that Refco possessed approximately $500 million in
excess working capital that had been deposited into a bank
account at BAWAG, when COLLINS knew that this account was funded,
in part, not by Refco’s working capital, but by a $390 million
overdraft loan from BAWAG.
COLLINS was found guilty of conspiracy to commit
securities fraud and other offenses (Count One); two counts of
securities fraud (Counts Two and Three); and two counts of wire
fraud (Counts Six and Nine). He faces a maximum penalty of five
years in prison on Count One and twenty years on each of the
remaining counts, as well as a fine of the greater of $250,000 or
twice the gross gain or loss from the offense, and three years
supervised release, on each count. The jury failed to reach a
verdict on the remaining charges against COLLINS, as to which a
mistrial was declared.
COLLINS, 58, of Winnetka, Illinois, is scheduled to be
sentenced by United States District Judge ROBERT P. PATTERSON on
November 3, 2009 at 10:00 a.m.
To date, several former executives of Refco have been
charged and sentenced for their participation in the $2.4 billion
fraud described above:
On July 3, 2008, BENNETT, 60, of Gladstone, New Jersey,
was sentenced to 16 years in prison by United States District
Judge NAOMI REICE BUCHWALD. BENNETT pleaded guilty on February
15, 2008, to all twenty charges filed against him.
On August 7, 2008, TONE N. GRANT, 64, of Chicago,
Illinois — one of the former owners of Refco — was sentenced to
10 years in prison by Judge BUCHWALD. On April 17, 2008, GRANT
was found guilty after trial in Manhattan federal court on all
five counts in the Indictment against him.
On February 20, 2008, ROBERT C. TROSTEN, 39, of
Sarasota, Florida — the former Chief Financial Officer of Refco
— pleaded guilty before Judge BUCHWALD to five counts charged in
the Indictment against him. He is scheduled to be sentenced on
September 24, 2009.
On December 19, 2007, SANTO C. MAGGIO, 57, of Naples,
Florida — a former Executive Vice President of Refco and the
former President and Chief Executive Officer of Refco Securities
LLC, a Refco subsidiary — pleaded guilty before United States
Magistrate Judge RONALD L. ELLIS to a four-count Information. He
is scheduled to be sentenced on September 24, 2009.
The case was investigated by the Criminal Investigators
of the Securities and Commodities Fraud Task Force of the United
States Attorney’s Office, along with the United States Postal
Inspection Service. Mr. DASSIN praised the work of those
investigators and thanked the Securities and Exchange Commission
and the Commodity Futures Trading Commission for their assistance
in the case.
Assistant United States Attorneys CHRISTOPHER L.
GARCIA, NICHOLAS S. GOLDIN, SHARON COHEN LEVIN, RUA M. KELLY, AMY
LESTER, and JEFFREY ALBERTS are in charge of the prosecution.