The collapse and subsequent bankruptcy filing of Refco Inc. – the futures broker under investigation for allegedly hiding a $430 million debt – has been a black eye, particularly for investor Thomas H. Lee Partners, the private equity firm that bought a majority stake in Refco in August 2004. TH Lee, which is currently preparing for a $7.5 billion fund-raising drive, may be asking how things got to where they are now. Below is a timeline of events.
August 2004: TH Lee invests $500 million, as part of a $2.25 billion leveraged buyout of New York-based futures brokerage Refco.
January 2005: Gerald Sherer is hired as Refco’s CFO and makes two important moves. First, he will inform the Refco board of troubles with the company’s internal controls – troubles which will later be disclosed in an IPO registration filing with the Securities and Exchange Commission. Second, he will hire a subordinate named Peter James, who will uncover some accounting irregularities.
April 2005: Refco files for a $575 million IPO.
August 2005: James begins discovering the accounting irregularities and brings them to Sherer’s attention. It is unclear if this notification occurred before or after Refco’s IPO, which priced at $22 per share on Aug. 11, for a take of about $583 million. TH Lee sells around $170 million worth of stock as part of the offering, but retains around a 40% ownership stake.
September 2005: Refco stock trades as high as $30.55 per share. TH Lee conducts pre-marketing for a $7.5 billion fund-raising drive slated to begin in November.
Oct. 10: Refco CEO Phillip Bennett takes a leave of absence, after admitting to having hidden $430 million in receivables owed to the company. He allegedly had been doing this since taking charge in 1998. Stock begins precipitous drop.
Oct. 11: Refco issues statement that Bennett has repaid money, but stock price continues to fall.
Oct. 12: Bennett is arrested on securities fraud charges. At end of day, the stock price falls to $10.85 per share, costing TH Lee up to $870 million.
Oct. 13: The New York Stock Exchange suspends trading of Refco stock at the pre-market price of $7.90 per share. Refco freezes customer accounts at its Refco Capital Markets subsidiary for 15 days, because the group might not have enough available cash to perform normal operations. TH Lee holds conference call with limited partners, but declines to answer many questions due to the possibility of future litigation.
Oct. 17: Refco agrees to sell its core futures brokerage business to a consortium led by J.C. Flowers & Co. Other participants include Enstar Group, Silver Point Capital, MatlinPatterson Global Advisers and Texas Pacific Group. To facilitate the deal, Refco files for Chapter 11 bankruptcy protection.
Oct. 18: The Dubai Investment Group expresses interest in buying Refco for $1 billion, but is rejected.
Oct. 20: Interactive Brokers Group bests J.C. Flowers’ offer, and it doesn’t include break-up fee.
Oct. 24: J.C. Flowers withdraws its bid after a bankruptcy court judge insists that the proposed break-up fee be lowered from $20 million to $5 million. Refco still has plenty of suitors, including Man Group, Apollo Management, Warburg Pincus/Merrill Lynch and Interactive Brokers Group.
Oct. 25: Refco says it will be auctioned off on Nov. 9 without a preferred bidder.
Oct. 25: Tradelink emerges as another bidder. Interactive Brokers says it will sign a confidentiality agreement, so that it can look at Refco’s books. Two commodities funds sue Refco for the immediate return of $362 million that was seized when the Refco Capital Markets subsidiary accounts were frozen.