The Refco meltdown has taken another legal turn.
Last issue, Buyouts reported that LBO firm
Refco, an options-trading house based in Chicago, declared bankruptcy a year after the buyout and two months after a public offering. TH Lee, based in Boston, is seeking $245 million in damages.
Now TH Lee is itself being accused of a cover-up. Earlier this month, the Refco Litigation Trusts, which were created during Chapter 11 proceedings to pursue all of Refco’s estate claims, sued TH Lee. The trusts allege that TH Lee “knew far more about the serious problems at Refco than it has let on in its public statements.”
“There were a number of red flags that the Lee folks ignored,” Marc Kirschner, the trusts’ attorney, who filed the suit, told The New York Times. “They learned of significant problems at Refco, which they basically ignored in the rush to go public.”
Because he is a Refco director, Thomas H. Lee—the man—is also named in the suit, although he no longer works for his namesake firm. He left a year ago, under a mapped-out succession plan, and has since started a new shop.
TH Lee, both the firm and the man, have called the trusts’ suit “misdirected and entirely without merit.”
In particular, the suit alleges that TH Lee knew that previous audits of Refco were ineffective and contends the LBO firm wouldn’t hire a new auditor for fear that it would force disclosure of unfavorable information. Instead, according to the suit, TH Lee was more interested in propping up the company in order to look good to investors ahead of a planned fundraising drive.
The suit claims that TH Lee pocketed $113 million by “siphoning” funds from the company, according to Reuters, and that the firm took home $162.5 million from the IPO. The suits seek to recover both of those sums, along with compensatory damages that could bring the total award to $670 million.
The trusts filed suit Aug. 8 in federal court in Manhattan.