An Analysis of the Financial Implications of Fraud on Business Failure; the Case of Refco Inc. Usa
A. Introduction
This research report attempts to highlight the circumstances that led to the failure of Refco Inc.; a New York based multinational commodities and forex brokerage firm. It focuses on the strategy deployed by the company’s executives in perpetrating fraudulent acts in misrepresenting the company’s financial accounts; the revelation therein have been described by many as one of the largest bankruptcy cases in the history of the United State’s financial services industry.
A critical analysis of the principal methods used in falsifying the company’s financial statements is crucial in providing a clear picture of the role played by financial information in the failure of Refco Inc. Thus an introduction to the term “Round Trip Loans” and its relevance in the Refco debacle is provided in the pages that follow in addition to a critique of the role of Refco’s finance team and its external auditors in the falsifications and cover-up.
B. Discussion & Analysis of Fraud and Loss at Refco Inc.
B.1 History of Refco Inc. Refco Inc. was founded in Chicago USA in 1969 by Ray Freidman and his Stepson, Thomas Dittmer. The firm was christened Ray E. Freidman & Co. at inception but was renamed after its relocation to New York. Initially, investors appeared confident in the latency of the futures market and Freidman had gathered a sizable customer base to propel the company to a favorable start(Smith, 2005). By 1998, Dittmer left Refco and relinquished his responsibility as CEO to the then Chief Finance Officer of the company, Phillip Bennet during a period when the industry was faced with losses following the Asian currency crises and the Russian debt default. Regardless, Refco steadily grew to eventually become one of the largest commodities and futures trading brokerage conglomerate in the United States. This was due largely to the return on investments to its hedge fund clients, amassing a customer base in excess of 200,000 over the years on the one
This research report attempts to highlight the circumstances that led to the failure of Refco Inc.; a New York based multinational commodities and forex brokerage firm. It focuses on the strategy deployed by the company’s executives in perpetrating fraudulent acts in misrepresenting the company’s financial accounts; the revelation therein have been described by many as one of the largest bankruptcy cases in the history of the United State’s financial services industry.
A critical analysis of the principal methods used in falsifying the company’s financial statements is crucial in providing a clear picture of the role played by financial information in the failure of Refco Inc. Thus an introduction to the term “Round Trip Loans” and its relevance in the Refco debacle is provided in the pages that follow in addition to a critique of the role of Refco’s finance team and its external auditors in the falsifications and cover-up.
B. Discussion & Analysis of Fraud and Loss at Refco Inc.
B.1 History of Refco Inc. Refco Inc. was founded in Chicago USA in 1969 by Ray Freidman and his Stepson, Thomas Dittmer. The firm was christened Ray E. Freidman & Co. at inception but was renamed after its relocation to New York. Initially, investors appeared confident in the latency of the futures market and Freidman had gathered a sizable customer base to propel the company to a favorable start(Smith, 2005). By 1998, Dittmer left Refco and relinquished his responsibility as CEO to the then Chief Finance Officer of the company, Phillip Bennet during a period when the industry was faced with losses following the Asian currency crises and the Russian debt default. Regardless, Refco steadily grew to eventually become one of the largest commodities and futures trading brokerage conglomerate in the United States. This was due largely to the return on investments to its hedge fund clients, amassing a customer base in excess of 200,000 over the years on the one
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