Refco and the Role of Counsel

We have posted on the financial fraud surrounding Refco. The broker used "round trip" transactions to move debt off its financial statements. For a very lengthy report on the fraud, go here. We noted that the matter was uncovered in a post-SOX era as a result of involvement by the newly empowered audit committee. An example of SOX at work, in short.

The report raised questions about the involvement of counsel in the transactions. In fact, according to the report:

• The Examiner concludes that there is significant evidence that Mayer Brown: · assisted Refco by drafting and negotiating documents in connection with the Round Trip Loan transactions, which Mayer Brown knew or should have known were fraudulent and undertaken for the purpose of manipulating Refco’s financial statements; · failed to disclose material matters in connection with the LBO, the IPO, and related transactions; and · failed to disclose its knowledge of the RGHI Receivable and Round Trip Loan scheme to persons at Refco independent of Bennett — including, after the LBO, THL personnel and, after January 2005, Refco’s independent outside directors.

That matter came at least to a partial head today with the announcement by the SEC and the DoJ that an attorney, Joseph P. Collins, a partner at Mayer Brown has been charged with civil and criminal violations (the DoJ filed a 55 page indictment). As the SEC's press release noted:

• In 2004, Refco placed $600 million in senior subordinated notes with certain financial institutions pursuant to an offering circular. In 2005, Refco commenced its initial public offering of common stock pursuant to a registration statement filed with the Commission. The SEC’s complaint alleges that the offering circular failed to disclose RGHI’s indebtedness, the period end transactions, and the related potential liabilities. It also is alleged that the registration statement failed to disclose the indebtedness and the potential liabilities. The complaint further alleges that Collins, while aware of the indebtedness and the transactions, reviewed and revised sections of the offering circular and the registration statement without inserting requisite disclosures regarding the indebtedness, the period-end transactions, and the potential liabilities.

The report refers to other individuals and makes repeated reference to the firm.  There may be more.  The Commission's release noted that the investigation is continuing.