Toomre Capital Markets LLC

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Mayer Brown Partner Joe Collins Found Guilty In Refco Fraud

Late on Friday July 10th 2009, Joseph Collins, a Mayer Brown law partner since 1994, was convicted of securities fraud and other criminal charges in a financial cover-up that brought down the one-time commodity trading giant Refco back in the fall of 2005. A federal jury in New York found Attorney Collins guilty on five of 14 counts, including two counts of wire fraud, two counts of securities fraud and conspiracy, according to the U.S. attorney's office in New York. A mistrial was declared on nine other counts. Collins is scheduled to be sentenced on November 3rd.

The Chicago Tribune has more information on this case here. The verdict ended a trial that lasted nearly two months and took some unexpected turns. In the middle of the trial, the judge presiding over the case became sick and had to be replaced. Apparently, "After the verdict was returned today, two jurors who declined to provide their names told Bloomberg News that the male juror pointed frequently at panel members. The two jurors said deliberations were otherwise uneventful. The jurors said the vote was 11-1 to convict on the remaining nine counts. The holdout was the juror who pointed at the others. That juror wanted a mistrial, they said."

Toomre Capital Markets LLC ("TCM") has previously written a number of blog posts about the Refco Scandal and Mayer Brown's possible involvement. Those posts can be found here and here.

Joseph Collins, Refco's External Lawyer, Indicted for Fraud

Toomre Capital Markets LLC ("TCM") has previously written several posts about the massive fraud that occurred at Refco and how various other organizations might have contributed to the illegal activities. These posts included a highly popular one entitled Details on Mr. Flottl, Bawag and Refco Losses in WSJ and another that is frequently searched entitled Connections: Refco, Bawag, Ross Capital Markets and Liberty Corner???. In the October 2005 posts Law firm Mayer, Brown, Rowe & Maw involved in Refco case and Chicago Sun-Times: More on Refco and Mayer Brown, TCM noted the rather curious fact that various publications were suggesting that Refco's outside legal advisor, Joseph P. Collins of Mayer, Brown, Rowe & Maw LLP, might be involved in the Refco scandal.

Throughout the entire Enron scandal, no external lawyer to Enron was ever indicted for the work done on special purpose entity transactions that were used to hide Enron's losses. Why then was Attorney Collins, a well-known specialist in derivatives and securitization legal specialties, being linked to the Refco scandal? On Tuesday December 18, 2007, the public learned why when both the Southern District of New York and Securities and Exchange Commission indicted Attorney Collins for being an alleged active participant in the Refco fraud. TCM is really sad to learn of these developments as the firm has had some direct interaction with Joseph P. Collins and Mayer Brown and found their legal work to be absolutely first class.

A copy of the federal indictment is here and the SEC complaint is likewise linked here. Click on this link to get a summary of all of the relevant news stories.

Details on Mr. Flottl, Bawag and Refco Losses in WSJ

The January 24th edition of The Wall Street Journal contains an informative Page One story on Wolfgang Flottl (sometimes spelled "Floettl") and his involvement in the scandals at Bawag Bank in Austria and the collapse of commodities broker Refco in October 2005. (TCM has previously commented on Mr. Floetll here, here and here.) In this WSJ article Bad Bet written by David Crawford and Carrick Mollenkamp, "Austrian prosecutors say they discovered that Mr. Flöttl's hedge-fund investments soured eight years ago, causing Bawag to lose more than $1 billion. But the bank hid those losses from auditors for seven years through a complex series of transactions involving Refco." The article continues:

Something Brewing in Refco, Bawag Bank and Wolfgang Floettl Scandal??

[Update 1-25-2007: More current information on the TCM website for this topic can be found here.]

Connections: Refco, Bawag, Ross Capital Markets and Liberty Corner???

This morning while investigating further information on the failed hedge fund Ross Capital Markets, TCM came across the resume of one Stuart Reed, who spent time at Enron after leaving a certain Liberty Capital Ltd. in London, U.K. from 1994 to 1996. In that resume document, Stuart Reed indicates that Liberty Capital was the middle and back-office are of Ross Capital Markets By happenchance, did the firm Liberty Capital somehow morph to Liberty Corner that has been tied to the parking of loans that former Refco CEO Phillip Bennett performed at each quarter-end?

Small World: Liquid Opportunities Plus Fund Linked to Bawag Bank

This International Herald Tribune article suggests that Refco Capital Markets Ltd in Bermuda held approximately $525 million in non-existent bonds at time of bankruptcy that were issued from six Anguilla companies, which in turn were owned by Bawag bank and Liquid Opportunities Fund in some undisclosed fashion. According to this press release from Jonathan P. Knight of Liquid Opportunities,

I was involved in the management of Liquid Opportunities until November 2004. Liquid Opportunities was an offshore investment fund with non-U.S. investors that primarily owned non-U.S. securities. Thus, Liquid Opportunities was not registered with the SEC or any other U.S. Agency.

Austria Issues Arrest Warrants for Wolfgang Floettl and Phillip Bennett

After Bawag bank admitted late last week to concealing close to a billion dollars in trading losses, Austrian officials have issued arrest warrants on March 28, 2006 for Wolfgang Floettl (sometimes spelled as Wolfgang Flottl), the son of the former head of Bawag bank, and Phillip Bennett, the former CEO of U.S. futures dealer Refco. This BBC story has more details.

Toomre Capital Markets LLC has previously posted here that Mr. Floettl and his firm Ross Capital were rumored to be one of the 10 or so customers whose losses during the 1997 Asian financial crisis led to the bad debts that were concealed by Refco’s former chairman Phillip Bennett. With recent news that Wolfgang Floettl also incurred unreported losses at Bawag during the period of 1996-2000, one has to seriously question just how “arm’s length” all transactions between Refco and Bawag ever were subsequent to mid-year 1997. For instance, since Wolfgang Floettl was the son of the head of Bawag bank (widely known as “Mr. Bawag”) and he is rumored to have incurred serious losses that were concealed by both institutions, one might reasonably question why and at what price Bawag agreed to purchase 10% of Refco in 1999.

Was there some quid pro quo between Bawag and Refco that never was disclosed to third parties? A reasonable person might suspect that the answer to this question is a resounding yes. If so, then a social network analysis (“SNA”) might be particularly helpful to better understand the relationships between Refco, Bawag, Ross Capital, PlusFunds, Liberty Capital and other organizations tied to the Refco scandal. Perhaps given time constraints, TCM might be able to pull together the names of key individuals who could be included in such a SNA mapping exercise. If one is interested in the initial data for such a SNA mapping, please contact Toomre Capital Markets directly.

PlusFunds tied to Refco and Bawag??

Greg Newton on his blog NakedShorts has been following the on-going developments with a money manger called PlusFunds that had a significant portion of its assets held by Refco Capital Markets, the unregulated Refco subsidiary based in Bermuda, until just before Refco’s bankruptcy filing. Apparently, the then CEO of PlusFunds, one Christopher Sugrue, a New York money manager and past employee of Refco, showed up at Refco’s offices just after the loan to Refco’s then CEO Phillip Bennett was announced and demanded that his company’s assets be transferred immediately to on-shore segregated accounts. The creditor committee of Refco subsequently got these funds to be frozen which in turn led to significant redemptions from PlusFunds’ investors and the filing for bankruptcy protection by PlusFunds earlier this month.

The Wall Street Journal has more information on a SEC investigation of PlusFunds’ dealings with Refco here. The article notes that Mr. Sugrue “was a senior executive at Refco for more than five years, according to a biography in court papers. In addition to working with hedge funds on the firm's behalf, Mr. Sugrue helped negotiate the sale of 10% in Refco to Austrian bank Bawag P.S.K. in 1999.”

Toomre Capital Markets LLC is curious about with whom at Bawag Mr. Sugure was negotiating. As noted in an earlier post here, news has recently emerged of hidden losses at Bawag incurred during the late 1990’s period and that executives up to and including the chairman were involved in the concealment. Was Mr. Sugure’s negotiating partner perhaps a certain Thomas Hackl, who at the time apparently was the head of Bawag’s Treasury department? Greg Newton mentions Mr. Hackl at the end of his PlusFunds post and this rumor mill page has other unsubstantiated information on Mr. Hackl.

All of this is very curious. The PlusFunds, Refco and Bawag seem to be much more intertwined than first appearances. It appears likely that the public will be learning more about the interrelationships between these three organizations and key individuals in the coming days.

Bawag P.S.K. Failed to Disclose Other Losses

YIKES!!! Earlier this week news emerged that Bawag P.S.K. Group, the Austrian bank that has been tied to the Refco Inc. fraud, had failed to disclose losses totaling more than $1.2 billion over a number of years after investments by the former chief executive officer’s son went sour. The Wall Street Journal reports that “the bank, as well as current and former executives, are now under investigation by the Austrian regulator, the Financial Markets Authority, for not informing regulators about losses run up by Wolfgang Flöttl , a New York-based investor and son of Bawag's former CEO, Walter Flöttl. The younger Mr. Flöttl used a €350 million loan from Bawag to offshore companies he controlled in the Caribbean island of Anguilla to make a highly leveraged bet in the foreign-currency markets that went bad, the bank said Friday. Between 1995 and 2000, investments made by Mr. Flöttl resulted in losses of about €1.3 billion in total, the bank said. Bawag Chairman Guenter Weninger said at a press conference that after he was informed of the losses by the bank's management board, they decided to write down the losses over a number of years and to keep them under wraps.” The article continues with the following amazing information:

Bawag, Austria's fourth-largest bank by assets, is owned by Austria's largest trade union, the OEGB. Bank executives masked the losses of about €1.3 billion with the help of a guarantee provided by the trade union and then failed to inform the regulators, the bank said. Mr. Weninger said no one asked him, so he didn't inform anyone.

Former Refco CEO Bennett Indicted

According to news service stories on Thursday evening November 10, 2005, the ousted former Chairman and CEO of Refco has been indicted by a federal grand jury on one count of conspiracy to commit securities fraud, wire fraud and making false filings with the U.S. Securities and Exchange Commission. A link to the actual indictment document will be added once it becomes available from the U.S. Attorney’s office in Manhattan.

This indictment comes on the same day that the Man Group won the auction to purchase Refco’s futures brokerage division for $282 million in cash. This is considerably less than the $768 million private buyout firm J.C. Flowers & Co. LLP had tentatively agreed to purchase pieces of Refco for prior to the Chapter 11 filing for various Refco subsidiaries.

Chicago Sun-Times: More on Refco and Mayer Brown

The following article in the Chicago Sun-Times on October 31, 2005 entitled Refco case could end up damaging law firm, too gives more details on how Mayer Brown Rowe and Maw – one of the biggest law firms in Chicago and the United States – could find itself mired in the widening scandal surrounding commodities brokerage Refco Inc. The article reveals that Mayer Brown has hired Mark Villa, of Washington D.C.’s Williams & Connolly, a lawyer who specializes in defending law firms.

Legal experts are said to disagree about whether Mayer Brown could face liability for its Refco work. A 1994 U.S. Supreme Court ruling indicates that law firms are not liable for “aiding and abetting” securities fraud and a plaintiff’s lawyer with a Refco suit pending indicated that Mayer Brown was an unlikely defendant. The article goes on to quote David Ruder, former chairman of the U.S. Securities and Exchange Commission and now a professor at Northwestern University School of Law, who indicated that there is a possibility of liability for drafting the documents, but the law is uncertain.

Refco Capital Markets former head Maggio reportedly cooperating

Staff reporters of The Wall Street Journal, Kara Scannell, Deborah Solomon and Peter A. McKay, report in the October 28, 2005 article “Maggio's Help on Refco Could Broaden Probe” that the decision by Santo C. Maggio, the former head of Refco Inc.'s securities arm, to cooperate with the government's probe of the futures brokerage may help authorities identify others who may have been involved in possible wrongdoing,

Scrutiny of Bawag Bank mounts in Refco case

The October 21, 2005 edition of The Wall Street Journal reports in an article entitled “Bawag Scrutiny Mounts, Putting CEO to the Test” that Johann Zwettler, chief executive of Bawag P.S.K. Group, the Austrian bank caught up in the Refco scandal, has been caught the unwelcome spotlight of financial regulators.

Law firm Mayer, Brown, Rowe & Maw involved in Refco case

The Financial Times of London reports this morning in an article entitled "Leading Law Firm Involved in Refco Case" that Mayer, Brown, Rowe & Maw – one of the world’s top international law firms – worked on the loans used by Phillip Bennett, the former chief executive officer of Refco to disguise his debt of $430 million to the brokerage group.

Selected reference material on the unfolding Refco story and Mayer Brown involvement:

Thoughts stirred by October 19, 2005 edition of The Wall Street Journal

Here are some thoughts (with associated ‘TCM smart’ links) provoked while reading today’s edition of The Wall Street Journal:

  1. From the article entitled “Splogs Roil the Internet, the following information is worth investigating: