Refco report points finger at top law firm

One of the biggest law firms in the US and two leading accountants should face legal claims over their role in alleged fraud at Refco, according to the examiner in the collapsed broker’s bankruptcy case.

Refco’s creditors have strong claims against Mayer, Brown, Rowe & Maw, the Chicago-based law firm, together with Ernst & Young and Grant Thornton, for professional negligence, said Joshua Hochberg in his final report filed on Wednesday.

The evidence also supports a state law claim of “aiding and abetting fraud” against Mayer Brown and possibly Ernst & Young, the 416-page report said.

Mr Hochberg’s findings do not have the force of law, rather they serve as legal advice for the creditors left holding the bag when Refco filed for bankruptcy in October 2005, a week after it was revealed that Phillip Bennett, its former chief executive, had disguised a $430m debt he owed to the company.

The debt allegedly originated from client losses which had been concealed through the use of the fraudulent round-trip loan scheme to present a false picture of the company’s financial health.

Refco, which was valued at more than $4bn before the disclosure, had gone public only five months earlier in an initial public offering handled by Goldman Sachs and Credit Suisse.

According to the report, Mayer Brown attorneys drafted and sometimes negotiated the transaction documents for roundtrip loans while knowing they “were part of a scheme to fraudulently bolster Refco’s financial appearance”.

Mayer Brown was unavailable for comment.

Ernst & Young, which provided tax advice to Refco but resigned in 2003, said in a statement: “We believe our tax work fully complied with professional standards. We resigned in 2003, well before Refco’s 2005 public offering, after the company’s former management refused to allow us to meet with its outside auditors.”

Grant Thornton, which served as Refco’s auditors, said: “Responsibility for the Refco collapse lies [with the firm’s former management] …Our audit work met professional standards and statements by the examiner for the bankruptcy estate do not reflect the context or the facts as we know them to be.”