The problems at commodities and futures broker Refco Inc. that emerged over the past week made for another interesting case study in the debate over the necessity of the internal control provisions contained in the Sarbanes-Oxley Act.
Refco, a brokerage firm, just went public this summer, raising $583 million in its initial public offering. The company saw its stock price surge through the following weeks -- major investors soon included a couple of the biggest pension funds in the country and the biggest shareholder in the company, Thomas H. Lee Partners LLC, saw their initial capital outlay nearly double.
But last week, the boom times ended abruptly. Refco disclosed its chairman and chief executive, Phillip R. Bennett, was being forced out, rumor leaked that the Securities and Exchange Commission was launching an investigation and word spread of the existence of a sister company allegedly saddled with more than $430 million of Refco's debts stretching back to the 1990s. The stock price freefell over the span of seven days after a trading half was lifted, erasing about $2 billion in market capitalization. The humbled brokerage firm sold off its remaining viable line of business (a regulated futures-trading unit) and entered into one of the largest Chapter 11 bankruptcies in history. Meanwhile, Refco's auditor, Grant Thornton LLC, found itself the target of an investor lawsuit that's sure to seek class-action status in the coming weeks.
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