Long before Refco Inc. found itself at the center of a scandal that ultimately led to its collapse, investors should have known that its financial house was in disarray. The company said as much in its initial public offering's prospectus.
Refco acknowledged on page 23 that its auditors had found "significant deficiencies" with how the company staffed its finance department that made it difficult to prepare compliant financial statements. It also noted problems with the procedures Refco used to close its books each quarter.
But investors chose to ignore such risks when they poured big money into Refco's stock during its IPO and thereafter. What a mistake: Weeks later, financial fraud destroyed the company.
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