October 18, 2005

Refco & Flowers in 'Advanced Negotiations'

NEW YORK (HedgeWorld.com)--Refco Inc. announced Monday (October 17) that it is in advanced negotiations with a group of investors for the sale of Refco's futures brokerage business, conducted through Refco LLC, Refco Overseas Ltd., and Refco Singapore Pre. Ltd., as well as related subsidiaries.

The group pursuing a purchase is led by J.C. Flowers & Co., the announcement said. J.C. Flowers is a private equity firm specializing in financial services run by Christopher Flowers, formerly of Goldman Sachs & Co. Goldman is serving as Refco's financial adviser.

Mr. Flowers, who worked on mergers and acquisitions at Goldman, is the largest shareholder of Shinsei Bank Ltd. and the Enstar Group Inc.

The announcement said that Refco expects that it and the Flowers group will enter into a memorandum of understanding shortly and will execute definitive contracts soon thereafter. But it cautioned that there "can be no assurance that any agreement ultimately will be reached or that the sale will be completed."

The weekend was rife with rumors concerning Refco's fate. Many of those rumors involved Man Financial, the brokerage arm of Man Group plc, the publicly traded hedge fund firm. But early Monday morning, Man issued this statement: "Contrary to market speculation, Man Group confirms that it is not currently in discussions with Refco or its advisers regarding a Refco acquisition."

The wording allows, of course, for the possibility that Man Group was formerly in such talks but terminated them some time prior to the statement. David Browne, a spokesman for Man, declined to expand on the statement, which he said "means exactly what it says."

The proposed deal with the Flowers group would leave uncertain the fate of Refco Capital Markets, a prime broker, and Refco Securities LLC, a broker-dealer, both of which were shut down last week.

No specifics about the deal, such as a price range, were available Monday morning; however, a spokesman for Refco's adviser, Goldman Sachs, said that more could be available "as early as later today [Monday]."

Goldman Sachs was also one of the lead underwriters for Refco's initial public offering in August 2005. Other firms involved were Credit Suisse First Boston and Banc of America Securities. It is possible that each will be on the hook for legal liabilities as the fallout from the transactions of former Refco Chief Executive Philip R. Bennett continues to spread.

Meanwhile, among the several class-action lawsuits involving Refco brought thus far, it appears that only one, drafted by Shalov, Stone & Bonner LLP, New York, names the hedge fund Liberty Corner Capital, Summit, N.J., as a defendant. It charges that Liberty Corner was "a willing and direct participant in the scheme to defraud investors."

The principal of Liberty Corner, William Pigott, referred a caller to his attorney, Kevin Marino, who could not be reached for comment but who was quoted last week saying that nobody involved with Liberty Corner had any reason to believe that the transactions into which it entered with Mr. Bennett and an entity Mr. Bennett controlled (transactions now alleged to have been used to deceive investors) were anything other than legitimate.

CFaille@HedgeWorld.com

Contact Bob Keane with questions or comments at bkeane@investmentadvisor.com.

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