Man Group Wins Auction for Assets of Bankrupt Refco

Date: Thursday, November 10, 2005
Author: Bloomberg.com

Man Group Plc, the world's biggest publicly traded hedge fund company, won an auction for parts of bankrupt futures broker Refco Inc., outbidding at least three competitors.

Man Group said in a statement that it will buy customer accounts and assets of Refco's regulated futures business for $323 million. Refco creditors, including money manager Jim Rogers, plan to challenge the sale at a hearing in Manhattan scheduled for later today in U.S. bankruptcy court. Judge Robert Drain must approve the deal. The creditors argue that some of the assets that Refco is selling belong to them.

The acquisition would give London-based Man Group control of what was the fourth-largest broker in the U.S. futures market, where $2.5 trillion of contracts trade each day. Man Group beat Interactive Brokers Group LLC, the Dubai government and U.S. buyout firm J.C. Flowers & Co. in the bidding for New York-based Refco.

``As an existing market participant, they'll be able to quickly integrate the customer base,'' said Dennis Dutterer, former chief executive officer of Chicago-based Clearing Corp., which guarantees futures transactions at exchanges.

Man Financial Inc., Man Group's Chicago-based U.S. brokerage unit, ranks as the ninth-largest U.S. futures broker, data compiled by the Commodity Futures Trading Commission on Sept. 30 show. Profit at Man Financial rose 21 percent last year to $145 million.

From Sugar, Rum

Man Group Chief Executive Officer Stanley Fink said in today's statement that the purchase of the Refco assets will be ``value enhancing.'' Shares of Man Group rose 2.6 percent to 1,690 pence ($29.51) in London trading.

The agreement with Man Group excludes the $746 million of regulatory capital that Refco put aside to guarantee trades. Interactive's $858 million bid included regulatory capital, and would amount to $112 million if stripping those funds. The regulatory capital will remain with Refco under Man Group's offer and will be used to pay creditors.

Founded in 1783, Man Group traces its roots to James Man, a sugar broker who provided sailors in the Royal Navy with rum. The company grew into one of the world's largest sugar and cocoa traders, and then expanded into trading financial futures. Man Group also oversees about $44 billion of hedge fund assets, more than any competing company.

Hidden Debts

Refco's auction follows an Oct. 17 bankruptcy filing caused by the disclosure that former CEO Phillip Bennett hid $430 million of debt. Federal prosecutors have until today to charge Bennett, 57, formally in an indictment, unless he agrees to postpone the deadline. Bennett was arrested Oct. 11 by U.S. authorities and charged the next day with securities fraud. He may face life in prison if he's convicted.

Bennett today won a ruling granting him more lenient bail conditions after he couldn't find six people to co-sign a $50 million bond.

Refco owes creditors about $16.8 billion. Several customers, including Rogers, who used to work with billionaire George Soros, filed objections to selling Refco before the judge assures them that their assets held by the company are protected and not sold.

Drain, the bankruptcy judge, said at a hearing this morning that he has reviewed the objections and he plans to give objectors ``some advance warning of what I'm thinking'' in ruling on the matter. Drain said he hadn't yet reviewed the proposed asset sale agreement.

`Matter of Days'

Rogers Raw Materials Fund LP and Rogers International Raw Materials LP have sued to recover $362 million in accounts held at Refco Capital Markets Ltd. Nine customers have filed lawsuits seeking the return of more than $840 million.

Bawag P.S.K, an Austrian bank that's owed $234 million, along with AQR Absolute Return Master Account LP, Currenex Inc. and more than 40 other creditors, objected to the sale on similar terms, court documents show.

``We believe that a sale of these businesses under the terms of Man's bid is in the best interests of Refco's employees, brokers, customers and creditors,'' said William Sexton, Refco's chief executive officer, in a statement. ``Our goal is to close on this sale transaction in a matter of days.''

Refco lawyer J. Gregory Milmoe of Skadden, Arps, Slate, Meagher & Flom said last week that customer accounts are unsecured debt, not client property. If the bankruptcy judge determines that those accounts are Refco's debt, the group including Rogers will be treated as unsecured creditors. In large bankruptcy cases, unsecured creditors typically receive about 40 cents on the dollar for their claims.

Bond Price

Refco's 9 percent notes maturing in 2012 fell 2.75 cents on the dollar to 74.75 cents, up from 40 cents on Oct. 13, as bondholders bet Refco will be able to raise enough money in the auction to make good on their debts. Before the fraud probe, Refco's bonds traded at 109 cents and yielded 7 percent, according to Trace, the bond price reporting system of the NASD.

Interactive last month offered the largest publicly disclosed bid. The government of Dubai and California billionaire Ronald Burkle, 52, together offered $828 million. J.C. Flowers also submitted a bid.

The sale of Refco is ``good for the industry, good for the customers, and good for the employees because it adds certainty to where there is uncertainty now,'' said Gary DeWaal, Chicago- based general counsel for Fimat USA, the futures brokerage unit of Societe Generale SA.

Refco puts together buyers and sellers of exchange-traded derivatives such as interest-rate futures, and arranges contracts bought and sold over-the-counter, according to its Web site. The company had more than 200,000 accounts before it filed for bankruptcy last month.

The case is In re Refco Inc., 05-60006, U.S. Bankruptcy Court, Southern District of New York.

To contact the reporters on this story:
Tom Becker in U.S. Bankruptcy Court at New York  tbecker5@bloomberg.net