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7/27/2019 BE REFCO CASE STUDY.pptx
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CORPORATE GOVERNANCEISSUES AT REFCO INC.INTRODUCTION
Refco was a New York based financial servicescompany, primarily known as a broker ofcommodities and futures contracts.
It was founded in 1969 as Ray E.freidman and co.prior to its collapse in oct,2005.
Refco was the largest independent futuresbrokerage firm in the world.
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CASE SUMMARY
The case details the growth of Refco from a smallcommodities futures trading firm to a company offeringbrokerage services in futures, securities, and capitalmarkets.
The case describes the accountingfraud by Refco's CEOMr. Bennett .
In Oct 10,2005,refco enter into crisis when it announcethat its chief executive officer and chairman Philip
Bennett had hidden US$ 430 million in bad debts andBennett has been concealing this information bymanipulating accounting record.
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When a board went public with information, amass of withdrawal of funds from Refco thatleft a Refco in bankruptcy position because ofthis some subsidiaries of Refco were put for asale.
BAWAG an Australian based bank which helpBennett to cover up the fraud.
Refco shareholder filed a lawsuit against
company. Bennett had been sued for fraud US$700
million and BAWAG US$675 million.
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ISSUES:
1. Analyze the corporate governance at Refco.Inc.
2. To understand the importance of investor
trust.3. Examine the importance of business ethics.
4. Examine importance to know more about
protection laws and their limitations.
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Analyze the corporate governance
issues at Refco. Inc.
It was discovered that a receivable owed to Refcoby an unnamed entity turned out to be controlledby CEO Mr. Bennett, in the amount ofapproximately US$ 430 million. By buying such
entity, there was breach of corporate governanceas on the one hand there was lack of disclosure,on the other hand, though that entity was relatedperson to Refco, that fact was not brought to the
knowledge of the other Directors and as a lossmaking concern, it was detrimental to theinterest of Refco.
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CONTINUED :
Mr. Bennett had been buying bad debts from Refco in order toprevent the company from needing them to be writtenoff.That much was to be paid to REFCO. Interestingly, thatamount was borrowed by him from Refco itself. Buying outsuch bad debts by him or through a concern controlled by him
itself was bad as there was no disclosure. At the same time,using the funds of the company for such purpose was not onlyunethical but also dishonest.
Mr. Bennett also made at the end of every quarter for a Refco
subsidiary to lend money to a fund, which then lend themoney an independent offshore company secretly owned byBenet with no legal or official connection to Refco.
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IMPORTANCE OF INVESTOR/CUSTOMER TRUST An investor is a person or entity that purchases assets with
the objective of receiving a financial return.
Bennett faced several problems, after the scandal broke
Refcos creditors and investors badly affected because ,when it comes to establishing business and building strongrelationships with investors trust is main key.
After the accounting fraud was made public and an insider
who made false journal entries, the consequence of thissituation is, the announcement, auditors, underwriters,lawyers and former Bennett subordinates came under strictscrutiny by federal prosecutors.
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CONTINUED CONSEQUENCE: Each business owner has/ his own business
successful and whats important to business?
But the real glue to every business is building the trust
relationship with investors/ customers. without it business
will fall apart.
Refcos shareholders filed class action lawsuit against Refco
lee partners, Grant Thornton. Building trust is about being real
and human. But here, the Refco can create trustworthy.
without the key of trust, investors reacted negatively.
As financial leader, the CFO is usually the companys publicface on all issues concerning financial performance.CFO is
uniquely among investors. Likewise, investors look to CFO an
honest and objective portrayal of the companys health and
development.
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The importance of businessEthics In the case Mr. Bennett had been buying bad debts
from Refco in order to prevent the company fromneeding them to be written off. That much was to bepaid to REFCO. Interestingly, that amount was
borrowed by him from Refco itself. Buying out suchbad debts by him or through a concern controlled byhim itself was bad as there was no disclosure.
Using the funds of the company for such purposewas not only Unethical but also dishonest. On theone hand it amounted to misappropriation of profitsand on the other it was wrongful presentation ofprofits and also the assets that is advancing funds tobuy its defunct assets.
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CONTINUED Having a moral thoughts leads to more effective
business but Mr. Bennett didnt follow up the principlesof ethics due to his fraudness and occurred a huge lossin a company and hence the company is in the positionof bankruptcy.
short term gain and long term pain and vice versa-
People normally like to take a shortcut to success waynot realizing that gain lead a long term pain.
Same Mr. Bennett had done in a company to achieve along a term goal.
Companies known for high ethical standards usuallyhave an ethical code stating that they treat everyonewith dignity, dont present misleading information andstrictly follow rules and regulation.
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Importance to know more about investor
protection laws and their limitations
The Refco scandal cost many investors plenty of money.
In rapidly changing national and global business environment, it hasbecome necessary that regulation of corporate entities is in tune withthe emerging economic trends, encourage good corporate governanceand enable protection of the interests of the investors and other
stakeholders. Further, due to continuous increase in the complexities of business
operation, the forms of corporate organizations are constantlychanging, . As a result, there is a need for the law who protectinvestors.
In INDIA there is Securities Contracts (Regulation) Act, 1956, Securities
and Exchange Board of India Act, 1992 and Depositories Act, 1996 havebeen introduced by Securities and Exchange Board of India (SEBI), witha view to protect the interests of investors in the securities markets aswell as to maintain the standards of corporate governance in thecountry.
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CONTINUED
Limitations:-
The Refco scandal seemed to suggest that even the strictestregulation could not prevent determined fraudsters, whomore often than not were the top executives of a firm,from perpetrating fraud.
Effectiveness of corporate governance system cannotmerely be legislated by law neither can any system ofcorporate governance be static.
Failure to implement good governance procedures has acost in terms of a significant risk premium when competing
for scarce capital in today's public markets. As competition increases, the environment in which firms
operate also changes and in such a dynamic environmentthe systems of corporate governance also need to evolve.
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Conclusion
There is no transparency in decision making ofMr. bennett as he manipulated accountingrecords which leads to heavy loss of thecompany. Refco creditors and investors were
also badly affected. They were once fairly reputable and even
boasted 33% earnings per year and issuedmillions of shares of stock while their CEO was
committing a huge fraud for which he is nowserving time.
The Refco bankruptcy has taught everyoneinvolved in trading forex a severe lesson.