Word: refco
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...Reportedly made Phillip Bennett, former chairman of financial-services company Refco, cry during his 2008 trial for fraud. Bennett was sentenced to 16 years in prison for cheating investors out of $2.4 billion. (See pictures of TIME's Wall Street covers...
...Badian episode might have been forgotten if not for its ties to Refco, which last month admitted to reporting false results after hiding $430 million of uncollectible debt. Refco CEO Phillip Bennett was charged with fraud, and his company sank into bankruptcy protection within days. It turns out, plaintiff lawyers say, that Badian had been making some of his Sedona trades through Refco, which has acknowledged an SEC investigation...
Looking the other way while clients manipulated the shares of small companies through what's known as naked short selling appears to have been yet another questionable way of doing business at Refco. Short selling is legal: you borrow stock, then sell it and hope to buy it back at a lower price, profiting from the difference. But naked short selling is illegal, barring certain exceptions for brokers trying to maintain an orderly market. In naked short selling, you execute the sale without borrowing the stock. The SEC noted in a report last year the "pervasiveness" of the practice. When...
Brokers are required to ask a client the nature of a stock sale. If it's a short sale, the broker must ascertain if the client has been able to borrow the stock. "I have seen evidence that links Badian and/or Refco to more than 50 stocks that were driven into the ground," says Wes Christian, part of a legal team headed by billionaire Texas tobacco litigator John O'Quinn, who is amassing a case against Badian, other hedge funds and now possibly Refco. Refco declined to comment. Badian didn't come to the door when a TIME reporter rang...
After high-profile alleged frauds like Refco's and another this summer at hedge fund Bayou Management, where managers shut down the firm without notice, the call for strict oversight is growing. Largely unregulated investment pools for institutions and the wealthy, hedge funds make big bets--up or down--on stocks, bonds, commodities and currencies. Officials are investigating trading records at 35 institutions as part of their probe into naked short selling. And starting in February, hedge-fund advisers must register with...