Late in the day on Friday, October 7, 2005, FTI was contacted by Refco’s audit committee counsel to assist in a major internal investigation based around potential fraud at the very highest level of the organization.
Within minutes, FTI Computer Forensics consultants were on the ground at Refco headquarters collecting data from several high importance custodians. This included data collection from over 250 media assets including laptops, servers, transactional and other legacy back-office systems.
Reconstructing Electronic Evidence
FTI deployed multiple teams of engineers and accountants to perform forensic analysis around the clock that weekend. One team worked to reconstruct complex financial and back office transactions while another streamed file and email data into Attenex for processing and document review.
FTI’s forensic accountants assisted in the following ways:
- Analysis of activities related to executive compensation payments.
- Extensive review and analysis of account statements, wire transfers, general ledger reports (directly from Oracle-based PeopleSoft databases), transaction memos and other supporting documentation to determine the flow of funds between Refco entities and other entities between 2000 and 2005.
- Restoration of recorded telephone conversations that occurred on its trading floor and conversion to reviewable format for subsequent analysis.
FTI’s computer forensics team acquired and extracted the custodian data from personal computers, network drives, email servers, financial database systems, BlackBerrys, and backup stores. Over seven terabytes of data was collected and processed, de-duplicated and loaded into both Attenex and Ringtail to provide attorneys at Latham and Watkins the ability to
- Perform searches on the documents in a variety of ways including searching by keyword, sort documents by date, witness or other criteria.
- Mark documents as privileged or redacted.
- Designate documents for production.
- Or any number of other tasks attendant at the document discovery process.
On Monday, October 10, 2005, FTI provided Refco’s outside counsel the opportunity to examine critical evidence related to the case.
On Monday, October 10, 2005, Refco’s board announced that Phillip R. Bennett, Refco’s CEO and Chairman, had transferred $430 million to a separate company he controlled, and had hid that information from the company’s auditors and board. Mr. Bennett had agreed to take an immediate leave of absence.
Within the coming days, FTI’s forensic analysis shed more light on the malfeasance. It appeared that between 2002 and 2005, Mr. Bennett had bought bad debts from Refco in order to prevent corporate write-offs, then paid for the bad loans with money borrowed by Refco itself. The company subsequently announced the need to restate its financial statements back to 2002.
As a result, a number of other investigations ensued, and on October 12, 2005, Mr. Bennett was arrested and charged with securities fraud. Only a few days later on Monday, October 17, 2005, Refco declared bankruptcy. Though Refco’s shares had been trading at $28 per share, on October 19 they dropped to $0.80 per share, prompting the New York Stock Exchange to halt trading.
When Refco entered Chapter 11 bankruptcy, it declared assets of roughly $49 billion, making it at the time the fourth largest bankruptcy filing in US history. Shortly after its filing, Refco resubmitted a revised filing declaring assets of only $16.5 billion with $16.8 billion in liabilities, with a plan to sell its regulated futures and commodities business, which ultimately was purchased by Man Financial on November 10, 2005.
FTI’s Computer Forensic consultants were deployed within minutes to collect, process and analyze complex transactional and document data at the request of Refco’s board and outside counsel. Within just three days of the initial collection, FTI provided an initial report to the board on money transfers and accounts outside of Refco.