Refco Files for Bankruptcy

Troubled US futures broker Refco filed for bankruptcy protection today and agreed to sell its core futures brokerage business to an investor group for $768m (£439.5m).

The investor group is being led by a private equity fund, JC Flowers, run by former Goldman high flyer Christopher Flowers, and includes Enstar Group, a financial services investment firm.

Flowers could face a rival bid. Dubai Investments, part of the Dubai government, has reportedly hired The Blackstone Group to advise it on a potential $1bn acquisition of the entire company.

Refco said it expected the bankruptcy court to establish procedures for the submission of competing proposals. None of Refco's regulated subsidiaries, including the key futures brokerage business and its broker-dealer unit, Refco Securities, filed for bankruptcy protection, the company said.

The interest so far appears to be in the regulated futures arm rather than in the unregulated capital markets operation that specialises in dealing with hedge funds and other professional players. The capital markets arm has effectively closed to new business.

Filing for bankruptcy will help the company to stop an outflow of customer assets. Clients have reportedly removed about 20% of assets from Refco's futures brokerage. That business had about $4.1bn in customer assets under management before customers withdrew at least $850m, the Wall Street Journal reported.

Before its recent troubles, Refco was one of the biggest market makers for commodities and financial futures, allowing funds and companies to trade contracts on commodities, bonds and currencies.

Investors started pulling their money out following news of a week ago that Refco's chief executive, Phillip Bennett, had been charged with defrauding investors by using a hedge fund to hide $430m of debts.

Mr Bennett, a British financier who has lived in the US for more than 20 years, is on bail and confined to his home in New York on an electronic tag.

Even though Refco is not believed to be breaching any regulatory capital requirements, it has been driven out of business by a crisis of confidence among its customers. The company has admitted its financial records going back to 2002 cannot be relied upon.

Refco only became a public company in August with an initial public offering priced at $22, its shares jumping 25% on the opening day. The company has operations in 14 countries, with 2,400 employees and more than 200,000 customer accounts.