Joseph Collins, Principal Attorney For Former Commodities Firm Refco, Found Guilty In Manhattan Federal Court
Preet Bharara, the United States Attorney for the Southern District of New York, announced that JOSEPH P. COLLINS, formerly the principal outside attorney for the now defunct financial services company, Refco Group Inc. (“Refco”), was found guilty today in Manhattan federal court of conspiracy, securities fraud, filing false statements with the SEC, and wire fraud, in connection with his role in the fraud underlying the collapse of Refco. The accounting fraud at Refco, once the nation’s largest independent commodities firm, cost investors and lenders more than $2.4 billion in losses. COLLINS was convicted after a four-week jury trial before Chief United States District Judge Loretta A. Preska.
Manhattan U.S. Attorney Preet Bharara stated: “In the eight years since Joseph Collins used his law license to help orchestrate this massive accounting fraud that left a major commodities firm in tatters, neither the gravity of the scheme nor our commitment to prosecuting its perpetrators has diminished, and today’s conviction is testimony to that commitment. Over and over and over again, Collins ignored his duties as an officer of the court by actively participating in the crimes of his client – telling blatant lies, falsifying important documents, and concealing others. In addition to the staggering losses and financial disarray caused by his actions, Collins gave the legal profession a black eye, something that is intolerable to this Office and to the vast majority of attorneys who serve their clients and the courts ethically and honorably every day.”
According to the Superseding Indictment filed in Manhattan federal court and the evidence presented at trial:
In August 2004 Thomas H. Lee Partners, L.P., purchased a majority interest in Refco through a $2.4 billion leveraged buyout (“LBO”) transaction. The buyout was financed with
approximately $500 million in cash from Thomas H. Lee Partners, $600 million in notes that Refco sold to private investors, and approximately $800 million borrowed from a syndicate of banks. In August 2005, Refco conducted an initial public offering (“IPO”) of its stock, which was then listed on the New York Stock Exchange. Both the LBO and the IPO were constructed and orchestrated in the context of a massive fraud scheme engineered by Phillip R. Bennett, former Chief Executive Officer and 50% owner of Refco, and others, with the knowing assistance of COLLINS. Only months after the IPO, Refco went into bankruptcy and its stock was delisted from the New York Stock Exchange.
During the relevant time period, COLLINS, then a partner at the law firm Mayer, Brown, Rowe & Maw LLP, was the primary outside counsel for Refco and Bennett. COLLINS participated in, among other things, Bennett’s scheme to falsify Refco's financial statements by hiding from Refco’s investors and auditors an enormous debt owed to Refco by a holding company partially owned by Bennett. This debt had ballooned to more than $1 billion by January 2004. On at least 17 different occasions from February 2000 through October 2005, COLLINS, and lawyers at his firm working at his direction, drafted documents that arranged for the routing - through various third parties - of more than $5.5 billion in loans from Refco to Bennett’s company. As COLLINS knew, the loans were made shortly before, and reversed shortly after, Refco’s fiscal year-ends and quarter-ends. During those brief periods, Bennett used the loans to pay down the debt his company owed to Refco, only to have the debt return once these “round-trip” loan transactions were reversed. These loans had the effect of concealing the size of Refco’s related-party debt by making it appear that the debt owed by Bennett’s company was significantly smaller than it really was.
COLLINS falsely represented to Thomas H. Lee Partners and others that all material contracts and related-party transactions had been disclosed, knowing that was untrue. In fact, documents relating to the round-trip loan transactions, including documents in which Refco guaranteed to third parties the performance of Bennett’s company - in amounts totaling billions of dollars - were never provided to Thomas H. Lee Partners. COLLINS also made affirmative misrepresentations and drafted contract terms that misled others into believing that Bennett’s holding company owed Refco no more than approximately $108 million, which COLLINS knowingly and falsely misrepresented would be repaid by the time the LBO transaction closed. In fact, COLLINS knew that Bennett’s holding company actually owed Refco at least $1 billion and that, even after the LBO, it would continue to owe Refco at least $300 million.
COLLINS also agreed with Bennett to conceal the terms of a 2002 agreement giving the Austrian bank BAWAG an approximately 47% economic interest in Refco, and further agreed to conceal Bennett’s plan to buy out BAWAG’s interest by using more than $500 million from the proceeds of the LBO. COLLINS also directed others not to disclose information relating to Bennett’s buyout of BAWAG’s interest, and lied to Thomas H. Lee Partners by representing that all material contracts and related-party transactions concerning Refco had been disclosed, knowing full well that these agreements and arrangements had not been disclosed. To that end, COLLINS created fraudulent corporate documents for Refco that he provided to Thomas H. Lee Partners in order to conceal from the firm BAWAG’s true economic interest in Refco and Refco’s true financial condition.
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COLLINS, was found guilty of conspiracy to commit securities fraud and other offenses (Count One); two counts of securities fraud (Counts Two and Three); two counts of filing false statements with the SEC (Counts Four & Five); and two counts of wire fraud (Counts Seven and Eight). He faces a maximum penalty of five years in prison on Count One and 20 years on each of the remaining counts, as well as a fine of the greater of $5,000,000 or twice the gross gain or loss from the offense, and three years of supervised release. COLLINS was acquitted of two counts of wire fraud (Counts Six and Nine) and one count of bank fraud (Count Ten).
COLLINS, 62, of Winnetka, Illinois, is scheduled to be sentenced by Chief Judge Preska on March 20, 2013 at 4:00 p.m. He was originally found guilty in 2009 on charges of conspiracy to commit securities fraud, wire fraud, bank fraud, and money laundering. His conviction was reversed by the United States Court Appeals for the Second Circuit in January 2012, and this was a retrial.
To date, several former executives of Refco have been convicted for their participation in the $2.4 billion fraud described above:
- Bennett, 64, of Gladstone, New Jersey, pled guilty in February 2008 to all 20 charges filed against him. He was sentenced on July 3, 2008, to 16 years in prison by U.S. District Judge Naomi Reice Buchwald;
- Tone N. Grant, 68, of Chicago, Illinois – one of the former owners of Refco – was convicted at trial in April 2008 on all five counts in the Indictment against him. Grant was sentenced on August 7, 2008, to 10 years in prison by Judge Buchwald;
- Robert C. Trosten, 43, of Sarasota, Florida – the former Chief Financial Officer of Refco – pled guilty in February 2008 before Judge Buchwald to five counts charged against him in the Indictment against him. Trosten has not yet been sentenced; and
- Santo C. Maggio, formerly of Naples, Florida – the former Executive Vice President of Refco and the former President and Chief Executive Officer of Refco Securities LLC, a Refco subsidiary – pled guilty in December 2007 before U.S. Magistrate Judge Ronald L. Ellis to a four-count Information. Maggio is recently deceased.
Mr. Bharara praised the work of the United States Postal Inspection Service and the Criminal Investigators of the United States Attorney’s Office, which jointly investigated this case. He also thanked the Securities and Exchange Commission and the Commodity Futures Trading Commission for their assistance in the case.
Assistant United States Attorneys Harry A. Chernoff, Michael A. Levy, and Edward A. Imperatore are in charge of the prosecution.