Regulators threaten to liquidate Refco unit
WASHINGTON – Regulators threatened to liquidate a unit of Refco Inc. that isn’t under bankruptcy-court protection, expressing “serious concern” about the language of a recent court order that directed the unit to transfer customer assets.The threat, disclosed by Refco in documents filed with the U.S. Bankruptcy Court in Manhattan, came from the Securities and Exchange Commission and the Securities Investor Protection Corp., or SIPC, an agency chartered by Congress to help customers of bankrupt securities brokers get their money back.Refco said the regulators agreed to wait “at least until Tuesday” before beginning liquidation proceedings.The Refco unit, Refco Securities LLC, is regulated by the SEC. It has been winding down operations ever since Refco sought Chapter 11 bankruptcy-court protection on Oct. 17.Since then, the unit has “closed out thousands of customer accounts by returning the cash, securities and other customer property in those accounts to the customers,” Jeffrey Mester, the unit’s chief executive officer, said in court papers.Refco lawyers believed that process had been completed by Dec. 16, when U.S. Bankruptcy Judge Robert Drain ordered Refco Securities to return $117 million in securities that creditors contended had been “improperly” transferred from an unregulated offshore unit, Refco Capital Markets Ltd.As a result, the lawyers agreed to language in that order that had unintended effects, an attorney for Refco said.”Lawyers were under the misimpression that all of the Refco Securities customers had been cashed out prior to the entry of the order,” said the attorney, Gregory Milmoe, of law firm Skadden, Arps, Slate, Meagher & Flom LLP.In fact, according to court papers filed Monday, Refco Securities still had 550 customer accounts and the language of Drain’s order could be interpreted to prohibit those customers from recovering their assets.Mester said that when he realized that interpretation was possible, he immediately directed Refco Securities personnel to stop returning any customer property.The remaining customer accounts, he said, contained about $14 million. Most of the accounts contained small balances – of the 550 accounts, more than 380 had cash balances of less than $100, Mester said.Mester said he notified the SEC and the SIPC that he would stop any transfers of customer property to or at the direction of customers until the language of Drain’s order was amended. Refco’s lawyers on Monday asked for that change.Mester said the SEC and the SIPC informed him Friday they had “serious concern” that Refco Securities customers were being barred from closing their accounts.