Lawsuit threat for Grant Thornton as Refco is sold off

Grant Thornton’s US arm is still facing lawsuit threats for its role in the
collapse of futures and commodities broker Refco, as regulators and banks
attempt to salvage the company this morning.

Former Goldman Sachs banker Chris Flowers is in pole position to buy Refco’s
futures trading arm, and a consortium led by his JC Flowers investment fund is
in advanced talks with Refco’s advisers.

Man Group and a Dubai consortium have also expressed interest in some
divisions of Refco’s business, but bankruptcy is still a possibility for the US

The brokerage collapsed after it emerged last week that the group’s accounts
concealed CEO Phillip Bennett’s involvement in a $430m (£245m) fraud. Grant
Thornton, Refco’s auditors, are now facing the threat of lawsuits as a result.

Before Refco proceeded with its $583m (£333.4m) listing on the New York Stock
Exchange in August, however, Grant Thornton did warn investors that there were
‘significant deficiencies’ in Refco’s internal controls.

In the group’s prospectus ahead of the float, Grant Thornton warned that
Refco’s finance function was not large enough to meet the demands of reporting
to the SEC and that formal procedures for closing the books were lacking.

A ‘significant deficiency’ is defined as a deficiency ‘that results in more
than a remote likelihood that a mis-statement of the financial statements that
is more than inconsequential will not be prevented or detected’ according to the

In the prospectus Refco itself admitted that it would be exposed to risks
relating to the evaluation of its internal controls as required by section 404
of the Sarbanes-Oxley act, which was introduced in 2002 to prevent corporate
scandals such as Enron and WorldCom.

At the time Refco said it was still ‘in the process of evaluating, testing
and implementing internal controls over financial reporting’ and did not have
the actual controls in place for auditors Grant Thornton to attest to.

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