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Weighed down by an accounting scandal, a former chief executive under indictment and the possibility of serious trouble with the Securities and Exchange Commission, commodities broker Refco Inc. appears to be struggling to hold on to as many customers — and as much cash — as possible. There was more evidence Friday that the $545 million accounting scandal in a Refco subsidiary that led to the arrest of ex-CEO Phillip Bennett was spilling out into the company’s other businesses. Credit rating agency Standard & Poor’s said the situation was getting so bad, the company was likely to default on its debt payments due to a lack of cash. Refco said Friday it would begin “winding down” its stock, bond and credit portfolios within its Refco Securities LLC subsidiary, selling all its holdings to pay off its customers and, hopefully, preserve some of its capital to potentially use to help keep the company going. Combined with the company’s previous move to freeze customer accounts in its Refco Capital Markets subsidiary, an offshore broker/dealer, analysts said Refco is busy trying to keep customers from fleeing the company and taking their money with them. “It’s the classic run on the bank,” said Bill Harris, head of forensic advisory services at CBIZ Accounting. “Customers see that other customers are leaving, and they lose confidence in Refco’s ability to produce their money when they need it. So they leave, too. That snowball rolls downhill and gets big pretty quick.” The nervousness over Refco’s health has extended from investors to the futures markets themselves. The Wall Street Journal reported Friday on its Web site that regulators for the Chicago Mercantile Exchange and Commodity Futures Trading Commission have asked Wall Street firm Goldman Sachs Group Inc. to buy out or assume responsibility for Refco’s futures trading business in an effort to calm investors’ fears about Refco’s cash crunch. The Journal, citing a person familiar with the firm’s thinking, said Goldman was not interested in backing or buying Refco. Goldman has been retained by Refco’s board as a financial advisor. The SEC on Friday compounded Refco’s problems by barring Refco Securities LLC and another Refco subsidiary, Refco Clearing LLC, from moving more than 30 percent of excess net capital to any shareholder, employee, partner or affiliate for the next 20 days. While the SEC would not comment on the implications of that order, Harris said it would be difficult for Refco to take substantial amounts of money from those subsidiaries to support other parts of the company. Twenty days could be too long to wait for the nation’s largest independent futures broker, which went from one of Wall Street’s rising stars to scandal and a looming cash crisis in the space of five days. Last Monday, Refco said Bennett would go on leave after paying the company $430 million, plus interest, to account for bad debts hidden in another entity under Bennett’s control. That made Refco’s revenues look much larger than they actually were, since it was unlikely that the company would ever collect on those debts. It also may have misled investors in the company’s initial public stock offering, just two months ago. The stock has lost more than 70 percent of its value since its Oct. 7 close. Refco’s stock remained halted on the New York Stock Exchange on Friday as the exchange sought more information from the company and considered whether Refco should be delisted because of the scandal. Its corporate bonds fell precipitously for a second straight session after Standard & Poor’s dropped Refco’s credit rating deeper into “junk” status a second time in as many days. Bennett was arrested late Tuesday on federal securities fraud charges, and is free on a $50 million bond. The company also faces a potential class action lawsuit from investors. Since the scandal broke, Refco’s board of directors appointed a company veteran, William Sexton, as its new CEO, hired a team of forensic accountants, and named former SEC Chairman Arthur Levitt as a special adviser. Spokespeople for the company would not comment on any aspect of Refco’s business beyond the company’s press releases. The company’s main futures trading subsidiary, Refco LLC, appeared to remain functional. Refco remains a major customer for the Chicago Mercantile Exchange, the New York Board of Trade and the New York Mercantile Exchange, and all three trading groups said Friday that Refco LLC remained in good standing. They also added, however, that all three would have to sign off before the company moved any capital out of that subsidiary. Refco LLC’s capital is used to support trading on each exchange, and losing that capital could produce more volatility for commodities such as oil, metals and food products. Copyright 2005 Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten or redistributed.

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