Grant Thornton Settles With Funds Over Refco Collapse

Law360, New York –  A New York federal judge signed off on a settlement Wednesday between investment funds and auditing firm Grant Thornton LLP, which joined Mayer Brown LLP in putting to rest allegations it helped now-defunct Refco Inc. carry out its $1.5 billion securities fraud scheme.

The terms of the settlement approved by U.S. District Judge Jed S. Rakoff weren’t disclosed, and attorneys involved in the case didn’t immediately respond to requests for comment Wednesday. On Aug. 16, Judge Rakoff also signed off a settlement of undisclosed terms between the liquidators and Mayer Brown.

“We are pleased to have this matter resolved, which includes no admission of wrongdoing, allowing us to keep our focus on providing outstanding client services,” Grant Thornton said in a statement.

The two firms were part of the sprawling litigation brought by Sphinx Ltd. funds, which allegedly lost $263 million when Refco collapsed in 2005, because of their suspected roles in Refco’s $1.5 billion fraud scheme that sent ex-CEO Phillip R. Bennett to prison for 16 years.

They alleged that Grant Thornton, as Refco’s auditor, knew about the precarious financial state but issued reports to the contrary, and that Mayer Brown attorneys assisted in the fraud by preparing and reviewing documents related to an alleged scheme to cover up customer losses by hiding receivables.

In April, Special Master Daniel J. Capra issued a report that said Grant Thornton and Mayer Brown couldn’t dispense with the accusations on summary judgment, finding that the Sphinx fund liquidators had raised issues of fact.

The suit arose from revelations that Refco’s ex-CEO had concealed $430 million in debt through complex trading and lending schemes and shell companies in an effort to bolster the company’s financial reports.

Refco sought Chapter 11 protection in October 2005, two months after a $583 million initial public offering and about a year after it was purchased for $1.9 billion in a leveraged buyout by Thomas H. Lee Partners LP.

Five days before Refco sought protection, more than $312 million was transferred from the Sphinx accounts at Refco to unprotected offshore accounts. The hedge fund group ultimately settled with Refco creditors, agreeing to turn over $263 million.

Meanwhile, federal investigators believe Refco had been covering up customer trading losses by transferring securities to appear as debts owed by Refco Group Holdings Inc., a holding company controlled by former directors. Directors later hid RGHI’s receivables from auditors by transferring funds to make the debt appear to be from an entity not related to RGHI, prosecutors alleged.

In September 2012, Grant Thornton reached an undisclosed settlement with Refco bankruptcy trustee Marc S. Kirschner in separate litigation. Mayer Brown settled with Kirschner in June.

The plaintiffs are represented by Lee M. Andelin, Robert T. Mills, Thomas A. Gilson and Leo R. Beus of Beus Gilbert PLLC and David M. Molton and Andrew Dash of Brown Rudnick LLP.

Grant Thornton is represented by Linda T. Coberly and Bruce R. Braun of Winston & Strawn LLP.

Mayer Brown is represented by John K. Villa, Robert M. Cary, Craig D. Singer, Daniel P. Shanahan and John S. Williams of Williams & Connolly LLP.

The case is Krys et al. v. Sugrue et al., case number 1:08-cv-03065, in the U.S. District Court for the Southern District of New York.

–Additional reporting by Matt Chiappardi, Emily Atkin and Martin Bricketto. Editing by Jeremy Barker.