NakedShorts

Phil Bennett’s comeuppance cometh today

Former Refco chief executive officer Phillip R. Bennett gets his at 11 am this morning, when he appears before US District Court Judge Naomi Reice Buchwald for sentencing on charges related to his role in the Oct. 2005 collapse of the futures brokerage and crime syndicate. While eligible for a sentence of 315 years and a $2.4 billion restitution order, the kindly folks at the Probation Service are recommending 20 years for the 58-year-old.

According to a statistically bogus poll of NakedShorts readers, a plurality—70 per cent—are looking for a punishment at the high end of the range, although a surprising (at least here) number—almost 20 per cent—chose the “3 months probation and $30 restitution” option.

The latest sentencing-related court filings add only some small points of color, with the defense ladling on the syrup of his sudden urge to cooperate with civil litigants seeking recovery of Refco-related losses. Including a hint that he might have turned on his old buddy Christopher Sugrue:

Mr. Bennett has had a very productive meeting with counsel for the Joint Liquidators of Minus Funds, an entity that went bankrupt in the wake of the collapse of Refco and is now seeking hundreds of millions of dollars for defrauded investors, in suits filed against a number of defendants associated with Refco.

The government? No sale.

...the information Bennett is providing to the plaintiffs is colored by the circumstances of his “cooperation”:

1. The significant incentive to lie to the civil plaintiffs by falsely inculpating his codefendants in order to gain the letters...that he has submitted to the Court;
2. unlike a cooperating witness, Bennett faces little risk of detection or punishment if he lies to the civil litigants;
3. unlike with a cooperating witness, there is no assurance that such “cooperation” will continue until completion (that is, after he is sentenced on July 3);
4. unlike with a cooperating witness, there is no opportunity for a credibility determination by a neutral party, such as the Court, or by a party whose interest is aligned with a truth-seeking function, such as the Government; and
5. unlike with a cooperating witness, there is no way to accurately assess the value of the cooperation after it has been completed. In other words, under the circumstances, and unlike a cooperating defendant, Bennett has every incentive to lie with little worry of having to suffer the consequences of having done so...

...Furthermore, even with respect to his so-called cooperation, it appears that Bennett has been less than fully candid in the single deposition he has given...
[Emphasis added]

It will be interesting to see, in light of recent developments, whether Judge Buchwald allows Bennett to remain on bail. Unlike Bayou founder Scamuel Israel III, Bennett has been accompanied by an ankle bracelet since his arrest in Oct. 2005, and his leash was tightened further after his guilty plea in February, when he was ordered to choose between his Park Avenue penthouse, or his Gladstone, NJ, palace. He chose the palace, doubtless to bolster his attorney’s claim that, at heart, he’s just a simple goose-botherer, and not one of the biggest thieves in financial history.

Reply Memorandum of Phillip R. Bennett
US v. Phillip R. Bennett
Jun. 19 2008

Response to Reply Memorandum of Phillip R. Bennett
US v. Phillip R. Bennett
Jun. 30 2008

Earlier on NakedShorts

July 3 fireworks for Refco boss
Jun. 13 2008

Serve him right

SPhinX liquidators sue Angolan resident

Sorry to tease, but the latest suit in the Refco/MinusFunds/ SPhinX shambles runs 280 pages, names—rough count—some 50 defendants, and, well, takes some wading through. This morsel could not, however, wait:

Defendant Christopher Sugrue...
Upon information and belief has
fled the United States and
currently resides in Angola

Several things:

• Bad news: Angola does not have an extradition treaty with the US. Doh.
• Good news: Downtown Luanda is pretty much indistinguishable from midtown New York.
• Better news (especially if Sugrue decides to take a drive in the country):

Travel within Angola remains unsafe due to bandit attacks, undisciplined police and military personnel, sporadic high-intensity military actions in interior provinces, and unexploded land mines in rural areas. Foreign nationals, especially independent entrepreneurs, are subject to arbitrary detention and/or deportation by immigration and police authorities (Source).

Much more next week.

The mother of all paper chases

MinusFunds’ documents, depositions ordered

Game on. Fourteen former directors, officers and employees of the defunct PlusFunds have been ordered to “produce documents and appear for examination” by the SPhinX Funds Trust, which has—following approval of PlusFunds’ bankruptcy organization—set about recovering the SPhinX investor losses.

The order, signed by US Bankruptcy Court Judge James M. Peck last Friday, comes almost exactly two years since Refco announced, on Oct. 10 2005, that it had found a $430 million hole in its accounts. Two days later, PlusFunds’  founder Christopher Sugrue arranged for $312 million in SPhinX assets to be moved out of Refco, setting off a chain of events cost investors in the SPhinX funds, and especially its managed futures strategy, some $250 million. It also took out PlusFunds, and the S&P hedge fund index, which was tracked by the once near-$3 billion SPhinX complex.

On deck: similar orders for service providers including the funds’ administrator DPM-Mellon, along with its former chief executive Robert Aaron, and chief operating officer Guy Castranova; auditors Deloitte & Touche LLP and PricewaterhouseCoopers LLC; and a grab-bag of second-tier law firms, including Gibson Dunn & Crutcher LLP, Pillsbury Winthrop Shaw Pittman LLP, Seward & Kissel LLP, and Curtis Mallet-Prevost LLP.

PlusFunds’ directors named in the action include Sugrue; Mark Kavanagh, Sugrue’s brother-in-law and a major PlusFunds investor; and Brian Owens, finance director of Hardwicke Ltd, the Irish property developer controlled by Kavanagh and, at various times, a director of both the SPhinX funds, and PlusFunds.

Most of the other individuals named were PlusFunds employees at the time of Refco’s collapse.

Things I wanna know...*

A miscellany of market motivators

Head on over the jump for Monday’s order book:

1. Whatever does this mean?

2. GS cred downgraded to BS

3. Stat-arb shambles: What say you BGI?

4. John, come down off that ledge, please

5. Where do they find these people?

6. MinusFunds? Overpaid? Surely not

7. Was mythical bird averaging down?

8. Let’s hope it’s not a reformation

9. Tight-knit wool, near-blind eyes

10. More sincerest form of flattery

* From an idea by Todd Harrison

MinusFunds document dumpster diving

Yesterday’s update on recent developments in the SPhinX funds fiasco produced what might best be characterized as a blizzard—well, three—documents from MinusFunds’ distant past. One must await another day, while its credentials are checked. Acknowledging that the vast majority of pixel-travellers passing here have absolutely no interest whatsoever in either MinusFunds and/or document dumpster diving, the sordid details of two have been relegated to the dark side.

SPhinX liquidators point to DPM Mellon

Fund records “inaccurate and incomplete”

DPM Mellon, the New Jersey-based hedge fund administration subsidiary of what is now Bank of New York-Mellon Corp (BK), faces close scrutiny for alleged shortcomings in its role at the MinusFunds-advised SPhinX funds, which collapsed last year after becoming embroiled in the Refco fiasco.

In an affidavit filed in the Grand Court of the Cayman Islands, Kenneth Krys—a partner at RSM Cayman Islands, and one of the joint official liquidators appointed over 22 SPhinX companies a year ago—characterized DPM Mellon’s records as “inaccurate and incomplete.” While noting that the errors “may not materially affect the overall result,” Krys charged a long list of deficiencies including:

• “Significant commingling of assets by certain members of management or agents” of MinusFunds in the SPhinX entities, including the supposedly legally inviolate segregated portfolio companies.
• Difficulties with certain DPM Mellon proprietary algorithms and programs, “incompatible with most other commercially available systems,” and “getting access to information.” The liquidators are not satisfied they have records necessary to establish the funds’ financial position with certainty.
• DPM could not provide a list of all prime brokerage accounts in which SPhinX assets were traded: it was told that funds shown as being held in a non-existent prime brokerage account are, in fact, at Mellon Bank, and may have been double-counted. As well, “We recently learned” that DPM was unaware of an escrow account established by one of the funds’ managers.
• The liquidators could not, after testing the cash flow and accounting records for a single month in “one of the less complicated SPCs,” resolve its true financial position. “Establishing the true financial position of individual companies will be very time-consuming and expensive.”

The relationship between MinusFunds (then d/b/a PlusFunds), DPM Mellon and the Sphinx Funds pivots on Robert Aaron, DPM Mellon’s founder and current chairman of the Managed Funds Association. He quietly left the company in Mar. 2007. So quietly, that until yesterday, when DPM Mellon was contacted for comment, Aaron was still listed as chief executive on the company’s website.

He was also a director of the now-defunct SPhinX funds, formed in 2002 to track the performance of the S&P hedge fund indexes, until he “departed...by resolution from [sic] the board” on Mar. 3 2006, according to an Irish Stock Exchange filing, days before MinusFunds filed for Chapter 11 bankruptcy in New York. The filing, along with all other traces of the handful of ISE-listed SPhinX entities, has disappeared from the exchange’s website following their de-listing last year.

Refco for Dummies

Joshua Hochberg, Refco’s bankruptcy examiner, issued his final report yesterday. Sadly, neither ‘PlusFunds’ or ‘MinusFunds’ made the cut in the 416-page main document. However, the elusive Christopher Sugrue managed a cameo:

...The [Nov. 1999] Collins memo was titled “Refco/BAWAG; Next Chapter,” and mentioned a newly created company to be owned by Bennett (40%), Grant (40%), and Chris Sugrue (20%)...
In re: Refco Inc et al
Footnote 785; Page 253 (Page 259 in .pdf numbering)

Both (former chief executive officer Phillip) Bennett and (former president Tone) Grant face criminal charges for their role in Refco’s collapse. In 1999, Sugrue was running through the then-infant MinusFunds’ first-round funding while, according to National Futures Association records, still registered with both Refco LLC, the regulated US futures brokerage, and Refcofund Holdings LLC, as an associated person.

The report makes interesting reading, especially as it relates to the performance of Refco’s not-exactly professional advisors, not-the-rock-star Tommy Lee and various other participants—witting, unwitting and merely witless—in this sorry saga. If this movie had a theme, it would be that immortal line from Hogan’s Heroes:

I hear nothing, I see nothing, I KNOW nothing.

In re: Refco Inc et al
Final Report of Examiner
(via The Wall Street Journal)

Related MSM coverage
(via Google News)

Refco trustee hits former PlusFunds CEO

Move over. It's getting crowded under the bus!

All other things being equal, Gabriel Bousbib should recently have cashed a very nice check, the finally out-of-escrow last fruits of a largely successful three-year-plus tenure as chief executive officer of PlusFunds Group Inc. Instead, he’ll be deposed in a Manhattan conference room this morning, trying to avoid joining the list of those Sugrued* by the Refco debacle and the subsequent rapid makeover of PlusFunds into MinusFunds.

Bousbib, now a managing director of Switzerland-based Gottex Fund Management, sold his PlusFunds shares in Mar. 2005 to Suffolk LLC, an entity associated with PlusFunds’ founder Christopher Sugrue and his brother-in-law Mark Kavanagh, a prominent Irish businessman. Bousbib received almost $36 for each of his shares, with 12 percent of the payout escrowed for two years, until Mar. 29 2007.

But less than two weeks before that escrow was due to terminate, Marc S. Kirschner, litigation trustee representing Refco Capital LLC—which financed the buy-out of Bousbib, and other minority PlusFunds shareholders—filed an involuntary Chapter 7 bankruptcy petition in US Bankruptcy Court, Delaware, against Suffolk LLC, Suffolk-MKK LLC, Suffolk-KAV LLC and Suffolk-SUG LLC, all Delaware corporations.

Now Bousbib is being forced to sue for his money.

I hope they had an exorcism

Fluttering through NakedShorts’ email box recently, a summary information sheet for the WR Multi-Strategy Fund, brought to you by the fine folks at WR Capital Mgt LP, resident at 40 Signal Rd in lovely Scamford, Conn. 40 Signal Road?

Writ much larger, of course, as the former mostly-monkey business address of the Bayou family (which still awaits sentencing).

And, it seems the new business home of—Welcome back!—Christopher H. Rose, chief operating officer of  the “next generation multi-manager fund of funds combining the strengths of a fund of funds in a managed account platform with active risk management…to maintain a market neutral exposure in all market environments.”

Rose was chief operating officer at another sort-of “next generation multi-manager fund of funds combining the strengths of a fund of funds in a managed account platform,” or words to that effect: MinusFunds. Where he was far from alone in not noticing that $300 million-odd invested in the SPhinX managed futures funds had wandered off to Refco Capital Markets. Until it was rather too late.

But apart from that, the document is a due diligence goldmine. Featuring:

MinusFunds data deal on hold dead

Seems like someone reached out and touched someone. Or someone grew a conscience. Or something. From a Dec. 7 filing in the MinusFunds bankruptcy case:

PLEASE TAKE NOTICE THAT, the Presentment Date for signing of an order granting the Motion for Order Authorizing Debtor to License Proprietary Database of Historical Trading Positions to Citadel…scheduled for December 15, 2006 at 11:00 A.M., has been adjourned, without date, until further notice.

PLEASE TAKE FURTHER NOTICE THAT, the objection deadline, previously scheduled for December 15, 2006 at 10:00 A.M., has been adjourned, without date, until further notice.

PLEASE TAKE FURTHER NOTICE THAT, MinusFunds Group, Inc. retains its rights to modify and/or withdraw the Motion.
[Emphasis added.]

Translated from the original legalese: Ooops. Never mind. Dripping sarcasm aside, the right decision, well done all concerned, and with luck that’s an end to it.

Earlier NakedShorts coverage

Thanks, Jerry

At 6:21 pm EST one evening last week, Jerrold L. Bregman, partner at MinusFunds’ attorneys Curtis, Mallett-Prevost, sent out an email containing a copy of a document “filed today in the Refco proceedings on behalf of MinusFunds Group Inc:  MinusFunds Group Inc's Response To RCM Trustee's Objection And Emergency Motion For Order...” blah blah blah.

Which is neither here nor there, but for the fact that he included the entire distribution list in the To: box, from where it magically jumped all the way to to NakedShorts’ clammy paws. Licenses available for…ummm…$75,000 seems to be the going rate. Of course, its’s not my list. But if Curtis, Mallett-Prevost can advocate the licensing of confidential information that doesn’t belong to its client, sauce for the goose etc etc.

(And apart from anything else, that Refco filing plays fast and loose with a fact or two).

And you managers: Get under the bus!

Citadel makes $75,000 bid to see competitors’ strategies

Add to the growing list of people who rue the day they ever heard of Christopher Sugrue, or MinusFunds, or the S&P hedge fund indexes: the hedge fund managers and trading advisors who agreed to run the managed accounts. In its latest attempt to extract value from the rubble, what’s left of MinusFunds plans licensing the “proprietary database of the historical trading positions of the managed accounts known as the ‘SPhinx Funds’” for the period from Jul. 2002 to Jun. 2006.

First up, with a bid of $75,000 for the “perpetual, non-exclusive, non-sublicensable, and non-transferable” peek at some of his largest competitors’ most intimate secrets? Come on down, Ken Griffin, principal of Citadel Investment Group, already recently in the news for floating a $2 billion bond issue to show his prime brokers just who is boss, days after denying yet another round of rumors that he’d Amaranthed himself.

The stunt has some hurdles to overcome, not least the existence of confidentiality agreements in the contracts between MinusFunds and at least some of the managers. But one well-known trading advisor characterized the initiative as “pretty sleazy.”

It’s likely the database would allow Citadel, and presumably other licensees, to reverse-engineer a wide range of trading strategies implemented by some of the world’s best-known hedge fund managers. (An email to Citadel sent after normal working hours last night seeking to confirm that that was its interest in the database had received no response by pixel time.)

But this being MinusFunds, the questions don’t end there:

Get back under the bus, losers!

SPhinX investors’ appeal unceremoniously tossed

It was always a long shot, but investors in the MinusFunds-managed SPhinX hedge fund index funds – and specifically its managed futures variant – last week got word that their attempt to overturn a controversial settlement that cost them $263 million, and a shot at participating in Refco’s bankruptcy payout, was dead.

In an order signed Nov. 16, and formally entered Nov. 22, US District Court judge Richard M. Berman dismissed appeals seeking to overturn a decision by Judge Robert Drain, who is handling the Refco bankruptcy case, to approve a settlement of a preferential transfer action brought by Refco creditors.

The settlement, negotiated by the directors of the SPhinX Funds, was attacked by SPhinX investors as a thrown fight intended to protect MinusFunds and SPhinX insiders from scrutiny and legal exposure. Judge Berman didn’t have to address that assertion; he simply endorsed Judge Drain’s finding that the investors had no standing to appeal the settlement, no standing in Bankruptcy Court, and whatever is going on the Cayman Islands don’t mean comity around here.

Dismissed. Have a nice life. And don’t ever let met catch you around here again, pretending you don’t know the difference between the law and justice.

S&P abandons hedge fund index

Standard and Poor’s will pull the plug on its hedge fund index Friday, victim of the implosion of licensee MinusFunds. The statement:

Due to the diminishing number of managed accounts and their distribution in the index as of July 1, 2006, the S&P HFI will not be representative of the broad range of strategies that hedge funds employ and therefore will no longer be published. Standard & Poor's is evaluating the publication of a monthly non-investable index value based on the funds themselves to provide continuity for those who utilize the S&P HFI as a benchmark.

That would tend to suggest that the idea that Hedge Fund Research might take over PlusFunds’ role as investment adviser to the SPhinX funds – which tracked the performance of the S&P hedge fund index – has worked out just about as well as everything else in this sorry tale.

Hackl raised, more family tree…

…and an update on Eric Lipoff

News yesterday of Thomas Hackl, the presumably former member of the Standard and Poor’s hedge fund index committee*, close buddy of MinusFunds’  founder Christopher Sugrue**, and one-time prominent employee at two of history’s more spectacular financial accidents.

From deep in the heart of another fascinating Bloomberg piece (tip o’ the hat to John Lothian), this one adding the late Yasser Arafat to the cast entwined in the Refco/Bawag/MinusFunds mess:

The day was Oct. 10 [2005], when Refco went public with the news it had a hidden deficit. Bawag sold its stake that day in offshore Liquid Opportunities and the related Anguilla companies Bawag used to hide losses, according to evidence gathered by Austrian investigators. The buyer was Thomas Hackl, Bawag's former head of treasury and investment banking, three people close to the investigation say. Hackl, 41, left Bawag to work at Refco as head of global asset management from 2002 to 2004…

For the elimination of doubt…

Greg,

I refer to your May 24 MinusFunds article (Career Day I: Hezzaplan) and want to make it clear that I did not in any way:

1. Benefit from the debacle at PlusFunds;
2. Run with Mr Sugrue in the “black-tie” set, as may have been suggested by the photo; or
3. Knowingly have any hand in the allegedly unscrupulous machinations at PlusFunds that helped lead to its eventual downfall.

While I realize that your article was based on comments I made in an unrelated context, it may have been interpreted by some in a manner that would be a true disservice to both me and those I jealously sought to protect and assist through this debacle.

Like our clients, my fellow employees and I were duped,

Refco document production ordered

Dittmer, Hackl, Kavanagh, Klejna, Murphy, Sexton,
Silverman, Sugrue on a list of 20 to receive subpoenas

The doors of many of the best-known names in the Refco bankruptcy – not to mention some so far more anonymous figures – will hear the rap of process servers’ knuckles over the next few weeks after Judge Robert Drain approved an order directing the production of documents “by certain persons.”

Barely a week after telling SPhinX Fund investors that they had no place in his court, the heavily qualified order,  signed Friday, Jun. 16, allows Refco’s Official Committee of Unsecured Creditors to issue subpoenas. Several of the respondents, if and when served, are likely to vigorously assert their “expressly reserved” objection rights up to, and including, those under the Fifth Amendment. Especially as the US Attorneys Office is among the small list of attorneys and consultants – mostly associated with the Official Committee – allowed to see documents produced under the subpoena.

Those covered by the order are alleged to have both information and documents relating to payments or other actions by Refco-related entities, and “events at issue that will be indispensable to the committee’s investigation.” Some of the proposed subpoenas seek records dating to Jan. 1 1995.

The list of individuals and entities covered by the order, with, in some cases, details of information being sought and links to background information:

HFR to replace MinusFunds?

A letter sent to SPhinX Funds investors yesterday says that Hedge Fund Research has made a heavily-qualified offer to replace MinusFunds as the investment adviser to the troubled – to say the least – SPhinX Funds.

Among the conditions: the change would require the “consent and cooperation of Standard and Poor’s;” what the letter doesn’t say is that HFR is a direct competitor with S&P in investable hedge fund indexing, and it’s unclear why S&P, which bills itself as the world’s leading index provider, might want to consent and cooperate with the Chicago-based boutique.

The letter – signed by SPhinX Funds directors Patricia Khoo Farquharson and Andrew Feighery – also provides other information, most of it previously reported on this site, about SPhinX developments.

SPhinX Funds investor letter

Movement under the bus

SPhinX Ltd sues MinusFunds – Reuters

SPhinX Ltd., a hedge fund company, sued [its] former investment managers on Friday for $270 million for allegedly allowing Phillip Bennett, then chief executive at futures brokerage Refco, to use the funds' money to hide bad Refco assets…

….The lawsuit names Christopher Sugrue, Mark Kavanagh, and Brian Owens as defendants. All three men were directors of [Minus]Funds, and could not be reached for comment…

Noted with interest I: Brian Owens was a director of SPhinX Ltd, one of the MinusFunds-advised Irish Stock Exchange-listed entities in the SPhinX fund fold, from Oct. 2004 until Dec. 30, 2005, when he resigned for ‘business reasons’. He remains a director of the now bankrupt MinusFunds; in his day job, he is bag-carrier to a director of Hardwicke Ltd, the Irish property developer controlled by fellow MinusFunds director (and brother-in-law of Christopher Sugrue) Mark Kavanagh.

Noted with interest II: Owens was appointed to the SPhinX Ltd board at the same time as Patrina Khoo Farquharson.

Noted with interest III: SPhinX Ltd is among the entities that is paying increased fees to keep MinusFunds in business.

NakedShorts was, at the time of writing, unable to access the suit in question. So he reserves judgment on such points as exactly what might be achieved by suing a cash-free bankrupt entity, and whether or not the suit might pierce the doubtless chain-mail veil between the corporate entity and the named individuals (who, at last report, were decidedly not cash-free).

Suffice to say that, on finding the Reuters story (thanks Matthias), and given the…ahem…complex relationship between PlusFunds and the SPhinX funds, the first word to spring to NakedShorts’ mind was ‘cluster,’ followed closely by a common four-letter expletive. Not for the first time in this sorry, and doubtless on-going, saga.

SPhinX sues former managers for $270 million
Reuters Jun. 9 2006

Judge drops bus on SPhinX investors

NEW YORK: Judge Robert Drain early this afternoon approved the settlement that will see the SPhinX Managed Futures Fund SPC turn over $263 million to Refco's Official Committee of Creditors, and abandon their rights to pursue recovery under the Refco bankruptcy case. And in a related decision, he also denied an attempt by the SPhinX fund investors to compel testimony and other discovery concerning the settlement, saying that the SPhinX investors had no standing to pursue their objections in US Bankruptcy Court.

Law 2, Justice 0. Further coverage to come.

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