Refco creditors sue TH Lee for $1bn(2)

In the latest twist in the Refco saga, the company’s creditors have filed a $1 billion lawsuit against TH Lee, its founder and three executives, alleging they covered up Refco’s myriad problems, which eventually sunk the company and resulted in criminal charges for its CEO. TH Lee has issued a scathing response, calling the claims ‘misdirected and entirely without merit’.

Refco Litigation Trusts has filed a $1 billion (€734 million) lawsuit against Thomas H Lee Partners, accusing the private equity firm, its founder and several executives of covering up Refco’s legal and regulatory problems. The lawsuit is the latest development stemming from the 2005 Refco scandal; less than three weeks ago, TH Lee filed a $245 million lawsuit against Refco’s legal counsel.

Led by trustee Marc Kirschner, Refco Litigation Trusts is seeking $670 million in compensatory damages for liability incurred by Refco, and liability claims for TH Lee’s role in approving $75 million in “improper dividends”. It is also seeking $162.5 million that the defendants received from Refco’s initial public offering and $113 million in “fraudulent transfers” the defendants received from Refco entities.

The lawsuit alleges that the firm, as well as the firm’s founder, Thomas H. Lee, and TH Lee executives David Harkins, Scott Jaeckel and Scott Schoen – all of whom served as officers and directors of Refco – was aware of Refco’s history of legal and regulatory problems at the time of investment and during their control of the company.

The lawsuit claims that “the story of THL’s misconduct is one of greed and a failure of integrity,” and says that “to date, THL has sought to portray itself as a victim that was deceived and defrauded by certain members of Refco’s management”.

The lawsuit further claims that after TH Lee acquired Refco, the private equity firm became aware of additional problems with the company, its management and its accounting staff, but failed to investigate these problems and “made a conscious choice to bury them”.

TH Lee said in a statement that the allegations are “misdirected and entirely without merit”, and noted that “as documented in the criminal charges brought by the US Attorney”, the firm was “one of the victims of a carefully concealed fraud”.

TH Lee agreed to acquire the company in 2004 for $2.25 billion, then tripled the value of its stake after it took Refco public in 2005 for $22 a share. Later that year TH Lee discovered that Refco’s chief executive, Phillip Bennett, owed the company $430 million in off-the-books receivables. A scandal ensued that eventually sunk Refco, costing TH Lee $245 million.

In late 2005, Refco was sold to a consortium led by JC Flowers for $768 million, and then filed for bankruptcy. Bennett was arrested and faces criminal charges of securities fraud. TH Lee subsequently sued Refco’s former management for $245 million and the law firm that represented Refco during the acquisition process for an additional $245 million. TH Lee also successfully sued Bawag, the Austrian bank that helped Refco to manipulate its balance sheet, for at least $84 million.

TH Lee is one of 40 defendants in a lawsuit filed by French businessman Gerard Sillam, who said he helped Refco establish its European securities arm in 1999. Sillam claims he is owed $800 million, and is seeking an additional $600 million in punitive damages.