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Grant Thornton facing claims in Refco case

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20th Oct 2005
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It took just eight days for US futures company Refco to go from new kid on the block ' it only floated in August ' to the fourth largest bankruptcy in US history.

Now the media is predicting that its auditors, Grant Thornton, will face multi-million dollar claims from disgruntled investors.

The problem for Grant Thornton is the $430 million hole in the accounts it signed off before flotation. The hole has since been made good, in cash and with interest, by Refco CEO Phillip Bennett, who was then sent on extended leave by fellow directors.

Refco's board say the problem was caused by Bennett funnelling bad debts through other organisations to give the appearance that the debts were Refco's assets. Bennett was promptly arrested, charged with fraud and released on bail of $50 million.

According to The Independent, Grant Thornton's CEO Edward Nusbaum admits the firm is likely to be sued but insists it had been misled along with shareholders by the former management.

"Everything we have seen so far indicates we complied with professional standards," said Nusbaum. "Certainly we will be sued. There will be significant legal costs. We believe the cost will be absorbed by the firm."

In Grant Thornton's defence, it did report two serious deficiencies in Refco's internal financial controls, which were included in the company's prospectus. The auditor noted there was a shortage of people to prepare Refco's financial statements and a lack of formalised procedures for closing the company's books.

Refco has filed for chapter 11 bancruptcy - which allows it to reorganise rather than go into liquidation. It asked the court for permission to re-organise $48.6 billion in liabilities and was de-listed from the New York stock exchange. Its shares are now being traded on the Pink Sheets ' the US listings for companies that don't meet the capitalisation or shareholder requirements of NASDAQ and OTC. Shares have plunged from $7.25 to 65 cents, wiping out $924 million in market value.

The bancruptcy filing excludes Refco's commodities trading arm which is the subject of a $768 million purchase by a consortium led by JC Flowers & Co. However, it includes the parent company and 23 of its subsidiaries.

The US media is predicting many more twists and turns in the tale.

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