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Praise for GATA''s presentation at the Toronto Resource Investment Conference

Section: Daily Dispatches

By Hamish Risk
Bloomberg News Service
Sunday, October 16, 2005

Refco Inc., the futures broker that's under investigation for
securities fraud, may be split in two as Goldman Sachs Group Inc.,
its financial adviser, seeks takeover offers, three people familiar
with the plan said.

Refco's regulated units, which offer futures contracts traded on
exchanges, may be broken off from parts that aren't regulated and
sold separately, said the people, who asked not to be identified
because talks are ongoing. Man Group Plc, the world's largest hedge
fund company and a futures broker, is among those involved in the
discussions, two of the people said.

New York-based Refco's disclosure on Oct. 10 that former Chief
Executive Phillip Bennett hid $430 million in bad debts led
customers to abandon the company, threatening its solvency. A buyer
would get the largest provider of customer transactions to the
Chicago Mercantile Exchange, the biggest U.S. futures market.

"Looking for a buyer is probably the best option they have," James
Bianco, president of bond research firm Bianco Research LLC in
Chicago, said in an Oct. 14 interview.

Refco Securities LLC, the company's largest unit, which offers
exchange-traded futures, is winding down outstanding positions and
avoiding new business. The unregulated Refco Capital Markets Ltd.
has a block on client withdrawals because it doesn't have enough

Calls seeking comment from Rob Solomon, a Refco spokesman in New
York, weren't returned. Refco's general counsel, Dennis Klejna,
didn't return a call placed to his New York office.

The sales under discussion would end the independence of a 36-year-
old company that less than two weeks ago was considered so healthy
its shares were trading near their record high. With the trust and
confidence of its clients and trading partners gone, Refco has few
chances of surviving on its own.

New York-based Goldman helped manage Refco's share sale in August,
with Credit Suisse First Boston and Bank of America Corp. The banks
may be liable for shareholder losses, Bianco said on Oct. 14.

"The people who brought them public realize they have a huge
liability, especially after doing due diligence two months ago,"
Bianco said.

The Financial Times yesterday reported that London-based Man Group
is involved in the takeover talks, without saying how it got the
information. Lachlan Johnston, a spokesman in London for Man
Financial, a unit of Man Group, and Goldman spokesman Lucas Van
Praag in New York declined to comment.

Refco puts together buyers and sellers of exchange-traded
derivatives such as interest-rate futures, and arranges contracts
bought and sold over-the-counter, according to its Web site. The
company employs 2,400 people in 14 countries and had more than
200,000 accounts.

The Securities and Exchange Commission, the U.S. Attorney's office
and the CFTC expanded their coordinated probe late last week.
Investigators who initially focused on the bad debts they believe
Bennett, 57, hid, are investigating whether there was other
misconduct or possible fraud at the company.

Christopher Cox, chairman of the SEC, declined to comment directly
on the Refco case when asked about it by reporters during his visit
to China with Treasury Secretary John Snow and Federal Reserve
Chairman Alan Greenspan. "The SEC has an enforcement interest in
that specific case," Cox said.

U.S. officials are in China to participate in the U.S.-China Joint
Economic Committee meetings.

Derivatives trading that takes place on exchanges such as the
Chicago Mercantile Exchange is regulated by the federal government,
and trades are backed by a central clearinghouse funded by all
brokers that participate in the exchange. Over-the-counter
derivatives trading is largely unregulated, so if one participant in
a transaction defaults, there isn't a central clearinghouse to back
the trade.

Refco processed 654 million derivative contracts in the fiscal year
ended Feb. 28, 2005, more than what was traded at the Chicago Board
of Trade, the Chicago Board Options Exchange, or the New York
Mercantile Exchange during the same period.

Trading in global futures markets rose 31 percent in 2004 to $1,144
trillion, according to the Bank for International Settlements in
Basel. A derivative is a financial obligation whose value is derived
from interest rates, the outcome of specific events, or the price of
underlying assets such as debt, equities and commodities.

Refco Securities, the regulated unit that accounts for more than
half of the broker's gross revenue, on Oct. 14 began unwinding
proprietary and client positions and said it won't seek new

Other brokers and investors may lose money should Refco become
insolvent. As counterparty, Refco may act as a buyer or a seller, so
if the company runs out of cash to honor its side of the trade, the
other party won't get paid.

Refco also maintains accounts for trading clients, providing loans
for them to make leveraged bets. If Refco runs short of cash as its
business deteriorates, it may be unable to meet requests to withdraw
from those accounts.

Trading in Refco's shares was halted on Oct. 13 at $7.90, 64 percent
lower than their IPO price of $22. Boston-based Thomas H. Lee
Partners LP, which bought Refco's shares at $8 when the broker was
still a closely held company, owns 40 percent.


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