Thursday, August 7, 2008

Refco Group Fraud

The Refco Group was one of the largest independent brokers & futures traders in the USA. The company had a successful IPO, then just a few months later (In October 2005) went bankrupt.
What happened ?
http://www.bloomberg.com/ report:
Prosecutors said, the owners were hiding tens of millions of dollars in customer trading losses. Later, their goal was to sell Refco at a price that would pay off the accumulated debt and ensure them a profit.
In addition to hiding losses, prosecutors said Bennett and Grant (owners) lied to Refco's lenders and investors about whether the firm had a proprietary trading operation. They also inflated revenue and moved expenses off Refco's books, prosecutors said.
Warning: Avoid brokerage companies in India that have proprietary trading operations in F&O. Ask yourself, why should the broker himself trade in F&O using high leverage and public funds ? If he is so keen on trading, let him set up a seperate trading entity, deposit margin like all other traders and keep his own trading and public funds at arms length.
Almost all the problems currently in the USA and Europe have come about because of proprietary trading with high leverage. In India, a wise regulator will ban such trading. Till that happens, stay away from brokers who trade on their own account. Most good brokers in India do not do so. Stay with them.

This is my second post for the evening. To read the first post, discussing the Nifty, scroll down.

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