Authorities and some creditors of Refco Inc. want to know more about money the brokerage firm shuttled between some of its business units in the days before it filed for bankrupty protection.
They may be able to learn some important details from Christopher Sugrue, a New York money manager and past employee of Refco, which imploded just weeks after its August initial public offering when Refco disclosed that its former chief executive, Phillip Bennett, had hidden bad debts.
U.S. securities regulators have been seeking information regarding such business dealings with Refco. And lawyers working for Refco unsecured creditors have sought information from Mr. Sugrue because of what court filings by those creditors describe as a "close relationship" between the 35-year-old Long Island native and Refco, where Mr. Sugrue was an executive before he helped launch PlusFunds Group Inc.
After Refco filed for Chapter 11 bankruptcy-court protection Oct. 17, the Securities and Exchange Commission visited PlusFunds' Manhattan offices and asked for a battery of records, according to a report attached to a sworn statement by S. David Peress, a crisis consultant hired by PlusFunds.
In an interview, Mr. Peress said the firm is cooperating with "a compliance examination." Lawyers for Refco unsecured creditors also have asked for documents related to PlusFunds and Mr. Sugrue, according to court filings. A spokesman for the SEC declined to comment, but the court document that references the SEC request says: "The SEC has not made any suggestion that any action is contemplated involving [PlusFunds]."
Mr. Sugrue's own firm filed for bankruptcy-court protection earlier this month, after a wave of PlusFunds clients demanded their money when some of their cash transferred from Refco accounts was frozen. A portion of the money and trades Mr. Sugrue helped oversee for PlusFunds clients often processed through Refco's sprawling brokerage firm. Mr. Sugrue initially was able to prevent that money from being frozen by persuading Refco to transfer the funds from unregulated offshore accounts to regulated, onshore accounts.
Now PlusFunds is up for sale. Speaking by phone from Florida, where he was vacationing with his family at Disney World, Mr. Sugrue stressed that he did nothing wrong in the Refco matter. "I'll say that unequivocally," he said. Mr. Sugrue said his business "got caught up in a drive-by shooting."
Court filings by Refco creditors seeking to recover the money Mr. Sugrue had transferred to the onshore accounts cite ties between the money manager and Refco, including loans the brokerage firm provided last year to entities affiliated with Mr. Sugrue. Those loans were secured by equity in PlusFunds.
Before starting PlusFunds in 1998, Mr. Sugrue was a senior executive at Refco for more than five years, according to a biography in court papers. In addition to working with hedge funds on the firm's behalf, Mr. Sugrue helped negotiate the sale of 10% in Refco to Austrian bank Bawag P.S.K. in 1999. During that time, Refco was chaired by Thomas Dittmer, who later was listed on a register of PlusFunds shareholders. Mr. Dittmer couldn't be reached for comment. Mr. Sugrue's knowledge of the inner workings of Refco were demonstrated in a tense exchange last October. Six days before Refco began bankruptcy proceedings, Mr. Sugrue burst into Refco's Manhattan office demanding that the brokerage firm move more than $300 million of PlusFunds' client money "to seg funds," according to a sworn statement by Refco Treasurer Matthew Hreben.
Specifically, Mr. Sugrue wanted his clients' money moved from Refco's unregulated Bermuda account, where it was mingled with Refco's money, to segregated, or "seg," accounts, where it presumably would be less vulnerable to Refco creditors. The money was moved the next day and soon sent to accounts at Lehman Brothers Holdings Inc., according to court papers and sworn statements by Refco employees.
Stanley S. Arkin, a lawyer for Mr. Sugrue, said his client should be given a "silver star" for looking out for his clients. Mr. Sugrue said his investors told him: "Thank God you went and got it. That's what you are supposed to do."
Yet Refco creditors got a federal court to freeze the money in the Lehman accounts, alleging in court papers that Mr. Sugrue was given preferential treatment. Those frozen accounts triggered the redemptions by PlusFunds' clients -- and the subsequent bankruptcy-court filing. The clients yanked more than $1 billion from the firms' funds -- about half their assets -- in the first two months of this year.
It is a quick reversal of fortune for Mr. Sugrue. Still on the board at PlusFunds, he is no longer an employee. "It feels like you got thrown out of the house you built," Mr. Sugrue said in the phone interview.
PlusFunds mainly offered funds designed to mimic the performance of Standard & Poor's hedge-fund indexes. The controversial money transferred from Refco was invested there to track 15 funds in S&P's Managed Futures index. PlusFunds' assets stood at more than $2.5 billion last summer.
After Mr. Sugrue started his fund firm, he continued to work closely with his old employer. Refco served as a clearing broker for several portfolios overseen by PlusFunds, according to court papers filed by Refco's creditors. And in 2003, Refco hired PlusFunds to manage a futures fund that did much of its trading through accounts at Refco, according to court filings by Refco creditors.
But the relationship extended beyond trading. Last spring, Refco Capital lent $158 million to Suffolk LLC, an entity affiliated with Mr. Sugrue, according to court papers filed by Refco creditors. Mr. Sugrue used the money to buy out minority shareholders of PlusFunds, the creditors say in court papers, adding that since then, Refco units lent another $50 million to entities related to Mr. Sugrue and other PlusFunds shareholders. Of that, $19.4 million went to an entity in which Mr. Sugrue is the sole member, court documents claim.
Several potential acquirers have emerged for PlusFunds, which will be auctioned off in April, according to public disclosures.
Separately, the federal bankruptcy judge overseeing Refco's bankruptcy proceedings ruled yesterday that Refco creditors investigating the brokerage firm's meltdown are entitled to documents from the underwriters of Refco's IPO. The judge also said former Refco directors, including private-equity investor Thomas H. Lee, should be allowed to collect on an insurance policy to cover legal expenses they incur in shareholder suits related to Refco's collapse.
A judge in a criminal case against Mr. Bennett, the former Refco CEO, set two trial dates yesterday -- Oct. 16, with a backup date of March 12, 2007. Mr. Bennett is fighting securities and fraud charges related to the Refco matter. The backup trial date was provided to accommodate Mr. Bennett's lawyer, Gary Naftalis.
—-- Peter A. McKay and Paul Davies contributed to this article.
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