What comes next? Class-action lawsuits, tumbling giants and public distrust of... well, everyone.

The good news: This week's column topic was a no-brainer. The bad news: Well, everything else.

Trader Daily’s poll suggests that 80 percent of you think Refco's former CEO, Phillip Bennett, should be sent to jail. But that, at least in my mind, is the tip of the legal iceberg.

Usually icebergs are perfect metaphors for legal actions; they move about as fast as the typical legal proceeding. The Refco scandal, for some reason, more closely resembles a tsunami. Unexpected. Devastating. Rapid.

Seemingly without warning, the first wave hit. About two months after a $583 million IPO, Refco was obliterated after a three-day period during which things went from bad to worse, and then from worse to awful, finally sinking to appalling. Not much of what formerly constituted the Refco conglomerate still exists as I write this, and I have no compelling reason to believe even a shell will remain much longer. Wall Street was appropriately stunned. The value of Refco shares plummeted while Mr. Bennett took about 72 hours to go from corporate trading titan to criminal defendant.

Some background, with the caveat that nothing has been proven yet, and Bennett remains innocent unless proven otherwise: Last Wednesday, Bennett was arrested and charged with violating 15 U.S.C. § 78j(b). That is the technical statute under which he was charged. But, more to the point, the criminal allegations focus on charges that Bennett surreptitiously concealed more than $400 million in bad debts owed to Refco by moving that debt to the books of a separate company that Bennett also controlled (Refco Group Holdings or "RGH"). At the end of the day, bad debt -- some of it more than seven years old -- found its way onto Refco's balance sheets as a receivable that had been paid. The connection to Bennett's other company was obfuscated.

While Refco announced that suspicious transactions of this nature date back to 1998, the criminal complaint focuses almost entirely on one particular series of such transactions that took place just a few months ago.

According to the criminal complaint, a few months before Refco filed for its IPO, Refco loaned one of its customers approximately $335 million. That customer then took those funds and used them to issue a loan to Bennett's RGH for $335 million, albeit at a higher interest rate than the interest rate at which Refco's loan had been issued. To bring matters full circle, Bennett allegedly used RGH's $335 million to pay off his own then-existing debt to Refco, which is allegedly illegally substituting one debt for the other.

Amidst the whirling waters of confusion, Refco issued a statement to the effect that Bennett had made Refco whole. And, sure enough, while Refco was busy announcing it had exiled Bennett, approximately 350 million (in euros) were wired from an anonymous foreign bank into a Bennett/RGH account.

I'll honestly admit that I don't quite know what to make of this, which is kind of irrelevant. What is relevant: It appears Michael J. Garcia, Esq., the U.S. Attorney for the Southern District of New York responsible for this investigation, doesn't entirely know what to make of it either. He hasn't said much about the anonymous wire transfer and the six-page Criminal Complaint focuses mostly on the $335 million loan itself.

Still, as complex a legal and accounting mess as this is, the underlying elements of the alleged crime are patently clear. Go back to basics -- where all criminal trials begin -- to motive and opportunity. As the CEO of Refco right before it went public, Bennett had all the opportunity one could imagine and, given his take from Refco's IPO, he had roughly 120 million motives. The U.S. Attorney will have to prove the details, but I'd hardly be surprised if the jurors eventually find that Bennett's convoluted debt transfers were part of a plot to buff up Refco's financials in the run-up to its IPO.

Like I mentioned, there's a lot of bad news here, and we haven't even begun. The criminal complaint only affects Bennett and the only company to fail was Refco. (That opinion is relative to the enormity of the overall situation; I will freely concede that Refco was one of the largest companies involved in commodities, derivatives and U.S. Treasury markets, operated in 14 countries and served more than 200,000 clients.) Nevertheless, this scandal won't stop with a criminal complaint and it won't stop with Refco. Just as tsunami waves tend to cascade, Refco will sweep in a lot of excess dirt with it.

At a minimum, Bennett allegedly used Liberty Corner Advisors, a New Jersey money-management/hedge firm, to mask his role in assuming Refco customers' seven to eight years of bad debt, so Liberty is another wave. The following resultant wave is the most obvious -- the well-known class-action lawyers waited maybe a day before rushing to slap together lawsuits. The class-action wave will include, as the lead underwriters of Refco's IPO, Credit Suisse First Boston, Goldman, Sachs & Co., and Banc of America Securities LLC. All are big players, of course, but as underwriters they should have certain viable legal defenses.

I left for last the institutional investors that purport to act as fiduciaries for the investing public because I believe this is the critical wave. This is where the real effects of the scandal are felt by real individuals. This wasn't Grandma in a trailer park in Boise who failed to catch the warning signs. It was the very financial companies that both Grandma and the unsophisticated mass public rely on to help them invest, like Oppenheimer Funds or TIAA-CREF. One can easily see a storm of lawsuits descending on such fiduciaries -- and such claims will be difficult to defend. Simply put, it appears these institutions failed to properly review the Refco prospectus.

For all its obscure dealings, Refco publicly disclosed more than enough warnings, and did so rather blatantly in its prospectus (among many other items, Refco disclosed ongoing investigations by the SEC and U.S. Attorney, as well as a disclosure that it was unable to manage its own financial records -- which is troubling for a financial services company). TIAA-CREF and other fiduciaries just didn't seem to mind such risks, or worse, neglected to even consider them. We have come to a point where it seems the only people who care what the prospectuses actually disclose are the lawyers who originally prepare the disclosures and the subsequent lawyers who use such disclosures to defend against lawsuits from those who chose not to heed the disclosed warnings.

Bad news, indeed, for everyone except the lawyers.

uretsky@phillipson-uretsky.com

10/19/05