We have posted the Final Report of the Examiner in In re Refco. It can be found at the DU Corporate Governance web site. The SEC has alreadysanctioned Bawag, an Austrian Bank, for aiding and abetting the scheme. Refco potentially illustrates the benefit of SOX in uncovering fraud.

According to the Report, Refco attempted to hide trading losses by packaging them as debt and selling them to RGHI, a company controlled by Phillip Bennett, the CEO of Refco. The debt, therefore, showed up as a receivable rather than a loss. To reduce the size of the receivable, Refco would engage in "round trip loans." These apparently involved short term loans usually done at the end of a quarter or year. Refco would loan funds to a third party and the third party would apparently make a loan to RGHI. The affect of these loans was to reduce the size of the receivables between RGHI and Refco. The report described the "round trip loans" as "sham transactions." Moreover, the loans by the third party involved no risks because they were subject to "secret guarantees by Refco".

The report is long (more than 400 pages) and complicated. What is particularly interesting is that the fraud was not uncovered while the company was private. Instead, it was only uncovered after the IPO when "a new Refco employee discovered the irregularities on the books" What did the new employee do? Bring the irregularities to the attention of the Audit Committee. Moreover, the Audit Committee acted. As the Report notes: "Immediately after the Board of Directors and its Audit Committee were alerted to the fraud in October 2005, they commenced an internal investigation, with the assistance of professionals, and subsequently publicly announced the discovery, removed Bennett from his positions of power, and took steps designed to remedy the malfeasance."

Employee notification and an audit committee ready to act. Sound familiar? Remember that SOX required companies to put in place a mechanism for employees to report financial irregularities to the board. Moreover, SOX increased the authority and independence of the Audit Committee.

As a small aside, the press reported that lawyers and financial advisors collected $171 million in fees and expenses in connection with the bankruptcy. That's about half of the amount that was allegedly hidden in connection with this fraud.