NEW YORK (CNN/Money) -
Problems may be mounting for bankrupt securities firm Refco and some of its current and former executives, according to published report.
The New York Times reports that some current and former executives cashed out more than $1 billion in company stock in the year before the collapse of the firm, and that creditors could try to recover some of those payments in bankruptcy proceedings.
And the Wall Street Journal reports that Refco faces millions in fines as well as civil and possible criminal charges related to its participation in the apparently illegal stock shorting practices by some of its clients, a practice known as "naked shorting."
Refco filed for bankruptcy court protection Monday after former CEO Phillip Bennett was charged with defrauding investors by concealing a $435 million loan he arranged with the firm.
The Times reports that Bennett received one of the biggest payouts through the company's sale of a $2.2 billion stake in the firm to Thomas H. Lee Partners, a private equity firm in Boston, in August 2004.
The paper reports that Bennett and Tone Grant, Refco's longtime CEO before Bennett, apparently shared in a $550 million cash payment under the investment from Thomas H. Lee Partners, and that Bennett appears to then have received another $507 million in the deal as well. Those payments were disclosed in a Refco prospectus as part of the firm's August initial public offering.
The Times reports Joseph Murphy, CEO of Refco Global Futures; William Sexton, then Refco's chief operating officer and now its CEO; Santo Maggio, the CEO of Refco Securities; and Dennis Klejna, the firm's general counsel, split $22 million related to the executives' interests in a profit-sharing pact at the firm, also disclosed in filings. Maggio has taken a leave from the firm, according to the Journal.
But the paper reports that Robert Trosten received $45 million when he left his post as chief financial officer a year ago, according to an arbitration case involving the firm, and that that payment was not disclosed in those filings. (See correction.)
All those payments could be at risk in the upcoming bankruptcy proceeding, the Times reports. While compensation -- like salaries -- is typically not recoverable, payments made in the sale of a company or dividends paid to its owners are fair game if the company is insolvent, Denis Cronin, a bankruptcy lawyer at Cronin & Vris in New York, told the Times.
"Dividends or payments with respect to their stock ownership, that is vulnerable to what is known in bankruptcy as a fraudulent conveyance or distribution," Cronin told the paper. "Fraudulent conveyance is a payment or distribution made while the company was insolvent or rendered insolvent. When you make those payments in that time frame, then creditors have a right to recover them."
Meanwhile the Journal reports the firm faces problems as part of various probes into the practice known as "naked shorting." Generally someone who shorts stocks borrows shares, then sells them, in the hopes that the stock will decline in price and they'll be able to buy shares to replace the borrowed stock, pocketing the difference.
The Journal says that in the case of so-called naked shorting, investors sells shares they don't own or haven't borrowed, knowing they have several days to deliver the shares. The practice is generally illegal.
The Journal reports that Refco earlier this year disclosed that the SEC had notified it of plans to file an enforcement action against the company's Refco Securities unit for securities-law violations in connection with the shorting of Sedona stock. The notice received little attention at that time, though.
The firm's disclosure said that the SEC officials have sought information related to, among other things, two former Refco brokers who handled the account of stock-trading client, a Panamanian corporation called Amro International, which engaged in short sales of Sedona stock.
The firm's filing said Refco was negotiating a settlement with the SEC that would likely include an injunction against future violations and "payment of a substantial civil penalty." It set aside $5 million for the potential settlement, the paper reports.
The company said that its Refco Securities CEO Maggio was also negotiating a settlement with the SEC regarding "certain supervisory matters raised in the investigation." The paper reported that Refco and an attorney for Maggio declined to comment. It reported Maggio took a leave from Refco at the same time Bennett did.
Correction: An earlier version of this story incorrectly said that the New York Times reported that several executives got payments that were not disclosed in the Refco prospectus. In fact, only one $45 million payment to former CFO Robert Trosten was not disclosed, the paper said. CNN/Money regrets the error. (Return to story.)
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