Grant Thornton and Refco – Small Favors

Refco is a favorite case of mine, since it is a Chicago case and also the first time I used the expression “big swinging sticks.”  I try to keep it clean on this blog, but occasionally I can’t resist wordplay that implies my visceral reaction to the true rogues that pepper my posts.

As I mentioned earlier, guilty pleas by Refco’s top three rogues helps the case of all other defendants, and there are more than a few suing and being sued in a money-fueled circle jerk the likes of which are unfortunately still all too common post- Sarbanes-Oxley.
Does that mean Sarbanes-Oxley is ineffective?
Au contraire, mon frere.
My contention is that Sarbanes-Oxley has at least raised the tone and tenor of the conversation about internal controls and about common sense, tried and true, reasonable practices for financial reporting to shareholders and other stakeholders. Sarbanes-Oxley has raised the expectations, to an appropriately high level, of corporate governance and ethical, non- self-serving behavior of corporate executives.  Sarbanes-Oxley has given stakeholders the tools to bring the hammer down on irresponsible, non-responsive, fat headed, cigar-chomping, belligerent, insular, seemingly untouchable “big swinging sticks.”  The Tone at the Top has improved in most major corporations and their professional advisors are on notice, if not by design then by default – the fear of prosecution.
Whatever it takes…
From Securities Law 360 (subscription required, 7-day free subscription available)

Refco-Related Claims V. Grant Thornton Tossed

Equity Firm Battles Grant Thornton In Refco Fraud Suit

A lawsuit claiming Grant Thornton LLP is responsible for an investment firm’s massive losses in connection with the collapse of Refco Inc. was partially thrown out Wednesday.

A federal judge tossed Thomas H. Lee Equity Fund V LP’s claims of negligent misrepresentation and professional malpractice but allowed a claim of aiding and abetting fraud to go forward against the auditing and consulting firm.

The suit…alleges Grant Thornton knew about the now-defunct Refco’s fraudulent loan transactions in April 2004 — during the time Thomas H. Lee was considering a $450 million investment in Refco in the form of a leveraged buyout.  The lawsuit alleges that Thomas H. Lee lost more than $245 million after making the investment in August 2004 and blames Grant Thornton for making “numerous misrepresentations” regarding Refco’s dire financial state.

Judge Gerard E. Lynch ruled Wednesday that “defendant’s motion to dismiss is granted with respect to plaintiffs’ negligent misrepresentation and professional malpractice claims, and denied as to all other claims.”

Lynch’s ruling says the complaint failed to prove that Grant Thornton had “any duty of reasonable care” to make sure the plaintiff knew about the fraudulent loans because, among other things, the audits were not performed with Thomas H. Lee’s specific investment plan in mind.

However, the judge, in upholding parts of the case, ruled that Thomas H. Lee was right in asserting that Grant Thornton was aware that Refco was making the now-infamous round-trip loans and that the auditors knew the loans were “suspicious.”

The judge added that Grant Thornton’s claims that it was never provided with documentation sufficient to discover the fraud are “belied by the complaint’s allegation … that [Grant Thornton]” discovered a $545 million suspicious transaction between Refco and a third party. Such a loan should have been a red flag for any auditor, the judge said.

Counsel in this matter for Grant Thornton is Bradley E. Lerman, Winston & Strawn LLP. The company and counsel, contacted Thursday, had no immediate comment. Counsel for Thomas H. Lee could not be determined Thursday and the company had no immediate comment.

6 replies
  1. Tracy Coenen
    Tracy Coenen says:

    Yo Francine… What say you about the fact that Sarbanes-Oxley has not reduced the incidence or cost of fraud? And the fact that management falsely believes it has?

    I agree with you that SOX has done something to raise awareness, yet the fact that the numbers show fraud hasn’t decreased at all since SOX says a lot. And it says even more when management is fooled into thinking that SOX has helped them reduce fraud, and the numbers don’t bear that out.


  2. Independent Accountant
    Independent Accountant says:

    Sarbox is a scam and that’s the way I have always ween it. That a management says something means nothing. Sarbox is directed at clerical accounting problems. Big accounting frauds invariably are the result of top management override of controls. Management is not “fooled” at all. The public is. If you want reform, repeal 1995’s Litigation Reform Act and put the Big 87654 firms at greater risk for defective work. Consider, in 1977 we got the Foreign Corrupt Practices Act. The FCPA had a “books and records” provision. So? It was never enforced by the SEC. Sarbox added nothing except it increased CPA firm fees.

Trackbacks & Pingbacks

  1. […] Refco case is another ongoing case that will become quite relevant to the Lehman case. In Refco, the […]

  2. […] et al., case number 09-2020, in the U.S. Court of Appeals for the Second Circuit which is about the Refco fraud. The Second Circuit certified the questions about an exception to the in pari delicto defense. […]

  3. […] parking, and channel stuffing. In another variation on the theme, global trading company Refco used a round trip loan to repeatedly hide a related-party transaction incurred to delay disclosure of significant […]

  4. […] parking, and channel stuffing. In another variation on the theme, global trading company Refco used a round trip loan to repeatedly hide a related-party transaction incurred to delay disclosure of significant […]

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