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Monday, October 17, 2005

Refco: Another Enron or WorldCom?

Just when you thought it might be safe to go back in the IPO market, Refco emerges with a potentially huge fraud.

In August 2005, Refco, one of the largest commodities and derivative stock brokerage firms in the world, went public with an IPO price of $22 per share. After a massive fraud was discovered last week, the stock feel to $8 and the company may be headed toward bankruptcy. What went wrong?

It appears that despite the passage of the Sarbanes Oxley Act and regulatory reforms, that a massive securities fraud was not detected by the so called "gate keepers", namely the underwriters, the accountants and the attorneys involved in due diligence on the IPO. Investors rely on these gatekeepers to prevent securities and investment fraud.

As we have seen with Enron and WorldCom, there will be investor class action lawsuits and securities arbitration cases filed against Refco and the various gate keepers including Goldman Sachs and CSFB who were its underwriters.

Unless these various gatekeepers who earn millions in fees in IPOs take their jobs seriously in questioning the financial statements and detecting fraud, it will not be a very safe place for investors to put their money.


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