US brokerage firm says it has filed for bankruptcy

Refco Inc, the giant commodities and futures brokerage firm that has been unraveling over the last week, said on Monday night it had filed for bankruptcy protection last Tuesday, people briefed on the company's plans said on Monday night.

At the same time, an investor group led by J. Christopher Flowers & Co, a former Goldman Sachs partner who runs a private equity fund, signed an initial agreement to buy the firm's futures brokerage business -- the only Refco unit remaining that is not in the process of being shuttered.

The proposed price was US$768 million, the statement said, and the tentative deal gives Refco the option to retain up to 20 percent of the equity value of the entities being sold.

By putting the unit in bankruptcy, Refco is seeking to limit the buyer's potential exposure to the raft of litigation that awaits Refco and its advisers.

On Oct. 10, the company announced that its chief executive, Phillip Bennett, was put on indefinite leave. It said that Bennett had hidden a US$430-million debt owed to Refco by a company that he controlled. That debt, which was shifted to a hedge fund called Liberty Corner Capital, was not disclosed or associated with Bennett in the company's initial public offering in August. Refco also said that its financial statements as far back as 2002 could not be relied upon.

Shares of Refco plunged more than 70 percent after the announcement and in the days following. On Thursday, the New York Stock Exchange halted trading in the stock, while the company's bonds continued to plummet. By the end of the week, Refco had shut its unregulated capital markets business as well as its regulated broker-dealer operation. Those businesses have been closing out trades and are not expected to be part of any sale.

Refco's client accounts have dwindled by roughly 20 percent, said one person involved in the negotiations.

It is unclear whether the prospect of a buyer will stem client losses.

The futures business was the largest independent futures commission merchant in the US with US$4.1 billion in more than 200,000 customer accounts, past regulatory filings indicate.