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Refco, Inc. Securities Litigation 05-CV-8626-First Amended

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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK _____________________________________ : MASTER FILE NO. : 05 Civ. 8626 (GEL) In re REFCO, INC. SECURITIES : LITIGATION : JURY TRIAL DEMANDED : ____________________________________ : FIRST AMENDED CONSOLIDATED CLASS ACTION COMPLAINT BERNSTEIN LITOWITZ BERGER GRANT & EISENHOFER P.A. & GROSSMANN LLP Stuart M. Grant (SG-8157) Max W. Berger (MB-5010) James J. Sabella (JS-5454) John P. Coffey (JC-3832) 45 Rockefeller Center, 15th Floor John C. Browne (JB-0391) New York, NY 10111 Noam N. Mandel (NM-0203) Telephone: (646) 722-8500 Jeremy P. Robinson Facsimile: (646) 722-8501 1285 Avenue of the Americas - and - New York, NY 10019 Telephone: (212) 554-1400 Megan D. McIntyre Facsimile: (212) 554-1444 Jeff A. Almeida Christine M. Mackintosh Jill Agro Chase Manhattan Centre 1201 North Market Street Wilmington, DE 19801 Telephone: (302) 622-7000 Facsimile: (302) 622-7100 Attorneys for Lead Plaintiffs RH Capital Associates LLC and Pacific Investment Management Company LLC and Co-Lead Counsel for the Putative Class TABLE OF CONTENTS Page I. NATURE OF THE ACTION ...............................................................................1 II. JURISDICTION AND VENUE ...........................................................................6 III. PARTIES AND RELEVANT NON-PARTIES ...................................................8 A. Plaintiffs ....................................................................................................8 B. The Company .........................................................................................10 C. The Defendants .......................................................................................12 1. The Bennett Shell-Entity Defendants .........................................12 2. The Refco-Affiliated Defendants................................................13 3. The Officer Defendants...............................................................13 4. Defendant Trosten.......................................................................17 5. Defendant Grant ..........................................................................18 6. The Audit Committee Defendants ..............................................18 7. The Defendants Affiliated with Thomas H. Lee Partners...........20 8. Grant Thornton............................................................................23 9. The Underwriter Defendants.......................................................23 10. Defendant BAWAG....................................................................31 IV. CLASS ALLEGATIONS ...................................................................................33 V. FACTUAL ALLEGATIONS PERTINENT TO CLAIMS FOR RELIEF UNDER THE SECURITIES ACT .....................................................................36 A. Historical Background Regarding the Company....................................36 B. The THL Partner Defendants’ Investment and the 2004 Recapitalization.......................................................................................38 i C. The Bond Offering..................................................................................41 1. The Offering Memorandum........................................................43 (a) The Financial Statements in the Offering Memorandum Contained Untrue Statements of Material Facts .............................................................44 (b) The Description of Customer Receivables and Related-Party Transactions in the Offering Memorandum Contained Untrue Statements and Omissions of Material Fact.............................................52 (c) The Offering Memorandum Misrepresented the Reasons for the Company’s Purported Success..............54 (d) The Offering Memorandum Misrepresented the Company’s Ability to Access the Cash It Needed to Service Its Debt...........................................................55 (e) The Offering Memorandum Misrepresented That the Company Had Taken Adequate Steps to Protect Itself From the Risk of Customer Defaults .....................57 (f) The Offering Memorandum Misrepresented That the Company Maintained Excess Regulatory Capital ....59 (g) The Offering Memorandum Failed to Disclose BAWAG’s Full Ownership Interest in Refco Group......60 2. The Bond Road Show.................................................................61 3. The Bond Registration Statement ...............................................62 D. The August 2005 Initial Public Offering ................................................68 1. The IPO Registration Statement .................................................69 (a) The Financial Statements in the IPO Registration Statement Contained Untrue Statements of Material Facts ................................................................................70 (b) Description of Customer Receivables and Related- Party Transactions in the IPO Registration Statement Contained Untrue Statements and Omissions of Material Fact...................................................................79 ii (c) The IPO Registration Statement Misrepresented That the Company Had Taken Adequate Steps to Protect Itself From the Risk of Customer Defaults.........81 (d) The IPO Registration Statement Misrepresented That The Company Maintained Excess Regulatory Capital.............................................................................82 (e) The IPO Registration Statement Failed to Disclose BAWAG’s Full Ownership Interest in Refco Group......84 E. The Truth Begins to Emerge and the Company Collapses .....................84 VI. THE COMPANY’S VIOLATIONS OF GAAP .................................................89 VII. GRANT THORNTON’S VIOLATIONS OF AUDITING STANDARDS .......94 A. Violations of General Standards .............................................................95 B. Violations of Standards of Fieldwork .....................................................96 C. Violations of Reporting Standards........................................................101 D. Violations of CFTC Rules and Regulations..........................................102 VIII. DEFENDANTS’ NEGLIGENCE.....................................................................103 A. The Offering Memorandum and the Bond Registration Statement ......103 B. The IPO Registration Statement ...........................................................105 IX. ALLEGATIONS PERTAINING TO CONTROL PERSON LIABILITY ......107 A. The Officer Defendants.........................................................................107 B. Refco Holdings and the Bennett Trust..................................................110 C. Robert C. Trosten..................................................................................112 D. The THL Partner Defendants................................................................113 E. The THL Individual Defendants...........................................................115 F. The Audit Committee Defendants ........................................................117 G. BAWAG .......................................................................................119 iii X. CLAIMS FOR RELIEF UNDER THE SECURITIES ACT............................122 COUNT ONE....................................................................................................122 COUNT TWO...................................................................................................125 COUNT THREE...............................................................................................130 COUNT FOUR .................................................................................................133 COUNT FIVE...................................................................................................137 COUNT SIX .....................................................................................................139 COUNT SEVEN ...............................................................................................144 COUNT EIGHT................................................................................................146 XI. DEFENDANTS’ FRAUDULENT SCHEME..................................................148 A. Origins of the Scheme...........................................................................149 B. Bennett Becomes CEO and, With the Aid of Maggio and Others, Transfers Uncollectible Receivables Off Refco’s Books .....................153 C. Refco Engages In a Series of Fraudulent “Round About” Transactions to Conceal the Receivable At Each Financial Period End ....................154 1. The Financial Statements Closest in Time to The Bond Offering and IPO Were Materially Misstated by Virtue of Transactions with BAWAG and Customer X...........................155 i. The February 2002 Transaction....................................158 ii. The February 2003 Transaction....................................161 iii. The February 2004 Transaction....................................162 iv. The May 2004 Transaction...........................................164 v. The August 2004 Transaction.......................................165 vi. The November 2004 Transaction..................................167 vii. The December 2004 Transaction..................................168 iv viii. The February 2005 Transaction....................................169 ix. The May 2005 Transaction...........................................170 x. The August 2005 Transaction.......................................171 2. The Fraudulent Transactions with
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