Refco announced today that the deal they had worked out with Gain Capital Group “has been jointly terminated.” I suspect the decision has less to do with the purchase agreement, than it did the adjournment to allow ... objecting parties more time to assess the so called “benefits of the transaction.” Here’s the formal announcement.
Refco Inc. (OTC: RFXCQ) said today that the proposed agreement with privately held GAIN Capital Group (GAIN), under which GAIN was to acquire the Refco F/X Associates (RFXA) retail customer account information and related assets, has been jointly terminated.
While the parties had entered into a term sheet outlining the transaction, they were unable to reach terms on a final asset purchase agreement.
RFXA said that as a result of its inability to enter into a final asset purchase agreement, it plans to terminate its agreement with FXCM, the company that services RFXA's web-based platform, www.refcofx.com, and notify customers immediately that as of July 31, 2006, their RFXA accounts will be closed and locked from any further trading activity.
On June 30, 2006, RFXA announced that it had reached a preliminary agreement with GAIN Capital and that it had filed a motion in the Bankruptcy Court requesting that a hearing be held July 20, 2006 to consider the matter. That hearing was later adjourned to August 10 in order to allow the parties more time to document the transaction and give objecting parties more time to assess the benefits of the transaction.
New Flash: July 27, 2006, 3:58 p.m. - The Associated Press has just reported that Refco will be permanently shutting down its foreign exchange subsidiary this coming Monday. The press release apparently was distributed to news outlets yesterday but wasn't released until this afternoon.
Note: I had another interesting discussion with a fellow trader yesterday afternoon. We were discussing among other topics, how traders deposits can be safeguarded. In passing he mentioned that at least one broker he knows of says that it carries a fidelity bond that covers individual trader accounts up to $100,000. Now, as I understand it, while fidelity insurance doesn’t protect traders from a broker’s insolvency, it would protect them from losses directly attributed to fraud.
So what does this have to do with the Refco? Well, everything I’ve read seems to point to the fact that certain parties who were working at Refco prior to the firm's declaration of bankrupcy, have, in fact, been indicted for fraud. So has anyone bothered to find out if Refco had a fidelity bond in place prior to its filing? If so, was it a blanket policy or one that covered individual accounts?
If such a bond covering individual accounts existed and fraud is proven, wouldn’t it be reasonable to assume that the coverage would kick in and most traders would get a dollar for dollar return instead of an offer of, say, 27 cents on the dollar? I suppose payment wouldn't come until someone was actually convicted but I can't imagine anyone getting upset by the delay.
Admittedly, I only started looking into the Refco debacle when I heard about the pending deal between Refco and Gain Capital in late June so the question I’m asking may have long ago been asked and answered. If that’s the case, disregard. This being said, traders would be well advised to find out if their broker is carrying a fidelity bond and, if so, find out what's covered and who's covered.
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