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The trustee pursuing claims on behalf of Refco Inc.'s creditors filed suit Wednesday against Boston private equity firm Thomas H. Lee Partners, which was Refco's largest shareholder when it was discovered that the commodities broker had cooked its books to conceal big losses and liabilities. The suit by trustee Marc Kirschner does not charge TH Lee with perpetrating the accounting fraud, but it alleges that the buyout firm chose to overlook problems when it invested in the company and later took dividends out of the company, to the detriment of its creditors. The suit comes just a week after TH Lee, which had to write off much of its investment, brought its own $245 million fraud suit against Refco's chief outside law firm, Mayer, Brown, Rowe & Maw LLP. TH Lee invested $453 million of equity in Refco for a 50.7% stake in August 2004. A year later, when it took the firm public, the stake was worth $1.4 billion, although it realized only a portion of that selling shares in the IPO. In October 2005, Refco filed bankruptcy.
The complaint against TH Lee includes claims for breach of fiduciary duty, unjust enrichment and receipt of illegal dividends, as well as bankruptcy claims for fraudulent conveyance and preferences. The last two refer to wrongly transferring assets out of a business and receiving payouts shortly before a bankruptcy. The suit, which names TH Lee founder Thomas H. Lee and three other top TH Lee execs, David Harkins, Scott Jaeckel and Scott Schoen, seeks "hundreds of millions of dollars in damages and penalties," according to a press release. The suit charges that the buyout firm "uncovered numerous red flags about Refco and its officers in the course of its due diligence process prior to its leveraged buyout of Refco but did not follow-up with additional investigation because it was tantalized by the prospect of a successful initial public offering that would result in a big payday for TH Lee as quickly as possible." A spokesman for TH Lee could not be reached immediately. The suit was filed in federal court in Manhattan. The trustee is represented by Luc A. Despins and Scott A. Edelman of Milbank, Tweed, Hadley & McCloy LLP. —John E. Morris Categories Deal Video
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