Law firm Mayer Brown LLP has quietly settled claims it aided a $1.5 billion fraud at Refco, the brokerage that collapsed in 2005. Unlike Refco’s spectacular fall, the news brought no front-page headlines, only a modest report in a trade journal based on a routine court filing. But Refco still holds lessons for today. The lack of press coverage was surely a relief to Mayer Brown, which made no mention of it on its website or elsewhere and must be eager to have the matter put to rest. In the settlement, Mayer Brown neither admitted nor denied the charge that, as counsel to Refco, it was complicit in a scheme to hide the firm’s losses.
Yet the fall of Refco is relevant today because the firm’s assets were purchased by MF Global, which collapsed in scandal in 2011 under similar circumstances – weak internal controls and comingling of customer assets with those of the firm. (See my earlier posts on the parallels between the two firms here and here.) MF Global’s bankrutpcy is winding down, with the announcement earlier this month that former FBI director Louis Freeh will step down as trustee.
Although Refco and MF Global share many similarities, their chief executives met very different fates. Both were led by CEOs who had strong personalities, extensive control over operations and an impatience for the kinds of checks that might have averted trouble. But Refco’s former CEO, Phillip Bennett, is serving a prison sentence for fraud; ex-MF Global chief Jon Corzine has not faced criminal charges (although he has faced plenty of anger from customers and Congressmen).
The Refco saga also marks a rare instance in which a law firm was held to account in the collapse of a financial firm. Joseph Collins, the Mayer Brown partner in charge of the Refco relationship, was prosecuted and convicted of fraud. The firm itself faced claims from the bankruptcy trustee and years of legal uncertainty.
Although there have been many failures at financial firms since Refco – and many eye-popping losses at others – no law firm has faced harsh scrutiny about the role it played. That’s a long run of good luck for law firms, but they can’t count on being lucky forever. Investor and public sentiment could turn against them when the next scandal arrives.