Phillip Bennett, the suspended chief executive of Refco, allegedly used a hedge fund to disguise $430m of debts owed by him to the futures broker.
The hedge fund, Liberty Corner Capital, was paid a fee for telling Refco's auditors that it owed the debts even though Mr Bennett's companies were liable, according to two people familiar with the internal inquiry.
Refco's shares have halved since Monday, when it placed Mr Bennett on indefinite leave and warned that its financial statements for the past four years could not be relied on because of accounting problems.
Refco said an internal review had discovered a receivable of $430m owed to it by a company controlled by Mr Bennett, which he repaid on Monday.
The Securities and Exchange Commission has opened an informal inquiry after the company admitted the receivable had not been disclosed as a related party transaction.
Shares in Refco, which fell 45 per cent on Monday, were suspended yesterday morning after the New York Stock Exchange demanded a fuller statement. After trading resumed, they closed down another 11 per cent, at $13.85. Refco sold almost $600m of shares in an initial public offering at $22 each in August.
People close to Refco's internal review said it was unclear how and why the $430m of debts had arisen.
They said the debts could represent personal trading losses by Mr Bennett or sums owed by Refco's clients, and possibly incurred during the Russian and Asian financial crises in the late 1990s.
Refco said it believed the receivable consisted “in major part of uncollectible historical obligations owed by unrelated third parties to [Refco] that arose as far back as at least 1998”.
The broker said: “The fact the receivable was from a company controlled by Mr Bennett was hidden at the end of quarterly and annual reporting periods by reasons of transfers to a third-party customer account.”
Liberty is believed to be the holder of the third-party customer account but people close to the internal review said it was unclear whether the fund had knowingly assisted Mr Bennett's efforts to disguise the $430m of debts. The debts appeared to have been moved from the company controlled by Mr Bennett to New Jersey-based Liberty just before the end of each quarter and subsequently passed back, said people familiar with the internal review.
Grant Thornton, Refco's auditor, received written confirmation from the hedge fund that the debts were owed by it. Refco said it was co-operating with the SEC and had also contacted the Commodity Futures Trading Commission, the NYSE and other regulators. A class-action lawsuit was filed in New York alleging Mr Bennett misled investors ahead of the flotation.
Refco said it had adequate liquidity to continue operations but the revelations have shaken the tight-knit broker community.
“People overall are worried [and] their clients are worried,” said one rival, noting that know-your-customer rules limited the ability of clients to switch business quickly.
Refcos credit rating was downgraded by both Standard Poors and Moodys, despite the repayment of the receivable, with the agencies citing the increased risk of regulatory uncertainties. Refco has said its financial statements since 2002 cannot now be relied on.
Mr Bennett, who was unavailable for comment, owns 38.4 per cent of Refcos stock while Thomas H Lee, the buyout firm, retains 38.2 per cent.