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Monday, October 31, 2005

Refco investors ignored warnings

Long before Refco Inc. found itself at the center of a scandal that led to its collapse, investors should have known that its financial house was in disarray. The company said as much in its initial public offering's prospectus.

Refco acknowledged on page 23 that its auditors had found "significant deficiencies" with how the company staffed its finance department that made it difficult to prepare compliant financial statements. It also noted problems with the procedures used to close its books each quarter.

But investors chose to ignore such risks when they poured big money into Refco's stock during its IPO and thereafter. Weeks later, financial fraud destroyed the company.

The Securities and Exchange Commission demands that companies list all relevant "risk factors" in prospectuses before they are allowed to sell stock to the public. Some need a dozen or more pages to inform investors about all the things that could go wrong in their businesses.

posted by Brian Moran @ 8:56 AM   0 comments

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