Executive Prison Sentences and Fraud Deterrence


One of the key parts of Sarbanes-Oxley, the legislation created to address the problem of massive financial statement fraud at public companies like Enron and WorldCom, was the increased prison sentences for executives participating in fraud.

Supporters of the legislation cheered harsher potential punishment for executives as one of the keys that would help prevent fraud.

Others weren’t so sure that longer prison sentences would really do anything to deter executives who want to commit fraud. If you’ve studied corporate fraud for any length of time, you have seen that fraud by executives is often fueled by feelings of arrogance and entitlement. These are important pieces of the fraud puzzle for executives, and they are part of the reason why executives may be unphased by penalties for committing fraud. Continue reading

Former CEO of Refco Cries His Way to a Guilty Plea


Phillip Bennett, the former CEO of Refco Inc. pleaded guilty today while crying… Refco was one of the world’s largest commodities brokerages, but it went down in flames a few weeks after going public in August 2005.

The reason? Management concealed the fact that a company controlled by Bennett owed Refco $430 million. The SEC says that Refco hid losses in the financial markets and made false filings from the late 1990s onward.

Bennett pleaded guilty to 20 charges of conspiracy to commit securities fraud, wire fraud, bank fraud, money laundering, and false SEC filings. He could get sentenced to 315 years in prison. Since he’s now 59 years old, analysts suspect he’ll spend the rest of his life in prison. And the government is taking $2.4 billion from him.

I’d cry too if I had to give up that much money and spend the rest of my life in prison. But if you do the crime, you do the time. And this seems to be a fraud scheme that went on for a long time and cost a lot of people a lot of money.

Refco’s Broker-Dealer Unit Owes Customers $4.16 Billion


The unregulated broker-dealer unit of Refco Inc., Refco Capital Markets Ltd, says it owes customers about $4.16 billion. This is $486 million more than previously estimated by the parent company.

Refco Inc. has filed for bankruptcy protection, and in those filings, it showed Refco Capital Markets owing $3.68 billion to customers. Total liabilities for the unit were listed at $5.34 billion, with $5.95 billion in assets.

The bankruptcy filing occurred one week after the former CEO, Phillip Bennett, was accused of hiding $430 million of debt. Bennet has pleaded not guilty to charges of fraud and conspiracy.