1. An Update on Derivatives and Hedge Funds Robert M. Hayes 2005

2. Refco §The Wall Street Journal, Tuesday, 18 October 2005: l How Refco Fell Through Regulatory Cracks l Scandal Highlights a System that Didn’t Require Much Oversight §Who regulates Refco? This question is swirling as the company and its investors reel from the disclosure that Refco Inc.’s chief executive, Philip R. Bennett, secretly owed the company nearly half a billion dollars. §The answer is that Refco may have fallen through a deliberate crack in the regulatory system that has been known about and debated for years. “It’s an intentional regulatory gap, and the derivatives world worked very hard to create that gap,” says Donald Langevoort, a Georgetown University law professor and former special counsel at the Securities and Exchange Commission.

3. Multiple Minders §Refco Inc.: Regulated by SEC and NYSE l Refco Securities LLC: Brokerage arm, Regulated by SEC and NASD l Refco LLC: Futures Trading, Regulated by Commodity Futures Trading Commission and Chicago Mercantile Exchange l Refco Capital Markets: Derivatives trading, UNREGULATED §During the week of 10 October 2005, the Refco Board of Directors revealed that the firm of its chief executive, Phillip R. Bennett, (one separate from Refco) owed Refco $430 million. §In February of this year, Refco loaned $355 million to a customer who thereupon loaned the money to Bennett’s firm, which then used that money to pay off his debt to Refco. §Despite all of the regulators for two of the components of Refco operations, they failed to identify the potential of an alleged fraud in that transaction. §Refco now is in Chapter 11 Bankruptcy, as of Monday night, 17 Oct. §In one week, the value of Refco stock (publicly traded) collapsed from an average of about $28 to a value of about $1!