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. Last Updated: 07/27/2016

Scandal-Ridden Broker Close to Sale Agreement

NEW YORK -- Refco, the futures broker facing insolvency because of a bad-debt scandal, is close to an agreement to sell part of the company to a group led by J.C. Flowers & Co., two people briefed on the discussions said.

Flowers, a New York-based buyout firm led by Christopher Flowers, emerged as the leading bidder for Refco's futures brokerage after a weekend of talks led by Goldman Sachs said the sources, who asked not to be identified because the discussions are confidential. Carlos Abadi, who runs New York investment bank Abadi & Co., said Goldman rejected a $1 billion bid for Refco from a group that included his firm.

A deal for Refco, the largest independent U.S. futures broker, may ease concern about the impact its collapse would have on financial markets. The New York-based company began shutting two of its three units after stunning clients and investors Oct. 10 with the revelation that former chief executive Phillip Bennett hid $430 million in bad debts.

"These situations demand immediate action," Richard Breeden, who was the U.S. Securities and Exchange Commission chairman when New York-based Drexel Burnham Lambert failed in 1990, said in an interview. "Customers can't wait and accept promises that things will be sorted out in days or weeks or months."

Regulators including the Commodity Futures Trading Commission stepped in Oct. 14 to help prevent a disorderly breakdown of Refco. Goldman, the world's No. 3 securities firm by market value, began seeking bids as Refco's chances of survival dwindled.

"Someone's going to come in, given there are a lot of entities with significant financial stakes involved," said Michael Missal, a partner at Kirkpatrick & Lockhart Nicholson Graham in Washington. "If this goes to bankruptcy, a lot of people will lose a lot of money."

Refco's unregulated unit, Bermuda-based Refco Capital Markets, may file for protection from creditors on Tuesday, a person familiar with the rescue effort said. Abadi, 45, said he expected all of Refco to enter Chapter 11 proceedings.

Should the Flowers-led group buy only the futures brokerage, it would become an immediate force in a market that traded more than $1,000 trillion in contracts last year.

Refco is the largest provider of customer-transaction volume to the Chicago Mercantile Exchange, the biggest U.S. derivatives exchange. The company processed 654 million contracts in the fiscal year ended Feb. 28, more than those traded on the Chicago Board of Trade, the Chicago Board Options Exchange, or the New York Mercantile Exchange in the same period.