"The breaking point came when I realized that none of these indexes included rice, despite the fact that two-thirds of the people on earth eat rice every day," Rogers said.
Rogers wanted his index to track the true global demand for commodities - not just the demand generated by the West. This diverse exposure, and Rogers' large personality, helped attract attention to two mutual funds tied to his indexes, ultimately driving assets under management up towards $500 million.
Refco Goes Poof!
Things were going well for the Rogers funds until mid-October. That's when Refco, at the time the world's largest independent futures broker, unraveled. The company disclosed that CEO Philip Bennett had covered up $430 million in bad debt owed to the company, and a classic confidence crisis and run on the bank occurred. Customers withdrew money in droves, and Refco could find new loans to maintain liquidity. The company filed for bankruptcy two weeks later.
The Rogers funds had over $360 million in assets at Refco at the time, and those funds were frozen in the bankruptcy filing. All of a sudden, Rogers' shareholders couldn't access their money.
It's hard to get to the bottom of exactly what happened at Refco. It appears as though the bad loan to Bennett was made to cover up non-performing loans from Refco itself. According to Bloomberg, Refco made a series of bad investments between 1998-2003, including loans to a Malaysian conglomerate that operated betting pools at a horseracing track (). Rather than recognize those loans as non-performing, which would have impacted Refco's credit and reputation, Bennett shifted them to a separate entity and personally guaranteed that they would be paid back. That put Bennett on the hook, rather than Refco, and made Refco's balance sheet look clean as a whistle. All of which helped Refco pull off its successful initial public offering in August of 2005, when the company raised over $500 million - and made Bennett enormously rich.
But the walls came tumbling down when Bennett's bad loans were revealed in mid-October. Bennett repaid the loans - but only by using Refco's credit. Bennett secured a $418 million loan from the Austrian bank Fuer Arbeit und Wirschaft AG - money that the bank says is now owed by Refco, making the Austrian bank the largest creditor in the bankruptcy proceedings.
Funds Frozen - And Who's To Blame?
Until October, the Rogers funds weren't affiliated with Refco. The money was held at Man Financial Group, an enormous UK-based futures broker. But this spring, Beeland Management - which manages the Rogers funds, and is largely owed by Rogers himself (Beeland is Rogers' middle name) - began talking with Refco about becoming a marketing partner for the fund. In many ways, it made sense: Refco was the largest futures brokerage in the U.S., and the Rogers funds invested mostly in futures. Refco could tap into its customer base and drive assets to the funds.
According to TheStreet.com, "the ongoing talks led to a deal which Rogers' Beeland Management Co. transferred $362 million in assets in the two funds from Man Financial to Refco in late September."
The quid pro quo was that, by October, Refco was the official marketing agent for the funds, and was in discussions with the group about becoming the prime broker. Refco even discussed buying a minority stake in Beeland.
And then the trouble started. When news of the bad loans surfaced, Beeland managers urgently emailed Refco to make sure that the funds were held in the regulated Refco LLC - rather than the unregulated Refco Capital Markets. The location of the funds seems like a technicality, but it makes all the difference: Funds in Refco LLC are not part of Refco's general assets, and not subject to any bankruptcy proceedings. Indeed, Refco LLC is not bankrupt - and is still operating as a regulated futures broker.
According to some excellent reporting from USA Today, Rogers' group says it repeatedly sought - and received - assurances from Refco that the funds were deposited with Refco LLC. And according to Rogers' legal complaint, Refco executives assured Rogers' company that the funds were deposited in the regulated account.