Oct. 13 (Bloomberg) -- Refco Inc., reeling from the disclosure that its chief executive officer hid unpaid debts, blocked client withdrawals from a currency-trading unit that doesn't have enough cash to stay in business.

Refco, the biggest independent U.S. futures broker, named Arthur Levitt, former chairman of the Securities and Exchange Commission, and Eugene A. Ludwig, formerly U.S. Comptroller of the Currency, as advisers, the company said today in a statement. It also hired Goldman Sachs Group Inc., which helped arrange Refco's initial public offering, as a financial adviser.

The New York-based firm imposed a 15-day moratorium on withdrawals from Refco Capital Markets Ltd. and said the liquidity of the unit, ``which represents a material portion of the business of the company, is no longer sufficient to continue operations.'' Refco's regulated futures brokerage isn't affected, the company said.

The collapse in confidence threatens Refco's survival, said Mark Williams, a finance professor at Boston University. U.S. authorities yesterday charged former Refco Chief Executive Phillip Bennett with securities fraud, saying he hid $430 million in unpaid debts dating to 1998. Refco said its own accounts for the past three years aren't reliable.

``It's the equivalent of a run on the bank, but without the insurance,'' said Williams, former chief risk officer at Citizens Power, an energy trader. ``All Refco really has in the trading and brokerage business is their name, and the marketplace is punishing them.''

Stock Tumbles

Shares of Refco plunged 27 percent to $7.90 today in pre- open trading on the New York Stock Exchange prior to the company's announcement. The NYSE said in a later announcement that Refco shares will continue to be suspended from trading while the exchange ``evaluates the need for further disclosure and the continued listing'' of Refco.

The stock has tumbled almost 75 percent since Oct. 7, the last trading day before Bennett's role in the alleged fraud was disclosed. Refco's bond due 2012 plunged 37 cents today to 40 cents, pushing the yield to 30 percent from 14 percent, according to Trace, the bond price reporting system of the NASD. That means investors are betting that Refco is riskier than Delphi Corp., the auto-parts maker that filed for bankruptcy last week.

``The bond market is saying this is a default scenario,'' Williams said.

Moody's Investors Service and Standard & Poor's today cut their ratings on Refco's notes for a second time this week, ranking the company four levels above default. Both said they may cut the ratings again.

Some Defections

Some Refco customers and rival brokers said yesterday they were switching to other companies and pulling money from their trading accounts. Jerome Israelov, a wheat trader at the Chicago Board of Trade who uses Refco to match his transactions, said he planned to cut the funds he keeps on account at the broker by at least half and that many of his peers are doing the same. Chicago-based Peregrine Financial Group Inc. said it has won clients who ditched Refco this week.

Rob Solomon, a Refco spokesman, declined to comment.

Refco had $4.9 billion in customer accounts on Aug. 31, making it the eighth-biggest futures broker by that measure after banks such as Goldman and Citigroup Inc. The capital markets unit is a securities and currencies broker based in Bermuda, according to Refco's IPO prospectus. It was headed by Santo Maggio until his removal, along with Bennett, on Oct. 10. Refco didn't disclose how much the unit has on account.

Refco got about 17 percent of revenue from businesses based in Bermuda in the fiscal year ended Feb. 29, 2004, SEC filings show.

Chicago Mercantile

Most trades using Refco take place at exchanges such as the Chicago Mercantile Exchange, which is regulated by the federal government. The trades are backed by a central clearinghouse that is funded by all brokers participating in the exchange. Trades through Refco Capital Markets take place outside of exchanges, and are unregulated. If one participant in a trade defaults, then there is no central clearinghouse to back the transaction.

Since Bennett, a former Cambridge University rugby player, took over Refco in September 1998, the company and its affiliates have been sued at least 110 times, including 40 suits in federal court. Of the suits in federal court, at least 16 claim fraud or securities violations.

Back in 1994, Refco was fined $1.25 million for dipping into customer accounts to pay loans. Refco borrowed as much as $123 million from the funds on an ``almost daily basis,'' the Commodity Futures Trading Commission, which regulates the futures industry, said at the time.

Separate Accounts

Futures brokerages such as Refco are required to keep customers' money in accounts separate from their own funds and to report daily to regulators on the amounts held. Clients of the brokerages often keep extra money in their accounts to save having to add to them should some transactions cause losses.

The CFTC has the power to freeze customer accounts should it believe the funds to be in jeopardy, Commission spokesman Alan Sobba said yesterday. He declined to comment on Refco.

``The customer's money is completely separate,'' said Leon Bressert, 42, a former Refco broker in Chicago now with 1st Futures Broker in Fairfax, Virginia. ``You can't touch it.''

Bennett's alleged fraud may have helped Refco appear more financially sound as it and underwriters Goldman, Credit Suisse First Boston and Bank of America prepared for a $583 million initial public offering in August. Bennett faces life in prison if convicted.

Criminal Complaint

A six-page criminal complaint against Bennett, who made $145 million from the IPO, lays out a scheme that the government claims began at least as early as 2004 and continued through this month.

According to U.S. officials, Bennett used loans as large as $545 million to a customer to conceal debt owed to Refco by a separate company that he controlled, Refco Group Holdings Inc.

Levitt, 74, is also working as a senior adviser to the board of American International Group Inc., the insurer that restated $3.9 billion of profit amid regulatory probes earlier this year. Levitt was hired in July to help recruit new directors and choose a permanent chairman for AIG. Levitt is also a director of Bloomberg LP, the parent of Bloomberg News.

Goldman, Credit Suisse First Boston and Bank of America Corp. face potential lawsuits brought by investors who lost money on the shares, according to Jeff Harte, an analyst at Sandler O'Neill Partners LP. Sandler O'Neill was one of the five banks that helped Goldman, CSFB and Bank of America on the sale.

Forex Market

Refco's freeze on customer withdrawals helped the dollar erase gains against the euro and yen on speculation that traders were forced to sell dollar assets to raise funds, said Hugh Walsh, a currency trader in New York at Fortis (USA) Financial Markets. People ``had to unwind a lot of positions,'' he said.

Shares of the Chicago Mercantile Exchange fell as much as 11 percent on concern a drop in business from Refco would reduce trading at the biggest U.S. futures market.

The Chicago Merc said it restricted Refco LLC, the company's registered broker-dealer, from withdrawing capital from its own account without permission from the exchange. It also required the Refco unit to submit weekly capital totals, the exchange said in a statement distributed by PR Newswire.

Refco's foreign exchange trading volume increased by $229 billion, or 127 percent, to $410 billion in the first quarter, compared with the same quarter a year ago. That's about $6.6 billion a day, based on Bloomberg calculations.

To contact the reporter on this story: Gavin Serkin on gserkin@bloomberg.net

Last Updated: October 13, 2005 18:20 EDT