AN INTERNAL investigation into the $430 million (£245 million) of bad debts that were allegedly hidden from Refco shareholders has widened beyond the company’s former chief executive to other key personnel, The Times has learnt.

Phillip Bennett, the British former chief executive of Refco, was arrested last week after it emerged that a company that he controlled owed the giant commodities trading firm $430 million.

Mr Bennett repaid Refco with his own cash as soon as the debts were revealed, but the discovery sparked fraud inquiries and an exodus of clients as doubts about the firm’s viability mounted.

The Refco audit committee l launched an investigation into Mr Bennett’s activities last week and hired forensic accountants and private investigators to look into at least seven years of dealings between the firm and his company.

Until now Mr Bennett was the only Refco executive to be scrutinised by the company-appointed investigators. But sources close to the investigation told The Times last night that the inquiry had widened to include other executives and close associates of Mr Bennett.

The investigators believe that other Refco staff knew about Mr Bennett’s company, where the debts were concealed. The investigators now want to know if those same people knew what the company was being used for.

Refco declined to comment on the investigation.

The company is also being investigated by the Securities and exchange Commission, the US market watchdog, The Commodity Futures Trading Commission and the New York Stock Exchange.

The company, which only floated on the New York stock Exchange in August, is also the subject of several investor lawsuits.

Meanwhile, Grant Thornton, Refco’s auditor, is also under investigation by the Securities and Exchange Commission. The firm claims that it knew of no wrongdoing at the company and that it gave investors adequate warnings about Refco’s lack of financial controls.

Grant Thornton wrote a boilerplate warning in the company’s recently published flotation prospectus to inform potential investors that the company did not have adequate financial control in place.

Refco is now thought to be close to collapse, with potential suitors circling to buy off its viable divisions. The company confirmed last night that it was in talks with JC Flowers, a New York Hedge fund, about the sale of its futures brokerage business. Refco said in a brief statement that it “expects that it will reach a memorandum of understanding . . . shortly and will execute definitive agreements soon thereafter.”

HEDGE FUND LOAN WARNING

THE European Central Bank has called for lending by banks to hedge funds to be monitored and subjected to regulation if guidance does not work. The proposal, in its annual Stability Report, comes after revelations that key banks have raised their exposure to hedge funds to potentially dangerous levels. The ECB said that banks were able to cope with losses, but that hedge funds could seriously affect financial stability.

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