Refco FX finds a new suitor

Customers of online forex firm RefcoFX.com have been in limbo since RefcoFX’s parent company, Refco LLC, went bankrupt in October.

Attempts earlier this year by FXCM to buy the assets of RefcoFX fell through, but it appears RefcoFX finally has a savior in Gain Capital. Gain agreed to buy RefcoFX’s 17,000 accounts in a deal that will eventually allow Refco customers to regain 100 percent of their account balances.

“[Gain has] both the financial and operational resources necessary to help achieve a smooth transition for customers and to offer continued support for their ongoing trading needs,” says Refco chief restructuring officer David Pauker. Also, Pauker adds, Gain and its retail subsidiary Forex.com are registered futures brokers regulated by the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC), which RefcoFX was not.

However, the terms of the new deal are not sitting well with many RefcoFX customers. Under the agreement, customers with less than a $150 balance will receive a full recovery of their account balance if they open an account with Forex.com and trade at least once, and anybody with less than $40 could immediately withdraw their funds. Larger customers will also receive full recovery — 25 percent of their account will be paid every six months — if they meet certain conditions. Mark Galant, CEO of Gain Capital, says customers who choose to open accounts with Gain but do not fully recover their balances would still retain all rights to that balance if they chose to make a claim against Refco as an unsecured creditor.

A group of RefcoFX traders have hired an attorney to protest the deal, claiming the terms are unreasonable. According to Todd Duffy, an attorney representing the Refco group, traders would need to make 240 trades per month for six months just to qualify for a full reimbursement. Jeffrey Matkin, who says his account at RefcoFX is “in six figures,” can’t understand why Refco agreed to a deal that would make it so difficult for their customers to get their money back.

“I won’t get everything back for two years,” he says.

“And that’s two years where the money is just sitting stagnant, not getting any kind of return.”

A Refco spokesperson said the firm believes the Gain offer is the best one available and the one most likely to allow customers to get their money back. She also said Refco will still entertain offers from other bidders.

However, when it filed its opinion with the court regarding the sale to Gain, Refco admitted that most customers would probably not go through the motions necessary to get a full refund.

Besides customer accounts, RefcoFX also owes more than $100 million to other creditors. Additionally, it is a guarantor of Refco’s bank debt and bonds, which are more than $1 billion, and is considered collateral by Refco’s lenders.

After the deal, Forex.com would have about 50,000 accounts.

Refco’s Capital Markets division (RCM) — which primarily consists of institutional customers — are also likely to see some compensation. Traders with securities accounts could get up to 70 cents on the dollar, while forex customers will get a little more than a quarter.

However, forex customers would also receive a lump sum payment of $221 million if the deal becomes official. RCM customers are collectively owed more than $2 billion, and Refco has faced numerous lawsuits from clients.

However, if RCM clients agree to the terms of the settlement, they will drop their claims.

As of late July, more than 50 firms and hedge funds had signed the agreement, including RCM’s largest creditor, VR Capital Group. However, RCM’s most famous client — veteran trader Jim Rogers — was among the last to join.

Rogers originally held off from signing in an effort to reclaim the $372 million he claims RCM owes his funds. Signing the agreement means Rogers’ legal team will drop the lawsuits it had against RCM.

Had Rogers refused to accept the settlement, it could have put the entire deal in jeopardy.

Refco trustee Marc Kirschner has asked a federal bankruptcy judge to approve the deal, saying it will allow for an orderly breakup of RCM’s assets and avoid a freefall liquidation.