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The Chairman
Victor Niederhoffer


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Calling it a Day

No matter how much detail I go into to show that Refco's association with my firm in 1997 was not a link in its debacle, someone, somewhere, is going to allude to some anonymous source saying something to the effect that Refco's problems started with losses they suffered with me in 1997. The latest was an Oct. 27 Bloomberg story saying that someone said that Refco suffered $35 million of losses relating to the settlements and agreements we came to in 1997. Not mentioned is the offset provided by the  value of all the assets turned over to them by me and my funds. Worse yet, just having my name linked with Refco is enough for 99.9% of the public to think that there is some substance to the idea that unbeknownst to me they hid their losses with me, and that somehow this morphed into massive losses and debts that killed the firm eight years later.

It's apparent that someone has been trying to deflect attention from true key links in the Refco debacle. The NYT reported today that before the acquisition of Refco by Thomas Lee & Co. in 2004, which valued the firm at $2.25 billion, Phil Bennett and Tone Grant, the previous Refco CEO, took out a total of $1 billion in cash bonuses, according to SEC filings. Bloomberg  reported the same, and noted that an additional $862 million was paid out to an "a former shareholder" who went unnamed in the documents. It has also been reported that a Refco comptroller was granted a $50 million bonus in connection with his leaving the firm in October of 2004. This should provide a reasonable corpus of those likely to benefit from deflected attention. Regardless, if Refco in 2004 still had $2 billion or so in cash seven years after they last had contact with me, with which to pay out cash bonuses, as well as additional money to pay a $82 million special dividend in connection with the August 2005 public offering, any bookkeeping transactions that they may have wrongfully kept on their books relating to how they closed out their transactions with me in 1997 had to be de minimis.

Yet even after this $2 billion payment, the firm was still valued by Lee at $2.3 billion and was sold to the public valuing it at $3.5 billion. Please, if they had a $4 billion or $5 billion value eight years after they last had contact with me, wouldn't it have been possible for them to write off, pay back or properly account for any losses or fictitious debts they still had on their books with me? Better yet, please someone expose me to losses and let me still have a firm where I can take out $2 billion in cash 8 years later, and still have a $3 billion value.

That's it. I can't spend any more time responding to these damaging, nebulous and untrue rumors. -- Victor Niederhoffer

Refco and Niederhoffer: The Real Story (Updated Oct. 25)

Over the past several days, my name has surfaced in news stories blaming Refco's collapse in part to a debt that the firm is said to have incurred as the result of my losses in 1997, when Refco was my broker. Typical of these was the Oct. 21 Wall Street Journal article headlined: "Refco's Debts Started With Several Clients: Bennett Secretly Intervened to Assume Some Obligations; Return of Victor Niederhoffer," complete with a picture of me. The article said former Refco CEO Philip Bennett allegedly took steps to hide debts that Refco incurred with my firm and as many as nine other customers. "Niederhoffer and Flotti both denied owing Refco any money," the article said in the third paragraph. Yet not even the anonymous sources cited have stated that I owed Refco money. Talk about "when did you stop beating your wife?" journalism.

"The people familiar with the matter say they believe the customers, including Mr. Niederhoffer, had no knowledge of the steps Mr. Bennett allegedly took to hide the debts," the Journal article said. The article makes it seem as though these debts played a major role in Refco's collapse. I believe this is highly unlikely and that it unfairly tarnishes me and my present firm, as I explain below.

There has been a "return of Victor Niederhoffer," but it has nothing to do with Refco. It relates to building my firm up to some 25 outstanding employees; developing numerous new methods of systematic methods of investing; establishing and acting as trading advisor for several highly successful hedge funds, including the Matador Fund -- the track record of which, while not cricket for me to detail here, is readily available from the standard hedge fund rating services;  rebuilding my family's fortune; recovering money at my own expense for clients involved in my 1997 debacle; co-authoring "Practical Speculation," which several industry reviewers have referred to as one of the best books on trading ever; co-writing more than 500 articles for CNBC Money and other publications; creating and expanding two self-improvement societies that now number hundreds of members; founding and editing this Web site; extensive benevolent activities; lecturing at universities and industry groups here and abroad; developing a unique musical presentation on speculation; and numerous athletic and familial pursuits. None of this was deemed worthy of mention by the media. But the tenuous connection I had with Refco eight years ago has been dredged up ad infinitum.

All of these recent stories have cited an anonymous source or sources who at best have partial or speculative information about what really happened at Refco and at worst are trying to deflect attention from themselves or are being used by others to deflect attention from the extensive wrongdoing that must be behind Refco's collapse. Since these sources are unnamed, neither I nor any other reader can gauge their credibility. I cannot query or cross-examine him, or her, or them, to elicit the full truth. I can't discern whether any documents they relied on used my name as an accounting fiction to hide others' debts or transgressions.

I have no way of knowing if Refco, with its extraordinarily inventive accounting methods, recast any aspects of the transaction in the eight years after it transpired. Nor can I determine whether the source has any self-interest, bias or competitive position against me. I have no way of knowing whether these anonymous sources had any other incentives that led them to provide pungent information to the press. I cannot tell how much expertise or training any of these anonymous source might have in these technical subjects with specific accounting, financial, legal, and clearing house rules overlaying all aspects of the transaction, nor can I tell how many levels away from direct knowledge the source described by a prominent newspaper as having been "briefed on the investigation" might be, nor can I tell whether that source has all the other problems described above in providing an accurate account multiplied by another level of uncertainty. I cannot note gaps, uncertainty and inaccuracy in whatever an anonymous source may have told a reporter, or evaluate whether the reporter has accurately reported his conversation with the anonymous source. Nor can I respond to specific statements with facts if I choose. Moreover, because I am not an attorney nor have I consulted one in writing this as of yet, I don't know what the defects of hearsay testimony are, why it is not allowed in court, and how many other tests and queries are relevant when vetting the accuracy and credibility of an anonymous source in such activities as cross examination.

One would have hoped that responsible media would not use anonymous sources who convey nebulous information and veiled suggestions of wrongdoing certain to be ruinous to a man and a firm's reputation. It's bad enough that I can't respond when my critics say that I am the world’s worst trader, because I can’t discuss my performance without a full disclosure statement to qualified investors only. But these innuendos are too much to just ignore as if there were any element of truth to them. Unfortunately, one publication follows another in using these anonymous sources and writing about the stories that quote them; they then embellish them, perhaps add other veiled suggestions to the fire, and then print the result as the truth, knowing full well that they are free to damage a public figure's reputation in the U.S. as long as the injured party can't prove that the publisher knew that the story was false. As you surely realize, that standard of proof is almost impossible to meet.

I have received much abuse for the performance and selection of trades of my fund during 1997. I have not hidden or walked away from that debacle. I have apologized extensively, made extensive efforts at reparation at my expense, described the gist of what happened in my 2003 book and in numerous columns, and seriously attempted to improve my trading and my knowledge. Kindly tell me anyone you know who has made profits in the nine-figure range who has not suffered one serious loss, or who has come back from this loss in a more successful fashion.

For each person who reads this note, there will be 10,000 who read headlines or heard TV reports based on these same anonymous sources, who could not conceivably be presenting an accurate recounting of the situation. Doubtless no matter what I say, part of my legacy will be that I was a key link in these terrible events. For those who wish to be fair-minded and know the truth, let me repeat what I have previously said:

Yes, there were losses that my fund and I suffered in conjunction with the market closing early on October 27, 1997. But there were also considerable assets. I was confident at the time that my funds and I would have more than enough assets to cover any losses that might accrue, if I were able to close out my positions in an orderly fashion. Indeed, I achieved this for all accounts that desired and allowed me to handle their disposition. For the benefit of those interested in what happened that day, this is an accurate capsule summary of what happened.

On Oct 27, 1997, the Dow dropped 550 points by 3:30 p.m. EST. Based on circuit breakers in existence at the time, all trading in stocks was closed for the day, for the first time in modern history. Under these chaotic conditions, the accuracy and stability of the pricing of our options portfolio was uncertain and variable, relative to the exchange, clearing house and time at which they were marked to market. Nobody was certain what would happen if the chaos continued. Refco, on its side, had to meet capital and liquidity requirements to satisfy regulators and their clearing company. They expressed their desire to have control of the timing and treatment of the positions outstanding. They asked that all the transactions between us, all the debits and credits, all the assets and liabilities, and all the obligations and commitments of my funds be for their account, and that we should each call it a day.

For 15 years before these events, my firm had enjoyed a mutually profitable relation with Refco. During this time, we often had stretches where liquidity was an issue and positions had to be adjusted or downsized, and other assets had to be sold or liquefied to meet unsettled market conditions. Special rules regarding market closure under conditions of extreme volatility had been in existence since 1988, but had never been triggered. Neither we nor Refco had experience or expertise in how to handle this market closure.

While we were not happy with this suggestion, and would have much preferred to be allowed to treat these transactions as we had in the past, we understood the forces that led to Refco making this request. Under the circumstances, and taking into account the illiquidity of our other positions, we reached a harmonious agreement that at the time seemed fair to us and them.

As part of this, we agreed that we would both release each other from all debts and obligations, that the proceeds and timing of all the assets and liabilities, debits and credits, realizable from the funds would be for the benefit or detriment of Refco, and that we would release each other, and hold each other harmless, for the future, with no amounts owed either way between us except that I personally would owe them $2 million, which I paid within a year, on schedule. That agreement was executed and perfected two days later by two major law firms, under intense scrutiny and close monitoring then and thereafter by all proper authorities, including Refco’s clearing association. Refco continued to do business throughout these events and met all its accounting, capital, liquidity, equity and other requirements. My firm was forced to reduce its activities to a snail’s pace. Almost all employees left. I then started rebuilding by liquefying my personal assets.

I am not privy to whether Refco lost or made money, on balance, when the proceeds of the assets received from me were netted against the trading losses or profits on the positions that they ultimately traded out of. I have seen estimates in the media that their losses totaled $45 million and I have heard rumors that on balance they made money on the transaction. I don't know how they may have recast those transactions since that time, or what explanations they have made to third parties. I do know that there were no financial obligations, receivables, debts, loans, accommodations or open-ended aspects of their transaction with respect to us. I also know that all the financial aspects of the transaction were completely transparent. The loss was not big enough at the time to affect Refco's compliance with capital requirements in 1997. And there is no way that it could have grown or morphed subsequently that had anything to do with my funds, me, or any subsequent market moves, hopes for collections, or other transactions.

I am also confident that the amount of any net loss that Refco had on the transaction if any was minimal relative to the amounts that have been disclosed about receivables improperly accounted for on their books, or payments to their key executives and owners, or other losses that they suffered in the subsequent eight years on transactions completely unrelated to mine. I have no idea why my name and my transaction with them eight years ago has been mentioned repeatedly by anonymous sources as a key link in the Refco debacle. It seems inconceivable to me that they could have kept open on their books any aspect of it, whether related to my funds or not. These nebulous reports of my involvement are inaccurate, based on partial information and may be self-interested attempts to deflect attention from other, more substantial sources of Refco’s problems.

I behaved quite honorably in all aspects of the transaction, seeking and gaining partial restitution for my customers as my own expense and effort. I sold off many of my holdings to gain liquidity and get back in business, I have relations with numerous brokerage houses to whom I have fully disclosed all aspects of the Refco transaction that I was party to, and they have made their own independent investigation and inquiries. I am again one of the best customers of the exchange on which these transactions took place. I have shed considerable light and focus on the transactions in my articles and books. I have hired many highly qualified individuals to build my firm up again, have tried to learn and improve from my past mistakes and have made a very successful and substantial recovery from the 1997 disaster for my own account and my new funds.

Yes, I had a disaster and I have attempted to bounce back from it. That is the American way. Kindly tell me why it is justified to cast further slings and arrows against someone who has suffered a debacle like mine, accepted the burdens that arose from it, acknowledged his own complicity for same in a most honorable and proper fashion, and succeeded in a recovery to the extent that I have. Your story has put me in a most untenable and unfair situation. My achievements have been unfairly denigrated; my business has suffered and will suffer; and my customers, associates and family will through no fault of their own be disadvantaged as a direct result of these irresponsible stories.

TheStreet.Com Commentator Jon Markman's Perspective on Niederhoffer and Refco:

In my opinion, Niederhoffer's return to the arena should be cause for celebration, not scapegoating. His success, defeat, reflection and re-emergence are all emblematic of a cycle of persistence and ambition over entropy and adversity that characterizes our best American myths. With any luck, Refco will survive too, chastened but stronger.