Scott Schoen, co-president of Thomas H. Lee Partners, rode into lower Manhattan in a rainstorm on Oct. 12 for a 6 p.m. meeting at the headquarters of Refco Inc.

In a cramped 23rd-floor conference room, Mr. Schoen, a Refco director, joined a dozen others around a square table for an eight-hour meeting, all riveted by a single sheet of paper that imperiled the commodities dealer. It said customers had asked to withdraw more than $1 billion in deposits -- and Refco couldn't raise the cash.

Refco's bankruptcy filing five days later, touched off by disclosure that its chief executive had disguised $430 million in debt, has plunged Mr. Schoen and other Thomas H. Lee officials into nonstop crisis efforts. Their first goal was to save a company they bought control of last year. Now their mission includes damage control -- to defend their own reputation as savvy investors.

Thomas Lee, now 61 years old, gained that reputation when his firm bought Snapple, the juice and tea company, for $135 million in 1992 and resold it for $1.7 billion two years later. At first, Refco looked like a home run, too. A Lee-led group paid $508 million for a majority stake in August 2004, then took Refco public a year later at more than double the price.

But as Refco spiraled toward disaster, Mr. Lee exclaimed, "I just can't believe it," according to one person who heard the comment. Refco's former CEO, Philip R. Bennett, faces federal securities-fraud charges that he temporarily handed off his debt to another Refco customer, in short-term transactions around the end of quarterly reporting periods.

The debacle came just as Thomas H. Lee Partners, led by a new generation of three co-presidents including Mr. Schoen, was gearing up to raise a $7.5 billion buyout fund. As of Sept. 30, returns on Lee's last fund, raised in 2001, were 45 percent annually, according to material prepared for the firm. Even if Refco's stock went to zero, the returns still would be 34 percent, the same material indicated.

Ordinarily, numbers like that would make raising the next fund a breeze. But after Refco, Lee investors have questions.

The California Public Employees' Retirement System, which has $200 million invested at Lee, has "some questions about what kind of due diligence they did on this particular company," a spokesman said Friday. Lee ranks in the top quarter of Calpers's buyout investments, he added.

"There's clearly a reputation issue they've got to work through," said Mario Giannini of Hamilton Lane LLC, a consultant whose clients account for more than 10 percent of Mr. Lee's funds. Investors want to know "whether this is something that should have been caught," he said. Mr. Giannini doubts it could have been, and believes Lee can "work through" the reputation issue.

Thomas H. Lee Partners considers itself "the victim of a fraud," according to someone familiar with the firm. Lee staffers "asked all the right questions" and did "extremely detailed diligence" before buying Refco, the same person said. But the alleged fraud was too "carefully constructed" to be detected, even by Refco's regulators and lenders. Despite the bankruptcy filing, Refco remains "fundamentally sound and profitable," this person said.

When first approached about buying a stake in Refco in November 2003, Thomas H. Lee officials raised questions about Refco's "reputational issues" relating to past run-ins with regulators, according to people familiar with Refco. For example, Refco in 1999 paid $7 million to settle regulatory charges related to investor losses incurred by money manager Jay Goldinger.

Mr. Bennett, who became the firm's chief executive in 1998, told the Lee officials he had made improvements in that area, the same people said. Lee's own checks by outside law firm Weil Gotshal & Manges LLP supported that view. Refco had brought in a former commodity regulator, Dennis Klejna, as general counsel.

Lee officials went ahead with the Refco investment in mid-2004 based on the fast growth of derivative products Refco traded in, as well as of the hedge funds that use them. They spent $10 million on seven months of "due diligence" by a law firm, an investigative agency, an accounting firm, and consultants in business, human resources and insurance.

But Lee didn't get merger advice from a major Wall Street firm. Instead, Lee paid itself and its limited partners a $30 million fee for advice on the deal; Lee also paid a $5 million advisory fee to a boutique firm specializing in financial services, Sandler O'Neill & Partners LP.

The buyout was financed with a $453.3 million investment by the Lee fund, plus $55 million from other Lee group members and $1.4 billion in debt. The total price tag of $2.2 billion was seven times Refco's projected $300 million in 2005 earnings before interest, taxes and certain accounting charges.

After the acquisition, the Lee team upgraded Refco's financial reporting by hiring a new chief financial officer, controller and tax director. Four Lee officials joined the Refco board, and Lee prepared Refco for an initial public offering in August 2005.

At first, Refco's stock price rose 38 percent, giving the company a market value of $3.9 billion. The Lee fund reaped $208 million in proceeds from the IPO, keeping a stake valued at $1.5 billion. At that point, the Lee investment had more than tripled.

Mr. Schoen first learned of the Bennett transactions on Tuesday, Oct. 4, in a call from Ronald O'Kelley, a former chief financial officer of State Street Corp., who was chairman of the Refco board's audit committee. The failure to disclose such a "related party" transaction made Refco's reported results look better, and this became the basis of the securities-fraud charge.

On the morning of Oct. 6, Mr. Bennett met with Refco audit-committee members at the New York offices of Weil Gotshal. Mr. Bennett, who previously had disclosed other related-party transactions, said the $430 million debt stemmed from customer losses dating back to 1997, and promised to repay the money. Mr. Bennett and a top aide were put on leave.

Refco's announcement on Monday, Oct. 10, saying Mr. Bennett had repaid the debt, but that Refco's past results couldn't be relied on, sent the stock down 45 percent. Three days later, Refco declared a moratorium on some customer withdrawals.

In the following two days, the Lee partners debated putting more money from their fund into Refco, as "a message to the market" to shore up the battered firm, according to people familiar with the debate. But they believed that it might take as much as $500 million to $1 billion to have any effect, and that such a large amount would leave the firm with too much of one fund in a single stock.

The Lee fund that holds Refco has, on $4.2 billion in 17 investments, a current value of $7.1 billion. Seven of those have more than doubled in value, according to calculations prepared by the firm, including Warner Music Group Corp., Houghton Mifflin Co., and National Waterworks Holdings Inc.