Refco Creditors May Benefit From BAWAG Sale

by Glen Shapiro, LawAndTax-News.com, New York

25 August 2006

It has emerged that the creditors of collapsed US brokerage Refco could receive compensation of up to US$200m if Morgan Stanley is successful in selling the beleaguered Austria Bank BAWAG for more than EUR2bn.

Attorneys for Refco's creditors say that they will in all likelihood also have a veto or at any rate a right to call for an independent review of any sale.

Earlier this year, BAWAG - owned by Austrian trade unions - settled a lawsuit brought against by the creditors for US$675 million. Morgan Stanley says it expects to have a deal to sell BAWAG before the end of this year.

Bawag itself sued Refco's ex-CEO Philip Bennett, who borrowed US$421m from the bank in order to repay Refco $430m which he had been concealing from the company; just days later he was arrested and charged with securities fraud. But the Refco creditors sued Bawag for US$1.3 bn, alleging that the bank actively helped Bennett to deceive the company.

Bawag admits that it was involved in the financing of investment companies mainly engaged in interest rate and currency derivative transactions in the 1990s, at an eventual cost of more than EUR1 billion. Independent enquiries have revealed that Bawag has also been involved in the little-known PIPE (public investment in private equity) market in New York, in which cash-strapped public companies sell off new stock at junk prices, often to or via hedge funds.

According to TheStreet.com, Bawag's investments into the PIPE market were via four Liechtenstein-based hedge funds: Alpha Capital, Austinvest Anstalt Balzers, Austost Anstalt Schaan and Celeste Trust. Bawag is also said to have a financial interest in LH Financial Services, a New York investment firm that is heavily involved in the PIPE market.

Bloomberg said at the time that Refco itself appeared to have held offshore accounts with as much as $525 million in fake bonds at its Bermuda-based unit. The bonds appear to have been owned by six companies incorporated in Anguilla, which were in turn owned by a fund called Liquid Opportunity and Bawag. The six companies were incorporated on July 26, 2004, by a local agent, and were initially listed as Refco creditors with a combined claim of $543 million.

BAWAG set up a joint venture with Refco in 1998 and bought a 10 percent stake in the futures broker in 1999. It sold the stake in 2004 to private equity firm Thomas H. Lee Partners. The Refco creditors claim that the company raised new debt at the time of the buy-back which found its way to Bawag.

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