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Austrian Bank Hit By Refco Scandal

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

02 May 2006


As the scandal around Austrian trade union bank Bawag (Bank für Arbeit und Wirtschaft) and its connections with bankrupt US futures broker Refco deepens by the day, New York bankruptcy judge Robert Drain last Friday froze Bawag's US assets after some Refco creditors sued the bank.

Bawag itself is reportedly suing 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 are suing 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 are 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.

In 2000, Bawag acquired PSK, Austria’s retail postal bank, and is now Austria's fourth-largest bank. Perhaps one should say 'was', because the revelations about Refco have triggered a classical run on Bawag by retail depositors, who are sucking EUR100m a day out of the bank's branches. Because of intimate connections between Bawag and Austria's centre-left opposition party, the affair has political resonance in Austria. Many senior officials of the Austrian Labor Federation are under investigation; Fritz Verzetnitsch, the head of the union group, has resigned.

The union movement says it wants to sell Bawag; Austria's other banks are said to be supporting Bawag with liquidity.

Bloomberg said last month 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 stated in March that it "wishes to make it clear that the losses from the so-called Caribbean transactions have been fully absorbed in previous years' financial statements and no longer constitute a risk exposure for the bank".

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.

Bawag Chief Executive Ewald Nowotny said last week that the bank was in talks about settling the dispute with the Refco creditors to give possible investors in the bank legal certainty. A figure of US$400m has been mentioned.

Erich Foglar, an official of Bawag's owners, said on Friday that a former official of the Union federation had helped to provide loans to Refco via a Liechtenstein-based foundation. It's not clear whether these loans are the same ones as those to Bennett. The union group's new president, Rudolf Hundstorfer, says that the Refco deals were set up by the union's former finance chief, Guenter Weninger, on his own. Hundstorfer said: "This deal wasn't and isn't acceptable, and we apologise to our members, our officials, and the public."


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