Inside Bawag's Refco Role

The Austrian bank Bawag was a partner in crime with former Refco(RFXCQ) CEO Phillip Bennett in the nearly $1 billion accounting fraud that led to the collapse of the New York-based commodities brokerage, prosecutors said Monday.

Over the past six months, the obscure Austrian bank has emerged as a key player in the Refco scandal. In fact, prosecutors contend in a settlement reached Monday that Bawag once controlled 47% of the brokerage through a secret deal with Bennett.

By agreeing to pay a minimum of $675 million in a complicated settlement hammered out by federal prosecutors, Bawag won't face any criminal charges over its role in Bennett's alleged debt-hiding scheme. The total amount shelled out by Bawag eventually could exceed $700 million.

Refco's creditors in the brokerage's bankruptcy proceeding will get most of the money, collecting at least $506 million from the Austrian lender. Refco shareholders and the private equity firm Thomas H. Lee Partners, which lost $245 million when Refco went belly up last October, will split the rest. Refco shareholders are guaranteed a $108 million payout, according to a separate deal negotiated by lawyers with Bernstein Litowitz Berger & Grossman.

A 13-page nonprosecution agreement between Bawag and federal prosecutors in New York requires the Austrian bank to "accept and acknowledge'' responsibility for participating in Bennett's alleged five-year scheme to keep up to $1 billion in uncollectible debts off Refco's balance sheet. The deal also requires Bawag to cooperate with authorities and turn over documents that could prove useful to prosecutors in the ongoing criminal investigation.

Ultimately, the settlement is a small price to pay given the fact that Austria's fourth-largest lender secretly owned up to 47% of Refco and pocketed $952 million from the brokerage's 2004 leveraged buyout. Federal authorities say the secret deal provided Bawag with a strong incentive to aid Bennett in his scheme to burnish Refco's books and make the brokerage appear financially healthier than it really was.