Inside Bawag's Refco Role

The $1.9 billion leveraged buyout set the stage for Refco's successful $583 million IPO last August. But just two months later, the debt-hiding scheme would come to light, Bennett would be arrested and charged with securities fraud and Refco would file for bankruptcy.

"This office will vigorously pursue those who aid and abet their business associates in committing financial crimes and defrauding American investors, even those who act entirely from abroad,'' says U.S. attorney for the Southern District of New York Michael Garcia.

The nonprosecution agreement with Bawag, however, left the door open to the possibility that the U.S. government may still go after the bank for tax violations. People familiar with the matter say the bank may have violated federal tax law by concealing its full ownership stake in Refco.

Before the secret ownership agreement came to light, Bawag had claimed to own no more than 10% of Refco prior to the 2004 buyout. TheStreet.com, in articles last November and March, was the first to report that Bawag may have had a secret deal with Refco to boost its equity stake in the brokerage.

The Securities and Exchange Commission in a civil complaint filed in conjunction with the U.S. attorney's action, charged that Bawag aided Bennett's scheme by engaging in a series of year-end transactions that involved loans worth hundreds of millions of dollars. The SEC contends Bawag executives knew the purpose of the year-end transactions was to conceal Refco's bad debts.

"Bawag's conduct was especially egregious because the bank's former executives understood that the deceptive year-end transactions would help Phillip Bennett and Bawag cash out their ownership interests at the expense of innocent investors,'' says Scott Friestad, an associate director in the SEC's enforcement division.

The year-end transaction involved a series of short-term loans, beginning in 2000 and ending in 2005. The loan amounts ranged from $250 million to $300 million.