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In a shadowy corner of Wall Street where cash-strapped companies go begging for their lives, one foreign bank stands out, both for the scope of its involvement and the measures it has taken to conceal it.

Over the last nine years, Bank fur Arbeit und Wirtschaft, or Bawag, the Austrian financial group best known for its ties to


, has quietly become a key player in an obscure but booming market where public companies seek last-ditch financing via private placements of new stock. Known as private investment in public equity, PIPE offerings have grown from a backwater into an $18 billion-a-year financial frontier dominated by hedge funds and other sophisticated players.

Even by the murky standards of the PIPEs market, Bawag's role is hard to pin down -- and that appears to be by design. Austria's fourth-largest bank uses a network of foreign hedge funds and a small New York investment firm to do its bidding in PIPEs, rarely linking its name to any transaction even though its fingerprints are stamped on scores of them.

has found that Bawag is either a significant investor or controlling shareholder in at least four foreign hedge funds that are active players in the PIPEs market: Alpha Capital, Austinvest Anstalt Balzers, Austost Anstalt Schaan and Celeste Trust, all of which are based in the tiny European country of Lichtenstein. Bawag also has a financial interest in LH Financial Services Corp., an obscure New York investment firm that has sunk more than $70 million over the past two years into about 150 different PIPEs deals, almost all of them penny-stock companies.

In 2004, LH Financial was the second most prolific PIPEs investor in the country by transactions, placing money in 102 different deals, according to PlacementTracker, a research firm. The pace slowed in 2005, when LF invested in about 45 deals -- still good enough to rank in the U.S. top 10.

Bawag officials did not respond to telephone calls and email requests to comment for this story.

established the bank's financial ties to the four hedge funds and to LH Financial after reviewing numerous regulatory filings and court documents and talking to people familiar with Bawag and the PIPEs market. (For more on how Bawag's activity was discerned, see

this sidebar.)

In the U.S., Bawag is best known for its dealings with Refco, the New York commodities brokerage that imploded four months ago in an accounting scandal allegedly orchestrated by its CEO. Bawag once had a minority interest in Refco and made a $410 million loan to the CEO, Phillip Bennett, just hours before the broker disclosed that Bennett had been hiding hundreds of millions of dollars in customer trading losses for years.

But there's another side to Bawag's relationship with the fallen brokerage. All four hedge funds affiliated with Bawag were once customers of Refco, and Refco helped each resell some of the cut-rate shares they acquired in PIPEs deals. Two former Refco brokers who worked closely with the Bawag funds are being investigated by securities regulators on allegations they engaged in manipulative trading on behalf of another entity.

Most of what can be gleaned about Bawag's behind-the-scenes maneuvering in the PIPEs market concerns LH Financial, a 10-person firm with a prestigious Central Park South address. LH Financial, which is not registered as a brokerage or investment adviser, exists almost exclusively to invest in PIPE deals of $5 million or less.

Founded in 1997, LH Financial is led by Solomon Obstfeld, who is listed in some telephone directories as being a rabbi. Obstfeld didn't return several phone calls or respond to email inquiries.

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In 1990, Obstfeld got caught up in a government sting that exposed brokers who allegedly used other people to take a licensing exam for them so they could work in the securities industry. Obstfeld, charged with a misdemeanor, paid a $5,000 fine and was sentenced by a federal judge to a year of probation.

LH Financial also has ties to Martin Schlaff, an Austrian billionaire who is one of Bawag's biggest individual customers. Schlaff is a partner with Bawag in the Alpha Capital hedge fund, along with other business ventures. A relative of Schlaff's briefly worked at LH Financial.

Schlaff has his own colorful history. The

Jerusalem Post

recently reported that Schlaff is being investigated by Israeli authorities over allegations he paid $3 million in "bribes'' a few years ago to family members of ailing Israeli Prime Minister Ariel Sharon to promote his business interests in Israel. Authorities suspect that some money may have been wire-transferred from accounts at Bawag.

It's easy to see why Vienna-based Bawag, which was founded in 1922 and has more than $50 billion in assets, would want to shield its role in the PIPEs market, given the unsavory reputation the deals have earned and the sketchy backgrounds of some its big players. Critics say PIPEs are particularly susceptible to abuse by unscrupulous short-sellers -- traders who place market bets that a stock will decline in price -- because they usually involve the sale of stock at discounted prices. The stock of a company announcing a PIPEs deal almost always declines as the market adjusts to the influx of new shares and the likelihood that they will be sold for a quick profit.

In light of those traits, U.S. securities regulators have been conducting a sweeping investigation into the PIPEs market for the past two years, looking for manipulative trading, especially in deals involving penny stocks. To date, the inquiry has resulted in only a few enforcement actions against a handful of small hedge fund managers. But more regulatory actions are on the way, including possible sanctions against

Knight Capital



Friedman Billings Ramsey


, plus a number of big hedge funds.

One thing regulators are looking for are instances in which an investor learned of a pending PIPEs deal and shorted the issuer's shares before it was publicly announced. Unlike the sale of discounted shares, this practice is flatly illegal, and it has resulted in enforcement actions over the last two years.

There's no indication that Bawag, the four hedge funds or LH Financial are in trouble with regulators. But over the years, a number of private litigants have filed at least six lawsuits raising allegations of fraud and stock manipulation against some of the Bawag-related entities; Bawag itself was never named as a defendant. Most of those lawsuits have been either dismissed or discontinued.

One instance in which Bawag's behind-the-scene activities became a point of controversy is a bankruptcy proceeding for

Mooney Aerospace


, a San Antonio manufacturer of small, single-engine planes. In that litigation, Paul Dopp, a former Mooney CEO and creditor, has claimed that LH Financial and Alpha Capital never disclosed in regulatory filings that they were acting in concert with Bawag to provide financing to the company.

The bankruptcy judge referred some of Dopp's allegations to federal prosecutors in San Antonio in August 2004. There's no indication prosecutors have seriously purused them.

Notwithstanding the court victories, the Bawag-affiliated entities keep some curious company.

The hedge funds -- Alpha Capital, Austinvest Anstalt Balzers, Austost Anstalt Schaan and Celeste Trust -- were once customers of two former Refco brokers, Matthew Drillman and Jacob Spinner, who were implicated in one of the first manipulative PIPEs trading cases ever brought by securities regulators


Securities and Exchange Commission

has never publicly identified the brokers, nor charged them with any wrongdoing. But people familiar with the inquiry confirmed their identities. The SEC, sources say, is continuing to investigate allegations that the brokers, working at the behest of an investment firm called Rhino Advisors, engaged in manipulative trading on behalf of Amro International, a Swiss hedge fund.

Michael Bachner, an attorney for Spinner, declined to comment on the investigation. Michael Sommer, the lawyer for Drillman, did not return several phone calls. Both men are currently brokers with Pond Equities, a small firm in New York.

Amro is now largely inactive. It hasn't appeared in a PIPEs deal for several years. However, for a time, Amro was investing in many of the same deals as the Bawag affiliates. In at least one PIPE, a financing for

Bravo Foods International


, Amro and Austinvest are described as having a "common investment representative.'' That investment representative was Rhino Advisors.

There's nothing to indicate that Drillman and Spinner ever engaged in any improper trading with regard to the Bawag-related hedge funds. Still, there is ample evidence the brokers were willing to go to great lengths to please their customers.

In January 2002, Drillman and Spinner wrote a "letter of reference'' on Refco letterhead for Alpha Capital. The letter, which is part of the court record in the Mooney bankruptcy, was designed to persuade officials at the aircraft company of Alpha Capital's good character.

"We suggest that you should feel comfortable in your dealings with Alpha Capital with respect to the integrity of those who speak on its behalf as well as with respect to its ability to perform on its financial obligations,'' the brokers wrote.

In the letter, the brokers also noted that Alpha Capital was "jointly owned by the Bank fur Arbeit und Wirtschaft'' and "a group of well regarded high net worth individuals.'' They added that Alpha Capital was formed by individuals "involved in similar investment vehicles,'' and that Refco had worked on transactions for these individuals totaling more than $100 million.

Of course, writing a glowing letter for a customer is a far cry from what regulators suspect Drillman and Spinner did for Amro, according to sources and investigation documents. Regulators are looking into allegations that the brokers helped arrange a series of illegal short-sales for Amro after the hedge fund invested in a $3 million PIPE deal by



, a small Pennsylvania software company.

The SEC's investigation into improper trading by Amro has been going on for more than four years and is the spark that ignited the broader regulatory inquiry into manipulative trading in the PIPEs market.

The first big development in that investigation came in 2003, when the SEC reached a $1 million settlement with Rhino and its president, Thomas Badian, charging them with "directing a series of manipulative short sales."

Regulators say the shorting was illegal because Amro had signed an agreement not to short shares of Sedona as part of the PIPE transaction, even though the price of the company's stock was expected to decline after the deal's announcement. The deal was structured so Amro would get more shares from Sedona as the price of the stock dropped. Amro, which has never been charged by the SEC, benefited from the brokers' actions because it got a ready supply of stock from the deal to cover the illegal short bets.

But the Rhino settlement didn't end the SEC's investigation. Just as Refco was set to go public in a big $583 million IPO last August, regulators notified the brokerage that it was planning to sanction Santo Maggio, the firm's former president, for failing to properly supervise two "former brokers who handled the account of Amro International.''

Maggio reached a tentative settlement with the SEC to serve a one-year suspension from some of his duties at Refco, but then the accounting scandal at Refco broke wide open in early October. Within days of the revelation, Maggio was gone.

People familiar with the Amro matter say Maggio was aware that Refco brokers were doing trades for the Bawag affiliates. On at least one occasion, these people say, he discussed the trading and payment of commissions with a top Bawag executive. Scott Hershman, one of Maggio's attorneys, declined to comment.

To be fair, Maggio wasn't the only executive at Refco pushing the broker to work with the Bawag-related hedge funds. Another was Thomas Hackl, a former Refco vice president, who joined the brokerage in 2002 after 11 years as head of investment banking at Bawag.

During his tenure at Bawag, Hackl came to know the hedge funds well. His name often appeared in early regulatory filings as the contact person for Austinvest, Austost and Celeste.

None of those filings, however, ever linked Hackl to Bawag.