Austria's Bank fuer Arbeit und Wirtschaft, which has emerged as a central player in the
scandal, is dealing for its life.
Officials of the bank, which is known as Bawag, announced an agreement last night to settle allegations brought by Refco's creditors that it aided and abetted in fraud at the now-bankrupt New York derivatives brokerage. Refco, which sold a stake in itself to Bawag during the late 1990s, collapsed in October amid allegations its CEO was engaged in an elaborate scheme to cook its books.
Bawag's deal with Refco's creditors was reached in conjunction with another last-ditch pact, this one sponsored by Austria's government, to funnel liquidity into the bank in an effort to preserve its solvency. Austria's fourth-largest lender has been teetering for several days amid demands for withdrawals from many of its 1.5 million retail customers.
Sources say Bawag's deal with Refco's creditors is also part of a larger settlement hammered out with U.S. prosecutors. Most of the terms of the deal are still secret, but could be disclosed by U.S. government officials in the coming days.
Last week, lawyers for Refco's creditors filed a lawsuit claiming the bank had a secret deal with former Refco executives that effectively gave Bawag a much bigger equity stake in the brokerage than it publicly acknowledged. The creditors contend the deal, which involved a small U.S. company called DF Capital, funneled Bawag $1.3 billion of the proceeds from Refco's $1.9 billion leveraged buyout in 2004.
first reported on the broad outlines of the DF Capital secret deal.
The LBO came a year before Refco went public in a $585 million IPO. Two months after the IPO, the once-dominant commodities and derivatives brokerage filed for bankruptcy in the wake of scandal
A spokesman for Michael Garcia, U.S. attorney for the southern district of New York, declined to comment on the negotiations. Garcia's office has charged former Refco CEO Phillip Bennett with masterminding the accounting fraud that led to Refco's collapse and bankruptcy filing.
Scott Edelman, an attorney with Milbank Tweed Hadley & McCloy, the law firm that represents Refco's creditors, declined to comment.
A Bawag spokesman could not be reached for comment. The
New York Post
reported last month that Bawag has hired
to find a buyer for the troubled lender.
Last month, federal prosecutors disclosed that they intend to file a revised indictment in the Refco case, which could include additional charges against Bennett and name some of his co-conspirators as defendants. Prosecutors allege Bennett masterminded a scheme to conceal up to $750 million in trading losses rung up by Refco customers to make the brokerage appear financially healthier than it really was.
Refco's creditors charged last week that Bawag was a participant in Bennett's debt-hiding scheme.
The negotiations between Bawag, Refco's creditors and the rescuing banks took place over the weekend. Bank officials and Austrian government hoped to have a deal with the creditors hammered out before Bawag opened for business on Tuesday. The bank was closed on Monday because of a national holiday.
On Friday, Bawag found itself the victim of escalating customer withdrawals, as news of its deeper involvement in the Refco scandal spread through Austria. Customers' nerves were further frayed after the president of Austria's Trade Union Federation, Bawag's owner, confirmed some of the allegations raised by the creditors.
Meanwhile, a second European financial institution may be connected to the Refco scandal.
Refco's creditors contend Lichtenstein-based Bank Frick has "overlapping connections'' to DF Capital, the company that played a critical role in the alleged scheme to boost Bawag's equity stake in Refco from 10% to as much as 40%. A Lichtenstein foundation set up by the Austrian trade union, which owns Bawag, was the sole shareholder of DF Capital.
Bawag owns a 26% equity stake in Bank Frick. Before it filed for bankruptcy in October, Refco owned 4% of the Lichtenstein lender.
One of the directors of Bank Frick is Thomas Hackl, who was head of investment banking at Bawag for nearly a decade before becoming a vice president at Refco in 2002. Hackl no longer works for Refco and is believed to be working for a European investment bank.
In 2004, lawyers from the
Securities and Exchange Commission
questioned Hackl as part an ongoing investigation into manipulative trading in PIPEs, or private investments in public equity, according to sources and information provided by Bawag officials to Austrian bank regulators. When Hackl was at Bawag, his name often appeared in regulatory filings as the contact person for a group of Bawag-owned hedge funds that heavily invested in PIPE deals.
PIPEs are an obscure but booming market in which small, public companies seek last-ditch financing via private placements of new stock, often sold at steep discount to the prevailing market price.
Last month, Bawag said its board had decided in February to exit the PIPEs business. The board's vote came several weeks after
a critical story was published in
describing Bawag's behind-the-scenes roll in the PIPEs market.