beleaguered shareholders are poised to get a piece of the estimated $700 million settlement Austria's
Bank fuer Arbeit und Wirtschaft
is close to serving up.
A class-action securities lawyer representing the now-bankrupt brokerage's shareholders says his firm is putting the finishing touches on a deal with Austria's fourth-largest lender.
"We're extremely close to a deal," says John Coffey, a partner with Bernstein Litowitz Berger & Grossmann. Coffey declined to say how much money Refco shareholders would get from Bawag, but said it would be "a significant financial'' sum.
The deal with Bawag would provide a measure of justice for Refco shareholders who saw their investment disappear when the once-dominant commodities and derivatives brokerage filed for bankruptcy last October, just two months after going public in a $585 million IPO. Refco collapsed following the disclosure that former CEO Phillip Bennett was cooking the brokerage's books by hiding up to $750 million in bad debts in a separate company.
Coffey's firm also has sued the underwriters of Refco's initial public offering:
Bank of America
. Those firms are not involved in the Bawag settlement.
Refco's shareholders and creditors accuse Bawag of aiding and abetting the fraud at the brokerage by helping Bennett conceal some of the bad debts, which mainly consisted of customer trading losses.
They also claim Bawag had a secret deal with Refco that effectively gave the bank a 37% equity stake in the brokerage, a much larger ownership position than it publicly acknowledged. The broad outlines of the
secret deal were first reported by
For the past three weeks, Bawag's lawyers in New York have been involved in a series of round-robin negotiations with attorneys for Refco's shareholders, creditors and the private equity buyout firm Thomas H. Lee Partners over how to divvy up the settlement money. Boston-based Thomas H. Lee Partners engineered the 2004 leveraged buyout of Refco that preceded the IPO. The buyout firm lost $245 million on its investment.
Federal prosecutors in New York, who charged Bennett with various counts of securities fraud, are overseeing all the negotiations. People familiar with the talks say the settlement will require Bawag to pay a fine greater than $100 million.
A spokeswoman for Michael Garcia, the U.S. attorney for the southern district of New York, declined to comment. Representatives for Bawag, Refco creditors and Thomas H. Lee Partners also all declined to comment.
The Bawag officials are eager to complete the four-way deal so they can clear the decks for a sale of the bank.
As part of a settlement, Bawag will not be charged with any criminal wrongdoing by prosecutors, sources say. But a key part of the deal requires the bank to turn over a mountain of documents that should prove useful in pursuing the investigation. Up until this point, Bawag has refused to turn over most of its documents, claiming Austrian bank-secrecy laws as a protective shield.
Regulators at the
Securities and Exchange Commission
are also hoping some of the bank records will provide clues to another investigation, which stems from Bawag's behind-the-scenes role in the U.S. market for private investments in public equities, or PIPEs. Earlier this year, Bawag announced that it had decided to stop providing customers with financing to invest in PIPE deals.
Bawag's board voted to quit the $20-billion-a-year PIPEs market after
reported that the bank was a major shareholder in at least four foreign hedge funds that have invested in such deals. The PIPE market has been under intense scrutiny during the past two years as regulators look into allegations of stock manipulation by some of the hedge funds that invest in these oft-maligned transactions. A PIPE deal is often a last-ditch financing mechanism for small-cap companies.
In 2004, securities regulators questioned employees of LH Financial, a small New York investment firm that once had close ties to Bawag and served as an adviser to several of the bank's hedge funds. People familiar with LH Financial say regulators also asked the investment firm to turn over several boxes of documents in 2004.
Officials with Bawag and LH Financial declined to comment. But a confidential document prepared by Bawag for Austrian bank regulators confirms the SEC opened an investigation into LH Financial, whose offices are located on the 27th floor of New York's Essex House hotel and boast a panoramic view of Central Park.
LH Financial, an obscure 10-person firm, has sunk more than $70 million over the past two years into about 150 different PIPEs, almost all of them penny-stock companies.
In late 2004, Bawag, according to the report, sold its financial interest in one of the four hedge funds, Alpha Capital, to a private foundation led by Austrian billionaire Martin Schlaff, one of the bank's biggest customers.
The bank, in that internal report, disclaims any direct ownership interest in LH Financial. But several people interviewed by
say executives with LH Financial always insisted that Bawag and Schlaff's organization were partial owners of the firm.
In fact, a number of people interviewed by
say Leon Lewkowicz, an Austrian businessman who claimed to be a Bawag vice president, was a frequent visitor to LH Financial's offices. Lewkowicz also had a number of meetings with officials at Refco, which handled the trading for some of the Bawag hedge funds. Lewkowicz could not be reached for comment.