cast a wide net hunting down the U.S. assets of
, the Austrian bank tied to the fraud that brought down the commodities brokerage.
In late April, more than three dozen financial firms received court orders directing them to put an immediate freeze on any assets the Bank fuer Arbeit und Wirtschaft may have had either invested or deposited with them. Most of the so-called attachment orders were served on the various firms on April 26 by lawyers for Refco's creditors.
To date, the names of the financial institutions holding roughly $1 billion of Bawag's U.S. assets have remained a secret, even though the Austrian bank has since agreed to pay nearly $700 million in restitution to federal prosecutors, Refco's creditors and the defunct brokerage's shareholders. The bankruptcy judge overseeing the liquidation of Refco directed the creditors to file the names under seal.
But other court records in the bankruptcy case provide a road map as to how the creditors tracked down Bawag's loot, much of which the bank contends is actually money and securities that belong to its Austrian customers. Unsealed copies of affidavits for the three dozen attachment orders reveal that the creditors went looking for Bawag's assets at Wall Street firms both big and small.
Some of the big banks asked to put a hold on Bawag's assets were
Bank of New York
J.P. Morgan Chase
. Lesser-known financial institutions that received freeze notices included the New York branch of Europe's Erste Bank, LH Financial Services, Merriman Curhan Ford, Westminster Securities, hedge fund administrator DPM Mellon and Ivy Maplewood Associates II, a hedge fund run by Ivy Asset Management.
Of the smaller firms, LH Financial Services, a 10-person investment firm located on the 27th floor of New York's Essex House hotel, may be the most interesting. The firm once advised a group of Bawag-backed hedge funds about investment opportunities in the $20 billion-a-year market for private stock placements known as PIPEs, or private investments in public equities.
previously reported that LH Financial, an unregistered investment adviser, drew scrutiny from securities regulators looking into trading abuses in the PIPEs market. Bawag has denied having any direct financial interest in the firm, although several sources dispute that claim and say the bank once was a part-owner of LH Financial.
Freezing Bawag's assets was one of several pressure tactics employed by Refco creditors in late April and early May that ultimately compelled Austria's fourth-largest bank to cry uncle and cooperate with the federal authorities investigating the Refco fraud. Earlier this month, Bawag agreed to pay $675 million to settle claims from Refco's creditors and the now-bankrupt brokerage's beleaguered shareholders.
In the deal with Bawag, prosecutors allege that the bank played an instrumental role in helping former Refco CEO Phillip Bennett hide nearly $1 billion in worthless assets in order to burnish the brokerage's books for an eventual $583 million IPO last August. Authorities also contend Bawag had a secret deal with Refco that boosted its ownership stake in the brokerage from a publicly stated 10% to nearly 47%, providing the bank with an added incentive to further the fraud.
On Friday, U.S. Bankruptcy Judge Robert Drain, who is overseeing the Refco liquidation, will hold a hearing on the portion of the settlement with Bawag that will deliver a minimum of $508 million to Refco's creditors.
For the most part, the attachment orders were lifted in early May, when Bawag indicated its willingness to cut a quick deal with Refco's creditors. The bank agreed to keep sufficient assets in the U.S. while the final deal was being hammered out.
Many financial firms declined to comment on the attachment orders. A few, such as Merriman and Westminster, two relatively small brokerages, denied ever having custody over any Bawag assets.
People familiar with bankruptcy proceedings say it's not uncommon for creditors to take a dragnet approach and serve freeze notices on any financial institution that could plausibly be holding a party's assets. It's possible some of the financial institutions served by the creditors never had any Bawag assets in their possession.
Meanwhile, it wasn't just financial institutions that the creditors targeted.
A freeze notice also was served on Wolfgang Flottl, the Austrian native and New York socialite who has been linked to Bawag's own scheme to keep $1 billion in financial losses off its corporate books. Refco creditors served an attachment notice at Flottl's apartment on the Upper East Side of Manhattan. The lawyer also served a similar notice at the offices of Normandy Asset Management, an investment firm run by Flottl.
Neither Flottl nor his attorney, C. Martin Goldenberg, returned phone calls.
In the 1990s, Flottl's now-defunct Ross Capital hedge fund apparently lost $1 billion for the bank in a series of risky bets on interest rates and foreign currencies.
Flottl is the son of former Bawag CEO Walter Flottl. Bawag officials previously have said they might sue Flottl, who is married to a granddaughter of former President Dwight D. Eisenhower.
Earlier this year, Bawag said it, too, had used subterfuge to hide much of the $1 billion in losses wrung up by Flottl. The bank's former management, working with Refco, shifted about $500 million in losses to six obscure Anguilla-based companies and several brokerage accounts at Refco.
Other losses were packaged into bonds sold by Bawag through an entity called Liquid Opportunities-Plus Fund. The prime broker for the fund was Refco. Some of those losses stemmed from Bawag's investment in a now-defunct casino built by the Palestinian Authority in the West Bank town of Jericho. The casino, opened in 1998, closed when violence broke out between Israelis and Palestinians in 2000.
Another prominent investor in the Oasis Casino, a money-losing venture, was Martin Schlaff, an Austrian billionaire and one of Bawag's biggest customers. Schlaff is a part-owner of LH Financial and was a major investor in at least one of the Bawag hedge funds that invested in numerous PIPE deals over the past six years.