AI
Monday, June 05, 2006 6:09:45 PM
SEC FILES SETTLED ACTION AGAINST MAJOR AUSTRIAN BANK FOR AIDING AND ABETTING REFCO FRAUD
http://www.sec.gov/news/digest/2006/dig060506.txt
The Commission today announced that on June 5 it filed a settled civil
injunctive action in U.S. District Court for the Southern District of
New York against BAWAG P.S.K. Bank für Arbeit und Wirtschaft und
Österreichische Postsparkasse Aktiengesellschaft (BAWAG). The
Commission's Complaint in that action alleges that BAWAG, a major
Austrian bank, helped Refco Group Ltd. (Refco) conceal hundreds of
millions of dollars in debt owed to Refco by an entity controlled by
Refco's Chief Executive Officer, thereby aiding and abetting Refco's
violations of the antifraud and periodic reporting provisions of the
federal securities laws.
The Commission's Complaint alleges that, from at least February 2000
into 2005, BAWAG engaged in a series of fiscal year-end transactions
with Refco and Refco Group Holdings, Inc. designed to conceal the real
condition of Refco's balance sheet. In spite of its name, Refco Group
Holdings Inc. (RGHI) was never a Refco subsidiary, but instead was an
entity controlled by, and eventually completely owned by, Phillip R.
Bennett, Refco's Chairman and Chief Executive Officer. Accordingly,
the RGHI receivables were related party transactions on Refco's books,
and the fiscal year-end transactions aided a scheme by Refco and
Bennett to move the related party receivables off Refco's books at the
end of each fiscal year. The Commission's Complaint further alleges
that the scheme utilized a series of short-term loans to shift the
receivables temporarily to BAWAG just before the end of February each
year. (Refco's fiscal year-end was the end of February.) At the end of
each Refco fiscal year, the short-term loans allowed RGHI to pay off
at least part of its debt to Refco. RGHI then owed a debt to BAWAG,
which was secured in part by a deposit from Refco to an account at
BAWAG. A few days after the Refco fiscal year-ends, the transactions
were reversed so that the debt once again resided with the Bennett-
controlled entity.
The Commission's Complaint also alleges that Refco made certain
representations to investors and filings with the Commission that
failed to disclose the RGHI receivables, including: a private offering
circular used by Refco to sell senior subordinated notes in connection
with a 2004 leveraged recapitalization; a Registration Statement filed
with the Commission that Refco used to offer those notes publicly in
April 2005; an Annual Report that Refco filed with the Commission for
Refco's fiscal year ended Feb. 28, 2005; and a Registration Statement
filed with the Commission that Refco used to make its initial offering
of common stock in August 2005. The federal securities laws required
that each of those Refco representations and filings disclose the RGHI
related party receivables. (After the August 2005 offering of common
stock, Refco Inc. became the corporate successor to Refco Group Ltd.
On Oct. 17, 2005, Refco filed for protection under Chapter 11 of the
U.S. Bankruptcy Code.)
Finally, the Commission's Complaint alleges that BAWAG had additional
connections with Refco, including, for a period of time, an equity
interest in Refco. Partly as a result of those connections, and while
assisting Refco with its fiscal year-end transactions, former BAWAG
executives understood, from at least 2002 through 2004, that Refco had
misstated its balance sheet, that Bennett and BAWAG intended to cash
out their Refco ownership positions, and that concealment of the RGHI
receivables would increase the likelihood of Refco being sold. By the
time of the February 2005 year-end transactions, the former executives
knew that Refco would file a Registration Statement with the
Commission for its senior subordinated notes and that the Registration
Statement would not disclose the related party receivables.
Accordingly, the Complaint alleges, by assisting in the fiscal year-
end fraudulent scheme, BAWAG knowingly aided and abetted Refco in its
deception of investors who purchased Refco securities.
Without admitting or denying the allegations in the Commission's
Complaint, BAWAG consented to the entry of a Final Judgment that will
permanently enjoin it from violating the antifraud provisions, and
from aiding and abetting violations of the periodic reporting
provisions, of the federal securities laws.
In a related action, the U.S. Attorney's Office for the Southern
District of New York announced today that it had entered into an
agreement with BAWAG not to prosecute the bank for its role in
assisting Bennett in his scheme to hide the RGHI receivables and that,
in connection with that agreement, BAWAG would forfeit $337.5 million,
which funds will be distributed to victims of the Refco fraud. The
Office also announced that BAWAG would pay at least $675 million
(including the forfeited $337.5 million) to settle its non-prosecution
agreement and related claims against it by the Refco bankruptcy
estate.
The Commission's investigation is continuing. The Commission
acknowledges the assistance and cooperation of the Office of the
United States Attorney for the Southern District of New York, the
United States Postal Inspection Service, and the Commodity Futures
Trading Commission. [SEC v. BAWAG P.S.K. Bank für Arbeit und
Wirtschaft und Österreichische Postsparkasse Aktiengesellschaft, 06 CV
04222 (DC) SDNY] (LR-19716)
Background on Refco, BAWAG and Alpha Capital.
Bawag Quits PIPEs Market
By Matthew Goldstein
3/17/2006 4:50 PM EST
URL: http://www.thestreet.com/stocks/brokerages/10274371.html
Austrian lender Bank fur Arbeit und Wirtschaft, in a surprise move, announced Friday that it is no longer financing customers in the market for PIPEs, or private investments in public equity.
Austria's fourth-largest bank announced its decision to withdraw from the $18 billion-a-year U.S. PIPEs market in a press release posted on its Web site. The bank's tersely worded statement said its managing board "decided in February 2006 to discontinue the financing of customer activities in the PIPE issuance market.'
In the U.S., Bawag, as the bank is commonly called, is best-known for its ties to Refco (RFXCQ:Pink Sheets) , the bankrupt and scandal-tarred commodities and derivatives brokerage. Bawag was a one-time minority owner of Refco and made a $410 million loan to the CEO, Phillip Bennett, just hours before the brokerage disclosed that Bennett had been hiding hundreds of millions of dollars in customer trading losses for years.
Bawag offered no reason for the decision to stop providing financing for PIPEs, which are often last-ditch financing mechanisms used by small-cap companies, many of which trade for around a dollar share. The PIPE market has been under intense scrutiny the past two years, as U.S. regulators look into allegations of stock manipulation by the hedge funds that invest in PIPE deals.
A Bawag spokesman was unavailable to comment.
In January, TheStreet.com reported that Bawag had quietly become a key player in the PIPEs market by becoming either a significant investor or controlling shareholder in at least four foreign hedge funds that invest in such deals. The four hedge funds with close financial ties to Bawag are Alpha Capital, Austinvest Anstalt Balzers, Austost Anstalt Schaan and Celeste Trust, all of which are based in the tiny European country of Lichtenstein.
TheStreet.com also reported that Bawag 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 based on the number of 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.
LH Financial is the official investment adviser to Alpha Capital, the main vehicle through which Bawag has invested in the PIPEs market the past two years.
LH Financial also has ties to Martin Schlaff, a controversial 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.
It's not clear what implications Bawag's decision to withdraw from the PIPEs market with have for LH Financial, a 10-person operation that is not registered with either the Securities and Exchange Commission or the NASD. A phone call to LH Financial, located in an office on Manhattan's Central Park South, was not returned.
In the press release, Bawag implied that it didn't directly invest in PIPE deals, but got involved as an intermediary on behalf of its customers.
"Bawag would only ever have been involved in such transactions as an intermediary for its customers,' the release said.
It's possible that Bawag's board decided to exit the PIPEs business because it felt it was attracting negative publicity. The bank's role in providing the last-ditch loan to Bennett has made it a prime target for Refco creditors in the bankruptcy proceeding. Sources say federal prosecutors investigating the Refco scandal have been asking lots of questions about Bawag's dealings with the brokerage.
Bennett was indicted on securities fraud charges shortly after the broker disclosed that he had been hiding hundreds of millions of dollars in customer trading losses for years.
TheStreet.com, meanwhile, reported that 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.
Just this week, the SEC brought its biggest PIPE enforcement case to date, fining a New York hedge fund manager $16 million for engaging in market manipulation in 23 PIPE deals.
More regulatory actions are on the way, including possible sanctions against Knight Capital (NITE:Nasdaq) and Friedman Billings Ramsey (FBR:NYSE) , plus a number of big hedge funds
Plumbing Bawag's Role in PIPEs
By Matthew Goldstein
1/24/2006 7:18 AM EST
URL: http://www.thestreet.com/stocks/brokerages/10263425.html
Locating Bawag's ties to the U.S. market for public investment in private equity, or PIPEs, was no easy feat.
TheStreet.com, using 10KWizard's online service for searching Securities and Exchange Commission filings, found only a handful of company documents in which Bank fur Arbeit und Wirtschaft's financial interest in a group of hedge funds was disclosed. Not surprisingly, the disclosures were always buried in the footnotes to filings listing the investors in a particular transaction.
Bawag's ownership interest in Alpha Capital, for instance, is disclosed just twice, in the Aug. 30, 2002, and Sept. 9, 2002, filings for Eagle Supply Group. The filings describe Alpha Capital as a "private investment fund owned by Bank fur Arbeit und Wirstchaft [sic] and Leguas Stiftung, a private family trust.'
In most of the filings, the only information provided for Alpha Capital is an address in Lichtenstein and a contact person, usually a man named Konrad Ackerman, who is identified as a director. Sometimes, LH Financial Services Corp. is listed as the representative for Alpha Capital.
It took another round of searching to discover that Leguas Stiftung is the family trust of Martin Schlaff, a billionaire Austrian businessman and one of Bawag's wealthiest customers. Schlaff also controls Balmore, a British Virgin Islands-based hedge fund that has invested in a number of PIPEs deals along with the Bawag affiliates.
Other footnotes in scattered filings reveal that Bawag owns 100% of Austinvest Anstalt Balzers and has "voting and dispositive power with respect to shares owned' by Celeste Trust. A 2000 annual report for Bawag says the bank owns 100% of Austost Anstalt Schann.
No regulatory filing directly ties Bawag to LH Financial. However, Roy Norris, a former CEO of Mooney Aerospace Group (MNYG.OB:OTC BB) , a company that got financing from LH Financial, says the New York firm made no secret of its ties to Bawag when it was negotiating to buy some of the aircraft company's assets out of a bankruptcy proceeding.
Norris says he was told on a number of occasions that Bawag "partly owned" LH Financial. Norris says he even accompanied Solomon Obstfeld, an LH Financial executive, to Switzerland in 2001 to meet a top Bawag executive.
That's not just idle chatter. Norris made the same claims in a sworn statement that was filed in the Mooney bankruptcy case, which is still pending in a Texas federal court.
In that sworn statement, Norris says, "Mr. Obstfeld had told me that LH Financial was owned in part by the Bawag bank.'
Bawag: Austria's Master Plumber
By Matthew Goldstein
1/24/2006 7:20 AM EST
URL: http://www.thestreet.com/stocks/brokerages/10263382.html
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 Refco, 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 public investment in private 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.
TheStreet.com 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.
TheStreet.com 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.
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 (NITE:Nasdaq) and Friedman Billings Ramsey (FBR:NYSE) , 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 (MNYG:OTC BB) , 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
The 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 (BRVO.OB:OTC BB) , 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 Sedona (SDNA.OB:OTC BB) , 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.
http://www.sec.gov/news/digest/2006/dig060506.txt
The Commission today announced that on June 5 it filed a settled civil
injunctive action in U.S. District Court for the Southern District of
New York against BAWAG P.S.K. Bank für Arbeit und Wirtschaft und
Österreichische Postsparkasse Aktiengesellschaft (BAWAG). The
Commission's Complaint in that action alleges that BAWAG, a major
Austrian bank, helped Refco Group Ltd. (Refco) conceal hundreds of
millions of dollars in debt owed to Refco by an entity controlled by
Refco's Chief Executive Officer, thereby aiding and abetting Refco's
violations of the antifraud and periodic reporting provisions of the
federal securities laws.
The Commission's Complaint alleges that, from at least February 2000
into 2005, BAWAG engaged in a series of fiscal year-end transactions
with Refco and Refco Group Holdings, Inc. designed to conceal the real
condition of Refco's balance sheet. In spite of its name, Refco Group
Holdings Inc. (RGHI) was never a Refco subsidiary, but instead was an
entity controlled by, and eventually completely owned by, Phillip R.
Bennett, Refco's Chairman and Chief Executive Officer. Accordingly,
the RGHI receivables were related party transactions on Refco's books,
and the fiscal year-end transactions aided a scheme by Refco and
Bennett to move the related party receivables off Refco's books at the
end of each fiscal year. The Commission's Complaint further alleges
that the scheme utilized a series of short-term loans to shift the
receivables temporarily to BAWAG just before the end of February each
year. (Refco's fiscal year-end was the end of February.) At the end of
each Refco fiscal year, the short-term loans allowed RGHI to pay off
at least part of its debt to Refco. RGHI then owed a debt to BAWAG,
which was secured in part by a deposit from Refco to an account at
BAWAG. A few days after the Refco fiscal year-ends, the transactions
were reversed so that the debt once again resided with the Bennett-
controlled entity.
The Commission's Complaint also alleges that Refco made certain
representations to investors and filings with the Commission that
failed to disclose the RGHI receivables, including: a private offering
circular used by Refco to sell senior subordinated notes in connection
with a 2004 leveraged recapitalization; a Registration Statement filed
with the Commission that Refco used to offer those notes publicly in
April 2005; an Annual Report that Refco filed with the Commission for
Refco's fiscal year ended Feb. 28, 2005; and a Registration Statement
filed with the Commission that Refco used to make its initial offering
of common stock in August 2005. The federal securities laws required
that each of those Refco representations and filings disclose the RGHI
related party receivables. (After the August 2005 offering of common
stock, Refco Inc. became the corporate successor to Refco Group Ltd.
On Oct. 17, 2005, Refco filed for protection under Chapter 11 of the
U.S. Bankruptcy Code.)
Finally, the Commission's Complaint alleges that BAWAG had additional
connections with Refco, including, for a period of time, an equity
interest in Refco. Partly as a result of those connections, and while
assisting Refco with its fiscal year-end transactions, former BAWAG
executives understood, from at least 2002 through 2004, that Refco had
misstated its balance sheet, that Bennett and BAWAG intended to cash
out their Refco ownership positions, and that concealment of the RGHI
receivables would increase the likelihood of Refco being sold. By the
time of the February 2005 year-end transactions, the former executives
knew that Refco would file a Registration Statement with the
Commission for its senior subordinated notes and that the Registration
Statement would not disclose the related party receivables.
Accordingly, the Complaint alleges, by assisting in the fiscal year-
end fraudulent scheme, BAWAG knowingly aided and abetted Refco in its
deception of investors who purchased Refco securities.
Without admitting or denying the allegations in the Commission's
Complaint, BAWAG consented to the entry of a Final Judgment that will
permanently enjoin it from violating the antifraud provisions, and
from aiding and abetting violations of the periodic reporting
provisions, of the federal securities laws.
In a related action, the U.S. Attorney's Office for the Southern
District of New York announced today that it had entered into an
agreement with BAWAG not to prosecute the bank for its role in
assisting Bennett in his scheme to hide the RGHI receivables and that,
in connection with that agreement, BAWAG would forfeit $337.5 million,
which funds will be distributed to victims of the Refco fraud. The
Office also announced that BAWAG would pay at least $675 million
(including the forfeited $337.5 million) to settle its non-prosecution
agreement and related claims against it by the Refco bankruptcy
estate.
The Commission's investigation is continuing. The Commission
acknowledges the assistance and cooperation of the Office of the
United States Attorney for the Southern District of New York, the
United States Postal Inspection Service, and the Commodity Futures
Trading Commission. [SEC v. BAWAG P.S.K. Bank für Arbeit und
Wirtschaft und Österreichische Postsparkasse Aktiengesellschaft, 06 CV
04222 (DC) SDNY] (LR-19716)
Background on Refco, BAWAG and Alpha Capital.
Stock Warrants
02/15/06 8K Alpha Capital AG Kounod Ackerman 2,803,738 520,833
12/05/05 8K Alpha Capital AG Kounod Ackerman 2,564,102 468,750
08/19/03 S3/A* Alpha Capital AG Konrad Ackerman ~908,942 ~454,471
*Series H conversion... shares are approximate
Bawag Quits PIPEs Market
By Matthew Goldstein
3/17/2006 4:50 PM EST
URL: http://www.thestreet.com/stocks/brokerages/10274371.html
Austrian lender Bank fur Arbeit und Wirtschaft, in a surprise move, announced Friday that it is no longer financing customers in the market for PIPEs, or private investments in public equity.
Austria's fourth-largest bank announced its decision to withdraw from the $18 billion-a-year U.S. PIPEs market in a press release posted on its Web site. The bank's tersely worded statement said its managing board "decided in February 2006 to discontinue the financing of customer activities in the PIPE issuance market.'
In the U.S., Bawag, as the bank is commonly called, is best-known for its ties to Refco (RFXCQ:Pink Sheets) , the bankrupt and scandal-tarred commodities and derivatives brokerage. Bawag was a one-time minority owner of Refco and made a $410 million loan to the CEO, Phillip Bennett, just hours before the brokerage disclosed that Bennett had been hiding hundreds of millions of dollars in customer trading losses for years.
Bawag offered no reason for the decision to stop providing financing for PIPEs, which are often last-ditch financing mechanisms used by small-cap companies, many of which trade for around a dollar share. The PIPE market has been under intense scrutiny the past two years, as U.S. regulators look into allegations of stock manipulation by the hedge funds that invest in PIPE deals.
A Bawag spokesman was unavailable to comment.
In January, TheStreet.com reported that Bawag had quietly become a key player in the PIPEs market by becoming either a significant investor or controlling shareholder in at least four foreign hedge funds that invest in such deals. The four hedge funds with close financial ties to Bawag are Alpha Capital, Austinvest Anstalt Balzers, Austost Anstalt Schaan and Celeste Trust, all of which are based in the tiny European country of Lichtenstein.
TheStreet.com also reported that Bawag 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 based on the number of 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.
LH Financial is the official investment adviser to Alpha Capital, the main vehicle through which Bawag has invested in the PIPEs market the past two years.
LH Financial also has ties to Martin Schlaff, a controversial 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.
It's not clear what implications Bawag's decision to withdraw from the PIPEs market with have for LH Financial, a 10-person operation that is not registered with either the Securities and Exchange Commission or the NASD. A phone call to LH Financial, located in an office on Manhattan's Central Park South, was not returned.
In the press release, Bawag implied that it didn't directly invest in PIPE deals, but got involved as an intermediary on behalf of its customers.
"Bawag would only ever have been involved in such transactions as an intermediary for its customers,' the release said.
It's possible that Bawag's board decided to exit the PIPEs business because it felt it was attracting negative publicity. The bank's role in providing the last-ditch loan to Bennett has made it a prime target for Refco creditors in the bankruptcy proceeding. Sources say federal prosecutors investigating the Refco scandal have been asking lots of questions about Bawag's dealings with the brokerage.
Bennett was indicted on securities fraud charges shortly after the broker disclosed that he had been hiding hundreds of millions of dollars in customer trading losses for years.
TheStreet.com, meanwhile, reported that 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.
Just this week, the SEC brought its biggest PIPE enforcement case to date, fining a New York hedge fund manager $16 million for engaging in market manipulation in 23 PIPE deals.
More regulatory actions are on the way, including possible sanctions against Knight Capital (NITE:Nasdaq) and Friedman Billings Ramsey (FBR:NYSE) , plus a number of big hedge funds
Plumbing Bawag's Role in PIPEs
By Matthew Goldstein
1/24/2006 7:18 AM EST
URL: http://www.thestreet.com/stocks/brokerages/10263425.html
Locating Bawag's ties to the U.S. market for public investment in private equity, or PIPEs, was no easy feat.
TheStreet.com, using 10KWizard's online service for searching Securities and Exchange Commission filings, found only a handful of company documents in which Bank fur Arbeit und Wirtschaft's financial interest in a group of hedge funds was disclosed. Not surprisingly, the disclosures were always buried in the footnotes to filings listing the investors in a particular transaction.
Bawag's ownership interest in Alpha Capital, for instance, is disclosed just twice, in the Aug. 30, 2002, and Sept. 9, 2002, filings for Eagle Supply Group. The filings describe Alpha Capital as a "private investment fund owned by Bank fur Arbeit und Wirstchaft [sic] and Leguas Stiftung, a private family trust.'
In most of the filings, the only information provided for Alpha Capital is an address in Lichtenstein and a contact person, usually a man named Konrad Ackerman, who is identified as a director. Sometimes, LH Financial Services Corp. is listed as the representative for Alpha Capital.
It took another round of searching to discover that Leguas Stiftung is the family trust of Martin Schlaff, a billionaire Austrian businessman and one of Bawag's wealthiest customers. Schlaff also controls Balmore, a British Virgin Islands-based hedge fund that has invested in a number of PIPEs deals along with the Bawag affiliates.
Other footnotes in scattered filings reveal that Bawag owns 100% of Austinvest Anstalt Balzers and has "voting and dispositive power with respect to shares owned' by Celeste Trust. A 2000 annual report for Bawag says the bank owns 100% of Austost Anstalt Schann.
No regulatory filing directly ties Bawag to LH Financial. However, Roy Norris, a former CEO of Mooney Aerospace Group (MNYG.OB:OTC BB) , a company that got financing from LH Financial, says the New York firm made no secret of its ties to Bawag when it was negotiating to buy some of the aircraft company's assets out of a bankruptcy proceeding.
Norris says he was told on a number of occasions that Bawag "partly owned" LH Financial. Norris says he even accompanied Solomon Obstfeld, an LH Financial executive, to Switzerland in 2001 to meet a top Bawag executive.
That's not just idle chatter. Norris made the same claims in a sworn statement that was filed in the Mooney bankruptcy case, which is still pending in a Texas federal court.
In that sworn statement, Norris says, "Mr. Obstfeld had told me that LH Financial was owned in part by the Bawag bank.'
Bawag: Austria's Master Plumber
By Matthew Goldstein
1/24/2006 7:20 AM EST
URL: http://www.thestreet.com/stocks/brokerages/10263382.html
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 Refco, 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 public investment in private 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.
TheStreet.com 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.
TheStreet.com 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.
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 (NITE:Nasdaq) and Friedman Billings Ramsey (FBR:NYSE) , 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 (MNYG:OTC BB) , 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
The 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 (BRVO.OB:OTC BB) , 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 Sedona (SDNA.OB:OTC BB) , 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.
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