Bawag, the Austrian bank, has agreed to pay at least $675m (€521m) and co-operate with prosecutors under a settlement announced on Monday with US officials investigating the collapse of Refco, the brokerage.
Under the agreement with the Securities and Exchange Commission and federal prosecutors, the Austrian bank will offer restitution to shareholders in the US brokerage, including private equity firm Thomas H. Lee Partners, whose investments in Refco were wiped out after the company imploded two months after its initial public offering. The SEC said $338m would be distributed to victims.
Bawag’s role in the Refco debacle emerged after the brokerage said in October 2005 that its former chief executive, Phillip Bennett, had allegedly hidden from Refco’s investors a $430m debt by an entity that he controlled, a revelation that led to the company’s collapse.
Michael Garcia, US attorney in the southern district of New York, said his decision against prosecuting the bank in connection with Mr Bennett’s activities was based on Bawag’s co-operation with the ongoing probe into the affair.
Under the terms of its deal with prosecutors, Bawag admitted that it assisted Mr Bennett in covering up his losses from 2000 to 2005 by loaning him $250m- $300m every year. Between 2000 and 2004, Bawag beneficially owned as much as 47 per cent of the brokerage, and received – directly and indirectly – $952m in proceeds from a leveraged buyout of the group in August 2004. Bawag also received help from Mr Bennett in concealing its own investment losses. Mr Bennett has pleaded not guilty to fraud charges.
The deal could have ramifications for a separate class-action suit brought by Refco investors against the banks and auditors who worked on the failed brokerage’s IPO. Attorneys representing RH Capital and Pimco, Refco investors set to receive about $100m from the Bawag settlement, required under the terms of their own deal with Bawag to be given access to documents in connection to the meltdown.
John “Sean” Coffey, attorney with Bernstein Litowitz, says documents obtained by his firm will give a “significant boost” to a suit against Refco underwriters Goldman Sachs, Bank of America and Credit Suisse, auditor Grant Thornton, and Refco insiders.
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