U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19716 / June 5, 2006
SEC v. BAWAG P.S.K. Bank für Arbeit und Wirtschaft und Österreichische Postsparkasse Aktiengesellschaft, 06 CV 04222 (DC) (S.D.N.Y. filed June 5, 2006)
SEC Files Settled Action Against Major Austrian Bank for Aiding And Abetting Refco Fraud
The U.S. Securities and Exchange Commission (the Commission) today announced that, on June 5, 2006, 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 February 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 October 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 Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder and from aiding and abetting violations of Section 15(d) of the Exchange Act and Rule 15d-2 thereunder.
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.