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These counterfeiters may have been just a few months ahead of their time
Refco Probes Lead to $525 Million
in Phantom Bonds, Hedge Fund
By Otis Bilodeau and Allan Dodds Frank
Bloomberg News Service
Wednesday, March 15, 2006
http://www.bloomberg.com/apps/news?
pid=10000087&sid=aQ0Nt31p4mPs&refer=top_world_news
Refco Inc. held offshore accounts with as much as $525 million in
fake bonds, indicating that the futures broker's troubles may be
more extensive than previously reported, according to four people
with direct knowledge of evidence gathered by U.S. prosecutors
investigating Refco's collapse.
New York-based Refco held the securities for Bawag P.S.K. Bank,
Austria's fourth-largest bank, and Liquid Opportunity, an offshore
hedge fund, under identification numbers that don't correspond to
registered bonds, said the people, who declined to be identified
because the investigations are ongoing. One person said Bawag and
Liquid Opportunity had shares in six Anguilla companies, which in
turn held the bonds.
The U.S. Attorney in Manhattan and the Securities and Exchange
Commission are trying to find out where the bonds originated and how
they were valued, the people said.
The bond accounts were at Refco's Bermuda-based unit, beyond the
reach of U.S. regulators. Refco owed creditors $16.8 billion when it
filed for bankruptcy protection on Oct. 17, a week after former
Chief Executive Phillip Bennett allegedly used a loan from Bawag to
pay uncollectible debts he had concealed from investors. Bennett
denied wrongdoing.
"These unregulated entities are opaque to the U.S. government," said
Michael Greenberger, a University of Maryland law professor and
former head of trading and markets at the Commodities Futures
Trading Commission. "Because there is no handle on them here or in
any of the other major financial centers, it's just that much easier
to commit fraud."
Anthony Clark, an attorney who represents Refco at Skadden, Arps,
Slate, Meagher & Flom in Wilmington, Delaware, declined to comment
on the bond accounts. "I'm not saying it did or didn't happen," he
said.
Vienna-based Bawag declined to answer written questions about the
bond accounts, citing legal restrictions and "banking secrecy."
Bawag doesn't comment publicly "on questions which are the subject
matter of pending legal proceedings," Thomas Heimhofer, a spokesman,
said in an e-mail.
The lender, owned by Austrian trade unions, sued Refco in federal
court in Manhattan in November, saying it was duped into extending
the 350 million-euro ($421 million) loan to Bennett.
Liquid Opportunity's fund manager, Jonathan Knight, didn't respond
to four messages left on an answering machine seeking comment.
Knight, 36, works in Lake Mary, Florida. David Esseks, the assistant
U.S. attorney handling the Refco probe, and John Nester, an SEC
spokesman in Washington, declined to comment.
U.S. Attorney Michael Garcia in Manhattan accused Bennett of fraud
on Oct. 12 after the futures broker disclosed he hid losses. That
week, customers abandoned Refco, forcing it to seek protection from
creditors. Bennett, 57, pleaded not guilty to federal fraud charges
in November.
U.S. officials haven't accused Bawag, Liquid Opportunity, Refco,
PlusFunds, or any related individuals of wrongdoing in connection
with the bond accounts.
Refco's creditors are hunting for information about six companies
based in the British West Indies that may be linked to the bonds
that prosecutors are scrutinizing.
Liquid Opportunity and Bawag held shares in the six companies, which
in turn held the bonds, according to a person with knowledge of the
Refco accounts who didn't want to be identified because of the
ongoing investigations by the Justice Department and the SEC.
The companies, named for islands in the South Pacific and regions of
Argentina, were incorporated on July 26, 2004, by a local agent,
according to government records in Anguilla.
They were initially listed as Refco creditors with a combined claim
of $543 million, according to court filings prepared by Refco's
lawyers. Unlike other creditors identified by Refco, none of the
companies filed any legal papers in the bankruptcy case. Refco has
since dropped four of the six from its creditors list and now says
that it doesn't owe any money to the remaining two.
In December, a judge overseeing Refco's bankruptcy authorized the
creditors to subpoena former Refco executives, including Bennett,
and Bawag for details about the six companies, court filings show.
"All of a sudden, half a billion dollars of liabilities just
vanished," said Howard Seife, a lawyer at Chadbourne & Parke in New
York who represents Refco creditors. "No one appeared on their
behalf in court. It was as if they didn't exist."
A woman who answered the phone at the office of the agent for the
six companies, Anguilla Offshore Management Ltd., declined to give
her name and said she couldn't provide any information about
them. "You'll have to contact the customers directly for that," she
said.
The ties between Bawag, officially known as the Bank fuer Arbeit und
Wirtschaft, and Refco date back to at least 1998. That year the two
companies formed a joint venture to clear futures and options traded
on European exchanges. The bank bought 10 percent of Refco in 1999.
It sold the stake five years later.
The relationship between Refco and Liquid Opportunity hasn't been
disclosed. Corporate records for Liquid Opportunity couldn't be
located in the U.S. and a dozen offshore jurisdictions. The fund
also doesn't appear in any SEC filings.
The fund administered the bonds on behalf of an investor until the
end of 2004, when the assets were transferred to Bawag, according to
one person close to Liquid Opportunity, who declined to be
identified because of the probes. Liquid Opportunity had no reason
to believe the bonds were fake, the person said.
A predecessor, Liquid Opportunity-Plus Fund, was formed in 2000 and
raised about $325 million from unidentified investors, according to
a 2001 press release by International Portfolio Analytics, a Bahamas-
based money manager that ran it. Jonathan Knight's father, Jon
Knight, owned a stake in International Portfolio Analytics until at
least 1999, SEC filings show.
Through a Liechtenstein-based partnership, Bawag and Liquid
Opportunity's Jonathan Knight are co-investors in at least two dozen
companies, according to SEC filings. They also share a connection to
Refco through PlusFunds Group Inc., a New York-based money manager
that sells investments based on hedge fund indexes.
PlusFunds Chairman Christopher Sugrue worked at Refco as a senior
vice president from 1993 to 1998. A biographical note formerly
posted on PlusFunds' Web site said he was "involved" in Bawag's
purchase of the stake in Refco in 1999.
Last year, Sugrue, 35, pledged his controlling interest in PlusFunds
to Refco as collateral for a loan of more than $200 million,
according to a Dec. 16 lawsuit by Refco creditors against a client
of PlusFunds and a person with direct knowledge of the loan, who
asked not to be identified while the suit is pending. Neither Sugrue
nor PlusFunds is a party to that lawsuit.
"In his dealings with Refco or any other financial institution,
Chris Sugrue believes he acted properly," said Stanley Arkin,
Sugrue's lawyer at Arkin Kaplan in New York. "With respect to Liquid
Opportunity, he has no knowledge of any fake bonds, and if there is
any culpability there, he had no culpable role."
Arkin represented Richard Wigton, the former head of arbitrage
trading at Kidder Peabody & Co., who was indicted for insider
trading during the 1987 junk bond scandal. The charges were later
dropped. He also defended former Gemstar-TV Guide International Inc.
Chief Executive Officer Henry Yuen in an SEC accounting probe and
criminal fraud trial last year. Yuen is awaiting a federal judge's
verdict in the trial.
PlusFunds helped draw investors to Liquid Opportunity, and Liquid
Opportunity in turn was a participant in the PlusFunds "platform,"
International Portfolio Analytics said in its 2001 statement.
PlusFunds made money by investing client assets in all or some of
the 41 hedge funds in the Standard & Poor's Hedge Fund Index. The
company filed for bankruptcy protection on March 6.
Offshore companies played central roles in the accounting frauds at
Enron Corp. and Parmalat Finanziaria SpA, according to prosecutors
in those cases.
Houston-based Enron allegedly used subsidiaries in the Cayman
Islands to cut the company's U.S. taxes and hide losses, before
collapsing in the U.S.'s second-largest bankruptcy in 2001.
Parmalat, the Italian food company that in 2003 filed the country's
biggest-ever bankruptcy case, inflated sales, fabricated assets and
funneled debt through units in the Netherlands Antilles and the
Cayman Islands, according to Italian court documents.
Refco lawyers told Esseks, one of Garcia's prosecutors handling the
Refco probe, about Liquid Opportunity as early as Oct. 21, according
to court filings in Refco's bankruptcy case.
Liquid Opportunity's Knight, who holds a doctorate from the
Massachusetts Institute of Technology in Cambridge, Massachusetts,
made investments for other clients through offshore entities
including Gamma Capital Opportunity Partners, Siam Capital
Management and Regenmacher Holdings Ltd., SEC filings show.
Regenmacher is the German word for "rainmaker."
Alpha Capital AG, a Liechtenstein-based investment firm part-owned
by Bawag, participated in many of the same investments, according to
the filings.
Bawag CEO Johann Zwettler stepped down after the Refco loans became
public, saying the move was not an admission of guilt, but meant
rather to keep the lender from being damaged. Zwettler hasn't been
accused of wrongdoing in the U.S. probe.
The bank's involvement with Refco prompted a regulatory
investigation in Austria. Bawag is preparing measures to improve
corporate governance and risk management, spokesman Heimhofer said
in his e-mail.
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