VZCZCXRO0658
RR RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHVI #1633 1581100
ZNR UUUUU ZZH
R 071100Z JUN 06
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 3765
RUEATRS/DEPT OF TREASURY WASH DC
INFO RUEAWJA/DEPT OF JUSTICE WASHDC
RUCNFB/FBI WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS VIENNA 001633 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR OCC/EILEEN SIEGEL 
TREASURY ALSO FOR OASIA/ICB/VIMAL ATUKORALA 
TREASURY PLEASE PASS TO FEDERAL RESERVE AND SEC/E.JACOBS 
JUSTICE FOR DOJ/CRM/ATMLS AND FOR OIA/RICHARD OWENS 
FBI FOR CID 
 
E.O. 12958: N/A 
TAGS: EFIN PGOV AU
SUBJECT:  BAWAG Settles Refco Lawsuit Out-of-Court 
 
REF:  A) VIENNA 1270  B) VIENNA 0976 
 
Summary 
------- 
 
¶1.  BAWAG P.S.K. (BAWAG), Austria's troubled fourth 
largest banking group, reached an out-of-court settlement 
June 5 with creditors from the bankrupt U.S. brokerage 
firm Refco.  As part of the settlement, BAWAG reportedly 
acknowledged that it assisted former Refco CEO Philip 
Bennett to conceal hundreds of millions of dollars in 
losses from Refco investors and creditors.  According to 
the terms of the settlement, BAWAG will compensate Refco 
creditors and shareholders $675 million.  BAWAG also 
withdrew claims to $425 million in outstanding loans to 
Refco.  The way is now free to move forward with the 
planned sale of BAWAG.  End Summary. 
 
 
BAWAG'S Out-of-Court Settlement with Refco 
------------------------------------------ 
 
¶2.  In a June 5 out-of-court settlement, BAWAG P.S.K. 
(BAWAG), Austria's fourth largest banking group, and its 
100% owner, the Austrian Trade Union Federation (OGB), 
agreed to pay $675 million to the creditors of the 
bankrupt U.S. brokerage firm Refco.  In addition, the OGB 
will have to transfer 30% (up to $200 million) of any 
proceeds from the sale of BAWAG in excess of Euro 1.8 
billion to Refco creditors.  BAWAG also renounced its 
claims for a repayment of $425 million in outstanding 
loans to Refco.  The settlement allows BAWAG to regain 
control of $1.1 billion in U.S. assets, which a U.S. 
court had previously blocked. 
 
¶3.  The settlement appears to close the chapter on 
BAWAG's problems with Refco.  Refco creditors filed a 
$1.3 billion class action suit on April 25, alleging 
BAWAG aided and abetted Refco CEO Phillip Bennett in 
fraudulent activities that led to Refco's October 2005 
collapse.  The lawsuit triggered a run on BAWAG deposit 
accounts and endangered the bank's stability, prompting 
the GoA to extend a Euro 900 million-rescue package (ref 
A). 
 
¶4.  The settlement reportedly includes an admission by 
BAWAG that it assisted Bennett to conceal hundreds of 
millions of dollars of Refco losses from Refco investors 
and creditors.  From 2000 through February 2005 BAWAG 
apparently provided short-term loans worth hundreds of 
millions of dollars to Refco, so that Refco could 
manipulate intercompany accounts and improve its balance 
sheet.  BAWAG reportedly also acknowledged that it sought 
and received assistance from Bennett to conceal BAWAG's 
own investment losses (ref B) on its balance sheet. 
 
¶5.  According to BAWAG press statements, the settlement 
protects BAWAG and the OGB from criminal proceedings in 
the U.S.  However, individuals may still face criminal 
charges.  Both BAWAG and OGB announced that they would 
fully cooperate with U.S. authorities in any criminal 
investigation.  The Austrian Public Prosecutor is also 
investigating the case. 
 
 
BAWAG Up For Sale 
----------------- 
 
¶6.  The settlement allows BAWAG to submit its 2005 
balance sheet, as certification was pending resolution of 
the U.S. lawsuit.  The OGB now plans to proceed swiftly 
with its intent to sell BAWAG (ref B).  BAWAG CEO Ewald 
Nowotny called the settlement "a good deal, because it 
draws a line with the past."  The OGB has reportedly 
engaged Morgan Stanley to carry out the BAWAG sale. 
 
MCCAW