VZCZCXRO9649
PP RUEHIK
DE RUEHVI #0063/01 0151449
ZNR UUUUU ZZH
P 151449Z JAN 10
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 4022
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCNMEM/EU MEMBER STATES
RUEHVB/AMEMBASSY ZAGREB 1808
RUEHBW/AMEMBASSY BELGRADE 0007
RUEHVJ/AMEMBASSY SARAJEVO 0202
RUCNFRG/FRG COLLECTIVE

UNCLAS SECTION 01 OF 03 VIENNA 000063 
 
SIPDIS, SENSITIVE 
 
TREASURY FOR ICB/MAIER, ICN/NORTON, OCC/SIEGEL, FTAT 
TREASURY PASS TO FEDERAL RESERVE AND SEC/E. JACOBS 
 
E.O. 12958: N/A 
TAGS: EFIN GM AU
SUBJECT: Hypo Alpe Adria Group's Future Unclear Amid Allegations of 
Widespread Fraud and Misconduct 
 
REF: A) 09 Vienna 1583; B) 09 Vienna 1479 
 
VIENNA 00000063  001.2 OF 003 
 
 
Sensitive but unclassified -- protect accordingly. 
 
¶1. (SBU) SUMMARY: Investigations into the nationalized Hypo Alpe 
Adria banking group (HAA) are likely to have significant legal and 
political implications in Austria and beyond.  Following the 
December 14 GoA takeover of HAA (Austria's sixth largest banking 
group with pre-crisis assets of about EUR 43 billion), criminal 
investigations are underway and media revelations abound concerning 
insider profiteering, widespread leasing fraud, illegal party 
financing, poor risk management, and offshore speculative losses. 
The role of Austrian insider and later HAA CEO Tilo Berlin -- who 
helped prominent investors make a fast buck in the weeks leading to 
BayernLB's takeover in 2007 -- is under criminal investigation in 
Germany.  The GoA downplays BayernLB's legal prospects of recovering 
funds from the 2007 takeover.  Recent reports suggest the HAA faces 
significant problems in southeast Europe.  Austria's Ministry of 
Finance/MoF will likely downsize HAA radically by selling some 
foreign divisions and closing others.  END SUMMARY. 
 
¶2. (SBU) This cable overviews the myriad allegations against HAA and 
the status of investigations in Austria (NOTE: we understand German 
prosecutors are hot on the case as well).  Since the GoA 
nationalized HAA in December (to avert a potential run on the bank), 
media reports have described insider trading in the course of HAA's 
sale to BayernLB in 2007, leasing fraud, offshore losses, and a 
variety of issues in southeast Europe including poor risk 
management, and questionable political ties. 
 
Criminal Investigation Progressing Slowly? 
- - - - - - - - - - - - - - - - - - - - - - 
 
¶3. (SBU) Criminal investigations in Austria began with the December 
14 nationalization of HAA, but (unlike in Germany) appear to be 
proceeding slowly.  Austrian business leaders including Claus Raidl 
(a steelmaker who also serves as President of Austria's central 
bank, the OeNB) and Hannes Androsch (co-head of FIMBAG, which leads 
the GoA's bank rescue effort) have criticized the slow handling of 
the case and called on the GoA to put more resources into the 
investigation.  Apparently the case is being led by a single 
prosecutor in Klagenfurt (HAA's "home base"): both Raidl and 
Androsch called on the GoA to move the investigation out of 
Carinthia, given that state's close ties to HAA leadership. 
 
¶4. (SBU) On January 14, an investigative committee in Carinthia's 
provincial parliament began looking into HAA's sale to BayernLB. 
Austria's coalition parties SPOe and OeVP have agreed to rely on 
that committee's findings and have no plans to establish a 
fact-finding committee in the federal Parliament.  So far, none of 
the major players in HAA management, the Carinthian government, or 
the Carinthian Provincial Holding Company (which held HAA shares on 
behalf of the province) has resigned.  FinMin Josef Proell is 
expected to announce personnel changes at HAA sometime after January 
¶18. 
 
Leasing Fraud, Alleged Party Financing 
- - - - - - -- - - - - - - - - - - - - 
 
¶5. (U) Austrian prosecutors are reportedly also investigating fraud 
in HAA leasing transactions.  Media reports say hundreds of luxury 
yachts and cars "disappeared" from HAA's leasing business in the 
Balkans; reportedly, 100 leased cars were stolen even before HAA 
acquired them (i.e. their registration papers were forged prior to 
HAA acquiring them).  HAA's loan business in the Balkans (see below) 
had similar gaps: country managers allegedly provided loans without 
evaluating risks or requiring appropriate collateral.  Other press 
reports point out that HAA lost several hundred million Euros in 
Lehman, Iceland, and other toxic paper invested via offshore funds 
on Jersey Island (however, those losses were publicly known prior to 
HAA's takeover). 
 
¶6. (U) A leading Austrian weekly has alleged that two political 
parties (the BZO and OVP) got large kickbacks from the 2007 sale to 
BayernLB, a charge that both parties flatly deny. 
 
Insider Trading On Behalf of Prominent Industrialists? 
- - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶7. (SBU) The role of prominent investors led by Austrian financier 
Tilo Berlin (reportedly a close associate of BayernLB CEO Werner 
Schmidt since the mid-1990s) is also under investigation for insider 
trading.  Mr. Berlin led a group of prominent Austrians 
 
VIENNA 00000063  002.2 OF 003 
 
 
industrialists -- reportedly including paper magnates Veit Sorger 
and Michael Groeller, furniture retailing CEO Herbert Koch, and 
representatives of the Flick, Tilly, and Senger-Weiss family 
fortunes -- who from December 2006 to March 2007 subscribed to an 
HAA equity increase, obtaining a 9.1% share in the bank.  In March 
2007, BayernLB CEO Schmidt was authorized to make a takeover offer 
for HAA; then-HAA CEO Wolfgang Kulterer was in contact with BayernLB 
regarding the takeover, but Kulterer was also on the board of a 
private trust belonging to one of Berlin's investors.  Thus, Tilo 
Berlin may have had inside information on BayernLB's plans when he 
negotiated with HAA stakeholder GRAWE to raise his investors' stake 
to 25% plus one share.  In April, BayernLB loaned Mr. Berlin EUR 300 
million to buy a 16.5% stake in HAA from GRAWE (when BayernLB took 
over 50% plus one share in May 2007, it bought the Berlin group's 
25% stake).  Berlin's group ended up with a profit of EUR 150 
million from a six-month investment, much of which was leveraged by 
BayernLB.  In June 2007, Tilo Berlin was appointed CEO of HAA. 
 
Bavarian Attempts to Claw Back BayernLB Losses 
- - - - - - - - - - - - - - - - - - - - - - - 
 
¶8. (SBU) BayernLB's engagement in HAA cost the bank (and now the 
state of Bavaria) at least EUR 4 billion, including the EUR 1.63 
billion it paid for a 50% plus one share in May 2007 (NOTE: at the 
time, BayernLB valued HAA at EUR 3.3 billion, while many experts 
pegged HAA's worth at only EUR 1.8-2.5 billion).  BayernLB and the 
Bavarian state government (its current majority owner) are 
considering legal action to recover money from HAA's former owners, 
claiming fraud.  Absent a detailed legal analysis, BayernLB's 
chances are difficult to assess, but Austrians point to several 
factors weighing against damage claims: 
-- a 2006 OeNB report cited problems at HAA; 
-- the Austrian press frequently cited governance problems at HAA; 
-- Ernst & Young's due diligence report, although positive overall, 
was critical of HAA's problematic loan portfolio in Bosnia and 
Croatia and the unclear risks in its leasing portfolio; 
-- the 2007 purchase contract reportedly stipulated that BayernLB 
took over HAA with all risks. 
An Austrian MoF contact opined to us that Bavarian efforts to 
recover money (either from the state of Carinthia or the GoA) have 
no chance. 
 
Problems in Southeast Europe 
- - - - - - - - - - - - - - - 
 
¶9. (U) Media reports suggest the bank has extensive problems in 
southeast Europe, on top of the leasing fraud detailed above.  In 
Croatia, the bank is alleged to have cultivated high-level favor 
through loans to political figures including former defense official 
Vladimir Zagorec (later convicted of corruption) and Zagreb mayor 
Milan Bandic; Austrian media have also linked the Hypo group to 
scandal-ridden ex-prime minister Ivo Sanader.  Hypo's business in 
Slovenia (with a balance sheet of EUR 2.3 billion in 2008, not 
including some leasing assets) is reportedly beset with similar 
issues. 
 
GoA Likely to Sell Foreign Subsidiaries 
- - - - - - - - - - - - - - - - - - - - 
 
¶10. (SBU) Austria's MoF is working on a restructuring plan for Hypo 
Alpe Adria, with details to be announced sometime in March.  MoF 
contacts say the government is still assessing HAA's situation, but 
is likely downsize HAA radically into a local Austrian bank by 
selling its (relatively) profitable businesses in Croatia, Slovenia 
and Northern Italy and by liquidating its operations in 
Bosnia-Herzegovina, Montenegro, and Serbia.  HAA's leasing business 
will be wound down as quickly as practicable. 
 
COMMENT 
- - - - 
 
¶11. (SBU) In retrospect, the rapid rise of Hypo Alpe Adria from a 
mid-sized Carinthian bank to a Balkan mini-empire appears rooted in 
highly risky business practices and aggressive pursuit of political 
favor.  The case speaks to regulatory forbearance in Austria, where 
regulators reportedly knew of HAA's weaknesses but did not want to 
rock the boat.  While the HAA scandal remains a central European 
story -- with few ties to the broader financial crisis -- the 
unraveling of Hypo Alpe Adria could tarnish a number of prominent 
economic and political figures in Austria and elsewhere.  END 
COMMENT. 
 
¶12. (U) This cable was coordinated with ConGen Munich/Embassy Berlin 
 
VIENNA 00000063  003.2 OF 003 
 
 
and Embassy Zagreb. 
 
EACHO