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Hypo Alpe Adria Group's Future Unclear Amid Allegations Of Widespread Fraud And Misconduct
Origin   Embassy Vienna (Austria)
Cable time   Fri, 15 Jan 2010 14:49 UTC
References   09VIENNA1479, 09VIENNA1583
Referenced by   10VIENNA99

E.O. 12958: N/A
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
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
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.
- - - -
¶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
¶12. (U) This cable was coordinated with ConGen Munich/Embassy Berlin
VIENNA 00000063  003.2 OF 003
and Embassy Zagreb.

Full cable/ Source: