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Thursday, December 9, 2004

Balkan privatization scam to affect Western banks?
Shadowy transfers of institution's shares allegedly involved communist 'warlords'

Posted: December 9, 2004
1:00 a.m. Eastern

By Aleksandar Pavic

An unraveling banking privatization scam in Croatia threatens to turn the Balkan Peninsula, an area known for constant political turmoil for the last 200 years, into a financial powder keg as well.

In this era of economic globalization, the scandal could possibly drag in Allianz A.G., a German-based global banking, insurance and asset management giant and one of Europe's largest financial institutions, and Unicredito Italiano S.p.A., one of Italy's three largest banks. Both concerns are ranked by various lists among the top 500 global companies. Capitalized at around $80 billion, Allianz has aggressively expanded on the U.S. market in the investment and insurance fields, having acquired, among others, such firms as Firemen's Fund Insurance. Its shares trade on the New York Stock Exchange and other exchanges worldwide. Unicredito, with a market capitalization of close to $30 billion, has itself enjoyed rapid expansion recently, especially in Eastern Europe, and has a growing network of investment interests in the U.S. as well.

In March 2002, a Unicredito-Allianz consortium took over Zagrebacka banka d.d. (ZABA for short), the largest Croatian bank, whose shares traded on the Croatian exchange, the London Stock Exchange and the Frankfurt Exchange's OTC market. Unicredito acquired an 81.91 percent stake, and Allianz 13.67 percent. The transaction was handled by well-known investment banks, the Italo-German consortium being advised by Dresdner Kleinwort Wasserstein, while ZABA was advised by Credit Suisse-First Boston.

What the two banks and their financial advisers may or may not have known at the time was that the Zagreb bank, formerly state-owned, seems to have been previously "privatized" in a murky process that not only failed to bring any money to the internationally indebted Croatian state's coffers but also "created" shares out of thin air, thus robbing legitimate small shareholders of their rightful stake in the bank and putting into question ZABA's very value.

This is the accusation leveled by one of ZABA's "small" shareholders, who claims that such a deal could never have been consummated or even conceived in the U.S. or Western Europe, whence the main actors originate or do their main business. Pask Kacinari, an affable, Zagreb-based gold and diamond wholesaler, has taken ZABA to court, demanding his "stolen" deposit and shares back, and is preparing to globalize his case by taking it before U.S. and European judicial and regulative bodies, the home turf of ZABA's new owners and their financial advisers in the deal. For, as Kacinari claims, not only have his own property rights been blithely ignored and violated, but also those of Unicredito and Allianz shareholders worldwide, the value of whose own stocks could be seriously compromised by the two banks' swallowing of "tainted" ZABA stock.

According to Ozren Tatarac, a Zagreb attorney and Kacinari's legal counsel, the Allianz-Unicredito takeover of ZABA was conducted "behind closed doors" and the ZABA shares taken over from a "mysterious seller." In addition, as reported by the Croatian weekly Hrvatsko slovo ("Croatian Word"), which has written extensively on the case, Allianz and Unicredito did not acquire ZABA stock at market value, but rather through a stock swap with "mysterious" ZABA shareholders, with only 20 percent of the acquisition paid in cash.

While the existence of "mysterious" buyers or sellers and stock swaps is no longer unusual in today's financial markets, what is unusual, charges Kacinari, whose tale would sound like a good detective novel if not for the three-pound pile of supporting documents he carries with him to back up his case, is the fact that the "mysterious" shareholders have been able to sell "phantom" stock to reputable Western banking corporations, while genuine, local shareholders have been left out in the cold, with their shareholding rights simply being "wiped off the books." In his lawsuit before Croatian courts, Kacinari claims that ZABA has willfully neglected to register his ownership of 164,421 ZABA shares, which represent 5.6993 percent of ZABA's 2,884,928 total shares, 96 percent of which are now owned by Unicredito and Allianz. And, according to Kacinari, this is only the tip of the iceberg, as he is not the only "small" shareholder involved.

'Mysterious' shareholders

On Nov. 13, 1990, Kacinari signed a contract with ZABA, forming a deposit on the basis of which ZABA was required to acquire shares out of its own emission in Kacinari's name. The bank did end up using a small part of Kacinari's deposit to purchase a negligible number of shares – 233 in all – but reneged on the remainder of its obligation and has since closed the account without Kacinari's authorization, refusing to disclose the basis for this decision or even a record of the account's activity prior to closing. Thus, the larger parts of Kacinari's shares and deposit have somehow been "lost."

However, according to Tatarac, the shares tied to Kacinari's deposit were in fact purchased, but to the name of other, "mysterious" shareholders, which de facto amounts to a "confiscation" of Kacinari's property. Tatarac underlines that this "confiscation" took place during the first half of the 1990s, at the time of the bloody ethnic war accompanying the break-up of the former Yugoslavia. Kacinari himself thinks that he may have been more vulnerable than most at the time as a minority Albanian living in Croatia.

The shares to which Kacinari claims ownership are Series 1A ZABA shares. Out of the total 2,884,928 ZABA shares emitted, 2,661,196 are series 1A. What is yet to be determined is when and how a large number of these shares was actually emitted.

As records show, on Dec. 27, 1989, ZABA emitted 851,827 court-registered shares. In a subsequent period ending on Dec. 31, 1993, official ZABA publications reported varying numbers of ZABA shares, finally settling on the figure of 1,862,115 series 1A shares. However, in that period, ZABA did not report any corresponding capital increase or any additional stock emissions.

Thus, Kacinari is laying claim to ownership rights to more than 10 percent of the 1,010,288 subsequently issued shares, which, although not officially reported, were nevertheless registered in ZABA's books as Series 1A shares. Kacinari suspects that the greater part of his original deposit was used to purchase the appropriate number of shares, but in someone else's name. Kacinari also does not exclude the possibility that "many of these subsequently registered shares were simply written into the bank's registry, without a corresponding capital increase, which, by itself would have illicitly diluted the worth of the shares held by other legitimate shareholders." It is further alleged by Kacinari that ZABA management attempted to legitimize the suspect share issues by repeated, retroactive changes to the original act authorizing the emission of the 1A Series shares, dated Dec. 27, 1989.

The number of Series 1A shares reached its present-day figure of 2,661,196 after the ZABA Main Shareholders' Conference of May 31, 1994, decided that each of the "shareholders'" holdings was to be increased by 42.86 percent. While this time ZABA did report a corresponding capital increase, it was still unknown who its new "private" owners had become and from whom they had acquired legal title to their holdings.

On top of everything, Kacinari accuses ZABA management of holding the suspect shares in the bank's treasury and using them to secure sufficient votes at shareholder conferences. In support of this claim, ZABA annual reports for 1998, 2002 and 2003 state that "the bank has a limited number of treasury shares," without providing specific numbers.

According to the initial reorganization scheme of 1989, the original owners of Series 1A shares were Croatian state-owned companies slated for privatization. These indeed entered the privatization process after 1995, when the war on the territory of Croatia ended. By then, however, ZABA management claimed that their bank had already completed its privatization, although there is no record of it anywhere.

In investigating who has confiscated his shares, Kacinari has come into the possession of a document from the Croatian Privatization Fund, which claims that it had "no knowledge as to who privatized the bank and by what means." Even more oddly, during a recent appearance on Croatian television, a former privatization minister, Davor Stern, stated that he was "totally unacquainted" with the the process by which Croatian banks had been privatized. In an added twist, Ivic Pasalic, a former senior adviser to the late Croatian President Franjo Tudjman wondered in a recent interview how it was that Tudjman, the most powerful man in Croatia at the time, had "no knowledge about ZABA's privatization," suggesting, furthermore, that ZABA has remained under the control of elements of the previous, communist regime.

Thus it seems that the relevant Croatian state bodies had no knowledge of the "privatization" of ZABA, the largest Croatian bank and one of the largest in neighboring Bosnia-Herzegovina, and that the Croatian state, the bank's former nominal owner, has not earned a cent from its prize financial institution's privatization, the fruits of which seem to have been illicitly picked by old communist structures that have simply gone "underground."

What Allianz and Unicredito shareholders themselves may want to know is how was it that the reputable Western investment banks handling the deal did not warn their clients about ZABA's murky "privatization" in their due diligence scrutiny prior to the deal's finalization.

Instead, according to Kacinari, Allianz and Unicredito went on to close the deal and simply swap their stock with the "Croatian warlord elite," which, having survived the apparent fall of communism, had illegally "privatized" the bank while a bloody war raged in the region and succeeded in, at least temporarily, covering their trail by becoming "legitimate" owners of respectable Western bank stock, while "polluting" the new owners' total assets with stock of questionable origin and value.

$100 million case

Kacinari has repeatedly tried to claim his legitimate ownership rights, both personally and in writing, even appealing directly to Allianz representatives on the ZABA Supervisory Board and Unicredito management at their company headquarters in Milan. Having received no response, he used the occasion of the ZABA Main Shareholders' Conferences in April 2003 and 2004 to personally warn Allianz and Unicredito representatives that their registration as ZABA shareholders was "highly suspect." Furthermore, Kacinari charged that neither Allianz nor Unicredito could furnish proof that they acquired their ZABA shares from legal shareholders, that the "shareholders" from which they did acquire shares did not come by them legally and that the ZABA share registry itself seems to have been "falsified."

To support this, Kacinari states that the bank does not possess records of shares transactions and accompanying contracts for each individual share ownership change for the period up to Dec. 31, 1993, which is the period in which he claims the local "warlord elite" illegally took over the bank. At this same April 2004 Shareholder's Conference, Tatarac underlined that, through the integration of ZABA with Allianz and Unicredito, the balance books of the two global banking giants have become "tainted," which is bound to affect their market value worldwide.

Kacinari suspects that Unicredit and Allianz are counting on Croatia's weak media and courts and hoping that the potential scandal will somehow go away or simply lose itself in the closed-off Balkan oblivion. However, perhaps pushed by Kacinari's one-man media blitz, the offices of the current Croatian president and prime minister have taken an interest in the case, ordering investigations into the matter. Not leaving anything to chance, Kacinari has also decided to take his case West, where "property rights are supposed to be respected."

To that end, according to attorney Tatarac, inquiries have already been sent to the American Securities and Exchange Commission, and several U.S. and Western European law firms have been contacted. Kacinari feels he will have little problem securing adequate legal representation, as his total claim for the value of his shares, dividends, interest and damages runs to a total of approximately $100 million.

This total, Tatarac feels, may seem like a drop in the bucket for corporations whose market capitalization runs into tens of billions of dollars, but the entire process may in the end prove much more costly to them, as it could seriously erode investor confidence in the two banks' shares in today's volatile world financial markets.

This would once again confirm the Balkans' "powder keg" reputation, while still leaving open the question of whether or not the region's turmoil is an export or an import. As usual, the truth probably lies somewhere in between, although many in the region feel that the onus of importing sound business practice and accountability lies squarely with the capitalist West. As for Pask Kacinari, who seems to rather enjoy wielding his David's slingshot in his lone battle against local and international Goliaths, he would simply like to have his rightful property restored: "That is not such a revolutionary, destabilizing idea, is it?"

Again, the answer may vary depending on whom one asks. For it seems that the "iceberg" of which Kacinari spoke earlier refers not only to other potentially damaged parties, but to the ripple effect the unraveling scandal may have on the global financial markets. As Kacinari surmises, other shareholders may wonder: How many similar such deals have been closed, not only in the Balkans, but worldwide?

Aleksandar Pavic covers the Balkans for WorldNetDaily.com.