ON a stormy night in December 2003, a colourful group of international businessmen gathered at Villa Castagnola, a grand hotel on the shore of Lake Lugano in Switzerland.
The former home of a Russian nobleman, it made a sumptuous setting for two days of talks. The main item on the agenda: how to spend the £150m that had made Crown Corporation the largest cash shell on London’s Alternative Investment Market (AIM).
Among those present were Crown’s chairman Mariusz Rybak, a Canadian technology executive, and Jean-Pierre Regli, a Swiss-Italian banker and the company’s co-founder.
A full line-up of advisers included Barry Townsley of stockbroker Insinger Townsley, a Labour donor who had supported Frank Dobson’s bid to become mayor of London. The bad weather meant he and Simon Fox, also from Insinger, had to hire a private jet to make the journey from France.
The biggest presence, physically and financially, was Abraham “Avi” Arad, a hefty 6ft 3in mathematical genius, terrorism expert and former adviser to the Israeli government. “Avi Arad was the man leading the discussions,” said one of those present. “He was the man who had found (Crown’s) backing.”
Vic Alboini of Northern Securities, a Canadian broker, outlined the Canadian firms that were available for Crown to buy: water, technology and security companies.
To some observers, there was no logic to the list. “I got the impression Crown did not know what it wanted to do,” said one.
Crown never did figure out what it wanted to do. Perhaps that is part of the reason why the firm, now known as Langbar International, is the subject of a £365m fraud investigation by the Serious Fraud Office.
By the time of the Lugano meeting, Crown had already “won” $633m (£366m) of contracts in Argentina to carry out waste-management and water-treatment work with businesses it had yet to buy. After its brief dalliance with Canada, it was soon distracted by opportunities in the oil and gas industry, setting up Crown Oil.
Then late last year there was the “very exciting” $294m demerger of Crown Pharmaceutical, which was going to buy a Russian drugs company, and Crown Development, an eastern European property company. More recently, it has been looking at buying properties in Spain and Portugal.
Most of these schemes seem to have evaporated into thin air — just like the cash in the company’s bank accounts. About the only deal Crown managed to pull off was the £700,000 purchase of Langbar Capital, a tiny year-old corporate-finance boutique run by Stuart Pearson, a northern accountant who took over as Crown’s chief executive in June. Pearson promptly changed the company’s name to Langbar International.
Confused? To appreciate the full extent of the company’s incoherence, look at these facts. Crown/Langbar is a Bermuda-registered company, founded by a Polish-Canadian, backed by Israeli money, which traded in Argentina, banked its money in Brazil, had its accounts audited in Spain ... and, which thanks to British financial advisers, listed its shares on the London stock market.
Yet even this does not capture the most unusual aspect — that came nine days ago when, after months spent trying to verify the existence of its cash deposits, Pearson issued the following statement.
“Kroll (the corporate investigations firm) has reported to the board that it appears likely that the company has been subject to a serious fraud. Kroll has not been able to establish the existence, nor verify the company’s entitlement to, any of the relevant assets at any time in the company’s history.”
Pearson has asked the police and the Financial Services Authority to investigate. The huge fraud is the biggest scandal to hit AIM.
Pearson’s shocking announcement flatly contradicted three earlier assurances he had given his investors. When he became chief executive, he simultaneously issued audited results that said €280m (£189m) had been paid into the company’s account at the Banco do Brasil.
This money was from selling the Argentine waste and water contracts to Lambert — a company controlled by Arad, and Langbar’s biggest shareholder.
Twice more before the end of September, and encouraged by a meeting with Banco do Brasil in São Paulo, Pearson told his shareholders that the company had hundreds of millions of pounds in cash deposits.
Investors piled into Langbar’s shares. At about 50p, their price was only a quarter of the 205p per share value of the company’s cash deposits. It looked too good an opportunity to be true.
Sadly, it was. Within two weeks of the interim results, Langbar suspended trading in its shares, assailed by fresh doubts about the cash in its bank accounts.
The pivotal person in the Crown/Langbar story is Arad. Through Lambert, he put up the £150m — contributed, he said, by 2,000 Jewish pensioners in Israel, Argentina and Germany — that enabled Crown to float in London in October 2003. That initially gave Lambert a 59% stake in Crown.
According to Regli, Arad’s Argentine contacts set up the $633m waste-management and water-treatment deals to serve “over 14,000 dwellings, 9 industrial parks, 2 commercial centres, 3 complexes of municipal buildings and 2 hospitals” in Buenos Aires.
Barely six months after Crown won this deal, Lambert bought these and other Argentine contracts with a $350m promissory note.
Baker Tilly, the accountant, was initially engaged as Crown’s auditor but grew concerned at the multiple roles that Arad was performing.
Regli said Baker Tilly refused to sign off the audit of Crown’s accounts. “They were concerned about the involvement of the major shareholder in the politics of the company because (Arad and Lambert) were advisers, they brought us the Argentinian contracts, they were bringing us to Russia. (Baker Tilly) did not feel comfortable with this relationship.”
Given Baker Tilly’s concerns, Crown’s response to the firm’s resignation was remarkable. It turned to a small Spanish auditor called Gironella Velasco — a firm introduced by Arad, who has a home in Barcelona.
Pearson became involved after Philip Wood, a business partner, met Arad, who said Crown wanted help with a gold-mining venture in Argentina.
“It was clear to me and Philip that Rybak didn’t have a clue what he was doing,” said Pearson. “He had a management contract that pays him 9% of net assets a year. No wonder the share price was so low when the company was being run as Rybak’s own little fiefdom.”
At a meeting in Monaco, Pearson told Rybak “his contract was a killer to investors”.
Pearson agreed to join the board and “sort out the corporate governance”, but only after receiving assurances about the company’s finances, in particular the $350m promissory note. The audited 2004 accounts published in June gave him the comfort he needed. Rybak left with a deal that gave him a 44% stake.
At the beginning of September, Pearson received news of a breakthrough: five or six certificates of deposit, worth a total of $294m, were to be placed in an account at ABN Amro in the Netherlands. Pearson rushed out this apparently good news to investors. In retrospect, he said, this was a “fatal” mistake.
Three weeks later, he learnt that the ABN Amro documents were fake. “ABN couldn’t find the cash. They said they never print certificates like the ones we had, they only have them in electronic form. Anyway, I panicked — how could such a big deposit be lost? So we immediately suspended the shares and brought in Kroll.”
Most of the investors realise they have lost their money. Institutional investors knew the risks — that’s why 200p a share in cash was until recently being sold for 50p.
Arad came to London last week to speak to Kroll. He told Pearson he had a solution — an offer to put more assets into Langbar at no cost. But Pearson couldn’t face it. “I can’t deal with him any more,” he said.
“I don’t know what’s happened. Maybe the company was floated on fresh air and then was the victim of an elaborate sting, part of which included looking for a British guy with Mug on his forehead to run it.”
