SAN DIEGO – Ever curious about how far some executives will go to cheat investors?
A lawsuit filed in June in U.S. District Court in New York by the liquidating trust for AremisSoft against the big British bank, Lloyds, tells a tale that should be a reminder of how elaborate a fraud can be, and how many unwitting investors and businesses can be affected.
First, a little background: In 2001, software maker AremisSoft was exposed (in part by yours truly) as a multi-hundred million dollar stock manipulation. Soon thereafter the company filed for bankruptcy reorganization. The allegations led to fraud charges by the SEC and, in 2003, a federal indictment against former co-CEOs Roys Poyiadjis and Lycourgos Kyprianou. According to the indictment, the duo repeatedly lied to investors about the company, causing its stock to become artificially inflated. They then sold millions of shares of AremisSoft stock through offshore accounts.
A year ago Poyiadjis, while not admitting or denying wrongdoing in response to an SEC complaint, gave up $200 million. He subsequently pled guilty in the federal fraud case to one count of conspiracy and is expected to be sentenced in September. He's now cooperating with authorities.
But (and this is where the story gets good) Kyprianou, who is believed to live in Cyprus, is still on the run. And for good reason: According to the lawsuit against Lloyds, he concocted an elaborate money-laundering scheme to sell $44 million in AremisSoft's stock. He deposited the proceeds, the suit alleges, in an account at the Geneva branch of Lloyds. The suit further alleges the account was set up by his wife's cousin, who at the time was the bank's deputy general manager and chief of private banking in Geneva. The bank is a subsidiary of Lloyds TSB Group Plc. (LYG)
The suit claims the bank failed to exercise the degree of due diligence required by the circumstances to verify who was really behind the account, especially in light of widespread publicity surrounding AremisSoft. The suit also says that Lloyds misrepresented material information "it knew would be relied on by AremisSoft and its auditors in reporting the company's financial condition ..."
For example, in March 2001, according to the suit, Lloyd's sent a "confirmation letter" to a person purporting to be AremisSoft's auditor; the letter claimed Lloyds was holding $9.98 million "blocked in favor" of AremisSoft's eastern European, Middle East and Asian operations; that was equal to about 30 percent of the company's cash. The letter, the suit says, was signed by two managers of Lloyds in Geneva.
When AremisSoft's financial reports were filed with the SEC, they showed cash "that did not exist," the suit alleges. In fact, according to the suit, Lloyds didn't hold the cash "blocked in favor of AremisSoft" because AremisSoft eastern European, Middle East and Asian operations "did not have any account at Lloyds ..."
The blocked funds, "if blocked at all," the suit says, "were in an account in the name of or for the benefit of, Kyprianou. Six months later, the suit continues, Kyprianou instructed Lloyds to open an account in the name of AremisSoft's eastern European, Middle East and Asian operations even though the company had no offices, personnel or business operations in Switzerland.
And that's only of the story.
A Lloyds spokeswoman says the company expects to aggressively defend itself against the charges.
P.S.: The winner from any recoveries via the liquidating trust is SoftBrands (SBN) , the reformulated AremisSoft, which receives 10% of any collections. Last year it pocketed $12.6 million, which was used to pay down debt.
In a piece Saturday, New York Post reporter Roddy Boyd wrote the IRS and federal prosecutors in New York are looking into a series of complex transactions Fairfax Financial (FFH), a Canadian insurer, used to prop up its sagging balance sheet. Fairfax told the Post it knows of no such investigation. Fairfax is no stranger to readers of this column. As previously reported here, it has disclosed that it is the focus of several regulatory investigations; this column also tracked a questionable trail of money into a hard-to-detect subsidiary in Luxembourg. In response to my query at the time, Fairfax declined comment.
That's all for now, folks...
Vacation starts ... now! See you in two weeks.
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