Tuesday, January 10, 2012
The detention of two executives of Malom Group AG – and the difficulties of the Swiss company in proving two Brazilian bonds it holds are legitimate – has held up closing on a $60 million loan that would enable bankrupt USA Springs to complete its controversial water bottling plant in Nottingham.
According to a Malom emergency filing, filed Jan. 3 in U.S. Bankruptcy Court in Manchester, Swiss authorities took Malom president Hans-Jurg Lips into “investigative custody” on Sept. September 28, 2011, weeks before the loan was supposed to be closed in October.
According to a memorandum from Lips included in the Jan. 3 filing, Lips said he was accused of issuing guarantees from NAS Ltd. – a U.S. surety company — without sufficient cover. Lips was held for 12 weeks and questioned five times regarding NAS. His partner, Martin Schlapfer, a director at both NAS Ltd and Malom, was still in custody on Dec. 29, when Lips’ memorandum was signed, Lips said in the memo. Both Schlapfer and Lips own NAS Operations AG, a Swiss subsidiary of NAS Ltd.
A detention in Switzerland related to financial issues is not the same as an arrest in the United States, explained USA Springs attorney Alan L. Braunstein. Swiss authorities are more likely to detain executives and freeze their assets at an earlier stage of a securities investigation, he said.
However it is categorized, because of the detentions the company’s “entire business came to a complete standstill,” Lips said, although the partners were able to keep it “going in some areas,” through James Warras, Malom’s U.S. executive vice president who is based in Las Vegas, Nev.
In addition, some of Malom’s assets were being blocked by Swiss and Lichtenstein banks as of September.
The detention was a “significant event,” said Malom’s Manchester attorney Bill Gannon, but it is not necessarily the one mentioned in his emergency motion, in which he said an event “outside of Malom’s control” prevented “Malom’s president from finalizing the financing” and “stymied” the closing of the deal.
Gannon said he could not further elaborate on that event because of attorney-client privilege.
In any case, according to the filing, the process can now begin again and close before Feb. 29 at the latest, according to Malom.
But there are difficulties ahead.
While there are no other restrictions on Lips and Malom, the USA Spring financing is now based on two Brazilian treasury bills worth more than $1.2 billion, at least when they mature in 2036.
The problem with these notes is that they are part of a series of paper notes released by Brazil’s military dictatorship starting in the 1970s.
But “there are also fraudulent documents floating in the market,” according to a Brazilian law firm’s lengthy explanation of the matter, and Brazil, which now issues notes electronically, “generically” denies them.
“Brazil, of course, would like and actually need to eliminate this older debts but wants to do so on its on terms and at prices that are at extreme terms discounts to face value,” according to the law firm.
“The Brazilian government website gives a vague statement that these older LTN (treasury notes) are fraudulent and worthless. Nothing more, nothing less.” But unofficially, investors working “behind the scenes” have been able to get notes verified, the law firm said.
These notes are genuine, asserts the law firm, and it claims to have extensive documentation to prove it, but it is still a lengthy process. Malom is also exploring swapping the notes with someone who already has electronic notes, or simply selling them.
The problem is that because of the reputation for fraud, every person involved in the deal has to be reassured.
“It tends to be a repetitive process that goes on and on,” said Gannon.
USA Springs and its creditors are concerned about Malom’s difficulties, and is in negotiations about alternatives, if “in the event that Malom does not close.”
In the meantime, it will share information with the creditors “so they can assess Malom, its intentions and its credibilities.” — BOB SANDERS/NEW HAMPSHIRE BUSINESS REVIEW