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Small World: Liquid Opportunities Plus Fund Linked to Bawag Bank

This International Herald Tribune article suggests that Refco Capital Markets Ltd in Bermuda held approximately $525 million in non-existent bonds at time of bankruptcy that were issued from six Anguilla companies, which in turn were owned by Bawag bank and Liquid Opportunities Fund in some undisclosed fashion. According to this press release from Jonathan P. Knight of Liquid Opportunities,

I was involved in the management of Liquid Opportunities until November 2004. Liquid Opportunities was an offshore investment fund with non-U.S. investors that primarily owned non-U.S. securities. Thus, Liquid Opportunities was not registered with the SEC or any other U.S. Agency.

The fund's mandate included the administration of several Euro-denominated note instruments contributed by an investor. To hold such non-U.S. instruments, Liquid Opportunities maintained a custody account at Refco's non-U.S. subsidiary, Refco Capital Markets ("RCM").

As stated in the story, it is true that the instruments mentioned above were not registered securities, but rather they were private instruments each with a single lender and a single borrower. As is the norm in such a circumstance, the instruments were not registered, either publicly or with a transfer agent, and thus would not reflect a CUSIP or other standardized identifying information. The article suggests that the instruments were "fake" or "phantom." There was absolutely nothing about the instruments, either on their face or in terms of their handling, that suggested that they were problematic in any way. No one, including no government official, has suggested that Liquid Opportunities had any reason to suspect any irregularity with regard to the instruments. In fact, Liquid Opportunities never suspected any irregularity. Any implication to the contrary implied in the article is inappropriate.

At the end of 2004, Liquid Opportunities was fully redeemed (including the shares of the six companies mentioned in the article) and, pursuant to that redemption, all positions were removed from the custody of RCM.

The IHT story above indicates that Bawag bank said March 17 that the bank had severed ties to the six companies by the end of last year. One wonders how much of the approximately $1.2 billion loss were still “hidden” through such unregistered bond investments as of the end of year 2005.