28 March 2011
6 October 2014
Austria: breach of trust — a recent Supreme Court ruling has broad implications for stock corporations
27 March 2014
Austria: corruptive behaviour in public procurement procedures as a deal breaker for mergers and acquisitions transactions?
25 March 2014
11 June 2014
5 September 2014
From being derided as a practice area, white-collar crime has become big business for Austrian firms. By James Swift
Against a background of billion-euro lawsuits and the arrest of some of the country’s most venerated businessmen, white-collar crime has become big business for law firms in Austria.
“White-collar crime’s booming from a lawyer’s perspective,” says Peter Lewisch, a senior attorney at Cerha Hempel Spiegelfeld Hlawati. “There’s definitely a strong trend towards more and more cases in recent years. Particularly in the last two or three years there’s been quite a dramatic increase.”
“Everyone’s talking about anti-corruption law and white-collar crime, it’s in the media every day,” says Schoenherr attorney-at-law Heidemarie Paulitsch. “There are a lot of criminal proceedings going on too. We’ve had the legislation regarding the criminal liability of corporations in place for around five years, but things are really starting to take off. With the stricter anti-corruption laws a lot more clients are coming to us for advice.”
As a practice area white-collar crime’s stock has been rising among law firms for the past two or three years and they are now keen to promote themselves as having full capacity in the sector. According to one lawyer, “in 2011 there isn’t a large firm that isn’t active in the area”.
Schoenherr, one of Austria’s largest firms, for instance, announced that it had established a compliance and white-collar crime team to target companies damaged by the criminal acts of employees and third parties, as well as companies facing criminal charges, in September 2010.
“This team is a response to the increasing requests we receive from clients about the responsibility and liability of managers when it comes to corruption and fraud,” explains partner Wolfgang Höller, who co-heads the team with Paulitsch. “There’s a lot of uncertainty about professional compliance.”
Other firms are also keen to stress their white-collar crime credentials. But this is in stark contrast to the situation as it stood a decade ago.
“We don’t do white-collar crime because it doesn’t really fit into our practice, but it’s become a very interesting practice area and every year we consider adding it to our firm,” says ENWC partner Raimund Cancola. “Other large firms in Austria have started to do it because it makes sense for business, and so it’s become more accepted by legal society. It wasn’t always the case though. Ten years ago, to be a criminal lawyer was almost like being a second-class lawyer in Austria. If you told someone 10 years ago that you were a criminal lawyer they might not have looked at you so respectfully, but now it’s a very profitable area of practice.”
A number of factors have combined to make Austria’s law firms sit up and take notice of white-collar crime. The first, inevitably, has been the downturn. That is not to say that more people are committing fraudulent offences because of hard times; rather, as more and more companies go into bankruptcy or face closer scrutiny, crimes are more likely to be detected.
“It’s because all the risky investment schemes that run into problems due to the financial crisis can’t fill the gaps any more,” says Wolf Theiss partner Bettina Knoetzl. “There’ve been a lot of scandals in Austria.”
“As stock markets go down and companies go bankrupt there are reasons to investigate companies and look at places where there were no reasons before,” confirms Felix Hörlsberger, partner at Dorda Brugger Jordis.
That said, even before the global financial crisis Austria was rocked by a series of financial scandals. The largest and most well-known involved Bank für Arbeit und Wirtschaft (Bawag), which was owned by the socialist trade union and which lost billions in questionable hedge deals. The losses, amounting to around e1.4bn (£1.22bn), surfaced in 2006 after the bankruptcy of US futures trading company Refco, which was linked to Bawag. The bank was eventually bought by an investor consortium led by US private equity group Cerberus. Nine people were jailed in connection with the Bawag scandal, with sentences ranging from two to nine years, although recently the safety of these convictions has been questioned.
Another high-profile case has been that of AvW Gruppe and its subsidiary AvW Invest, which both filed for insolvency last May. It is estimated that the group owes between e190m and e240m. Just over a week prior to filing for insolvency, the company’s CEO Wolfgang Auer von Welsbach was arrested on accusations of fraud. Von Welsbach, a prominent individual whose grandfather was a famous scientist credited with inventing the flint used in lighters, was sentenced to eight years’ imprisonment for fraud, infidelity, falsification of balance sheets and falsification of evidence in January 2011.
Wolf Theiss, meanwhile, is currently involved in one of the largest-ever cases of its kind in the country. The firm is representing Atrium European Real Estate in a e2.1bn action against its former chairman Julius Meinl V, heir to an Austrian coffee bean empire, as well as Meinl Bank and eight other people.
The claim has been submitted in the English High Court and relates to losses suffered by Atrium when it was known as Meinl European Land (MEL) (a subsidiary of Meinl Bank) prior to August 2008. MEL’s shares listed in 2002, but dropped dramatically in 2007 when it was discovered that the company had bought back around e1.8bn worth of investment certificates. Meinl was arrested in 2009 on charges of breach of trust, overcharging fees and fraud, and was released on e100m bail.
Another reason for the uptick in white-collar crime has been a push on the part of the public prosecutors. To a certain extent, however, this is a chicken-and-egg scenario, since the political will behind increasing the attention on these sorts of crimes by public prosecutors came amid the wave of corporate scandals that brought the issue under the spotlight.
At any rate, in August last year Austrian Justice Minister Claudia Bandion-Ortner made her feelings known. “Corporate crime’s getting ever more complex,” she told reporters. “We need to rearm in the fight against white-collar crimes and corruption.” She added that a proportion of the country’s 300 public prosecutors would be assigned to specialist white-collar crime units.
“Now we have specialised white-collar crime units and the government’s trying to recruit people for positions like these - that’s not happened before,” says Hörlsberger at Dorda Brugger Jordis.
Learning to try
In Austria, to gain full admission to the bar, a lawyer must undertake a number of years of practical experience after completing their law degree. Part of this is a mandatory nine-month (soon to be shortened to a six-month) traineeship at a court, as well as a minimum of three years with a law firm. Once this is complete wannabe lawyers have the option of taking the bar exam.
“Of course, everyone wants to take it after the minimum three years because you get more money,” explains Hörlsberger. “In the exam you get tested on all areas of law in written and oral tests. In the oral exam the judges presiding over the test are now asking particularly good candidates if they want to become a public prosecutor. So now we have good lawyers [who before would have gone on to large commercial firms] who understand the other side, the business side, of white-collar crime cases, and so they’ve become better at detecting these crimes.”
In addition to this, white-collar crime cases exude a special allure to prosecutors, according to one lawyer. Bandion-Ortner, before being promoted to justice minister, presided over the Bawag case in 2007 as the prosecutor, leading to a feeling among young and ambitious prosecutors that if you want to get ahead, then white-collar crime cases are the means to do so.
But there is still a long way to go until the prosecutors are suitably equipped to deal with the onslaught of complex cases, according to one Austrian lawyer.
“The structure in place at the moment’s still not good enough to fight the scale and types of white-collar crime we’re seeing,” insists Gabriel Lansky, name partner at Lansky Ganzger & Partner.
The justice system needs many more personnel and more equipment, but they don’t have enough money. Lawyers have a tendency to overestimate the importance of law
and underestimate the importance of equipment and organisation.”
That said, everything that can be done appears to be being done. Further evidence that white-collar crime cases are becoming increasingly numerous and complex comes from the introduction of a leniency regime into Austria’s Criminal Code in January 2011, enshrined in Section 209a of the Austrian Code of Criminal Procedure. The leniency regime applies to all offences that would result in a prison sentence of five years or more. However, those perpetrators who come under the wing of the new law will not go unpunished and can still expect to pay a fine.
“There are many pros and cons to the new leniency law, but it’s still very new and we’ll have to see how it’s implemented before drawing any conclusions,” says Paulitsch. “But it’s an interesting development and shows that the authorities are stepping up their efforts. Public prosecutors are very optimistic and think they can use the new law to crack big cases and investigations.”
The path of righteousness
As much as the large-scale frauds and white-collar crime prosecutions have hit the headlines, for commercial law firms the real benefit to come out of the increased focus on the sector has been in compliance.
“The personal liability of the management is a threat to every company,” says Paulitsch. “And these days they’re being forced to consider this risk a lot more.
“A lot of our clients do work in the UK and so the Bribery Act’s caused them to take more precautionary measures, as has the Foreign Corrupt Practices Act. In particular, not having an efficient compliance programme in place will be a criminal offence on its own.
“Internal investigations have very much increased in companies too, and so this has all led to an increase in work for us.”
“Compliance is where all the rather big firms get their fees from,” reveals Hörlsberger. “Since cases such as Bawag, companies want to know what can happen to them in similar situations and we offer compliance programmes.
“In our practice at least, two-thirds of the work, or even more, is compliance-based. The rest is white-collar crime advice, but only a tiny amount involves court work.”
Restructuring - law firms’ staple diet
White-collar crime and compliance has hogged the headlines and been one of the main talking points among the Austrian legal profession of late. But as a contributor to firms’ bottom lines it is still dwarfed by insolvency and restructuring work.
“Restructuring and insolvency’s a huge area in Austria,” confirms Paul Luiki, a corporate partner at Fellner Wratzfeld & Partners. “It’s still one of the big boom areas for business law firms.”
And taking place right now is Austria’s third-largest insolvency in the economic history of the country. On 20 October last year A-Tec Industries, one the country’s most powerful industrial companies, filed for bankruptcy. Creditors have filed claims of around e1.2bn (£1.05bn) against the company
“One major case is A-Tec Industries, which has been going on since October last year and is the biggest case of the past 10-15 years,” says Schoenherr partner Wolfgang Höller, whose firm is advising the bondholders in the action.
The case falls under Austria’s new insolvency regime, which came into effect on 1 July 2010, and is one of the first to take advantage of the self-administration option.
But despite the new regime, the bondholders, who are owed around e309m, are being obstructed by an 1847 law, which states that bondholders must be represented by a court-appointed trustee and not a trustee of the their own choosing.
“It’s unusual because bondholders usually appoint their own trustee,” says Höller. “But it’s an old law and doesn’t fit very easily into the new regime.”
Höller also bemoans the lack of compulsory debt-to-equity swap under the new insolvency regime, believing that it is something that “will have to be dealt with by the legislature”, since it protects the shareholders while creditors are still presented with a situation in which they must vote against a restructuring plan that might not be in their best interests and not to the benefit of the company.
The restructuring plan adopted by A-Tec’s creditors in December 2010, which states that creditors will be paid 47 per cent within two years, has been approved by the company’s shareholders.
Now they must wait for court approval. A-Tec boss Mirko Kovats has until June 2011 to find investors, but hopes are not high. If he fails then an insolvency administrator will be appointed as trustee on behalf of the creditors and the company’s assets will be sold in a distressed M&A process.
“There’s a big market out there for a number of these subsidiaries,” says Höller. “We’re getting requests on a weekly basis.”
Austrian m&a activity
”As far as Austria’s concerned, with the M&A markets we’ve seen some sense of a recovery,” says Schoenherr partner Sascha Hödle. “And we’ve seen some high-value transactions, although, certainly things aren’t like they were in 2008.”
Nor were 2010’s M&A values as high as in 2009. But, as the information provided by Thomson Reuters shows (see table), the number of deals did increase dramatically, which some lawyers have found to be just as good.
“From mid-2010 we’ve had a remarkable improvement,” says ENWC partner Raimund Cancola. “Of course, M&A values aren’t at the level they were before, but the volume and amount of work for the law firms is as high.
The reason’s simple - clients want every stone unturned in the run-up to a deal. The value and number of deals may be lessened, but the billable hours are 120 or even 200 per cent of what they were.”
Austrian M&A deals 2000-10