Wolfgang Flottl's Network Of Shadows Leah Nathans Spiro 9. Mai 1994, 06:00 MESZ
To his New York society friends, Wolfgang Fluttl is just another well-heeled up-and-comer. Born in Austria, he is married to Barbara Anne Eisenhower, the granddaughter of President Dwight D. Eisenhower, and attended Richard M. Nixon's funeral. He has an eight-acre spread called Castle Point in Tucker's Town, in an exclusive Bermuda billionaire's enclave where his neighbors are Ross Perot and Italian media mogul and Prime Minister-elect Silvio Berlusconi.
A former Kidder, Peabody & Co. vice-president, Fluttl, 38, drives a $229,000 Lamborghini Diabolo and motors a $700,000 speedboat named Barbara Anne of Hamilton, according to The Bermuda Sun. He is developing the tallest building in downtown Hamilton, Bermuda, in partnership with Sir John W. Swan, the British colony's Premier. Employing public-relations advisers to speed his social aspirations, Fluttl has contributed to New York's Metropolitan Museum of Art and American Ballet Theatre.
FUTURES SHOCK. Some Wall Street firms see Wolfgang Fluttl in a very different light. To them, he is a potential liability. An aggressive and extremely secretive investor, Fluttl apparently has been making huge market bets. Although hard information about Fluttl is scarce, rumors abound on the Street that his sprawling Bermuda-based trading empire has suffered some serious losses in the first quarter of this year because of the sharp increase in interest rates, an event that battered many other professional traders. Those losses came on the heels, say Street sources, of large profits of $575 million in 1992 and $750 million to $1 billion in 1993.
The most recent rumors link Fluttl to large sales in mid-April of Japanese futures, German and French bonds, and other sovereign debt. "There is a large liquidation going on and the Street thinks it's him [Fluttl]," says a hedge fund trader.
Some Street firms with which he has traded now are reexamining their exposure to Fluttl and whether to continue trading with him. But Fluttl still has friends on Wall Street, including Bear Stearns, Morgan Stanley, and Nomura Securities International. "We've done business with him for six and a half years, and its been a joy and a pleasure. We would like to have other clients like him," says Bear, Stearns & Co. Chief Executive Alan C. Greenberg. Morgan and Nomura declined comment.
Representatives of Fluttl won't comment on his profits or losses but say that Ross Capital Markets Ltd., his chief investment vehicle, is "highly liquid" and "very well capitalized." And they insist that none of the Street firms where he does significant business has pulled credit lines from Fluttl.
Possible losses aren't Fluttl's only problem. Recent articles in the Austrian press have uncovered a close financial relationship between Fluttl and his father, Walter Fluttl, chairman of the Vienna-based Bank for Labor & Business, known as BAWAG. Owned by Austria's labor unions, BAWAG had been considered Austria's most conservative bank. Yet Walter Fluttl, through BAWAG, has invested hundreds of millions of dollars in offshore companies affiliated with his son, a relationship Walter Fluttl has not denied. The money, Austrian publications say, was put in often risky, speculative investments, which Fluttl senior denies. Austrian authorities are investigat- ing whether the bank took undue risks.
The most recent stories in the Austrian press claim Wolfgang Fluttl now owes BAWAG $1.7 billion, with some $400 million in loans extended this year alone to cover margin calls on leveraged investments when the bond market turned down. The publications say Fluttl's apparent securities liquidations stem from BAWAG's effort to retrieve the banks' funds from Fluttl's Caribbean entities.
Fluttl's representatives deny these reports. In a recent letter to BAWAG, Fluttl said that because of "scurrilous attacks" in the press, he was ending dealings with BAWAG. Fluttl's representatives insist that by the first week in May, Fluttl will have terminated all outstanding BAWAG transactions and the bank will have retrieved all the cash advanced to Fluttl's entities. "The bank won't have any investments--structured or advised--by Ross or Wolfgang," say Fluttl's representatives.
"GOOD FORTUNE." By all accounts, financial help from his father and BAWAG was crucial to Fluttl's investment success. Fluttl obtained degrees from Vienna University, the London School of Economics, and Harvard business school, and spent six years with Kidder in international corporate finance. But when he left Kidder in 1987 to trade independently, he had very little capital of his own.
Representatives of Fluttl acknowledge some initial assistance from BAWAG, but depict him as a highly skilled investor with an almost uncanny ability to play market cycles. In the late 1980s, they say, he scored repeatedly in risk-arbitrage bets on takeover deals. When the deal business cooled, Fluttl moved into less-developed-country debt, picking up choice credits on the cheap and selling out with big gains. More recently, they say, he has been rolling up big profits with U.S. government bonds and foreign sovereign debt. "I've always looked at the relationship as an accommodation to the bank, where the bank had the great good fortune to hook up with a sophisticated investor," says Theodore Altman, an attorney for Fluttl. "Wolfgang helped them get into the capital markets and had enormous success."
Austrian regulators may not see it that way. Traditionally, BAWAG remained consistently profitable by spurning such fads as foreign lending and sticking to mortgage loans to individuals. But in mid-April, the Austrian magazine News published a document purporting to show that BAWAG had loaned at least $330 million to Ross Capital, a Bermuda-based trading company owned by Fluttl. Subsequent reports in another Austrian magazine, Wirtschaftswoche, said that by the end of last year, BAWAG had funnelled as much as $1.7 billion to Fluttl through some two dozen companies affiliated with Fluttl on various Caribbean islands. That amount exceeded the bank's core capital, News said. The investments carried interest of LIBOR (London interbank offered rate) plus 5%--high even for risky deals. Walter Fluttl has claimed that these investments were riskless because they were fully secured.
Fluttl's representatives say BAWAG most recently invested in some 25 offshore companies affiliated with Fluttl, which held securities similar to collateralized bond obligations. Structured specifically for BAWAG to carry a very low risk, they were secured by U.S. government and other sovereign debt. Fluttl's representatives will not comment on the size of BAWAG's investment, but they claim BAWAG received only LIBOR plus 2% on most of their investments.
The bank's relationship with Fluttl was apparently very remunerative. It accounted for about a quarter of BAWAG's annual earnings over the past six years, making BAWAG Austria's most profitable bank, with a 1993 operating profit of $168 million.
At times, according to Wirtschaftswoche, BAWAG has shielded profits for political reasons. For instance, BAWAG, through Fluttl's offshore subsidiaries, invested massively in the RJR Nabisco takeover battle in 1989, making a profit of $250 million to $300 million. But BAWAG did not want to declare this profit, which would have incurred a 40% tax rate and produced a sudden jump in earnings that would have pressured the bank to declare a special dividend. Just as important, the bank feared it might have seemed inappropriate for a trade union bank to profit from a takeover battle. Thus, Fluttl kept the money parked in overseas subsidiaries, funneling it back to the bank in the form of high-interest loans. Fluttl's representatives do not dispute this explanation.
Fluttl's dealings with BAWAG have enabled him to create a secretive empire of almost overwhelming complexity. His main company in Bermuda is Belforte Group Holdings Ltd., according to his representatives, which owns Ross Capital Markets, his main trading vehicle. Other affiliates include Pembroke Co., EBT Securities Ltd., and European Bank & Trust.
Fluttl's main U.S. arm is Normandy Asset Management, which has offices in midtown and downtown Manhattan and Greenwich, Conn. Normandy runs some of Fluttl's money but the company is not owned by Fluttl, says a Fluttl representative. It is primarily owned by Edward Dalidowicz, a trader and a close associate of Fluttl, say the representatives. Some of Fluttl's money had been managed by Max C. Chapman Jr., CEO of Nomura Securities International Inc. (BW, Dec. 20, 1993), but the Fluttl representative claims that Fluttl no longer trades with Moran Group, Chapman's investment company.
Stories of Fluttl's penchant for secrecy abound. The Bermuda offices of Ross Capital can only be cleaned when the computer screens are off, says a knowledgeable Bermuda source. Employees must sign lengthy contracts that contain strict rules against divulging information, say Street sources. Fluttl recently hired the former head of the Secret Service in New York to provide security for his companies. Despite the fact that many Wall Street firms trade extensively with him, financial officers of two such firms told BUSINESS WEEK that Fluttl never provided them with satisfactory financial information. In one case, a government bond dealer stopped trading with Fluttl when he refused to provide a peek at his balance sheet.
"BEYOND WEIRD." Not surprisingly, much of the speculation about Fluttl centers on where he gets his money. In early 1992, Salomon Brothers hired Kroll Associates, the investigations firm, to look into rumors that he was tapping shadowy Middle East figures and that drug money and money laundering were involved. Kroll determined the rumors were baseless. But Arthur Liman, Fluttl's attorney, asked Kroll in 1992 to investigate the source of the rumors. Kroll identified an Austrian and an Israeli who had attempted to blackmail Fluttl, claiming that they could help him stop the rumors. Kroll says the Israeli had played this scam before and that both are now under Federal investigation.
Kroll Chairman Jules Kroll says he reassured Fluttl's trading partners the rumors were part of an extortion plot. "It was beyond weird," Kroll says. "Our conclusion was that these dirtballs had tried to shake him [Fluttl] down. He refused. The source of funds was an arrangement with his father's bank: Nothing more or less mysterious than that."
A special task force of representatives of the Austrian Central bank and finance ministry is now probing BAWAG's offshore activities. "It is not forbidden by law to have business dealings with family members. This is an ethical question that concerns only the supervisory board and the owners," says Anton Stanzel, head of the Austrian Finance Ministry's banking supervisory agency. One issue is whether the bank exceeded legal risk limits on dealings with one client.
The most important business stories of the day. Get Bloomberg's daily newsletter. Another matter is whether the BAWAG's supervisory board or Austrian regulators knew about the bank's dealings with Fluttl. Wolfgang Fluttl's representatives insist that the bank was fully informed. They point to a letter Wolfgang sent BAWAG in April that said: "The management and supervisory boards of the bank which reviewed and approved all of these investments can share our pride in these outstanding results." But Stanzel says he was unaware of the relationship. Banking sources in Vienna say the supervisory board wasn't informed either. Walter Fluttl could not be reached for comment and a bank spokesman was unable to say whether the board was fully informed.
As is the case with even routine facets of Wolfgang Fluttl's empire, the truth of this matter is likely to remain very elusive for some time.