Austrian bank chief pleads not guilty

The main suspect in a scandal surrounding Austria's Bawag bank, Helmut Elsner, pleaded not guilty yesterday on the second day of the biggest trial in recent Austrian history.

Mr Elsner, along with eight other former directors of the bank, is charged with fraud and betrayal of confidence following speculative deals in the Caribbean and US that almost led the bank to bankruptcy in 2006.

The other defendants also formally pleaded not guilty yesterday. Mr Elsner, once chief executive of what was Austria's fourth-largest bank, and others gambled away at least €1.4 billion in one of the world's biggest speculative failures, a prosecutor said on Monday.

Mr Elsner, hedge fund manager Wolfgang Floettl and seven other men face Judge Claudia Bandion-Ortner, an assessory judge and two lay judges in a Vienna court this week, accused of committing or aiding breach of trust and false accounting.

State prosecutor Georg Krakow said in his initial statement the accused had invested amounts they were not entitled to in financial instruments that were too risky, upping the ante whenever they lost the money, and then hid the losses to evade their responsibility.

"This is a case of financial jugglers who have caused one of the biggest banking losses worldwide ever," Mr Krakow told the court.

The Bawag case rivals that of Britain's Barings bank in size. Barings lost around £850 million pounds in 1995 due to unauthorised speculation by one of its traders.

"The investments were not just highly risky, their risks were also more or less identical," Mr Krakow said. They were "above the legal levels from the beginning. They were not backed up by appropriate collaterals".

"Mr Elsner was the head of the group," Mr Krakow said. "Mr Elsner threw good money after bad, over and over. He knew that he was not allowed to do what he did."

Workers' Bank Bawag was founded in 1922 as "Workers' Bank" to manage the Austrian trade union federation's funds. The federation had to sell the bank to buyout fund Cerberus Capital for €3.2 billion after the offshore losses became public last year.

The trade union and Bawag are also suing the defendants, who include Mr Elsner's successor Johann Zwettler, other Bawag board members, the union's finance chief Guenter Weninger and a KPMG auditor.

Mr Elsner's lawyer, Wolfgang Schubert, told the court on Monday that his client, together with the rest of the board, had "pushed the limits" of banking law with the Floettl investments but did not violate them.

"The trade union gave Bawag the political mandate to offer the working class cheap credit and good interest on savings. Therefore earnings and dividends were small," Mr Schubert said. "That's why those special investments were made."

He said Mr Elsner's strategy to restructure the debts in secret was justified by the risk that making them public would have caused a run on the bank, and had been eventually successful.