Langbar International - Verified AIM Fraud

Crown Corporation Langbar International

In 2003, a company registered in Bermuda, owned by European investors, planning to invest in North American public companies, listed on the Alternative Investment Market in London with shares denominated in Euros. Nothing about that scenario appears ordinary, but that is what happened with Crown Corporation (LSE:CCO) in October 2003, and the story of Crown Corporation runs far deeper and entangled the Serious Fraud Office in one of AIM's biggest frauds that cost investors tens of millions of pounds over just a few years.

Stage 1: The Creation of Crown

Crown started off as a shell company headed up with Dr Mariusz Rybak as Executive Chairman and Wolfgang Menzel as Deputy Chairman and CEO after the company was incorporated in June 2013. As per the description of a shell company, Crown Corporation was created with the objective of investing in publicly listed companies in the US and Canada, or to put it in Crown's awkward terminology:

Central to Crown's fraud was the botched and quite frankly outlandish admissions process. Crown announced that it had secured the equivalent of over £150m from institutions across Europe for a majority stake; that would ordinarily seem to be quite an incredible feat for a shell company with no obvious business plan, and especially for a management team whose track record is not phenomenal. Neither Rybak or Menzel would readily fit the description of being 'phenomenal'.

Prior to listing, Nomad Navarro Wells was informed that Swiss investment bank SCS would take the shares in listing, but shortly prior to the listing taking effect, the subscriber of the shares was changed to Lambert Financial Investments (LFI), a vehicle in the Americas that was said to manage money for the rich and wealthy. Despite this last minute change, Navarro Wells accepted it and the listing was effected. The stock of Crown was tightly held by insiders including Rybak.

As it would later emerge in December 2003, LFI issued an "international certificate of deposit" to Crown that was said to be from Banco de Brasil. This was intended to cover the purchase of shares required for the subscription, but this would never proceed as the certificate was faked. SCS, the bank that had accepted the deposit noticed that one of the signatories had left Banco de Brasil before the certificate was written. Rybak ignored this. Other smaller third parties took shares (some paid cash), but the sum total of these cash amounts was small with some even paid for by way of promissory notes.

Upon listing, Crown was a shell with the fake certificate that would never be paid, and with shares that had a very low intrinsic value of near zero. But the market did not know this would turn out to be the case. Crown completed its listing with ~70 million shares in issue at 5 euros each; 41 million (59%) of those were held by LFI after the certificate had been faked, and the shares issued. Crown's shares had no real intrinsic value since it had not received the cash. 100,000 of the shares were "founder shares", which we will look at later.

Stage 2: The Imaginary Contracts

Just one month after having listed on AIM, Crown Corporation announced in November 2013 that it had won a massive $633m of contracts in Argentina with a series of regional companies, and that these contracts would be fulfilled by companies that Crown plans to acquire. The contracts were for a range of waste management plants, water treatment infrastructure and construction projects in a poorly built area of the country.

How would a shell company with no firm plans win such large contracts? Peculiarly, local coverage of the massive contracts was sparse, and the deal seemed "too good to be true", and as the saying goes, "If something sounds too good to be true, it usually is". The market did not care, and the share price rose sharply. To follow this up, Jean-Pierre Regli was appointed as the company CFO on November 13th.

But all was not well at Crown. On November 18th, just a few days after winning the large contracts, CEO Wolfgang Menzel resigned as CEO with immediate effect for "health reasons." A CEO resigning with immediate effect is enough to arouse suspicion, but so shortly after the large deal and IPO appeared more than coincidental. His resignation came before he paid for his IPO shares so they were cancelled and the LFIs stake rose.

However, it didn't take the market long to lose that concern as on December 16th 2003, Crown unveiled it had won a further $70m in contracts for the provision of security products and services. Again, Crown was a shell company with no genuine expertise and was planning to acquire a company that could fulfil the contract. Again, this is particularly odd. "In light of sensitivities ... no further details can be revealed at present."

After this contract, Crown reached a peak of nearly 900p/share on a closing-price basis and was valued at approximately £600m despite only being a shell, with highly opaque contracts in place, but this reflected the thinly traded share capital.

Stage 3: An Oil Deal that Slipped Away

In line with the previous two contracts showing no signs of similarity in terms of market sector, Crown continued and formed an oil subsidiary called Crown Oil Corporation. Remarkably, Crown had already decided that it might wish to acquire a company called International Hydrocarbon Trading Ltd - that was operating in Russia - for a substantial €235m.

IHT's main business operations were, well, thinly described. Crown was apparently purchasing just 100 hectares of land that had the approval to develop a natural resources transhipment terminal and berth structures; that €235m fee appears quite extortionate. Fortunately for shareholders, this is a deal that never was completed.
Stage 4: Selling the Imaginary Contracts for Imaginary Money

In June 2004, and shortly before construction on the Argentinian contract was scheduled to supposedly start (convenient?), both the Argentinian construction contracts and the security services contracts were sold to LFI for a combined $350m, despite Crown having not actually done any work on these contracts. Consequently, it is near impossible to see what justifies those contracts being worth that value, when you factor in likely margins. Nonetheless, LFI aimed to give these funds to Crown via a promissory note also to be transacted through Banco de Brasil. Note how no actual work had been done, nor had any of the touted North American companies been invested into.
However, the market had not taken this lightly, and had become suspicious of the company's activities. The share price has fallen from the circa 875p high to as low as 400p in June 2004.

It was suspected that the deal was thought up as a method of using the fake promissory note as a basis for turning the LFI money into something that Rybak could extract, and that Russia was the place to do this. The intention was to gain access to an asset that he could monetise. However, complications prevented that deal from going ahead.
Further announcements followed this. Crown dual-listed on Germany's XETRA exchange in August, proving that the company was not a lost cause at this point, and actually de-merged two new subsidiaries in December 2014, namely Crown Pharmaceutical Ltd, and Crown Development Ltd. Again, the purpose of these subsidiaries was to enter two more sectors that Crown had no obvious knowledge in; pharmaceuticals and property development.

All this really ensured was that Crown's group structure was even more complex; this is a common trait when companies have some activities to cover up. The share price continues to perform badly, reflecting the market's lack of trust in the company's activities.

Stage 5: Purchasing Langbar. Concerns Arise

In June 2005, alongside receiving notice that LFI had deposited the $350m note with Banco de Brasil, Crown purchased Langbar Capital Ltd, a corporate advisory and investment company and Stuart Pearson joined Crown as Acting CEO and Chairman, from Langbar. Pearson held shares in Crown prior to joining the company and had worked with certain members of the management team previously. There is also a broker and NOMAD change with Arden Partners taking over from Nabarro Wells.

In tandem with this, Rybak stepped down from the board "to pursue other business interests", leaving the company knee deep in fraud. But that was not before Rybak managed one last payment; he terminated the 100,000 founder shares and converted them into millions of euros worth of Crown shares. He is suspected to have disposed of over half of his shareholding thereafter (netting tens of millions of dollars) and that the whole vehicle of Crown was to profit from selling shares at values based upon investors believing that the imaginary assets existed.

However, after such a lengthy period of time without receiving the money in Brazil, investor concerns arose regarding the legitimacy of the deposits with Banco de Brasil. Crown knew that Brazil had certain currency restrictions that hampered expatriation of funds (again, convenient?), but engaged in discussions to try to unlock the $633m held by Banco de Brasil and owed by LFI.

Pearson started his reign at Crown by confirming that this was the case, following discussions.

Unfortunately, investors would later find out that this was just another inaccurate statement in a web of tall tales. This led to the market marking the share price higher, but in the grand scheme of events, the share price remained weak and the market had lost confidence. As at 25th July 2005, the market cap of Crown stood at £97m versus the touted deposits of £350m.

In August 2005, Crown Corporation engaged in a £4.36m placing, leading misled institutions such as Merrill Lynch and Gartmore into providing funds. The company's name was changed from Crown Corporation to Langbar International (LSE:LGB).

Stage 6: Funds "Released", but Fraud Unravels

In September 2005, Langbar released an RNS stating that $294m of the Brazilian funds had been released and received following discussions, and were held in Langbar's head office account at ABN AMRO in Holland. A $25m tax payment was stated to potentially become payable, but there was circa $370m remaining in Brazil. This $370m was expected to be moved into a new subsidiary, European Property Investment Company.

The company structure was actually intended to become yet more complex with the proposed acquisition of marketing company Real Affinity PLC in September for £2.6m, but this was cut short by the unravelling of the Fraud that was Crown Corporation and now Langbar International.

Perhaps suspiciously, Langbar was forced to release an interim results correction for an incorrect profits figure just a few weeks before it was suspended with the comment below:

The suspension followed a further decision by Pearson to ascertain the legitimacy of the funds at ABN AMRO; ABN commented that they did not hold the funds or actually issue deposits in paper form and that Langbar did not hold a business account with ABN. Consequently, an independent investigation into the assets was initiated to assess their existence, and whether the values attributed to them was fair.

Stage 7: Langbar "Subject to a serious fraud"

A company called Kroll had been drawn in to investigate the legitimacy of the bank deposits in Brazil and Holland. They eventually concluded with this...

To put it simply, the entire contracts, and assets had been fabricated. Langbar never had access to any funds in Brazil, nor did it ever have contracts in Argentina or for security services. That is a conclusion that could have been guessed by the share price performance, which was dire at best, despite the supposedly high asset value of the company. Regli resigned as CFO on December 19th 2005.

Stage 8: Legal Proceedings and Outcome

After Pearson resigned in February 2006, an investigation was initiated into the entire history of Langbar, including the period when it was known as Crown. This process was initiated by new Chairman David Buchler, who launched a $477m civil lawsuit. In particular, legal proceedings commenced against Mariusz Rybak, Jean-Pierre Regli and Lambert Financial Investments Ltd; three key components of the entire fraud. Worldwide asset freezing injunctions were put into place and European arrest warrants were issued for certain individuals; unfortunately this process was severely hampered by the passing away of key financial backer Avi Arad, which caused integrity issues within the investigation.

Although Langbar was delisted in April 2006 after being suspended for 6 months, the legal proceedings carried on long after with various judgements obtained against those involved in the fraud. Whilst millions of pounds were recovered through this process and some shares were eventually bought back via a tender offer at 5.1p, it was pittance in relation to what investors lost on the open market. Notably though, Rybak was chased and after the asset freeze he settled for circa £30m in 2008; this included Rybak selling his Monaco property. Regli was dealt time in jail in absentia, for failing to comply with the courts judgement with respect to identifying assets he owned.

The Langbar case was also assisted by a rule in previous AIM documents which stated that foreign companies only have to publicly disclose major changes in the shareholder register if the foreign country requires in. Since Langbar was incorporated in Bermuda, it had to abide by Bermuda rules, which stated that the only way of publicly viewing changes is to visit Langbar's offices in Bermuda in person. That's a requirement out of the bounds of most investors and enabled some parties to sell their shares pre-suspension. AIM rules on NOMADs was changed in light of Langbar.

NOMAD Nabarro Wells was fined £250,000 and publicly censured on numerous counts including "inadequate consideration of the experience of the Board of a company before its admission to AIM" and "not advising a company of its obligations to update the market under AIM Rule 11 when previously assumed subscription monies were not received." This was the first fine and private censure given by the AIM team.

In addition, Stuart Pearson was jailed for one year and disqualified as acting as a director for 5 years, which can be argued as insufficient given the due diligence negligence and sums of money lost for investors. Pearson's judgement was based on him being charged on 3 counts for "Making a misleading statement, contrary to s.397 of the Financial Services and Markets Act 2000".

What warnings signs were there?

Importantly for investors, there were so many red flags in Langbar's case that it was almost impossible to miss them, and that is reflected in the market's lack of trust in the company and the severe discount to the touted net assets shown in the share price (although as is turned out, it was not severe enough).

-  The share price action from 2004 onwards failed to reflect the face value operational performance. The wider market has become suspicious of Crown/Langbar
-  CEO Wolfgang Menzel resigned after just a month of the IPO and just a week of the Argentinian contract
-  Crown was essentially a shell company with little in the way of assets of employees
-  Crown was incorporated in Bermuda, which assists in avoiding shareholder transparency
Foreign accounting firm that was not well known: Gironella Velasco Auditores, S.A

Subscription payments for the shares upon listing were never received. Rybak never actually paid for the subscription shares he received
-  The group structure of Langbar became ever complex as time passed with numerous subsidiaries
Touted acquisitions failed to materialise
-  The board composition at the time of the Langbar takeover was weak and reflected that it would have been easier to get away with fraud with a lack of management oversight

Worrisome track records of certain individuals including LFIs new Latin American division head Alberto Camjalli who had been jailed in the past
Convenient lack of local deal coverage in Argentina, convenient inability to initially expatriate funds from Brazil, and convenient sale of the Argentinian contract before tangible work started
Broker changed from Insinger Townsley to Nabarro Wells in November 2004 with "immediate effect" and from Nabarro Wells (also as NOMAD) to Arden Partners in mid-2005
Unbelievable contracts. Investors were led to believe that contracts were won without even having subsidiaries capable of delivering them. Furthermore, the contracts were of such size that major companies would have been involved in a tender process, had it actually been carried out. There was no reason why Crown should win those contracts over established companies

Contract sale price. The two contracts for $703m were sold for $350m. That suggests a minimum blended gross margin of nearly 50% must exist for the deal to be attractive to LFI. That is ridiculous for two highly competitive industries
Unclear corporate objectives. Focus switched from investing in North American PLCs to Argentina construction projects to security services to Russian Oil & Gas, with even reports that a gold mining venture was considered
-  Before the suspension, Crown had to restate its results on two separate occasions due to misreporting revenue and profits, and misreporting profits respectively. At the very least this suggests incompetence
Dodgy preferential voting rights given to Rybak's founder's shareholding. These include him receiving 0.75% of Crown's net assets every month by way of a dividend. See picture on the right for the preferential voting rights