James Bagnall, The Ottawa Citizen
Published: Saturday, April 26, 2008
Former Ottawa businessman Mariusz Rybak shocked everyone earlier this week when he agreed to pay $60 million -- nearly all of his family assets -- to settle a two-year-old fraud claim by the company he founded. But that wasn't the only surprise to emerge from the five-month-long civil trial in London's High Court. There were also revelations of death threats, fake resumés and colleagues' links to a major banking fraud in Spain. Associate business editor James Bagnall reports on one of the most bizarre stories in many years involving a Canadian entrepreneur.
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The words were in Polish, written in an old-fashioned paper diary on May 17, 2003. They were never meant to be entered into evidence in a London courtroom, though Izabela Rybak, the diminutive author and wife of former Ottawa businessman Mariusz Rybak, was not troubled by the publication of her diary extracts.
"A new face has shown up in our lives since the end of April," she had written. "A colorful and rich personality of (Avi Arad) fascinates Mariusz, who admires his achievements, his connections, his knowledge, and everything he sees and hears. (Avi) is an amazing person and the stories about him are amazing as well."
Arad, in his early 50s at the time, was oversized and boisterous, an inveterate talker with an exotic history. He told Rybak that he was born in Argentina and had moved as a child to Israel, where he had earned a doctorate in mathematics at age 19.
Arad had homes in Jerusalem and Barcelona, and claimed to have worked for the Israeli secret service and in the office of Israel's prime minister. There were whispers that he had been part of the hunt to capture Carlos the Jackal, the infamous Venezuelan-born terrorist and enemy of Israel. And, not least, there were strong hints that Arad was backed by exceptional wealth -- an impression reinforced by his easy access to parties swarming with Spanish aristocrats.
That summer, the charismatic Israeli introduced Rybak and his daughter Magdalena to a select group of Spanish royals at the Ritz Hotel in Barcelona. Arad made sure his new Canadian friend received symbolic decorations issued by various aristocratic groups. Arad at one point suggested Rybak should apply for the position of consul in Monaco, implying such an entreaty would be looked upon with favour. Rybak's world was spinning faster.
Arad's interest in Rybak was less easy to comprehend. The Rybaks -- residents of Monaco since 2001 -- had been a couple since their late teens in Poland and did not like to be apart from each other for more than a few hours at a time. Mariusz was rich, but not exceptionally so by Monaco standards. He had made a few million dollars during the tech boom while running Intelligent Detection Systems, an Ottawa-based firm that made technology for sensing explosives at airports. Mariusz talked endlessly about Canada, but he rarely visited. His social circle in Monaco seemed hardly to exist.
Mariusz spent his days on his Bloomberg terminal, plotting business strategies and ways to buy the remaining of assets of his former company, which had run out of money in 2001. At regular intervals, he would walk his dog along Monaco's pristine boardwalk. The Rybaks doted on Magdalena, tall, willowy, attractive -- their only child. Magdalena was employed in nearby Switzerland. It was she who inadvertently provided the link to Arad.
Magdalena introduced her father to Wolfgang K. Menzel, a former Swiss banker who consulted for the software firm where she worked. Even by Swiss standards, Menzel was a gifted linguist, fluent in six languages, and well connected. He seemed to enjoy discussing business with Mariusz, and liked his idea for buying equity in underperforming high-tech firms in North America, fixing them up and selling them for a profit.
They co-founded the company that would become Langbar and looked for investment capital to get started -- Rybak reckoned $20 million would do the trick. Menzel believed they could do considerably better.
Menzel, it turned out, was good friends with Arad. Just weeks after meeting Rybak, Arad said he would be willing to invest $100 million in Langbar through a fund he managed -- Lambert Financial Investments, which handled retirement money on behalf of wealthy Jewish families in Latin America and Europe. Later, Arad would bump his contribution to 207 million euros. Rybak could hardly believe his good fortune.
From the beginning, it was an odd partnership, not least because nearly everything about it favoured Rybak. Even though Arad had purchased nearly 60 per cent of Langbar's common shares, Rybak retained control of the firm through a second class of equity called founders' shares. Not only that, but Rybak was also entitled to consulting fees of $285,000 annually, and a monthly dividend based on Langbar's assets. Arad contributed significant capital, contacts and an entrée to Langbar's first sizeable deal. Rybak, for his part, kicked in next-to-no money and charged exorbitant fees for managing the company's assets.
No one was surprised when the two men parted ways little more two years later, amid much acrimony.
Langbar went public on London's junior stock exchange on Oct. 31, 2003, and briefly attained an astonishing market value of $1.5 billion. By November 2005 it was under criminal investigation for fraud. Roughly $800 million worth of Langbar's assets -- nearly everything it had on its books at that stage -- had been examined by a forensic investigator and declared non-existent. Investors, mostly European, had lost a fortune in one of London's most egregious frauds.
New managers took over Langbar late in 2005. David Buchler, a prominent forensic investigator, was designated chairman. Early the following year, he launched a $477-million civil suit against Rybak, Arad, Lambert Investments and Jean-Pierre Regli, who served as Langbar's CFO.
That action culminated in a 56-day trial in London's High Court, which ended dramatically earlier this week when Rybak agreed to pay $60 million to Langbar. Jones Day, the London legal firm representing Langbar, reckons that makes up nearly all the Rybaks' family wealth. It's possible Langbar will receive even more. The Rybaks have the choice of selling or mortgaging their Monaco high-rise. The first $9 million in proceeds will go to Langbar, and that's included in the $60-million estimate. The Rybaks can keep the next $3 million (as well as a property in Poland), but amounts above that belong to Langbar.
Langbar is now considering its next steps. The company has intimated it will continue its legal battle to recoup additional money from Arad, Regli and Lambert. It may also widen its focus to include independent advisers -- all of whom missed signs, obvious in retrospect, that a massive fraud was being perpetrated.
The unexpectedly early end to the trial this week has left things somewhat unresolved. Although Rybak has returned the proceeds of his share sales, he has acknowledged no part in the fraud. He maintains that when he ran Langbar he believed its assets were real. Furthermore, Rybak says he spent a small fortune on independent advisers -- lawyers, accountants and financial experts -- who should have warned him things were amiss. He adds that he was a neophyte when it came to international business and complex financial instruments, so how could he have been expected to spot a clever fraud when none of the experts did? And, not least, according to his lawyer John Wardell, he was duped.
"Rybak was being set up by a set of skilful crooks, all of whom were connected," Wardell argued in court, "Arad is also known as Avi Hochman, Avi Arad Hochmann and various other combinations with different ones geographically in Spain, the U.S.A. and elsewhere." Parts of Arad's curriculum vitae, he added, were stolen from Lotfi Zadeh, a well-known mathematician who teaches at the University of California.
Drawing on the investigative work of Navigant Consulting, Wardell laid out his case that Mr. Arad and his associates had both the means and the experience to conduct a major international fraud. He pointed out to Justice Sir William Anthony Blackburne that several of Mr. Arad's allies were connected with Spain's largest banking fraud in the late 1980s.
"Anytime anything is investigated about Arad it is all made up and fantasy," Wardell noted. "But when you investigate Rybak it is real and not made up. He has a history. They want someone to be the fall guy."
The basic facts of the case are fairly straightforward:
(1) Mr. Arad's fund, Lambert Financial Investments, invested 207 million euros (roughly $328 million) to buy 41.4 million shares in Langbar International. This represented 59 per cent of Langbar's common shares, though Rybak retained control of the company through a separate class of founder's shares.
(2) Lambert made good on its investment through a financial instrument known as a certificate of deposit, issued through Lambert's bank in Brazil. It could be converted to cash only if another financial institution lent money against it. None did. It would prove a fake.
(3) Meanwhile, Arad's allies secured $633 million U.S. worth of contracts to supply waste-water systems and build shopping malls and 22,000 homes in suburbs of Buenos Aires. Not only did Langbar have no track record in this sort of work, it had only a tiny amount of actual cash on hand. Langbar couldn't pay for the work necessary to begin the contracts. In 2004, Rybak convinced Arad to buy the contracts. He did so, through Lambert, for $350 million U.S. Astonishingly, Langbar pocketed the sum in the form of a profit. This, in turn, entitled Rybak to a huge bonus.
(4) In Canadian-dollar terms, Langbar at this point had roughly $800 million worth of assets on its books -- consisting of the profits from Argentina, Lambert's payments for its initial shares and accumulated interest. Trouble was, the assets were in the form of financial instruments that were merely promises to pay. They proved fraudulent.
(5) Rybak spent much of 2004 and early 2005 trying to acquire various properties, such as Russian energy and pharmaceutical companies and Latin American mines. None of the deals worked in large part because of the difficulty in convincing anyone to accept Langbar's assets as collateral.
(6) Rybak left as CEO in June 2005 and began selling tens of millions of shares. His successor as CEO, Stuart Pearson, eventually hired a forensic investigator to analyse Langbar's assets. In the fall, the company announced it was most likely the victim of a massive fraud; trading in the company 's shares was suspended.
On the face of it, the facts suggest a strong circumstantial case against Arad. His fund was associated with the financial instruments that proved so problematic and he was present each time Langbar officials travelled to South America to verify the deposits.
Yet evidence at trial suggests that a setup by Arad and his associates alone strained credulity. In part, this had to do with Rybak's style of operating.
From his apartment in Monaco, Rybak stayed in touch with all aspects of Langbar's business by phone and e-mail. He met with investment bankers in Switzerland, Spain and London and went over the fine print of contracts. Rybak disbursed about $4 million on professional services, and another $1 million on private jets. He carefully tracked the trading patterns of the company's stock and took control of negotiations over potential acquisitions brought to him by Arad. Those who watched the two up close had no doubt who was in charge.
"Nothing happened at Langbar without Mariusz knowing about it," Menzel said this week in a rare interview. "He was the cat and Ari was the mouse."
Rybak's lawyers made much of the history of some of Arad's associates -- including Diego Magen Selva and Menzel -- suggesting they were tainted by their connection with a major fraud involving Banco Espanol de Credito (Banesto), a private Spanish bank. "Rybak's back was to the wall," Menzel said, "so his instinct is to fling mud." Indeed, the relevance of events that took place in the late 1980s was never made clear in the court of Judge Blackburne. In some instances, the individuals did not appear to do anything wrong. The primary villain in the Banesto affair was the bank's chairman, Mario Conde, who was found guilty of misappropriating millions of dollars and who obviously had nothing to do with Langbar.
agen -- Conde's aide at the time -- testified at Conde's trial. According to Magen's lawyer, Ernesto Martinez, the only charge brought against Magen was that of perjury -- at the instigation of Conde's wife. Magen was absolved of that charge in 2003. Nor did Magen play a formal role at Lambert. Arad called him from time to time for advice about
potential acquisitions and negotiations. The two men had known each other for many years but were not particularly close.
In the late 1980s, Menzel ran Argentia Trust, the entity through which Conde funnelled some of his illicit proceeds. Menzel was detained in a Swiss jail for questioning but says he was never charged in the affair. He also maintains that he informed Rybak about his experience before Langbar went public on the London stock exchange. Menzel wound up playing a rather minor role at Langbar because Rybak sacked him as the company 's first CEO in November 2003, just weeks after the firm's shares began trading. Rybak testified that he fired Menzel for not declaring on Langbar's incorporation certificate that he had earlier spent time in jail.
But that's not how Rybak relayed the event to investors. In a press release dated Nov. 15, Langbar announced that Menzel had stepped down because of ill health and that Rybak would become CEO. At trial, Rybak said his professional advisers had approved the release, prompting Judge Blackburne to remark, "So, it is all up to others?"
It was not the only time Rybak hid behind his advisers, or lied to investors.
l Two months after the start of trading for Langbar's shares, the company had yet to receive payment from Lambert for its 59-per-cent stake. When payment did arrive, it came in the form of a promise to pay. Neither of these material facts were brought to the attention of the market.
l When Langbar announced it had hired Northern Securities of Toronto to help it identify takeover candidates, a press release referred to the availability of substantial reserves of cash. There was, in fact, very little cash -- there were only several million dollars, courtesy of AVF, a minor investor from Germany.
l Rybak failed to disclose he was the beneficiary of some 10 million shares (nearly 15 per cent of the total) held in the name of relatives of Regli. Rybak said these shares were to be used to pay outside professionals for services rendered, thus saving on cash. Since insiders such as he and Lambert were restricted from selling shares for a year, Rybak also wanted to make sure at least some shares were available to trade. However, none of this was disclosed to the stock exchange when Langbar applied for its listing.
l During the trial, Rybak explained he was forced to transfer a considerable number of the shares held by Regli's relatives to a blackmailer. Rybak said Luis Sanchez, who he met during a party with Spanish aristocrats, threatened to kill his daughter, Magdalena, unless he paid for his Spanish decorations.
Perhaps the oddest part of Rybak's reign as CEO was his unwillingness to deal with the most obvious problem on his agenda. He had a huge asset that he could not turn into cash because no one else would accept it. For the better part of two years, Arad introduced him to people with companies to sell. There were Russian pharmaceutical firms, oil and gas concerns, European real-estate firms, Latin American mines. Rybak would hire professionals to analyse the deals and then try to negotiate a price. None of the deals were consummated.
There was an "Alice in Wonderland" quality to the business, in the words of Judge Blackburne. The deal making involved breathtaking sums that did not appear anchored in reality. Hard on the heels of landing the $633-million U.S. construction contracts in Argentina, Rybak implored associates of Arad to line up additional deals. They obliged in November with billions of dollars' worth of contracts for hospitals, medical-waste-disposal technology and other projects in Latin America.
"These were fantastic schemes that Mr. Rybak knew made no sense," argued Langbar lawyer Ali Malek.
No work was done on the original Argentine contracts; nor on any others in Latin America. Negotiations to acquire Russian pharmaceutical and energy firms for hundreds of millions' worth of Langbar assets also went nowhere.
Rybak said he finally grew frustrated and stepped down as CEO in June 2005. He began a program of selling his extensive shareholdings, without informing the stock market that he was doing so. Rybak was within his rights as an ex-CEO to keep his share sales secret, but he knew this was not the usual practice at major stock exchanges in North America. Here, rules compel anyone with more than 10 per cent of outstanding shares to disclose such trades. Thanks to a number of complicated transactions -- having to do with the formation and reversal of a Russian subsidiary for Langbar, and the awarding of shares in lieu of cash -- Rybak by mid-2005 controlled most of Langbar's common shares as well as its founder's shares.
By the time Langbar's fraud was discovered, he had sold an estimated $70-million worth of shares. At the same time, Lambert had sold at least $9-million worth of its stake. The incredible part, of course, was that Langbar hadn't yet done any substantial business. The value of the shares sold depended almost entirely on the company's balance sheet, which held the fraudulent assets.
In 2006, Judge Blackburne issued a worldwide freezing order against Rybak, Regli and Arad, to prevent them from moving their financial assets while the civil suit unfolded. While Rybak complied with the order and began preparing his defence, Regli and Arad ignored the order, thus triggering a contempt-of-court citation. Each has been sentenced to a British jail in absentia for periods of at least six months.
"If Avi made a mistake," said his lawyer William Watson III, "It was in ignoring that order. But you have to understand he did it in order to pay back some of Lambert's investors, who had lost a lot of money." Mr. Watson added that his client, too, has been threatened with his life and is living now in Israel "for security."
In the end, what seems uncontestable is that Rybak and Arad both disregarded the interests of investors, and stripped Langbar clean. Whatever their dark and private battles with each other, the result was an empty enterprise built on greed, with no principles or products to sustain it. The fact that a host of well-paid professionals failed to discern a pattern of corporate mis-governance only adds to Langbar's shame
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