Banker Julius Meinl V, head of an Austrian coffee-roasting dynasty and chairman of Meinl Bank, was arrested late on Wednesday on suspicion of defrauding investors through secretive share buybacks.
The arrest follows 18 months of investigations by prosecutors and financial watchdog FMA, and mainly relates to Meinl's role in the fall of Meinl European Land, a listed real estate firm started by Meinl Bank, Vienna prosecutors said.
Among other crimes, British-born Meinl is accused of having orchestrated a buyback in which Meinl Land bought 1.8 billion euros ($2.4 billion) worth of its own shares to prop up the share price before it suddenly fell off a cliff in July 2007.
The most serious is defrauding investors by buying back shares to prop up the share price, said Michaela Schnell, spokeswoman for Vienna state prosecutors. He was arrested because there is risk of escape.
Other allegations include that Meinl Bank damaged Meinl Land shareholders by overcharging for services, and that it wrongly portrayed Meinl Land shares as an almost risk-free investment in several widely advertised share issues during 2005 to 2007.
Meinl, a personal friend and business partner of former Austrian Finance Minister Karl-Heinz Grasser, would face up to 10 years in jail if found guilty. His lawyer was not available for a comment.
Meinl Bank declined to comment on the suspicions against its chairman but only issued a statement reassuring clients that the bank and clients' deposits were safe.
MEINL'S RISE AND FALL
Julius Meinl's arrest marks the nadir for a once proud family that started selling coffee beans in Vienna in 1862, built a retail chain, fled from the Nazis to Britain in 1938 and then rebuilt the chain in Austria after the war.
Trained at Bear Stearns in the 1980, Julius took over the family's bank and turned it into the center of the family's fortune, selling off the retail business but for a posh deli in Vienna's center.
Apart from the bank, which mainly does wealth management and investment banking, Julius used property acquired when he was still running a retail chain as the starting point for Meinl Land, which became a shopping mall developer in emerging Europe.
Meinl Land sold shares to the public in an IPO in 2002 and between 2005 and 2007 raised a total of 4.3 billion euros in several share issues, mostly sold to Austrian retail investors.
While Meinl Bank never officially held a stake in Meinl Land while it was listed, the bank owned the company that acquired and managed Meinl Land's investments for a fee, it handled its capital measures and it acted as its market maker.
The share buybacks took place between February and July 2007 and were not authorized by and not disclosed to shareholders until they were concluded.
The buybacks buoyed Meinl Land's share price at a time when real estate stocks were falling across the world. When they eventually became public, Meinl Land's share price dropped sharply at the end of July 2007.
The buybacks overlapped with a period in which a vehicle controlled by Meinl Bank was selling 620 million euros worth of the stock in the market, and with initial public offerings of two similarly structured sister company of Meinl Land.
Meinl Bank does not dispute the buybacks, but says it did not need shareholder authorization and denies it bought back shares directly from Meinl Bank or an affiliate.
Meinl Land was last year taken over by Israeli real estate investment firm Gazit Globe and renamed Atrium European Real Estate
The two other companies Meinl started -- Meinl International Power
(Additional reporting by Sylvia Westall in Vienna and Tova Cohen in Tel Aviv; editing by Simon Jessop and Andrew Callus)