VIENNA, March 27 Austria's Salzburg province will try to claw back money from banks by questioning if they improperly sold a large number of complex financial products to a bureaucrat unauthorised to do such deals.
Salzburg sacked budget chief Monika Rathgeber last year and accused her of covertly borrowing 1.8 billion euros ($2.3 billion) over a decade to run a shadow financial portfolio of highly speculative investments and exotic currency trades.
Rathgeber has denied any wrongdoing and insisted her superiors knew of the transactions she carried out to bolster state finances. Prosecutors are investigating her for possible breach of trust and abuse of office.
The case triggered early state elections and exposed lax supervision of opaque provincial finances and prompted a drive to rein in regions.
Now Salzburg has commissioned expert opinions from outside consultants that could lay the legal groundwork for seeking compensation from banks or trying to annul some of the state's myriad purchases of complex structured products.
One central factor will be whether state officials got the proper authorisation for deals, as required by Austrian law, said Meinhard Lukas, a law professor at Johannes Kepler University in Linz who is advising the state.
"We are looking at this now, but certainly in Salzburg some individual transactions needed approval from the state parliament or at least from the whole government," he said.
"Frau Rathgeber, who did these deals, had authorisation from just one member of government, the finance director."
THOUSANDS OF DEALS
If it turns out proper authorisations were lacking, many transactions may be declared null and void, Lukas said.
"Thousands of deals were made over years so you can't say how many deals here are affected," he added.
The legal experts also question whether banks should have checked if something akin to "gambling addiction" may have played a role in the investment portfolio, Lukas said.
Rathgeber's lawyer, Herbert Huebel, said it was "ridiculous" to suggest that addiction drove any of her trades. "This is obviously a bad attempt to discredit her," he said.
Salzburg is hiring outside lawyers to help it to press banks for compensation. At issue is whether dozens of unnamed counterparties in Austria and abroad used proper diligence and warned of the risks of the products they sold.
Initial concerns that the portfolio faced a 340 million euro book loss have not been borne out. The latest snapshot showed the province's financial portfolio had a 64 million euro surplus at mid-March thanks to market developments and asset sales.
Officials say it will take months if not years to unwind the complex deals at uncertain final cost.
Outside experts brought in last year to dismantle the portfolio encountered holdings including 531 million euros in foreign-currency debt denominated in Turkish lira, Russian roubles, Brazilian reais and Indonesian rupiah, and 837,000 euros in Greek state bonds.
More than half of the securities were linked to other currencies or had payoffs that depended on moves in yields on different maturities of debt. Many were highly structured private placements that were so complicated that the experts had to value them via computer models rather than market prices.
One Austrian banker who asked not to be named likened the case to one involving British borough Hammersmith and Fulham in a swaps affair two decades ago.
In that case, the House of Lords eventually ruled that borough councils had no power to do swaps contracts, forcing the unwinding over years of hundreds of contracts with a notional value of billions of pounds.
A similar legal battle to the Salzburg affair is brewing over a swap transaction the Austrian city of Linz struck with lender BAWAG PSK in 2007.
($1 = 0.7777 euros) (Additional reporting by Georgina Prodhan; editing by Stephen Nisbet)