Suit unveils new Pioneer fraud details

Pioneer Group’s foray into the heady world of Russian finance collapsed in a fog of disappearing bank accounts, shifty stock swaps and phony companies, ultimately costing more than $10 million, new court filings reveal.

The disclosures, contained in a lawsuit filed by Pioneer Group Inc. in Boston Superior Court, offer the first specifics of the scandal since it unraveled in May 1998.

The company is suing underwriters at Lloyd’s of London for refusing to make good on more than $10 million in claims to cover losses arising from the fraud at its now-defunct Russian banking operations.

Pioneer, which is struggling to improve investment performance and sell off some of its money-losing businesses, absorbed most of the losses last year.

“This shouldn’t generate any additional write-offs, even if they lose the case,” says Michael Beall, an analyst with Richmond, Va.-based Davenport & Co. “They’ve already taken their bath.”

At the same time, “this doesn’t sound like a plain vanilla claim,” adds Theodore Liftman, chairman of Boston’s Theodore Liftman Insurance, which specializes in selling insurance policies to mutual fund companies and other financial institutions. “It has some exotic aspects to it.”

Indeed, the fraud has been a riddle wrapped in an enigma. Until the court filings, Pioneer, which uncovered the fraud on its own, had refrained from publicizing details of the scandal — even as to whether it is pursuing legal action against the bank’s management.

bank partnership ended

Pioneer spokesman Tim Frost declined once again to offer further elaboration this week. But the suit sheds new light on the extent of Pioneer’s losses and the Byzantine nature of the scam, which forced Pioneer to scrap a pending sale of 35% of its Moscow bank to an Estonian financial institution.

According to court papers, one of the frauds that Pioneer believes should have been covered began to unfold in September 1997. Employees of its Russian subsidiary, PBank, arranged to buy 1.35 million shares of another Russian institution called Promsitroy Bank.

Eight days later, the same employees arranged for PBank to sell the shares at the same price to a phony company, believed to have been controlled by the employees.

The Promistroy Bank shares were then transferred to a second phony company, also controlled by the bank employees.

Two days later, PBank repurchased the same shares for twice what it had sold them for.

The bank’s loss in that transaction: $660,161, according to court papers.

The bank’s employees, “intended through their action to cause PBank a loss to obtain substantial benefit for themselves,” the suit states.

In all, Pioneer contends that the bank suffered $8.2 million in losses through dishonest loans and transfers of PBank securities to sham corporations.

It lost another $1.16 million trough “theft, conversion and unexplainable disappearance of PBank assets through unauthorized bank accounts.”

big audit bucks, too

The losses come on top of $450,000 in scandal-related audit fees that the company paid to New York accounting firm Arthur Andersen. Pioneer argues that the fees should be covered by insurers.

On June 14, 1999, however, Pioneer received a letter from Berwin Leighton, a London-based law firm representing Lloyd’s, denying coverage of all claims.

In its denial, Lloyd’s misrepresented certain facts about the policy in question, failed to conduct a reasonable investigation into the matter and engaged in unfair claims settlement practices, Pioneer argues.

“Lloyd’s, in bad faith and in breach of its contractual obligations, refuses to pay Pioneer’s claims,” the suit adds.

All told, Pioneer is seeking more than $10.5 million.

Sarah Pelling, a spokeswoman for Lloyd’s, declined comment, saying the matter is under review.

Suits over insurance claims are not uncommon. When Lloyd’s and other insurers refused to pay for the $2 billion cleanup of Prince William Sound after the Exxon Valdez oil spill in 1989, the oil company went to court. The two sides eventually reached a $650 million settlement.

Pioneer has hired Anderson Kill & Olick, a high-powered New York law firm known for representing large companies in disputes with insurers.

Meanwhile, Pioneer this week reported a $42 million loss, or $1.60 a share, in the third quarter, thanks in large part to a $42.8 million write down, after closing its money-losing gold mine in Ghana.

The company earned $800,000, or 3 cents a share, on continuing operations compared to a loss of $7.8 million, or 31 cents a share, last year.

Pioneer earnings totalled $64.1 million, down from $65.9 million.