Business — 13 March 2011

Vahid AlaghbandVahid Alaghband, Founder and Chairman of Balli Group plc, was educated in Switzerland and the USA, where he received his BS and MS degrees in Industrial Engineering and Operations Research at Cornell University. He is a member of the Clinton Global Initiative, a trustee of Asia House London and an International Council Member of Asia Society New York.

The Iranian Alaghband family’s extensive steel, textile and property interests were taken over in 1979 when the Shah fell. The family moved to Britain and, under Vahid Alaghband, 53, rebuilt through its London-based Balli Holdings. Its main subsidiary, Balli Steel, produced £9.6m profit on £1 billion sales in 2002.  An £80m valuation of the family’s wealth is a cautious one.

March 31 (Bloomberg) — After completing the 1.1 billion euro ($1.4 billion) buyout of Germany’s Kloeckner & Co., the world’s largest independent steel distributor, Vahid Alaghband was a perfect candidate to address “cross-border mergers — challenges and pitfalls” at the World Economic Forum in Davos, Switzerland.

The Iranian-born founder and chairman of London-based steel trading company Balli Group Plc never got the chance. As he traversed the Zurich airport on Jan. 23, 2003, immigration police detained him on a German arrest warrant.

Without Alaghband’s knowledge, WestLB AG, Germany’s third- biggest state-owned bank and his partner in the Kloeckner takeover, had filed a criminal complaint almost a year earlier accusing him of unlawfully removing 120 million euros from Kloeckner.

Instead of starring in Davos, Alaghband, 53, spent the next 11 months in jail, first in Zurich and then in Duisburg, the German city where Kloeckner was based. In February 2003, the same prosecutor’s office that’s investigating Alaghband charged Deutsche Bank AG Chief Executive Officer Josef Ackermann with breach of trust for his role as a Mannesmann AG director in paying bonuses during Dusseldorf-based Mannesmann’s unsuccessful attempt to fend off a takeover by Vodafone Group Plc. In both cases, foreign acquirers bought German icons and suffered as a result.

Solitary Confinement

Alaghband was never charged. German criminal law allows suspects to be held for as long as six months without charges, and a court can extend that period, says Klaus Bernsmann, a law professor at Bochum University in western Germany. Most of the time, Alaghband was in solitary confinement. He says he broke the seclusion with an hour of exercise each day, one shower a week and handcuffed visits for outside medical checkups.

“This is a mistake, I thought,” Alaghband says, recalling his arrest during an October interview at Balli’s Stanhope Gate office, with its view of Hyde Park and artwork that includes two miniature paintings of Shah Jahan, who commissioned India’s Taj Mahal. “I expected my lawyers to sort it out by morning.”

The Dusseldorf prosecutor’s office is still investigating. In November 2003, it raided WestLB’s Dusseldorf headquarters and found memos, e-mails and board minutes related to the takeover.

The major issue is whether Alaghband did anything wrong in financing his deal for Kloeckner, whose roots began in telecommunications and date to Duisburg’s first telephone, in 1906. In May 2003, while jailed in Zurich, Alaghband ceded his 94.5 percent stake in Kloeckner to WestLB, handing over 35.7 million shares to repay a 212.5 million euro loan. On Dec. 18, 2004, WestLB sold Kloeckner to New York-based private equity firm Lindsay Goldberg & Bessemer LP for 320 million euros and 900 million euros in debt.

`Get My Company Back’

Alaghband lost the company and at least 100 million euros that he had invested to buy it, he says. In January, he sued WestLB in Dusseldorf Landgericht, a regional court. The suit charges that WestLB’s March 2002 complaint that landed him in jail was part of a successful effort to elbow out the Iranian family and seize control of Kloeckner. Alaghband is seeking to rescind the May 2003 agreement in which he forfeited his Kloeckner shares. His case is pending.

“I was detained for 11 months because of WestLB’s accusations,” says Alaghband, who also serves as a director of the Iran Heritage Foundation, a London nonprofit organization that supports Iran’s arts, and who is advising the British Museum on an exhibit about the Persian Empire set for the fall. “They tried to ruin me and destroy my reputation. Now, I want to get my company back.”

`Proud Owners’

WestLB executives declined interview requests for this story. “We had made a loan to Balli, and they could not pay us,” says Hans Obermeier, the bank’s chief spokesman. “In May 2003, that is when we became the proud owners of Kloeckner.”

Lindsay Goldberg spokesman Tobias Weitzel says he’s convinced the firm’s purchase of Kloeckner won’t be affected by Alaghband’s suit.

Even as Europe unites under a single currency and the European Union extends its economic and political clout, foreign buyers such as Alaghband can be stymied by cultural differences, employee resistance and laws and procedures that vary from country to country.

Of 122 global mergers from 2000 through 2001, just half enhanced shareholder value, according to the London-based branch of KPMG International, the world’s fourth-largest accounting firm. Newbury, England-based Vodafone, the world’s biggest cellular phone service, has lost 55 percent of its value since April 12, the day it completed the acquisition of Mannesmann, the No. 1 German mobile-phone network company. Yesterday, Vodafone shares traded at 141.5 pence in London.

Hostile Bids

“There is considerable concern, both in the general public and among politicians, about hostile foreign bids for German companies,” says Katinka Barysch, chief economist at the London-based Center for European Reform, which studies the European Union.

In particular, leveraged buyouts such as Alaghband’s acquisition of Kloeckner raise suspicion, says Juergen Breuer, head of leveraged finance at DRKW Securities LLC, a unit of Dresdner Bank AG.

For Alaghband, rules governing the rights of employees and shareholders and Germany’s system of powerful state-owned Landesbanks fortified the barriers.

“In Germany, you are never sure if you have control of a company even if you have the majority of the shares,” says Richard Godden, a corporate partner at London-based Linklaters, the top legal adviser on European mergers last year, according to data compiled by Bloomberg.

Germany’s Mitbestimmungsgesetz, or codetermination law, mandates that employees make up one-third to one-half of the supervisory board that approves major corporate decisions. At Kloeckner, the supervisory board’s vice chairman, Horst Schmidt, fought Alaghband’s control, correspondence obtained by the Dusseldorf prosecutor shows. Schmidt declined to comment.

Limited Control

German regulations governing the structure of corporations also thwarted Alaghband. In an Aktiengesellschaft, or AG stock corporation, such as Kloeckner, even majority shareholders such as Alaghband have little leverage over the Vorstand, or management board, which reviews corporate strategy.

“Routinely, foreign investors are surprised that there is only limited shareholder control,” says Juergen Reemers, a partner at Washington-based Jones Day, the second-biggest U.S. law firm.

At a company known as a Gesellschaft mit beschrankter Haftung, or GmbH, shareholders call the shots and can direct the management board to take specific actions, Reemers says. Alaghband says WestLB delayed his plan to change Kloeckner to a GmbH company.

WestLB, with 271 billion euros in assets, is among the most aggressive and acquisitive of Germany’s 11 Landesbanks. “They were the most active of the Landesbanks in the international markets,” says Stefan Best, a Frankfurt-based analyst at Standard & Poor’s.

Government Subsidies

Like all Landesbanks, WestLB benefits from government subsidies and guarantees that protect loans and deposits. Standard & Poor’s and other credit rating firms assign their top ratings to the banks, allowing them to borrow at 1 or 2 percentage points below publicly traded rivals such as Deutsche Bank. In 1999, the European Commission ruled that the subsidies were illegal and that state guarantees must end by this July 18.

Once a domestic lender that funded apartment houses and the steel and coal industries in Germany’s Ruhr Valley, WestLB embarked on an expansion binge during the past decade.

From 1998 to 2003, it orchestrated 30 transactions by making loans and taking equity positions in companies that totaled $22 billion. In 1999, the bank’s private equity division, called the principal finance unit, underwrote a $1.4 billion bond for Formula One Holdings Ltd., the owner of the Grand Prix auto-racing circuit. The next year, it loaned 860 million pounds ($1.65 billion) to Box Clever Ltd., a London-based television rental business that filed for bankruptcy protection in 2004.

Wembley Stadium

In 2002, WestLB made a 433 million-pound loan to the English Football Association to finance a new, 757 million-pound soccer stadium at Wembley — home of the national team — after U.K. banks pulled out.

With Kloeckner, Alaghband says in his lawsuit, WestLB had a “master plan” as early as January 2002 to wrest the company from him. He claims that WestLB generated negative publicity about him so it could call in the loan that enabled him to buy Kloeckner. Then it obstructed his attempts to repay the loan, he says.

In addition, WestLB provided erroneous advice and urged him to appoint a trustee to stabilize the company, Alaghband says. That man, Walter Droege, 52, of Dusseldorf management firm Droege & Comp., acted secretly on behalf of WestLB, Alaghband alleges.

His 144-page complaint contains 114 documents and computer disks that include letters, e-mails and WestLB memos seized by prosecutors. Droege declined to comment and didn’t respond to e-mailed questions. WestLB spokesman Armin Kloss says the bank isn’t concerned about Alaghband’s suit.

Iranian Revolution

For Alaghband, whose family lost 95 percent of its $25 million of assets in the 1979 Iranian Revolution and then started anew to build Balli into the world’s second-largest steel trader, Kloeckner may prove the ultimate test of fortitude.

Alaghband says owning Kloeckner was part of his strategy to create a trading and distribution empire. For three generations, the Tehran-based Alaghband family traded fabrics, chemicals and metals between Iran and Europe, mainly in Germany and the Netherlands.

In the 1960s and 1970s, Vahid’s father, Hussein Alaghband, won the nickname “king of cotton” because he controlled 40 percent of Iran’s market. Alaghband says his father expanded Iran’s cotton industry to $400 million in sales in 1978 from $15 million in 1950.

When Vahid was 17, his parents enrolled him at Boston’s Chauncy Hall boarding school, now Chapel Hill-Chauncy Hall. He went on to Cornell University in Ithaca, New York, graduating with a bachelor of science degree in engineering in 1974 and earning a master’s degree in process engineering in 1975.

Oil Boom

Alaghband returned to Iran that year. The Middle East’s second- largest oil producer was benefiting from prices that had jumped to $11 a barrel from $2 a barrel in 1972. Shah Mohammad Reza Pahlavi invited Western companies to help Iran build factories and improve manufacturing of everything from shoes to cars to televisions. The Alaghbands branched into petrochemicals with Dow Chemical Co., based in Midland, Michigan, and into food processing with Izegem, Belgium-based Vandemoortele NV.

In 1979, the Islamic Revolution toppled the shah and shut down the Alaghband companies. “We lost everything — our businesses, our property, even our clothes,” Alaghband says. As family members fled Iran, Alaghband, who was then 27, stayed behind for a year to oversee the handover of his assets. At times, revolutionary guards detained him in a prison cell to ensure his cooperation, he says.

“If you had money, the revolutionaries assumed you were a friend of the shah,” Alaghband says. “I got a receipt from every revolutionary organ to verify that there was nothing more to take and we owed them nothing.”

Fresh Start in London

Alaghband arrived in London in 1980 and moved in with his in- laws. He set up Balli Group with $200,000 borrowed from relatives, hiring a part-time secretary and trading chemicals and steel from a two-room office in West London. By 1981, Balli had sales of $6 million. Five years later, they soared sixfold to $36 million. In 1990, Balli broke through $300 million and traded 1 million tons of steel, Alaghband says.

Alaghband expanded into processing ore and smelting aluminum. Among his purchases was 67 percent of Tulcea, Romania-based aluminum ore processor Alum SA for an undisclosed price. He took an option to buy a stake in Slatina, Romania-based Alro SA, a state-owned company that was the biggest aluminum smelter in Eastern Europe.

“Aluminum is a competitor to steel, gradually replacing steel in many applications,” Alaghband says. “Client demand led us to that direction.”

By 2000, Balli had more than $2 billion a year in revenue, its annual report says. Alaghband went searching for another acquisition. The steel industry was consolidating after more than 30 U.S. companies, including Bethlehem, Pennsylvania-based Bethlehem Steel Corp. and Cleveland-based LTV Corp., sought bankruptcy protection from 1997 through 2002 because of falling prices and rising labor costs.

`Get Big’

“The only way to survive was to get big,” Alaghband says.

Dusseldorf-based E.ON AG, Germany’s largest utility, was looking to sell assets, including Kloeckner, which had 10,000 employees worldwide. Viag AG, a Munich-based energy producer, had bought Kloeckner from Deutsche Bank in 1989. When Viag merged with fellow energy provider Veba AG to form E.ON in 2000, the combined company put some assets on the block.

“E.ON wasn’t interested in running a steel company, and Kloeckner had lost its way,” Alaghband says. “We could create a global force.”

Alaghband already knew something about Kloeckner. He had bought the company’s steel-trading arm in 2000 for 380 million euros. A year later, he offered to buy the rest. At the time, Balli had 2.3 billion euros in revenue, less than half Kloeckner’s 5.3 billion euros. E.ON accepted Balli’s takeover offer of 278 million euros in cash and 800 million euros of assumed debt.

A Dozen Advisers

Alaghband says he hired more than a dozen firms to help him shepherd his biggest-ever acquisition. Among them were New York-based Goldman Sachs Group Inc., the world’s top mergers adviser, according to Bloomberg data, and Gibson, Dunn & Crutcher LLP, the Los Angeles law firm that won George W. Bush the U.S. presidency before the U.S. Supreme Court in 2000. Alaghband put London-based Clifford Chance LLP, the world’s biggest law firm, in charge of German legal matters. Spokespeople for all three declined to comment.

Management consulting firm Booz Allen Hamilton Inc. of New York forecast the combined company would save about 100 million euros a year, according to a 2001 report. Booz Allen declined to comment. Advisers recommended cutting Kloeckner’s German work force by about 20 percent and relocating the headquarters to Switzerland, where costs would be lower.

“There is substantial value to be created through operating in a leaner fashion, which focuses on cash flow, working capital and return on funds employed,” Goldman Sachs said in a presentation to E.ON, Kloeckner and potential lending banks.

Borrowed Money

Alaghband says he chose WestLB as his bank because it had offered to provide further loans backed by Kloeckner’s cash flow. On Oct. 16, 2001, Balli agreed to pay 92 million euros, borrow 171 million euros and pay an additional 4 million euros in fees to acquire 94.5 percent of Kloeckner. WestLB put up 15.3 million euros for the remaining 5.5 percent, a stake the German bank would hold in a special fund for Balli, Alaghband says.

For Balli’s cash contribution, Alaghband borrowed 35.5 million euros from his subsidiary, Balli Steel Plc. Credit Suisse Group, Switzerland’s second-largest bank, loaned Balli 56.5 million euros, which was secured by a letter of credit from the Hamburg branch of Bank Melli Iran, that nation’s biggest bank.

Alaghband appointed his brother Hassan, 47, and Balli’s finance director, David Spriddell, 43, to Kloeckner’s management board, the body that reviews strategy. He and his youngest brother, Nasser, 44, joined the supervisory board, which with its employee members oversees management while representing workers, outside directors and shareholders. The Balli team didn’t speak any German.

Cultural Issues

From his earliest days as Kloeckner’s new owner, Alaghband sparked resentment. He proposed moving the Duisburg headquarters to London, where Balli is based, and making English the official company language. Hassan Alaghband, who took over Kloeckner’s finance and legal departments, got off on the wrong foot, too.

“I walked up to the 11th floor, to the executive offices, floor by floor to meet people and introduce myself,” Hassan recalls. “It’s called management by walking. When I got to my office, there was a typed letter on my desk from the union representative asking, `Why is the management spying on workers?”’

Employees were suspicious of their new bosses. “It was a culture shock to be taken over by the Alaghbands,” says Alex Kopp, 54, who headed Kloeckner’s steel-trading business until Balli bought it in 2000 and who now runs the group for Balli. “Here was a very German company that thought it ran a global empire, but now it was bought by a U.K. trading company run by Iranians.”

Mannesmann Mess

A year earlier, German workers had demonstrated and called strikes as Vodafone arranged its 154 billion-euro takeover of Mannesmann. Ackermann, the Deutsche Bank CEO who was a Mannesmann director, approved 57 million euros in bonus and pension payments to executives at the German company. Prosecutors alleged that the payments were designed to persuade managers to drop objections to Vodafone’s bid. A Dusseldorf criminal court found Ackermann not guilty in July 2004; an appeal filed by prosecutors in October 2004 is pending.

Given the mess at Mannesmann, Kloeckner employees were concerned about another foreign takeover, and the Alaghbands were clueless about German customs, Kopp says.

“Hassan Alaghband underestimated German attitudes and acted like an American lawyer — wearing red suspenders, working long hours, wanting short, quick meetings,” he says. “The workers thought he’d come from a different planet.”

It didn’t take long for a power struggle to percolate behind the scenes. Immediately after taking over Kloeckner, the Alaghbands sold properties, including an unused warehouse in Duisburg, raising 120 million euros. They deposited the money in a special account, called Kloeckner Ltd., to which only the Alaghband team had access.

`Atlantic Assets’

Alaghband then pulled together assets from several of his Balli units, including aluminum smelters, a port operator on the Black Sea and an Iranian steel distributor. He called them the “Atlantic Assets” and valued the collection at 120 million euros. Alaghband says he wanted to meld the Atlantic Assets into Kloeckner to expand into Eastern Europe and the Middle East.

In court documents, Alaghband says he planned to remove the 120 million euros in the Kloeckner Ltd. account and replace it with the Atlantic Assets. Then he’d take the 120 million euros and repay the Credit Suisse and Balli Steel loans that he’d used to buy Kloeckner.

In effect, Alaghband says, he was moving assets among sister firms. He says he told WestLB early in the buyout discussions that Balli had planned to merge some of its assets into Kloeckner to finance part of the purchase.

120 Million-Euro Dispute

At a management board meeting on Jan. 14, 2002, Kloeckner CEO Raimund Muesers complained that he couldn’t withdraw the 120 million euros because only Balli executives could tap into the Kloeckner Ltd. account. Muesers wanted to use the money to pay off debt, according to minutes of the meeting.

He and marketing manager Roland Strassburger, the management board’s two Kloeckner representatives, pushed to return the 120 million euros to accounts they could control. The four-man board deadlocked, with Hassan Alaghband and Spriddell voting to block Muesers’s proposal.

About two weeks later, Muesers alerted WestLB that Balli had transferred Kloeckner’s 120 million euros without consulting the board or the bank, according to management board minutes. WestLB officials grew alarmed, spokesman Obermeier says.

At the supervisory board meeting on Feb. 14, 2002, Alaghband explained that the 120 million euros was pledged to the Atlantic Assets. Muesers countered that the board hadn’t approved the Atlantic Assets — and in fact knew nothing about the deal.

“Our loan to Balli was securitized with Kloeckner shares,” Obermeier says. “When assets are removed from the company, that reduces our security. As a bank, we became concerned.”

Other Stakeholders

Part of the trouble for Alaghband was the difference between Kloeckner’s status as an AG corporation and the less restrictive status of a limited liability, or GmbH, company, says Theodor Baum, ethics adviser at the Bundesbank, Germany’s central bank.

With an AG company, “the Vorstand has to take into account the interests of not just the shareholders but other stakeholders like the employees, the creditors and even the community,” he says.

German corporate law says an AG company’s assets may be distributed to shareholders only by specific means, such as a dividend. When assets are removed, assets of equal value must replace them, says Reemers, the partner at Jones Day.

Alaghband says he’d always planned to change Kloeckner to the GmbH structure, which would let him move assets around. WestLB’s own legal department had insisted that Kloeckner be changed to a GmbH as a condition of the loan, Alaghband says in his lawsuit.

Kloeckner Conversion

Three weeks before the acquisition was set to close, Alaghband asked E.ON to convert Kloeckner to a GmbH. E.ON declined. In an Oct. 11, 2001, letter viewed by Bloomberg News, E.ON Executive Vice President Rolf Pohlig warned that E.ON might take legal action if Alaghband delayed the purchase. Josef Nelles, a spokesman for E.ON, says the company saw no merit in changing Kloeckner’s structure in the final stages of the handover.

Unable to complete the conversion to a GmbH company before the acquisition closed, Alaghband set a Feb. 18, 2002, meeting for shareholders to approve the change. Because he controlled 94.5 percent of Kloeckner, he reasoned the measure would pass.

“I am not a German law expert, but I was told that if we converted the company quickly, we’d be fine,” he says.

Alaghband says that in the first week of February, Alexander Winkels, manager of WestLB’s equity investments, persuaded him to postpone the vote to calm tensions. Winkels also urged Alaghband to remove the two Balli executives — his brother Hassan and Balli CFO Spriddell — from the management board, Alaghband says.

`We Wanted Consensus’

“WestLB was our partner, and they said my brother Hassan was moving too fast, alienating too many people,” Alaghband says. “We wanted consensus.” Winkels declined to comment.

Without Hassan Alaghband and Spriddell to counter them, CEO Muesers and marketing manager Strassburger rejected the Atlantic Assets purchase. That meant Balli had removed 120 million euros without replacing the money with assets of similar value, as German law requires an AG company to do.

More than 40 stories in German newspapers suggested that the British-Iranian family was guilty of embezzlement, a Lexis-Nexis search of a five-week period during that time shows.

On Feb. 28, Balli and WestLB signed an agreement to delay the GmbH conversion for six more months. “I didn’t think a delay would be that significant,” Alaghband says.

The next day, WestLB secretly filed its criminal complaint against Alaghband. The bank alleged Alaghband had committed fraud, Dusseldorf prosecutor Bernhard Englisch says. The criminal complaint paved the way for Alaghband’s arrest in Zurich 10 months later.

Englisch and a second prosecutor, Alex Beerman, began trying to figure out how a company half Kloeckner’s size could buy the German steel distributor.

`Alligators Eat Rabbits’

“In the real world, alligators eat rabbits,” Beerman says, seated in a dark office surrounded by dozens of folders bursting with papers. “In this case, a rabbit tried to eat the alligator.”

Back at Kloeckner, Alaghband agreed to WestLB’s request that Droege, the trustee the bank had recommended, replace him as chairman. He says he assented to the change as a temporary measure.

On April 2, Alaghband sent two lawyers, Roland Steinmeyer, a partner at Wilmer, Cutler, Pickering, Hale & Dorr LLP in Berlin, and former German Economics Minister Otto Lambsdorff, to meet with Johannes Ringel, a WestLB management board member who oversaw the bank’s investments. Ringel was already shopping for alternatives to the Alaghbands, Steinmeyer says. Ringel also warned that Alaghband would likely be arrested.

“Ringel didn’t see any possibility of the Alaghband family remaining as Kloeckner shareholders,” Steinmeyer recalls. “We were talking to people who had already made up their mind.” Ringel couldn’t be reached for comment. He is no longer a bank employee, WestLB’s Obermeier says.

Agreement With WestLB

In August 2002, frustrated at not being able to take control of Kloeckner, Alaghband signed an agreement with WestLB at Balli’s London office. He pledged to either repay WestLB 200 million euros or sell Kloeckner to WestLB for 320 million euros, which would eliminate the loan and part of the disputed missing money. Alaghband says he had no idea that WestLB had filed a complaint against him.

Alaghband says he was confident he could pull together a second buyout. He lined up Deutsche Bank and PWG Capital LLC, a New York-based private equity fund managed by Paul Pearson, to raise 400 million euros. The deal fell through after Kloeckner’s new finance chief, Derrick Noe, declined to provide the financial data needed for due diligence, Alaghband says. Noe and Deutsche Bank declined to comment.

PWG then offered to buy Kloeckner with New York-based investment company RFR Holding LLC, which owns the city’s Seagram Building, Pearson says. That offer also failed because Kloeckner didn’t provide the information required to assess the offer, Alaghband alleged in his lawsuit.

`No Interest’

In January 2003, Swiss police arrested Alaghband as he was en route to Davos and took him to jail in Zurich. During his confinement, Alaghband says, he contacted Bahrain-based Investcorp SA to join the PWG bid. Again, Kloeckner declined to provide information.

“Our offer went through numerous extensions, but it became apparent that between WestLB and Kloeckner, there was no interest in the transaction,” Pearson says. Investcorp and RFR declined to comment.

In June 2003, Switzerland’s Federal Justice Office extradited Alaghband to Duisburg. “I shared a cell with a Ukrainian burglar who slept all day and stayed up all night,” Alaghband says, recalling his first two weeks in the German jail. “The toilet was in the middle of the cell. You learn to appreciate the simple things in life.”

In December, he won two court cases against the German prosecutors to gain his release after paying 6 million euros as bail.

Promising Turn

His case also began to take a more promising turn. A month earlier, in November 2003, prosecutor Englisch’s team raided WestLB’s offices. They discovered a January 2002 letter from Kloeckner CEO Muesers to WestLB that warned the steel distributor faced bankruptcy because the Alaghbands planned to drain its cash.

In another letter, Schmidt, the supervisory board vice chairman, Kloeckner’s highest-ranking union member, urged WestLB’s Ringel to stop Kloeckner’s conversion to a GmbH. Soon after the Schmidt letter, WestLB contacted the law firm Buesing, Mueffelman & Theye in Bremen to develop a strategy to prevent the GmbH transformation, documents viewed by Bloomberg show.

Other documents portray a link between WestLB and Droege, the manager the bank recommended as Alaghband’s trustee. A month before introducing Droege to Alaghband, WestLB offered Droege a loan of more than 100 million euros to acquire Kloeckner shares, documents uncovered by the prosecutors show. That raises the question about Droege’s loyalties, Alaghband says.

In June 2004, prosecutors dropped the fraud investigation. “The WestLB loan to Balli had always been secured,” Englisch says. “WestLB had never suffered any damage.”

Breach of Trust

Englisch’s office is still looking into breach-of-trust allegations that Alaghband failed to act in Kloeckner’s best interest and broke German stock corporation law.

Without the possibility of fraud, there was never a need to detain Alaghband, says Christoph Rueckel, a partner at Atlanta-based Bridgehouse Law, who heads Alaghband’s legal team.

“We told the prosecutors, `Just read the files, read the loan documents, because once you do, you’ll realize there could never have been any fraud,”’ he says. “Their idea of an investigation is to throw you in jail and wait till you confess.”

The bank was looking out for its interests, says WestLB’s Obermeier, speaking in his Dusseldorf office. “We had made a loan to Balli, and they could not repay it,” he says. “We had to take action to protect ourselves.”

Poor Steel Market

In August, Muesers, who resigned as Kloeckner CEO in 2002 and is himself under investigation for his role in helping the Alaghbands sell Kloeckner assets, broke his two-year silence. He told Germany’s Focus, a weekly current-affairs magazine, that the Alaghbands were victims of a poor steel market at the time of the takeover.

“If steel prices had been as high then as they are today, Kloeckner would still be part of Balli and the Alaghbands would be the kings,” he told Focus.

Muesers declined to be interviewed for this article. Last year, prices for European hot-rolled coil steel for export surged 94 percent to $585 a ton, according to Metal Bulletin prices on the Bloomberg Professional service. It was the biggest annual gain since 1987.

Alaghband’s timing and intention to transform Kloeckner to a GmbH company may determine the outcome of the breach-of-trust probe, Englisch says.

“The Alaghbands could only finance the deal with assets of Kloeckner,” he says. “Using these assets would have only been possible after the conversion of the company into a GmbH.”

Legal Ambiguity

Germany’s breach-of-trust law applies broadly to cases of alleged failure of fiduciary duties that lead to damages, says Bernsmann, the Bochum University professor.

Franz Salditt, a lawyer from Neuwied, Germany, who is on Alaghband’s legal team, says the law’s ambiguity may be problematic for prosecutors. “It has to be a serious breach to warrant a criminal charge,” he says.

Since the Kloeckner takeover, WestLB has fallen on hard times. In June 2003, the bank’s supervisory board ousted CEO Juergen Sengera, 62. Frankfurt-based regulator BaFin said WestLB didn’t provide for bad loans and writedowns to cover risky investments after the bank lost 1.7 billion euros in 2002.

In November 2003, the Dusseldorf prosecutor began investigating WestLB’s financing of Box Clever, the television rental company. The loan contributed 650 million euros in losses to a 4 billion-euro writedown at WestLB in 2002 and 2003.

Fifteen months after his release from jail, Alaghband is back to running Balli. Last year, the company increased revenue 50 percent to $2 billion as demand and prices for steel surged.

`You Fix It’

Vahid AlaghbandAlaghband is busy as a member of the international council of the Asia Society, the New York-based organization that John D. Rockefeller founded to promote understanding between Asia and the U.S.

Alaghband says even if the Kloeckner acquisition ran afoul of German laws, he could have resolved the differences.

“In any cross-border merger, there are things that fall between the cracks,” he says. “When you have a plumbing problem, you fix it, not blow up the house.”

As for the circumstances that stripped the Iranian millionaire’s fortune in the 1970s and then allowed him to rebuild, only to have his freedom and his property seized again, Alaghband says: “I had lost my assets in Iran once. I didn’t think it was going to happen again in Germany, in the middle of Europe.”

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