Thomas Badian was expecting a package, just not this one. Standing in his doorway, smiling, he opened the envelope a courier handed to him. Then he froze, and the color drained from his face. It was over: after two years overseas, the former New York City hedge-fund operator had been located. Badian slammed the door of his posh Vienna, Austria, apartment in the heart of the city's embassy quarter--but not before being officially served with a civil lawsuit linking him to the beleaguered U.S. commodities firm Refco and tying him and Refco to a type of fraud that some argue has destroyed thousands of companies and bilked investors out of billions of dollars.
The boyish-looking Badian, 36, of East European descent, seems an unlikely key figure in a high-stakes Wall Street intrigue. Yet long-standing criminal and civil charges place Badian at the center of a scheme to lend Arizona software developer Sedona much needed operating capital, then trigger the collapse of its stock and profit from the company's demise. This pattern is also alleged in the civil suit handed to Badian on Aug. 8 in his apartment in Austria--only this time the mark was pet-supplies company Pet Quarters, based in Lonoke, Ark.
Three years ago, Badian paid a $1 million fine to settle a Securities and Exchange Commission (SEC) charge that he had manipulated Sedona's shares. Related criminal charges were filed a few months later, but by then Badian had fled. His whereabouts were recently given to U.S. Attorney Michael Garcia in New York City, whose office is handling the criminal case. Garcia's office said only that the case remains open.
Yet the Badian episode might have been forgotten if not for its ties to Refco, which last month admitted to reporting false results after hiding $430 million of uncollectible debt. Refco CEO Phillip Bennett was charged with fraud, and his company sank into bankruptcy protection within days. It turns out, plaintiff lawyers say, that Badian had been making some of his Sedona trades through Refco, which has acknowledged an SEC investigation.
Looking the other way while clients manipulated the shares of small companies through what's known as naked short selling appears to have been yet another questionable way of doing business at Refco. Short selling is legal: you borrow stock, then sell it and hope to buy it back at a lower price, profiting from the difference. But naked short selling is illegal, barring certain exceptions for brokers trying to maintain an orderly market. In naked short selling, you execute the sale without borrowing the stock. The SEC noted in a report last year the "pervasiveness" of the practice. When not caught, this kind of selling has no limits and allows a seller to drive down a stock.