Aristocrat faces fraud case - Friday 12th of August 2005

ARISTOCRAT Leisure (all.ASX:Quote,News), the worlds second-largest slot machine maker, has lost a claim against Deutsche Bank over a disputed bond issue and was ordered to respond to allegations of fraud in a US court, court documents show.

The New York-based court has dismissed a claim by the Australian company against Deutsche Bank last December over the interpretation of a clause in a bond that was convertible into Aristocrat shares. The issuance of the bond was handled by Deutsche Bank.

The court has ordered Aristocrat (all.ASX:Quote,News) to respond to counter claims that were filed by a group of hedge funds alleging "fraud and breach of the covenant of the obligation of good faith and fair dealing" over Aristocrats interpretation of the clause, according to the documents, seen by Reuters yesterday.

Aristocrat said in a statement to the Australian stock exchange yesterday that it would appeal against the courts interpretation of the bonds indenture.

Aristocrat shares fell in early trade, down 6 cents to $12.89 at 10:30 AEST. The stock has, however, regained ground in afternoon trading and has been a stand-out performer on the Australian Stock Exchange, returning around 140 over the past 12 months.

Tim Allerton, a spokesman for Aristocrat, said the company would not be making any further comment on the case. The company has denied any accusations of fraudulent behaviour in the past.

Deutsche Bank would not comment.

Aristocrat had argued that a clause in the $130-million convertible bonds indenture, put together by Deutsche Bank, allowed it to cancel the rights of investors to convert the securities into shares.

Typically, investors will convert their bonds into shares after notice of a call when it is profitable to do so.

Aristocrat claimed that the wording of the clause cancelled this right and that Deutsche Bank, which is also Trustee, was refusing to correct errors in the prospectus that were stopping it from calling the bond.

A group of hedge funds had filed a counterclaim against Aristocrat alleging that its attempt to cancel those conversion rights was fraudulent.

Investors alleged in court documents seen by Reuters that if the clause did allow Aristocrat to call and cancel conversion rights then the company acted "knowingly or recklessly in misrepresenting its understanding of the terms of the indenture".

This, the investors alleged, would be a breach of rule 10b-5 of the U.S. Securities and Exchange Act, which prohibits deceptive statements and omissions in the sales of securities.

While the courts ruling against Aristocrats claim against Deutsche Bank means that bondholders would not be able to pursue the company with accusations of fraudulent behaviour – unless the ruling is overruled on appeal – the court has nevertheless asked Aristocrat to respond.

"Plaintiff is ordered to respond to the intervening defendant bondholders counter-claims, stayed pending the disposition of this motion," the court said.

Aristocrat has been ordered to appear in court on August 31.

With Aristocrat shares trading at more than 180 per cent of the face value of the bond when it was called, investors stood to lose more than $US100 million ($130.3 million) if they were redeemed at just the price they were issued at in 2001.

The US court has yet to rule on possible damages, but its decision means that fund managers could receive shares that would dilute Aristocrats current share base by about 7 percent.

"We are delighted with the progress so far. Now we are just hoping that the judge will grant us the stock and all the damages that have flowed out of Aristocrats delay," said one bond holder who declined to be named.

Aristocrat was pitted against some of the convertible bond markets biggest names, including KBC Financial Products, part of Belgian banking group KBC, UFJ International PLC, which is owned by Japanese banking giant UFJ, and Alexandra Global Master Fund and London-based hedge fund CQS Ltd.

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