Procedo chief arrested on suspicion of vast fraud: Banks lash out with charges but fail to agree on how to spread the damage

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DIETER KLINDWORTH, managing director and part-owner of the bankrupt Procedo factoring firm, was arrested in Germany yesterday on suspicion of fraud.

The Bielefield state prosecutor said Mr Klindworth had been arrested just before noon. Mr Klindworth had reportedly said earlier: 'I understand that these things must be investigated . . . But I really don't have anything to blame myself for.'

The move follows the arrest for fraud early last week of the entire four-member board of Procedo's largest customer, Balsam, a maker of artificial sports surfaces.

The collapse of Procedo may cost creditor banks as much as DM2bn ( pounds 826m).

Representatives of Procedo's 50 creditor banks broke off a noisy meeting outside Frankfurt yesterday without getting any nearer to agreeing on sharing out responsibilities for the factoring firm's collapse. The banks discussed the possibility of Procedo being sold as a shell to certain interested creditors, who could then keep the firm going in an effort to recover the loans.

Mr Klindworth's arrest came after BfG bank, owed DM80m by Procedo, laid fraud charges against the founder of Germany's biggest factoring firm. The Frankfurt banking establishment, eager for revenge at this latest humiliation following the Metallgesellschaft and Schneider fiascos earlier this year, is convinced that, far from being a victim of large-scale fraud allegedly carried out by Balsam, Procedo was part of a fraud involving bank loans for fake invoices.

The Balsam directors are accused of having forged invoices and auditors' certificates to raise cash from Procedo, which the factoring company advanced in return for taking over responsibility for collecting payment on the invoices. Procedo, which carried out more than two-thirds of its business with Balsam, covered the cash advances through bank loans.

Balsam directors had been using the cash raised from the allegedly fake invoices to speculate on the money markets, running up currency options contracts totalling more than DM10bn.

Because they had been reasonably successful, they had managed to make enough money to disguise the weakness of the company's flooring business.

Arthur Andersen, the auditor, confirmed that invoice certificates issued in its name on behalf of Procedo and Balsam were false. Its investigations showed that certificates, apparently originating from Arthur Andersen's office in St Louis in the United States, were sent to the factoring group.

The auditor said it had never been asked to certify invoices from Balsam or Procedo.

The administrator of Procedo, which filed for bankruptcy last week, said it had debts of DM1.8bn, of which the banks are expected to lose a large part. The banks also stand to lose all their direct debts to Balsam, estimated at between DM300m and DM500m.

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