DOKUMENT: Audit Jiřího Čunka - Could H&B Real have gaind....

In order to reconstruct the circumstances surrounding the formation of Vsetinske Byty, Kroll interviewed primary sources, reviewed documents in Mr. Cunek’s police file, and consulted other Czech public records.

Vsetinske Byty was established in April 1999. The company’s purpose, stated by Mr. Cunek and other Vsetin officials, was to buy some 700 apartments from Zbrojovka Vsetin (“Zbrojovka”), the bankrupt Vsetin-based maker of arms and industrial machinery. Mr. Cunek declared on a number of occasions that the city wanted to buy the apartments to “prevent speculators” from exploiting their tenants. Mr. Cunek promised to sell the apartments to tenants at the lowest possible price.

Zbrojovka once was Vsetin’s dominant employer. It had as many as 7,000 workers and housed many of them in hundreds of company-owned flats. In 1998, after Zbrojovka filed for bankruptcy at the Regional Business Court in Ostrava, the company’s assets were administered by bankruptcy trustee Jan Zetocha. Zbrojovka’s bankruptcy petition signed by Mr. Zetocha valued the company’s 657 apartments at CZK 27 million. The court approved Mr. Zetocha’s bankruptcy petition on 17 December 1998 and Mr. Zetocha solicited offers for the flats. (13)

According to Mr. Zetocha’s sworn police testimony only two companies bid for the apartments: Helago s.r.o. and Valachia s.r.o.

Valachia was immediately disqualified because it did not enter a firm bid and thus failed to meet the conditions of the tender. (14) On 19 December 1998, Helago sent a letter to Mr. Zetocha and offered to buy Zbrojovka’s apartments for CZK 42 million. (15)

But Helago failed to pay a required 10% deposit and was disqualified as well.16 Mr. Zetocha also told the police that Helago changed its offer just before the bid was placed. “I thought that something fishy was going on,” he testified.17 It appears that Helago lowered the bid from CZK 60 million to CZK 42 million just before it entered its bid. Mr. Zetocha told the police in his statement that the CZK 60 million figure was whited-out in the typed offer and somebody wrote in CZK 42 million by hand.

13 “Usneseni,” jednaci cislo 8 K 32/96, Krajsky obchodni soud v Ostrave, 12/17/1998

14 Mr. Zetocha police deposition, taken on May 2, 2007, Mr. Cunek file page 1662

15 Letter from Helago to Jan Mr. Zetocha, dated December 12, 1998, Mr. Cunek file page 1675

16 Osvedceni o vyhodnoceni verejneho navrhu, December 21, 1998, Mr. Cunek file page 1676

17 Mr. Zetocha police deposition, taken on May 2, 2007, Mr. Cunek file page 1663

Mr. Zetocha called a creditors’ meeting for 13 January 1999. At that meeting he started discussing Vsetin’s interest in buying the Zbrojovka apartments. Mr. Zetocha said that Mr. Cunek, who was elected Mayor in December 1998, proposed to match the CZK 42 million price offered by Helago. (18)

COOP Therm Attempts to Buy Zbrojovka Apartments

One other company was interested in buying the apartments in 1998: COOP Therm. COOP Therm was a utilities company based in the Czech town of Jindrichuv Hradec. In early 1998 Zbrojovka hired COOP Therm to manage the company apartments, administer apartment leases, collect and enforce delinquent rent payments, carry out repairs, and provided other services. (19)

COOP Therm knew the Zbrojovka apartments well. In the 1990s the company installed flowmeters in the flats. It claims it is still owed CZK 1,800,000 for the job.

COOP Therm had twice proposed to buy the Zbrojovka apartments: in August 1997 and again in March 1998. (20) The company offered to assume CZK 5,300,000 in debt Zbrojovka owed to heat, water and sewer suppliers. (21)

It is not clear why COOP Therm did not enter a bid for the flats in the bankruptcy sale.

COOP Therm’s general manager Stepan Gargos told the police that COOP Therm initially offered to pay “around CZK 30 million” for the apartments. He stated he negotiated the purchase with Zbrojovka’s chief executive officer Rostislav Levicek. He told the police that he “did not recall that the city would be too interested” in the property at the time. (22)

Mr. Gargos also testified that he was contacted by Petr Hurta during the second half of 1998. (This would be before Mr. Cunek was elected Mayor.) Mr. Gargos stated that Mr. Hurta “asked us for a meeting which took place at their headquarters in Vsetin. At this meeting he asked us whether our company would loan his firm money to purchase these apartments. We declined this because we were interested in buying the apartments. We also declined his request to let his company manage the apartments. That’s how we parted.” (23)

Mr. Gargos confirmed to Kroll his meeting with Mr. Hurta.

18 Mr. Zetocha police deposition, taken on May 2, 2007, Mr. Cunek file page 1662

19 Smlouva o obstarani spravy bytu a nebytovych proctor, March 25, 1998. Mr. Cunek file page 1619

20 Letter from Stepan Gargos to ing. Fic, COOP Therm, August 14, 1997, Mr. Cunek file page 1615

21 Smlouva o budoucim prevzeti dluhu, March 25, 1998, Mr. Cunek file page 1629

22 Gargos police deposition, taken on April 19, 2007, Mr. Cunek file page 979

23 Gargos police deposition, taken on April 19, 2007, Mr. Cunek file page 980

Mr. Gargos also testified that sometime after the meeting with Mr. Hurta, he received a phone call from Mr. Cunek. He said that Mr. Cunek asked him whether he had made up his mind about how much he was willing to pay for the apartments. “I answered that my partners agreed to make the purchase for CZK 41 million,” he testified. Mr. Gargos stated that “during this call Mr. Cunek was talking to some other person – this person must have been standing next to him – and repeated that we wanted to pay CZK 41 million for the apartments.” (24)

Mr. Gargos told Kroll that he believed that the person Mr. Cunek was talking to was Hurta. Kroll asked Mr. Cunek about the telephone call and he denied that he was talking with Hurta. “It was most likely one of my colleagues,” he said.

Documents in Mr. Cunek’s police file show that Gargos and Mr. Cunek discussed details of the sale. On 5 February 1999, Gargos sent Mr. Cunek a letter announcing that COOP Therm executives “approved the result of our negotiations” and decided to buy the Zbrojovka apartments together with the city of Vsetin. Mr. Gargos said that COOP Therm would finance the purchase with its own money and proposed to discuss “technical aspects” of the contract between 15 February and 19 February 1999. (25)

On 1 March 1999, Mr. Cunek sent Mr. Gargos a set of six conditions the city required for the deal to go through. The letter put the sale price at CZK 42,009,999, with a 10% down payment, and asked Mr. Gargos to reply by 3 March 1999. (26)

Mr. Gargos replied on 3 March 1999 and agreed to all of Mr. Cunek’s conditions including the new price. His letter also included a detailed breakdown of costs and profits. (27)

Mr. Gargos testified that this was the last time he heard from Mr. Cunek regarding the apartment deal. “We never received any official reply,” Mr. Gargos told the police. (28) On 19 May 1999, Mr. Gargos received a letter from Mr. Zetocha. Mr. Zetocha wrote that he cancelled COOP Therm’s management contract and that the city of Vsetin now owned the apartments. (29) H&B Real became the new manager.

Mr. Gargos told Kroll that he felt that Vsetin “played a dirty trick on us.” He said that he visited Vsetin “once a week or once every two weeks. I was not invited to speak before the city assembly.”

Mr. Gargos told Kroll that at the time the deal was awarded to H&B Real, “there were rumours that [Hurta] was building [Mr. Cunek’s] house. However, Kroll notes that Mr. Cunek did not start building his house until 2001-2002. Mr. Cunek was granted his construction permit on 8 August 2001. Records show that the Mr. Cunek requested to commence building on 5 December 2001.

24 Gargos police deposition, taken on April 19, 2007, Mr. Cunek file page 980

25 Letter from Gargos to Mr. Cunek, February 5, 1999, Mr. Cunek file page 1035

26 Koupe bytu od upadce Zbrojovky Vsetin, a.s. – navrh podminek , March 1, 1999, Mr. Cunek file page 1036

27 Gargos reply to Mr. Cunek, March 3, 1999, Mr. Cunek file page 1037

28 Gargos police deposition, taken on April 19, 2007, Mr. Cunek file page 980

29 Mr. Zetocha letter to Gargos, May 19, 1999, Mr. Cunek file page 1039

Vsetin city deputies selected H&B Real as the town’s partner in Vsetinske Byty at a meeting on 16 March 1999. It appears that the meeting was attended by all 21 deputies, including Mr. Cunek, although it is not clear that all 21 deputies were present when Vsetinske Byty was discussed. Vsetinske Byty was No. 20 on the meeting agenda out of 23.

The proposal to select a partner for the city in Vsetinske Byty was presented by Mr. Cunek at the meeting. Two possible partners were introduced: COOP Therm and H&B Real. Kroll notes that Petr Hurta was present and spoke at the meeting. Nobody from COOP Therm was present. (30) Mr. Gargos told Kroll that he was not invited.

Mr. Hurta told the deputies that he had carried out market research and that he expected to sell 70% of the apartments within the first year and 90% within three years. (31)

Mr. Cunek proposed to vote on the proposal after Mr. Hurta finished speaking. He first asked the deputies to vote on selecting COOP Therm “based on the documents and calculations presented.” The documents showed that COOP Therm planned to sell the flats at a cost per square metre of CZK 2,087.40. H&B Real planned to sell at a cost per square metre of CZK 1,907.00. Nobody supported COOP Therm. Sixteen deputies voted for choosing Hurta. (32)

The apartments eventually sold for CZK 1,963 per square metre against an average market price in Vsetin of CZK 7,000.

Based on the meeting minutes, the discussion regarding Vsetinske Byty likely didn’t take more than 10 minutes. (33) Several of Vsetin deputies were questioned about the meeting by the police in 2007. The vast majority could not recall exactly why H&B Real was selected and why COOP Therm was not invited to the meeting.

Kroll asked Mr. Cunek about the vote and whether Mr. Gargos was invited. He said that since H&B Real had already been endorsed by the city finance committee, he only invited Mr. Hurta and not Mr. Gargos. He said that deputies effectively rubberstamped the decision made by the finance committee.

However, the endorsement of the finance committee is not apparent from the minutes of the city hall meeting. It is not clear either who were the members of the committee that approved the transaction with Mr. Hurta. Deputy Mayor Mr. Kudlik told Kroll that the committee was an “advisory” body consisting of “appointed members selected by the [elected] deputies.” He said that “their recommendations are not binding.”

30 City hall meeting minutes from March 16 meeting, Mr. Cunek file, page not numbered

31 City hall meeting minutes from March 16 meeting, Mr. Cunek file, page not numbered

32 City hall meeting minutes from March 16 meeting, Mr. Cunek file, page not numbered

33 City hall meeting minutes from March 16 meeting, Mr. Cunek file, page not numbered

From the police file it seems that the police did not press Mr. Cunek on the role of the Finance committee or examine it further.

Vsetinske Byty was registered as a corporation on 26 April 1999. The company took out a loan from Komercni Banka (KB) for CZK 42,010,000 which was used to acquire the Zbrojovka apartments. Mr. Cunek and the General Manager of H&B Real, Mr. Hurta, were the directors of the joint venture.

The flats went on sale from April 1999 for an average price of CZK 120,000. In the first two years, the majority of the portfolio was sold. From 1 July 1999 to 15 July 2000, 559 apartments were sold, for a total of CZK 60,706,977.60 at an average price of CZK 1963 per square metre.

In October 2001, 98 apartments and 1 garage remained unsold. Sales in 2001 had dropped to CZK 215,593. An independent specialist, Vlastimil Zajicek, was tasked by the council with valuing their 51 per cent stake.

On 9 October 2001, the town council discussed the sale of Vsetinske Byty. According to the notes from the meeting, the item was proposed by the mayor. The other motions for the day’s meeting were put forward by other officials.

The vote was carried by 16 votes. The mayor, in proposing the disposal, stated that he had the information on the sale with him for review, but had not provided it to everyone present because it was voluminous. Ms. Matochova, head of the finance department, and Ing. Pucek, the secretary of the council, were appointed to oversee the project.

The agreement to transfer control of Vsetinske Byty to H&B Real was signed on 23 October 2001.

Mr. Zajicek valued the stake at CZK 3,618,000.

Kroll notes that in calculating the company’s liabilities, Mr. Zajicek did not include the reserve, CZK 11,898,000, but included in short term loans a deferred tax charge of CZK 3,970,000. The combined effect of these is to significantly reduce the value of the joint venture.

The cash reserve was intended to pay for repairs on each of the apartments. As the apartments were sold, the cash reserve should have reduced proportionately. Why there was such a large sum when so many of the properties had been sold raises questions about the joint venture’s management.

Messrs. Cunek, Zajicek and Hurta told Kroll that the reserve was just an accounting item and did not represent actual cash. An independent court appraiser contacted by Kroll agreed with this interpretation. Further research is required to fully ascertain the state of the matter.

Mr. Zajicek also does not mention who were the short term creditors/debtors to the business. H&B Real had previously taken short term loans from Vsetinske Byty.

An agreement was signed with H&B Real on 23 October 2001, transferring the city’s stake. Mr. Cunek resigned as a director.

The Mr. Zajicek valuation became a matter of dispute and the police hired an independent appraiser, NOVA s.r.o., to determine whether the sale price was too low.

Using Mr. Zajicek’s numbers, NOVA valued the Vsetin stake in Vsetinske Byty at CZK 6.7 million in February 2007. NOVA’s chief executive Alexander Beran told Kroll that NOVA completed another valuation of Vsetinske Byty in April 2007. That valuation was based on Vsetinske Byty’s books rather than figures provided by Mr. Zajicek and involved a three day visit to Vsetin by four NOVA auditors. Also, Mr. Beran told the police that he met with Ms. Hurtova in March 2007 and that Ms. Hurtova cooperated and provided documents for his audit.

However, NOVA’s April 2007 report is missing from Mr. Cunek’s police file. Kroll asked Mr. Beran to provide another copy which he has not done to date. Without this valuation it is hard to determine whether the amount paid by H&B Real was a fair price.

Kroll finds it significant however that H&B Real was left with some 100 apartments after the buy-out. At the time (1999-2002), these apartments were selling for about CZK 2,000 per square metre. According to Zajicek, the market price for an apartment in Vsetin was CZK 7,000 per square metre in 2001. But Zajicek valued the unsold apartments at just CZK 327 per square metre. Their tenants apparently did not want to buy their flats and Hurta could not evict them because they had unrestricted leases. Such apartments had a total size of 3,558 square metres.

For comparison, a Czech real estate agent researched prices for Kroll and found that Vsetinsk Byty apartments would “sell only in exceptional circumstances for prices below CZK 20,000 per square metre today.” This means that should one of the unsold apartments now come up for sale, Hurta’s profit would be CZK 19,673 per square metre. This suggests that a fraction of the unsold apartments, sold today, would be worth more than the amount paid by H&B Real to the city.

Mr. Cunek and Deputy Mayor Kudlik have repeatedly told Kroll that Mr. Hurta was not required to pay the city any money beyond the CZK 51,000 Vsetin initially invested. They said that Mr. Hurta carried all of the economic risk of the transaction. Mr. Kudlik pointed out that there was a recession in 1998 and “it was not certain at all” that Vsetinske Byty [would] be able to sell the Zbrojovka apartments. He said that the contract with Mr. Hurta was “written in such a way to allow the city to exit after a year if sales went poorly.”

Mr. Cunek stressed that the city did not invest any money in the deal. He also stressed that the deal appeared lucrative only in hindsight.

Kroll has reviewed the founding statutes of Vsetinske Byty and found that the city initially set in writing that it would transfer its share to Mr. Hurta for CZK 51,000 one year after it offers the last apartment for sale. However on 9 April 1999, the city amended the clause. It anticipated that the market value of its share may be more than the nominal value of CZK 51,000. It reserved the right for itself to name the price for its 51% stake and give Mr. Hurta the right of first refusal. If Mr. Hurta declined to pay that price in 30 days, the city could sell its stake to a third party. The statutes also say that “neither party may unilaterally exit the company” which means that the financial risk of the development was shared between both parties.

Mr. Cunek also said that when Vsetinske Byty received a multi-million tax rebate from the apartments sales, the city pressured Mr. Hurta to distribute the money to the apartment buyers, rather than keeping it. Kroll has been able to partially validate this claim. We were able to validate that a letter from Vsetinske Byty regarding the back tax to apartment buyers exists.