In a rare turn up for the books, the head of state of Latin America’s largest economy just accused the country’s richest billionaire of engaging in blatant accounting fraud.
In an interview with Rede TV! last Thursday (Feb 2), Brazil’s recently reelected President Luiz Inácio Lula da Silva, popularly known as Lula, laid into Brazil’s richest man, Jorge Paulo Lemann, accusing him of engaging in fraud. Together with his partners at the Brazilian-US investment firm 3G Capital, Lemann is one of the largest shareholders of nationwide retailer Americanas, which recently declared bankruptcy following the “discovery” of 20 billion real (US$ 3.87 billion) of accounting “inconsistencies”.
Lemann is a Brazilian investment banker, businessman and modern-day “philanthropist” with dual Brazilian and Swiss citizenship. His wealth is largely tied up in the investment fund he co-founded, 3G Capital, whose holdings include household brands such as Burger King, Kraft Heinz and Anheuser-Busch Inbe, the world’s biggest beer company. 3G Capital is also close partners with Warren Buffet’s Berkshire Hathaway. But the sudden collapse of Americanas is doing serious damage to Lemann and his partners’ reputation, says Lula:
“He was sold as the epitome of the successful businessman on planet Earth. He was the guy who funded young people to study at Harvard with a view to entering future governments. He was a guy who spoke out against corruption every day. And then he commits a fraud that could cost R$40 billion (USD7.76 billion).”
Brazil’s Worst Ever Corporate Scandal?
Lula was rounding down; Americanas’ total debt is actually R$43 billion (USD 8.35 billion). The company is currently undergoing judicial review after filing for chapter 15 bankruptcy in the US in late January. With shareholders and creditors staring at huge losses, thousands of suppliers holding billions of dollars of unpaid bills and tens of thousands of workers possibly facing the axe, the blame game is now in full swing for what some are calling Brazil’s worst ever corporate scandal.
Lula compared Lemann to Eike Batista, the mining magnate who was formerly Brazil’s richest man before suffering a vertiginous fall from grace a decade ago. Between March 2012 and January 2014, Batista’s wealth plunged by over 100%, from a peak net worth of $32 billion to a negative net worth. In 2018, he was sentenced to 30 years’ imprisonment for bribing former Rio de Janeiro governor Sergio Cabral with the goal of obtaining state government contracts.
Lula also lambasted the “financial markets” for their rank hypocrisy:
[W]hat I get upset about is the following. Any word you say on [social spending], any word, the market gets nervous, the market gets very angry. And now one of their own plunders BRL 40 billion from a company that seemed to be the healthiest on the planet and the market says nothing, it remains silent.
Lula isn’t the only major player in Brazil that is blaming Americanas’ collapse on Lemann and two of his partners at 3G Capital (which has no involvement with Americanas), Marcel Telles and Carlos Alberto Sicupira, who are respectively Brazil’s third and fourth richest billionaires. In fact, this is one of those rare occasions where the super rich have begun turning on each other in the most public of ways.
Banks Against Billionaires
André Esteves is Brazil’s seventh richest person. He is also a major shareholder of Brazilian lender BTG Pactual, one of Americanas’ biggest creditors. And BTG recently called the Americanas case “the largest corporate fraud in the country’s history”. As the FT put it, Americanas’ “mysterious” financial hole “has pitted banks against billionaires.”
In an attempt to overturn part of Americanas’ protection from creditors, BTG’s lawyers described the case as “the sad embodiment of a country”:
The three richest men (with assets valued at 180 billion real), anointed as some sort of demigods of ‘good’ global capitalism, are caught with their hands in the till of what, since 1982, has been one of their leading companies.
Other major creditors include Deutsche Bank, with exposure of around $1 billion, though the bank insists it has neither direct loan or credit exposure to the retailer; Bradesco, Brazil’s second largest bank by assets ($925 million); Banco Santander SA’s Brazil unit ($715 million); Itau Unibanco Holding SA ($560 million), Banco Safra SA ($480 million) and Banco do Brasil SA ($270 million). Both Deutsche Bank and Safra have questioned the accuracy of Americanas’ claims.
But one thing that is beyond doubt is that fraud was committed, says Daniel Gerner, a lawyer representing 20 minority shareholders in Americanas. “The fraud was malicious. It was a procedure orchestrated and accepted by all involved and which generated fantastic profits for the distribution of bonuses for years.”
There are still a lot of unknowns about the cause of Americanas’ collapse. What is known is that the $3.9 billion of accounting inconsistencies were a direct result of “supplier financing operations” that were not adequately reflected in its accounting.
Here’s how it probably went down. Little by little Americanas began paying its suppliers later and later. After a while, a growing assortment of banks and other financial intermediaries began offering to pay Americanas’ suppliers in advance, at a charge. Americanas would then be responsible for the repayment of these loans, including interest payments. The amount it owed would steadily grow, but the execs did not have to disclose the money as debt, which meant they could keep reporting nice juicy profits and pocketing their bonuses. Until the financial hole on Americanas’ books was suddenly too big to hide or fill.
One of the favourite management books of 3G co-founder Marcel Telles is Bob Fifer’s 1993 bestseller, Double Your Profits in Six Months or Less. The book’s chapter on accounts payable includes a recommendation to put off paying your company’s suppliers for as long as feasibly possible. As some pundits are now speculating, Telles and his associates appear to have taken Fifer’s advice to the absolute limit, while using supply chain finance to hide the growing debt pile for as long as possible.
Conspicuous Silence
This is the biggest problem with (and most important attraction of) supply chain finance: the debt is usually not disclosed, which means that investors, creditors and regulators have no idea how much debt a company is actually carrying, until it is too late. It also means that investors and creditors end up bearing much larger losses when the company finally — and often very suddenly — collapses, as has already occurred with Abengoa, which defaulted on its debt for the first time in 2015, Carillion (2018), NMC Health (2020) and now Americanas.
Lemann, Telles and Sicupira remained silent on the issue, even days after Americanas filed for bankruptcy protection. But the men finally published a note claiming they had no idea of the accounting irregularities at the company and would never give their blessing to such practices.
They also said that the retailer had employed one of “the most respected independent auditing firms in the world, PwC,” as if that were some kind of defense. As I noted in my Jan 13 post, Another Supply Chain Finance-Enabled Crisis Hits, This Time in Brazil, every high-profile business collapse caused (or at least exacerbated) by supply chain finance issues has one thing in common: the auditors have failed to spot (or at least report) any of the glaring irregularities, until it is too late.
Also, Lemann, Telles and Sicupira have a storied history of bending or breaking the rules and norms of business and accounting practices, and not just in Brazil. In 2005, they were “accused of abusing control power after distorting the objectives of their beverage company Ambev’s stock option plan,” said BTG’s lawyers. The three fund managers were “also accused, as directors of Ambev, of having violated their fiduciary duties to the company.”
In 2015, 3G Capital teamed up with Warren Buffet’s Berkshire Hathaway to bring about the merger of Kraft with Heinz. The resulting company — the fifth largest in the global food and beverage sector — has been plagued with accounting issues. The most important was a mind-watering $15.4 billion impairment charge in 2019 — the consequence of a $7.1 billion goodwill impairment in the US Refrigerated and Canada Retail unit and an $8.3 billion impairment related to intangible assets belonging to Kraft and Oscar Mayer. In the aftermath, Kraft Heinz posted a $12.6 billion loss after taxes.
As The Economist warned at the time, 3G’s “widely admired” business model of “buying venerable firms and using debt and surgical cost-cuts to boost their financial returns” was beginning to look like a fiasco. At that time, 3G-owned firms owed at least $150 billion. There was, the article noted, a “queasy sense that 3G’s approach of dealmaking, squeezing costs and heavy debts, can be found at an alarming number of other firms.”
That is already clearly the case with Americanas. Concerns are now growing that similar problems could also affect Ambev and Eletrobrás, Brazil’s electric utility in whose controversial privatization both Lemann and PwC allegedly played a key role.
Last week, reports surfaced suggesting that Ambev may owe billions of real in local taxes. The Brazilian Beer Industry Association (CervBrasil), which represents smaller producers than Ambev, has accused the company of accumulating 30 billion real ($5.9 billion) of tax credits that it is not entitled to, enabling it to make more profit by embezzling the treasury. As the director of the association notes, while the case of Americanas involves a multi-billion dollar debt with banks and suppliers, in the case of Ambev the debt would be with federal, state and municipal authorities.
The National Collective of Electricians (CNE, in Portuguese) has warned that Eletrobrás, which generates roughly one-third of all of Brazil’s electricity, could also be at risk. From Brasil de Fato (machine translated):
Last year, the company was privatized by the government of former President Jair Bolsonaro (Liberal Party). Lemann’s 3G Capital took 10 percent of the company’s preferred stock…
According to CNE, Lemann and his partners were the ones who pushed for the privatization of the former state-owned company. They installed Wilson Ferreira junior in the presidency of Eletrobrás and call the shots at the company to this day. “Lemann’s 3G group put Elvira Presta as CFO of Eletrobrás during Themer’s presidential term with a view to preparing the company to be privatized,” reads a report by CNE.
“Lemann’s 3G group is a corporate leech: it acquires healthy companies that have consolidated their position in the market, cuts expenses to their limits, and increases profit margins at the expense of competitiveness until companies become bankrupt. But by then, the owners of 3G have already multiplied their low investment,” CNE added.
But now the spotlight of scrutiny is once again on 3G’s business practices. With President Lula now joining the fracas and top Brazilian banks threatening to go after personal assets belonging to Lemann, Telles and Sicupira, the pressure on the three billionaires to reach a negotiated settlement with Americanas’ creditors is rising.
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I see PwC is the auditor of record. Sometimes these huge audit firms get what’s coming to them, at least when looking upon this financial book chicanery from afar. While those billionaires deserve whatever is coming to them, surely they would not be so stupid as to personally guarantee anything related to their holdings (at least when it involves companies controlled by 3G). That said, best keep a check on where the loyalty does lie (hint. it is always them and their immediate family) and monitor any sudden airline trips to say, Switzerland.
Corporate leeches. Yeah that term is a keeper I think!
Thank you, G.
I used to work at HSBC with the firms and banks listed above, including brief visits, from 1999 – 2006. Personal guarantees were not uncommon.
The guarantor(s), often the founder(s) and largest shareholder(s), would ask for a loan to a company to be guaranteed or collateralised with cash, so a deposit would be paid, often from home or a tax haven, into another tax haven, usually Panama or “un des paradis fiscaux de sa majeste” (copyright French former minister Arnaud Montebourg), and the deposit used to lend to the depositor’s company. This was often the case with Latin American and Turkish oligarchs.
For loans, including securitisations, the borrower would, after a short, but decent, interval, not be able to pay, so the guarantor would step in. This was often the case with Russian and Ukrainian oligarchs.
London and NYC banks, law firms and audit firms, all of whom employed former regulators, are more than happy to facilitate for a handsome fee.
In the cases of Russian and Turkish oligarchs, we were warned off by law firms in London and family office staff in Switzerland and jostled with them for the exit.
Thank you, the above information is interesting. I do not follow international financiers or their firm’s financing much, so the above comment of mine was a novice view or opinion based upon what most American finance firms are up to. My knowledge base on the chicanery of international firms can be boiled down to the Deutsche Banks and Credit Suisse variety (of which there is no seeming end of it).
I also had figured such international financiers get the same rule of law as nearly all American financiers. Rules are for the suckers and the little people.
Maybe those billionaires should have learned from the Enron fiasco. You had the same things going on there that led to that corporation going down in flames. Things like off-the-books debts – and I wonder who the Arthur Andersen accountancy firm was here giving them a pass. This could get interesting though. There are so many foreign corporations tied up in Americanas. But having these three billionaires go to prison for their crimes would not be popular with them either. Maybe Lula should nationalize Americanas, arrest those three billionaires and fire senior management, separate the bad parts of that corporation into a separate one, recapitalize Americanas with public money before selling it back onto the market to get back that money, and then slowly sell of the parts of that bad corporation for a profit where they can. And send Lemann, Telles and Sicupira to prison. Those foreign corporations will not like that but if given a choice of going with it or losing their money, they may go with the former.
Wondering here if Brazil’s fast-rotting decay is a canary in the coal mine for another Western financial contagion. Surely, if we looked into the finances of every American billionaire and their accounting practices we’d find half the national deficit at least in penalties, crimes, and debts?
A curious coincidence.
Thank you, HH.
Are you surprised by our former parish? I was there from 2016 – 21 and am still in the City.
Surprised to the extent that DB is mentioned in so many similar articles!
I was at DBNY for a decade and a half during the Ackermann regime. When I finished feeding my own vultures in 2007, DB stock was trading around $120/share. It currently trades around $12/share, mostly as the result of mischief that occurred on Herr Josef’s watch. I believe those figures represent about a 90% loss in value, and probably even greater when inflation is factored in.
I do have to add, however, that the people I worked with at DB were super, and many of us alums are still friends. Being there was a lot of fun until it wasn’t. And I also have to respect DB for the way they responded when our building was destroyed on 9/11.
Ps. Thank you, CS. Just read your comments below re DB exposure. It feels like you are correct, that the proper term is “masked”. Now the question is how much will the mask slip?
Thank you, HH.
It feels similar in London.
Der Spiegel’s English language edition had an interesting feature some years ago about that value destruction.
At least, they got something right with regard to 9/11.
There’s a note at the bottom of this FT article saying Deutsche Bank didn’t actually have lending exposure to Americanas. Is this correct? Or is the $1 billion of DB exposure Corbishley refers to in equity, derivatives, or some other unsecured claim?
Thank you, SH.
It could be a mixture or even to the leading shareholders. To get around restrictions and capital rules, the exposure(s) could be masked in different instruments, locations etc.
What does DB mean, the main bank, wider group or a subsidiary providing loans and investment services to wealthy individuals. It can happen that a company turned down for a loan will get it via a loan to its shareholder(s).
Sarah,
Thanks for bringing that up. As I noted in the article, both Deutsche and Safra have questioned the accuracy of Americanas’ claims. As far as I can tell, Deutsche is definitely at the top of the list of creditors provided by Americanas, but the German lender denies having “direct” loan or credit exposure to the retailer. I have now included a clarifying statement to that effect in the text.
As the Colonel kindly points out above, whatever “indirect” exposure Deutsche may have could come in an array of forms.
Thank you, Sarah and Nick.
I used to work for DB and am used to their weasel words.
DB has long suffered from an identity crisis and, in its desperation, often found ways to ingratiate itself with clients. Relationship managers even complained that it was getting difficult to book escorts for clients. One way of getting corporate business is to target the managers, owners etc. It’s also a way to target the manager or owner’s brood, circle etc. This is why Epstein was on boarded after his conviction. It was hoped he would make introductions to the likes of Clinton, Gates, Mandelson et al.
and this is why you cannot have free trade economics. many call it neo-liberalism, i call it free trade economics because free trade is the lynch pin to the whole shebang. as the article says, these guys were global, they got supported by other global oligarchs.
they operate everywhere, they are supported by others everywhere. keynes warned us free trade would never work.
now it looks like another bail out of free trade, how many times now since 1993 have we bailed out the rich and their free trade economics.
the ink was not even dry on nafta, when the first bailout began.
its why clinton/blair types were the most dangerous. they were not kool aid drinkers, they were feverish believers in the fairy tales woven by hayek/freidman/rand etc.
Sadly, the feedback cycles between Economics & Politics in “Democratic” countries create strong tendencies toward ever-worsening vulture capitalism. Right-wing governments allow/encourage the Zillionaires who fund their Party to crank up the corrupt deals, creating economic bubbles which actually do trickle down somewhat (plebs get hired by the [temporary] companies which get created to enact the scams). Eventually the bubbles burst, and citizens elect Leftish (or at least less Rightist) governments to clean up the mess. But cleaning up the mess scares “investors”, so the economy rebounds slowly, if at all. Right-wing Parties blame the government for the lack of growth, and – funded by those same “investors” – get elected, then start the cycle all over again.
But each time through that cycle, the money (and the real resources) get concentrated into the hands of the “investors”. Leftish governments get less time to clean up the mess; the poor get poorer, and the rich get richer, faster and faster.
Until it all breaks. I think we’re close to that now. It’s easy to be glad about that, but it’s gonna be a terrible mess for a while (lotsa people dying of hunger, etc?).
It’s good to see reality is perhaps catching up with 3G Capital. I’m not a finance type and not American so have never heard of Americanas. No, as a Canadian, I got to watch Lemann (as Restaurant Brands International) buy out Tim Hortons coffee chain and ruin it, while good ole Warren Buffett cratered the entire Southern Ontario tomato growing region by closing down a 100 year old Heinz plant that produced excellent ketchup, and instead imposed the ersatz US version made up of reconstituted tomato solids from California on Canada — it’s crap, even looks different, being deep and artificially red. Plus tastes weird.
This was all after InBev hoovered up beer brands worldwide and made watered down brews the new normal. Stella Artois., Labatts, Fosters etc etc etc and the world’s number one fizzy alcoholic pop, Budweiser. Half the world’s “beer” is some InBev junk brew or another.
And they did it the old-fashioned way apparently — stiffed the suppliers to get indecently wealthy. Nice to be so rich you can steamroller all opposition until the company edifice is so rotten, it falls down anyway, ruining hundreds of thousands of lives.
I lost all respect for Buffet in his forced marriage of Kraft and Heinz. And I never had any for Lemann in the first place. Typical sociopathic capitalist, er neoliberal parasites on the body politic. Not that the average human sheep is even aware of these machinations going on, because incuriosity about anything actually important is the modern disease, but a Burger King “sandwich” or a Tim Horton’s “croissant” are but absolute muck these days. A Frenchman wouldn’t recognize a Timmy’s croissant as anything but an absurdity, just as Montreal bagel makers look askance at Tim’s fat little piggy “bagels”, which bear zero resemblance to a real one except in the most fevered of imaginations. I patronize them no longer. Got better things to eat.
Thank you, Bill.
That explains what happened to Brahma beer when it got here, Blighty.
Are we possibly looking at the black swan that could take us to a GFC again?