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 total exposure of around $1 billion; 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 veracity of the data provided by Americanas.
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.