When Luis Vieira and about 100 other small Portuguese investors put money in Grupo Espirito Santo’s Swiss affiliate, they thought the Helvetian nation’s renowned safety protected them. They’re now learning that it might have been better to have left their money at home. With the collapse of Banco Espirito Santo, or BES, once Portugal’s biggest publicly traded lender, investors who at the height of the European debt crisis put money in Espirito Santo Financial Group SA’s Pully, Switzerland-based Banque Privee Espirito Santo SA risk losing everything.
In Portugal, Novo Banco SA, the entity that emerged from the split of Banco Espirito Santo, has pledged to reimburse some retail clients after intervention from the
country’s central bank. A group of Banque Privee clients are demanding the same treatment. A report by law firm Macedo Vitorino e Associados for the clients says they believed they were investing with Espirito Santo, and that branch managers of BES asked them to open accounts and invest in products sold by the Swiss affiliate.
“After 2010 and 2011, some clients were advised that, given the crisis in Europe and the country’s situation, their money would be more protected in Switzerland,” Vieira, president of a clients’ association called Abesd, said in an interview. “It was all Espirito Santo. For the clients there was never a distinction.”
Banque Privee Espirito Santo's Swiss offices are in Lausanne, pictured.
Banque Privee was not owned by BES, but rather by its main shareholder, Espirito Santo Financial Group, and was regulated by Swiss authorities.
Declining Fortunes
Swiss regulators started bankruptcy proceedings against Banque Privee in September and are investigating its role in distributing securities and financial products of the Espirito Santo group. The Swiss Financial Market Supervisory Authority, or Finma, said in a statement Sept. 19 that the parent group’s collapse posed serious problems for Banque Privee as it wasn’t included in the measures ordered by Portugal’s central bank.Banque Privee and Novo Banco declined to comment on the situation of the Swiss affiliate’s clients and on the reimbursement of their investments. The Bank of Portugal, the country’s central bank, said in August that securities not issued by BES should be reimbursed by the concerned issuer.
Investors like Vieira saw their fortunes fade with the unravelling of the web of businesses the Espirito Santo family had spun over the decades, from a soybean farm in Paraguay and a hotel chain in Portugal to property holdings in Brazil.
Risky Products
The family’s control over BES started to come apart as the Portuguese central bank took a closer look at its inter-group lending. In the course of a week in July, three companies related to the family filed for creditor protection as they were unable to meet debt obligations. Family member and former BES Chief Executive Officer Ricardo Salgado declined to comment on the group’s troubles.As the investors try to pick up the pieces, they say Espirito Santo marketed to clients debt instruments where there was a “serious risk that those entities wouldn’t fulfil their commitments on the due date,” according to the report given to Bloomberg News by Abesd.
In some cases, funds were reinvested without the authorization or knowledge of the client, it said.
“The products were sold to clients with a conservative profile as a low-risk, capital-guaranteed investment that could be easily moved, as if they were fixed-term deposits,” said Vieira, who also invested in the group’s debt instruments.
Left Out
Most of Abesd’s members are not sophisticated investors, being either retired or small businessmen managing their life savings and those of their families, Vieira said.They invested about 100,000 to 200,000 euros each in Espirito Santo International SA and Rioforte Investments SA debt, he said. Both Espirito Santo units sought bankruptcy protection in July. A Luxembourg court on Oct. 17 denied those requests for protection.
In Portugal, Novo Banco said Aug. 14 that it planned to buy Espirito Santo International and Rioforte commercial paper sold to retail clients of BES until Feb. 14. Before the collapse and at the request of the Bank of Portugal, Espirito Santo Financial had set aside a 700 million-euro provision to ensure the bank’s retail clients would be reimbursed.
Investors of the other financial units of the group were left out of this solution, as the Bank of Portugal focused on protecting BES and its depositors from the rest of the group, the clients’ group says.
Not Included
Espirito Santo’s Swiss private bank’s balance sheet dropped to 80 million Swiss francs from 600 million francs after it said it was selling its Spanish, Portuguese and Latin American client assets to CBH Cie. Bancaire Helvetique SA in July.While clients’ cash deposits of as much as 100,000 Swiss francs were ordered by the regulator to be repaid from the bank’s available assets, securities -- such as bonds -- weren’t covered, according to a Finma statement on its website.
Earlier, as the financial crisis roiled Portugal and the euro region, BES didn’t pay dividends for three years and posted a 517.6 million-euro loss last year. In December, after an audit carried out by PricewaterhouseCoopers revealed an unusual rise in financial liabilities at Espirito Santo International, the Bank of Portugal told BES to take measures to mitigate the contagion risks between the bank and the group’s other units.
‘Perverse Effect’
The Bank of Portugal ring-fencing the bank “had a perverse effect,” as BES, to comply with the supervisor’s order, looked for other ways to place Grupo Espirito Santo debt with institutional and retail clients, according to the legal report.“They didn’t reduce debt, they just passed it on to clients,” Vieira said.
If BES had been forced in 2013 to recognize the group’s difficulties to pay and had made the necessary provisions, “it’s very likely that it would have had to be intervened at that time,” the lawyers noted in the report. The central bank declined to comment on the report.
BES reported a first-half loss of 3.6 billion euros as it created provisions for its exposure to companies of the Espirito Santo Group. It had been the only one of Portugal’s three biggest publicly traded banks to not resort to state aid in 2012. Banco Comercial Portugues SA and Banco BPI SA did.
Questionable Deals
Bank of Portugal Governor Carlos Costa, in a speech Aug. 3, the day the central bank took over BES, said “Grupo Espirito Santo, through its non-financial entities not subject to the Bank of Portugal’s supervision, developed a scheme of fraudulent financing within the group’s companies.”Former BES CEO Salgado has said he won’t comment on such charges until he has seen the findings of the audit the central bank is conducting on the bank’s accounts.
Macedo Vitorino e Associados’ report questions the purchase by Espirito Santo unit Rioforte of direct and indirect stakes in Espirito Santo Financial in December 2013. It paid 2.15 billion euros for a 49.26 percent stake, when its market value was about 460 million euros and equity attributable to holders amounted to 1.3 billion euros at the end of 2013, according to the holding’s annual report. The stake was financed through short-term debt.
Broken Trust
“Within Grupo Espirito Santo there was a financing scheme of various entities with extreme financial difficulties, very likely equivalent to insolvency situations, including BES,” the lawyers wrote in the report.The entities “acted together to sustain liabilities that certainly couldn’t have been paid and that only were because Grupo Espirito Santo and BES actively continued a policy of rotating debt until it reached levels much higher that the value of the assets,” they said.
Attracting clients to the Swiss unit and then selling them Espirito Santo debt was instrumental to this strategy, according to the lawyers.
“We were all Espirito Santo clients, we are all equally being wronged,” Vieira said. “We believed in all the Espirito Santo banks and that trust has been broken.”
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