Brazil’s USD 4 billion accounting scandal puts spotlight on investor Jorge Paulo Lemann

Brazil | The Swiss were in for a shock. Two of the richest Swiss, whose fortune is partly made from beer, are embroiled in scandals. First it was Pierre Castel. Now it is Jorge Paulo Lemann.

The Brazilian retailer Americanas has massaged its balance sheet. This came to light on 11 January, when the new CEO suddenly resigned after only nine days in office. The case casts a shadow over Mr Lemann's investment – he built his stake 40 years ago – and his oversight.

Mr Lemann, 82, as well as Marcel Telles, 72, and Carlos Sicupira, 74, who founded the private equity firm 3G Capital, are among Americanas’ principal “reference” shareholders. Messieurs Lemann, Sicupira and Telles together own roughly 30 percent of Americanas' stock. 3G Capital itself has no stake in Americanas. The three are also major shareholders of brewer AB-InBev.

Americanas is omnipresent in Brazilian high streets and malls. The company runs 1,700 stores, selling everything from electronics to snacks and homeware.

Americanas’ big accounting hole

Brazil's biggest accounting scandal in history first hit the news on 11 January, when Sergio Rial, CEO of Americanas, announced his resignation. He blamed it on “inconsistencies in the balance sheet”.

In fact, he had discovered a USD 4 billion accounting hole – which stemmed from an operation common among Brazilian retailers. As the Financial Times newspaper explained, banks would pay Americanas’ suppliers in advance, with the company then responsible for the repayment of these loans, including interest payments. These interest transactions, however, were effectively camouflaged by the company, which did not classify them as financial debts. The practice, which resulted in higher reported profits and flattered the company’s balance sheet, is believed to have gone on for years.

Americans also has debts to the order to USD 4 billion. It has since filed for bankruptcy protection, after revealing its cash reserves had evaporated. Brazilian authorities are investigating whether this was a case of gross error or fraud.

3G’s founders say they are sorry

The whole debacle raises several pertinent questions: How can one explain, for example, that Mr Rial, the ex-Santander CEO, and thus a former major lender of Americanas, was appointed as CEO? What is more, is it not odd that it took Mr Rial five months – he was appointed in August last year – to discover that USD 4 billion are missing? Besides, many wonder why in late 2021, the founders of 3G Capital reduced their stake in the retailer, apparently without demanding any premium, as would otherwise have been the case?

Media say that Mr Sicupira continues to lead the Board of Directors. Pedro Lemann, Mr Lemann’s son, sits on the Board of Directors. Suspicions of insider trading are also being voiced: the directors sold as many shares of the company in 2022 as in the previous ten years combined.

Eleven days later, on 22 January, 3G issued a statement, in which the three investors declared that they had never known anything about accounting manipulation. “Over the decades, our actions have always been guided by ethical and legal principles,” the statement read. They said they are “sorry for investor and creditor losses,” according to Reuters.

Reputations are at risk

The Swiss newspaper Neue Zürcher Zeitung (NZZ) commented on 27 January: “The accounting scandal could cost the investor trio dearly. Americanas’ stock, [which has plummeted more than 90 percent since], has diminished their combined fortune by about half a billion dollars. This is annoying, but well manageable given the size of their portfolios. More worrying, doubts are growing among international investors as to whether their private equity firm 3G is above board.

For the three Brazilians, no less than their whole empire, which they have built over 50 years, is at stake, NZZ concluded.

At the moment, it is unclear what will become of Americanas. Per NZZ, the firm has hired global consulting firm Alvarez & Marsal to provide legal support, and Rothschild Bank to represent it in insolvency proceedings.

Over the past twenty years, modern format retailers such as Magazine Luisa or Mercado Libre have made inroads into in South America. As a result, Americanas trails its competitors, despite management’s many attempts to spruce it up.