PORTUGAL UNDER PRESSURE: Ricardo Salgado, here at a news conference in early 2012, led the family empire for decades. REUTERS/JOSE MANUEL RIBEIRO The billion-dollar fall of the house of Espirito Santo Was there unlawful activity behind the spectacular collapse of the Espirito Santo empire? BY SERGIO GONCALVES, LAURA NOONAN, ANDREI KHALIP SPECIAL REPORT 1 PORTUGAL BILLION-DOLLAR MELTDOWN CLEAN UP: Banco Espirito Santo had grown to become the second biggest lender in Portugal. REUTERS/HUGO CORREIA LISBON, AUGUST 29, 2014 directive from Portugal’s central bank that The two letters, whose existence was Salgado stop mixing the lender’s affairs made public last month but whose de- n June 9, with his 150-year-old with the family business. The guarantees tails are revealed here for the first time, Portuguese corporate dynasty were also not recorded in the bank’s ac- are a key part of an investigation into the Oclose to collapse, patriarch Ricardo counts at the time, which is required by spectacular fall of one of Europe’s most Espirito Santo Salgado made a desperate Portuguese law. prominent family businesses. Portuguese attempt to save it. The following week, after intense pres- regulators and prosecutors are examining Salgado signed two letters to Venezuela’s sure from regulators, Salgado resigned. them along with the bank’s accounts and state oil company, which had bought $365 Within a month, the holding company, other evidence to determine whether there million in bonds from his family’s hold- Espirito Santo International, filed for was unlawful activity behind the fall of the ing company. The holding company was bankruptcy, crumbling under 6.4 billion Espirito Santo empire. in financial trouble. But the letters, accord- euros ($8.4 billion) in debt. In August, So far, shareholders and investors in ing to copies seen by Reuters, assured the Banco Espirito Santo was rescued by the the family companies and Banco Espirito Venezuelans that their investment was safe. Portuguese state, after reporting 3.6 billion Santo have lost more than 10 billion euros, The “cartas-conforto” – letters of comfort euros in losses. making this one of Europe’s biggest corpo- – were written on the letterhead of Banco rate collapses ever. Espirito Santo, a large lender controlled by The letters offer a glimpse into how the family. They were co-signed by Salgado, Salgado ran the Espirito Santo empire who was both the bank’s chief executive and and its crown jewel, the bank, virtually head of the family holding company. unhindered. In addition, interviews with “Banco Espirito Santo guarantees ... it family members, company officials and 87% Collapse in value of Banco will provide the necessary funds to allow Portuguese regulators, as well as financial reimbursement at maturity,” said the letters. Espirito Santo shares between documents, show how the 70-year-old There were problems, though: By prom- May and August patriarch consistently blurred the lines be- ising that the bank stood behind the hold- tween the bank’s interests and those of his ing company’s debt, the letters ignored a Source: Thomson Reuters Text continues on page 4 SPECIAL REPORT 2 PORTUGAL BILLION-DOLLAR MELTDOWN The Family Businesses The collapse of the Espirito Santo empire shines a light on the gaps that can open up when companies span di erent jurisdictions. The Espirito Santo family companies were mostly registered in Luxembourg, while their main asset – Banco Espirito Santo – was in Lisbon. Main players: who owns what Banco Espirito Espirito Santo Espirito Santo Espirito Santo International (ESI) Financial Group Santo Control based in Luxembourg Rioforte (ESFG) (BES) Espirito Santo family Financial Owns Owns Owns assets Owns Owns stake stake stake stake stake 88.4% 57.2% 100% 49.3% 20.1% Non financial assets Rioforte owns assets around the world, from hotels to energy, hospitals and real estate. Market cap of bank and its main owner €8 billion 8 6 6 4 4 LAST TRADING DAY 2 BES €674.99 million AUG. 1, 2014 0 ESFG 2008 2009 2010 2011 2012 2013 2014 €259.46 million JULY 9, 2014 Sources: Thomson Reuters; Rioforte; Banco Espirito Santo M. Ulmanu/Reuters Graphics SPECIAL REPORT 3 PORTUGAL BILLION-DOLLAR MELTDOWN family and even his country. Around the time he signed the letters, Salgado sought public funds to save the family empire, arguing that it was impor- tant for Portugal. “This is not just my problem, it’s a national problem,” he told officials at Portugal’s central bank, according to people at a meeting they held. Salgado declined to comment for this story. One person close to him said Salgado had asked Portuguese authorities to help him fix the family business in 2013. The bank’s collapse, the source said, could have been avoided. The corporate meltdown also shines a light on Portuguese and Luxembourg regu- lators and the gaps that can open up when companies span different jurisdictions. The Espirito Santo family companies were mostly registered in Luxembourg, while HEADLINES: News of the collapse of Espirito Santo empire rattled markets in Portugal, and around their main asset – Banco Espirito Santo Europe. REUTERS/HUGO CORREIA – was in Lisbon. Little information was exchanged between regulators in the two countries. That helped hide the true state of wrongdoing after finding “signs of abuse of stable shareholder base and long-term plan- the family companies’ affairs. insider information” and a “possible crime ning as a recipe for growth. But Europe’s Portuguese financial regulators knew in of abuse of confidence.” debt and financial crisis, which has left one January about deep financial problems at Portugal’s prosecutor general says there in five out of work across the continent’s Espirito Santo International, the family’s are now several investigations under way southern rim, has changed things. Luxembourg-based umbrella holding. ESI, regarding the Espirito Santo empire, but The Espirito Santo business was found- though, continued to borrow heavily in the has given no details. ed in 1869 by lottery dealer and currency months that followed, with deepening con- Antonio Roldan, an analyst for Portugal exchange broker Jose Maria do Espirito sequences for the Lisbon-based bank. and Spain at Eurasia Group in London, Santo e Silva. The family guided its bank- Luxembourg’s regulator CSSF said it says the European Union, the European ing empire through World War Two by did not supervise any holding companies of Central Bank and the International helping finance Europe’s trade in tungsten, the Espirito Santo family, while the coun- Monetary Fund, who arranged the 78 bil- a crucial ore found in Portugal and used to try’s central bank said it had no responsibil- lion euro bailout of the Portuguese state in make weapons. ity for supervising Espirito Santo entities. 2011, should also have spotted problems. By the early 1970s, Portugal was in the Portugal’s central bank and its markets “Portugal was supposed to be under very last years of the Antonio Salazar regime, a watchdog CMVM both say they acted close supervision” by international authori- dictatorship that looked favourably upon the promptly and efficiently. Portugal’s central ties as a condition of the bailout, he said. Espirito Santos and their glamorous con- bank says Banco Espirito Santo former nections. After 1974’s peaceful “Carnation” A EUROPEAN TALE managers repeatedly violated its directives. revolution, the country’s left-wing gov- CMVM chief Carlos Tavares told a par- In many ways, the rise of the Espirito Santo ernment nationalised the banks and the liamentary committee earlier this year that empire is a quintessentially European tale. Espirito Santo clan lost the business. the watchdog had examined Espirito Santo Family dynasties such as the Agnellis in Italy The following year members from the companies various times over the past six or Germany’s Quandts have helped define family’s five branches decided to rebuild years and alerted prosecutors about possible the continent’s corporate history using their their empire with $20,000 (around $90,000 SPECIAL REPORT 4 PORTUGAL BILLION-DOLLAR MELTDOWN at today’s value) of their own money and loans from several international banks. The move offered a chance to shine for Ricardo Espirito Santo Salgado, great- grandson of the bank’s founder. He had joined the family business a few years earli- er as a mild-mannered 31-year-old to head Banco Espirito Santo’s economic studies unit. Once the family set out to rebuild he opened a bank in Brazil, together with French lender Credit Agricole. In the mid- 1980s, when Portugal began to encourage private investment again, Salgado returned to Lisbon and set up a new bank, again with Credit Agricole. He bought back an insurance firm, called Tranquilidade, that the family had once owned. The family business grew. So did its ownership structure. At the top was Espirito Santo Control, a non-listed hold- ing company that owned Espirito Santo HISTORY: Bank of Portugal Governor Carlos Costa on August 3, the day he announced the central International, the umbrella for businesses bank would rescue Banco Espirito Santo in a 4.9 billion euro recapitalisation. REUTERS/HUGO CORREIA spanning hotels, property and finance. Luxembourg-registered ESI was 57 per- cent owned by the family, with the rest held This is not just my problem, Luz, a traditional wood-panelled restaurant by friends and Portuguese executives who it’s a national problem near Lisbon. wanted “a seat at the Espirito Santo table,” FAMILY TENSIONS according to a person close to the family. Ricardo Salgado Through an intermediary company, ESI Espirito Santo patriarch Portugal fell into recession after seeking owned Espirito Santo Financial Group its international bailout in 2011. As part (ESFG) which in turn owned Banco department bosses.