What Happens When a Global Billionaire Is Backed Into a Corner?
Eike Batista used to be the richest man in Brazil. At his peak, in 2010, he commanded a fortune of $34 billion dollars. He was named by Forbes as the world’s 8th richest man. He vowed to become number 1, aiming for a net worth of $100 billion. While his commodity and logistics empire had experimented overseas--in Canada, Greece, Russia, and China--he made his biggest profits back home.
Fans and critics alike couldn't stop talking about his opulent life style. He reportedly parked his sports car in his bedroom. He competed in speedboat racing. He traveled in a private jet, and commuted around Rio by helicopter.
Then, in under 4 years, Batista lost his entire fortune. Business journalists have performed a number of autopsies on his career in capital allocation, the best and most gory of which might be Bloomberg’s BusinessWeek feature.
Beyond the ups and downs of the money game however, there’s another story. Last Thursday, the rule of law stung Batista himself. A federal court froze $55 million of his remaining assets. He’s charged with insider trading, money laundering, and market manipulation. Local newspapers revealed that he started hiding his assets last year, in anticipation of bankruptcy. What happens when a member of the global elite is backed into a corner?
Getting Away With Murder
The Batista family is no stranger to strategic criminal litigation. In 2012, Batista’s then 20-year-old son Thor hit and killed a bicyclist. It was a Saturday night, and Thor drove himself and a friend down a Rio highway in a Mercedes-Benz sports car. The bicyclist was a railroad laborer named Wanderson Pereira dos Santos. He was on his way to buy flour for his wife’s birthday cake, according to a piece in the New York Times. In a highly stratified society divided by race and class, the case was symbolic of Brazil’s existing problems. Pereira dos Santos was black and poor, relegated to the non-existent pedestrian system. Thor was rich and white, driving a sports car straight out of a Hollywood movie.
In Thor’s defense, highway crossings in Brazil are extremely dangerous. Pereira dos Santos didn’t have the right of way, he wasn’t near a crosswalk, and he probably didn’t have any lights or reflectors. Thor’s father, Mr. Batista, lashed out at the dead bicyclist to his more than 1 million Twitter followers. “The carelessness of the cyclist could have killed three people,” he tweeted.
The trial was a mess, however, showed a different picture of the accident. Thor and his father paid off the family in an out of court settlement, and they violated their own secrecy clause. That resulted in a separate fine. Then, the court learned that Thor already had a record, with many points against his license for driving infractions. He had already hit another pedestrian and admitted on Twitter that he “knew there were a lot of bicyclists crossing in the area [where Pereira Santos was].”
Finally, the court found Thor guilty of involuntary manslaughter (homicidio culposo, sem intenÃ§Ã£o de matar). It seemed for a moment that the rule of law extended beyond property rights, all the way to human rights. In a country where only 8% of murders are solved, and 70% of homicide victims are black, the conviction might have been welcomed by the public.
However, Batista’s lawyers succeed appealing the decision. When the sentence finally came, it was watered down from prison time and a driving ban to a stint of community service and a $500,000 fine. His driver’s license was suspended for only two years. (A tabloid reported that he now drives an Aston Martin, like the one from the 007 films.)
In response, Brazilian blogger Andre Forastierri wrote an article entitled Thor and Eike are Innocent, We’re the Guilty Ones.
“Thor symbolizes the new, rich Brazil. Wanderson makes me think, ‘poor old Brazil.’ [.... The Batistas] still have plenty in the bank, and Thor walks free. The reason is that we continue to live in the poor, old Brazil, which allows Eike to be so rich, and therefore untouchable and automatically innocent, him and his offspring. [....] They are and will continue to be innocent. We’re the guilty ones.” [Translation mine].
Multiplication of Wealth
Long before his son hit a bicyclist, before he gained and lost his billions, Eike dedicated himself to what he called “multiplying wealth.” The son of the former mining minister and life-long minerals tycoon, Eike was educated in Europe and coddled amongst Rio’s elite. Thanks to his time abroad, he skipped the worst of Brazil’s dictatorship. When he returned to his home country at age 23, he set out to build his own fortune.
Tapping his social circle in Rio de Janeiro, he raised enough money enough to fund his first entrepreneurial adventures in the Amazon. He founded his first company, Autram Aurem. It made millions in the booming gold business, first as a middleman and later as a mine-operating entity. Thanks to high gold prices and a stable Brazilian currency, he was able to convert tracts of the Amazon into tangible assets.
To my knowledge, no one has documented Autram’s Aurem’s impact on the health of the Amazon. As a buyer of gold from pick-and-shovel operations in the 1980s, it very likely contributed to the deforestation, invasion of indigenous lands, and creation of goldmining footholds that pervade to the present day. With mechanized mining, it may have spewed out all sorts of externalities, such as mercury poisoning.
Success in mechanized alluvial mining led to a global conglomerate. Soon Eike had mines in in Russia, Chile, and even Canada. A large oil project in Greece failed when he couldn’t secure an environmental permit. A big investment in Canada helped him form his first publicly traded company, TVX.
The “X” in TVX symbolized the multiplication of wealth. As his resource and infrastructure empire grew, he incorporated the “X” in each company’s name: OGX, for oil and gas, LLX for logistics, MPX for energy, and so on. For Eike, multiplying was an end in itself. Growth for growth’s sake, he reasoned, would help build up Brazil.
Yet building up Brazil appeared sometimes to be an afterthought. In another candid moment during his Charlie Rose interview, Eike admitted it was largely insecurity that fueled him to achieve. Growing up, he walked in the shadow of his father. Mid-career, Brazilians knew him only as only as the husband of Luma Oliviera, the Playboy cover girl and a well known figure in Rio’s Carnival scene.
He certainly wasn’t known for philanthropy.
“Don’t compare me to these people [Bill Gates and Warren Buffet],” he said in a filmed interview with the Wall Street Journal, also in 2010. “My money is all in my projects. [Not all] philanthropy is good. I prefer to give them a rod, and let them fish. Maybe will the profits of all this, we can build some hospitals or something.” He never specified who “they” were, but in the context it seemed like he was referring to the class of people that get run over on highways by playboys.
Insider trading is perhaps the most damning charge that Rio’s federal court has brought against Eike. Here’s the gist of the argument. In fall or winter of 2012, Eike and other OGX board members were reportedly informed that their largest investment was going bust. That big investment was the Tubarao Martelo oil fields, and it had 62% less reserves than his team had stated when pitching to investors and the market in general. They were no longer commercially viable, wrote the Brazilian magazine Valor.
Allegedly, Batista sold a chunk of his personal OGX stock right after he received the news. Only in July of 2013 of the following year did his company share the information with the public. Therefore, the argument goes, he used his position inside the company to sell stocks only he knew were worthless, rotten shares from a barrel he helped ferment. The court recently said that he snagged $63 million this way.
Publically, he tightened his belt. He sold his helicopter and scrapped his yacht. Some claimed he was buying less lavish lunches. Privately, he offloaded assets to his sons, as revealed last week by Brazilian outlet Folha. Perhaps sensing impending bankruptcy, he quietly transferred ownership of residence and vacation homes to his sons, Thor and Odin. On paper, he valued them at a little over $7 million. In reality, they’re probably worth more like $22 million.
A few weeks ago, after the federal probe was announced, Eike projected confidence in an interview with the Wall Street Journal. "It's excellent that everything get clarified," Mr. Batista said over the telephone. "I'm very calm. Let them investigate."
Now, the federal court has frozen his assets. After consulting with lawyers, Folha believes that the court could seize the homes as well, since they were transferred after his alleged financial crimes occurred. As in Thor’s homicide trial, Eike is likely to maneuver in court until he achieves the most banal sentencing possible.
The Bubble Builder
When OGX first started it’s oil venture, it boasted a 100% hit rate in the wells. Before the facts were in, its shares peaked at $22. Once the real oil reserves were made public in July of 2013, they plummeted, bottoming out at around $0.18. But it wasn’t the first time that Eike had overpromised and underdelivered. Back in his Canada days, the boom and bust of gold pumped up and later gutted TVX. Apparently, TVX lost 96% of its peak value.
Why such a gap between perceived value and results? The Economist used to call Eike Brazil’s salesmen. “We mean that in a positive sense,” they said. In Brazilian circles, Batista’s persona lent itself to this joke comparing him to another well-known billionaire. “Who made more money with PowerPoint, Eike Batista or Bill Gates?”
After his fall, English language media called him out on his braggadocio.
“Mr. Batista liked to call [oil] assets ‘idiot proof.’ But years after he took them to market, none has turned a profit,” wrote the Wall Street Journal. What did that mean for the business world?
“It’s partly a story of Brazil falling out of favor with investors, but it’s really a story of someone who made really big promises, priced everything to perfection, and failed to deliver,” said Alex Cuadros (see video below). He’s now writing a book about some of the 40 or so billionaires in Brazil.
In the end, what will Batista’s bravado mean for himself, his investors, and everyday Brazilians? The past two weeks may hint at the future. On May 2nd, Eike Batista was elected Chairman of OGX. His father, the former mining minister, was elected vice-chairman. Thor enjoys a comfortable position at OSX. He recently got a new girlfriend, according to tabloids that follow him. Much of the “X” empire is restructuring or entering bankruptcy, but most of the companies will remain intact.
"These are projects that employ a lot of people,” said one financial analyst in an interview with the Wall Street Journal. “[They’re also] tied to infrastructure—which jibes with what the government has been saying about developing infrastructure. [...] In the worst case, the government can come in as a partner or help out in some other way."
Cedar Attanasio is a freelance journalist based in SÃ£o Paulo. Follow him on Twitter: @cedarattanasio