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Cedar Attanasio
What Happens When a Global Billionaire Is Backed Into a Corner?
May 12, 2014
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 intenção 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.
Something Fishy
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.
Epilogue
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 São Paulo. Follow him on Twitter: @cedarattanasio
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10 Surprising Facts About Brazil On the Eve of the World Cup
May 01, 2014
Preparing for the World Cup is not all fun and games for Brazil. In this messy emerging economy, this nascent democracy, the opulence of the Cup contrasts the gaps in infrastructure, security and accountability. Arguments with the Swiss Fédération Internationale de Football Association (FIFA) have, at times, challenged Brazil’s sense of national sovereignty. Meanwhile, foreigners are paying closer attention to Brazil. And we’re learning that much of what we thought we knew about the country was wrong.
1. Brazil is really, really big. It’s larger than the continental United States, though much of that is sparsely populated rainforest. Soccer matches will be played in 12 host cities across the country. If you wanted to visit each city by plane, you’d have to fly over 5,000 miles. That’s like traveling from New York City to Miami, and then to Anchorage. Team USA will play its first game against Ghana in the coastal city of Natal, and then travel 2,500 miles to play their second game against Portugal in Manaus, in the middle of the Amazon.
2. Brazil is ethnically very diverse. The city of São Paulo is home to the largest community of ethnic Japanese outside of Japan. Brazil has 10 million citizens of Lebanese descent; three times the population of Lebanon itself. If you consider indigenous tribes, there are literally thousand of minority groups across the country. With population of over 200 million, those groups are minorities. But no racial group in Brazil comprises more than 50 percent of the population; it’s already a majority-minority country, as the US is projected to become in 2050.
3. President Dilma Rousseff is a twice-divorced socialist. She’s also an ex-guerrilla who survived torture. She spent three years in prison during the military dictatorship. For the first 22 days in jail, she resisted torture by beating and electric shock without giving up her companions. After gaining her freedom, she earned a degree in economics. She’s an accomplished economist whose pragmatism and experience earned her a place in Lula’s government as Energy Minister and later as his Chief of Staff. Like Lula, she’s proved to be a pragmatist, though she’s put forward some truly progressive legislation, such as a recent net neutrality law protecting citizens' rights to privacy and competitive Internet offerings.
4. Soccer stadiums will cost Brazil $3.47 billion. That’s more than three times the $1.1 billion South Africa spent on stadiums for the 2010 World Cup. Most stadiums are over budget, and some may never be used again. The stadium Manaus ran $67 million over budget. Its local soccer team is likely to attract less than 5 percent of the stadium’s 42,000 person seating capacity. Outside the stadiums, the costs are almost incalculable. At least $10 million was invested in infrastructure to handle the tourism surge performed more poorly than expected. Of the 13 airports slated for renovations, only two will be ready in time for the World Cup. Meanwhile, Rio de Janeiro announced a hike in public transportation fares, despite massive protests sparked by a similar announcement last year. More protests are planned, with the rallying cry “If there’s not going to be rights, there’s not going to be a Cup.”
5. FIFA made Brazil change its laws in order to host the World Cup. Many of Brazil’s progressive federal laws clash with the moneymaking mechanisms of FIFA, the World Cup’s official organizer. (Based in Switzerland, the “nonprofit organization” operates on a budget of $800 million. According to the Guardian, FIFA’s 23 executives earn an average of $1.2 million per year.) FIFA demanded exemptions from federal laws, culminating in the General Law of the Cup, passed by the Brazilian legislature and signed by the president. The law granted a free pass to FIFA, exempting it from payroll taxes, visa requirements. To appease Budweiser, FIFA’s booze-sponsor, alcohol was allowed in stadiums (it’s normally banned, to reduce violence). Brazil’s elected officials didn’t capitulate on every single demand, and the Supreme Court scrutinized the General Law. Still, many citizens felt that FIFA had dictated terms after awarding the cup.
6. “Terrorism” and “gang activity” laws threaten Brazilian activists. Perhaps most troubling, Brazil’s government has embraced laws establishing vaguely defined crimes such as “gang activity” and “terrorism.” Human rights groups fear the laws will be used to suppress the protests that flourished in June 2013; Brazil’s answer to the Arab Spring. According to a press release by Amnesty International: "The rights to freedom of expression and to peaceful assembly are under threat in Brazil....New draconian 'anti-terror' laws currently before parliament signal the government’s intent to crush any peaceful protests in the country."
7. Rio’s seawater is literally full of shit. With fecal content rate more than 70 times the legal limit, the girl from Ipanema might think twice about dipping her toes into Rio de Janeiro's water. While few soccer players will use the water in 2014, sailors from around the globe hope it can get cleaned up for the 2016 Olympics. "We have had a couple of incidents where people went in the water and came up with red dots on their body,” said Olympian Allan Nørregaard, in an interview with the AP. “I don't know what's in the water, but it's definitely not healthy." So what is in the water? Dead horses. Sewage. Runoff from a giant landfill. Rio’s topography doesn’t help. The city’s hills form a bowl, a mountainous drainage that funnels effluent and open sewers into the bay. Guanabara itself forms a lekythos, a broad bay 16 miles in diameter with a narrow one-mile-wide entrance connecting it to the ocean. The resulting bottleneck could explain why pollution isn’t diffused easily by seawater. City officials have promised to reduce pollution by 80 percent before the Olympics. Until then, sailors might want to hold their noses and cover their skin.
8. Only 48 percent of Brazilians still favor hosting the World Cup, down from 79 percent in 2008. Could it be the corruption? The loss of liberties? The ceaseless and fruitless federal spending? Yes. But there’s another reason: Brazilians can’t get tickets. Of Brazil’s 200 million citizens, a very unscientific guess is that 199,999,999 want to see a World Cup game live. Unfortunately there are only 3.3 million available in total. Tickets for the final start at $440, and run up to $990. FIFA ties some tickets to travel packages. Many tickets have been scooped up by scalpers, foreigners and VIPs. Not only are Brazilians paying a high tab in advance, they’re not even invited to the party.
9. Soccer players enter politics when they leave the pitch. Many ex-soccer stars currently serve as legislators on the national and state levels. If you ever followed the Brazilian national team you might have heard of Rómario, Delei or Marquez. They’re all politicians now. Some soccer players such as Ronaldo are mulling a run in the next elections. Then there’s soccer legend Pelé, who once served as the Minister of Sports. He helped create a law to protect athletes in the workplace. He resigned in 2001. (More on Pelé in #9.) However, just because politicians were once soccer players doesn’t mean that they blindly back the World Cup. Rómario, a congressman, has had repeated public spats with Pelé about issues surrounding the World Cup (here’s one example [translation by Attanasio]).
10. Pelé is a money-hungry conservative and a shill for Brazil's Big Ag. Arguably history’s greatest attacking midfielder on the soccer pitch, Pelé is a right-winger in the arena of politics. Unlike his colleagues (see #9), Pelé never ran for office. He focuses on commercial interests, appearing in ads for Subway sandwiches, shampoo, Viagra... even diamonds made from his own hair. But that hasn’t stopped him from stumping for a conservative agenda. He currently represents the National Agriculture Confederation (CNA), an agribusiness lobby. In a 2013 ad campaign, Pelé presented the CNA as patriotic, domestically focused and pro-environment. In reality, CNA was formed to support deregulation and exports. When Brazil passed a forestry law in 2012 the CNA lobbied hard to give amnesty to loggers who had destroyed protected rainforest. In fairness to Pelé, he’s known for plying his trade as a spokesman for many philanthropic causes such as pediatric health, and served as a goodwill ambassador for UNESCO. His popularity plunged last year, however, when he took to YouTube to shoo protesters off the streets. His comments showed ignorance of the protester’s concerns — including price hikes on public transport, widespread corruption, healthcare woes and high spending on soccer stadiums — and led to him being mocked on social media and called a traitor. “Pelé missed a great opportunity to express himself in the language of change,” wrote blogger Josias de Souza [translation by Attanasio].
Bonus: Brazilians are getting pretty fat. Boasting appearances in 32 Miss Universe pageants and 20 World Cups, Brazil has a stereotype for having active and attractive citizens. However, as food has become more plentiful and more processed, the Brazilian waistline has waxed. Over half the population of Brazil is overweight, according to a 2013 government study cited by O Globo. One in five Brazilians is now obese, up from a mere 4 percent in 1990. It’s a far cry from American obesity (30 percent), but it has led to serious costs in pediatric care and cultural shifts, such as inauguration of the Miss Brazil Plus Size beauty pageant.
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