By Patricia Kowsmann, Margot Patrick and David Enrich
Credit Suisse Group AG helped sell billions of dollars of
securities that ultimately played a role in toppling Portugal's
second-largest bank.
The Swiss bank was responsible for putting together securities
that were issued by offshore investment vehicles and then sold to
retail customers of Portugal's Banco Espírito Santo SA.
Many customers didn't realize that these vehicles were loaded
with debt issued by various Espírito Santo companies and apparently
served as a mechanism to finance the family-controlled empire,
according to corporate filings and people familiar with Portugal's
investigation into the Espírito Santo affair.
Now those investment products are at the center of an unfolding
scandal. Banco Espírito Santo was bailed out and broken up this
month. Other parts of the Espírito Santo group have filed for
bankruptcy amid alleged fraud and accounting problems. In addition
to sinking the Portuguese stock market, the episode has undermined
confidence in the European banking sector, analysts say.
Representatives of Espírito Santo declined to comment.
Credit Suisse said in a statement that it had no role in selling
or distributing the investments to customers.
"Credit Suisse has no visibility as to any onward distribution
by the BES branches or subsidiaries," the Swiss bank said.
Portuguese regulators investigating the Espírito Santo mess have
identified at least four offshore investment vehicles whose
securities, mostly preferred shares, were sold with the help of
Credit Suisse to Banco Espírito Santo customers, according to the
people familiar with the investigation. Portuguese regulators, who
received complaints about the products from customers who didn't
understand what they were buying, are now making the bank buy back
the securities. That caused crippling losses for the bank.
The offshore vehicles used at least some of the proceeds from
selling the securities to buy more Espírito Santo debt, according
to corporate filings. Regulators suspect the sales were part of an
effort to prop up the bank and other Espírito Santo companies, the
people say.
Three of the vehicles--named Top Renda, EuroAforro Investments
and Poupanca Plus Investments--are based in Jersey, an island tax
haven off France's northern coast. Credit Suisse served as
"arranger and dealer" for those three vehicles, a role that
included not just underwriting securities but also handling
administrative and financial needs, according to corporate records
filed with the Jersey Financial Services Commission.
A fourth vehicle, EG Premium, is in the British Virgin Islands,
also a tax haven.
Credit Suisse said it "is not connected to and was not involved
in establishing" EG Premium.
The people familiar with the investigation say all four entities
are controlled, at least in part, by Swiss financial company
Eurofin Holding SA, which was part-owned by Espírito Santo until
2009 and has had close business ties to the collapsed conglomerate.
Portuguese regulators suspect Eurofin played a central role in
Espírito Santo's financing and ultimate collapse, according to a
person familiar with the investigation.
Eurofin said in a statement last week that it didn't sell or
promote any investment products to Espírito Santo clients and that
it has never designed products for retail customers. Eurofin also
has denied playing a central role in the Espírito Santo
situation.
It isn't clear who owns the four investment vehicles.
Representatives of the trust company listed as custodian of the
three Jersey entities didn't respond to requests for comment.
The vehicles invested primarily in debt issued by Espírito Santo
companies, including the Portuguese bank, its Luxembourg-based
parent and an Angolan mining- and infrastructure-investment company
called Escom, according to corporate filings and internal Eurofin
documents reviewed by The Wall Street Journal.
Poupanca, for example, reported a total of EUR426 million (about
$570 million) in assets last year, about EUR1.3 million of which
was in cash and money it was owed. The remaining EUR425 million was
investments in long-term bonds issued by Espírito Santo companies,
according to Poupanca's financial statements. Top Renda and
EuroAforro's balance sheets consist of similar proportions of
Espírito Santo debt. EG Premium was also a big buyer of Espírito
Santo bonds, according to internal fund documents.
The annual reports of the three Jersey vehicles, which have been
operating for more than a decade, say their "sole purpose" is
issuing preferred shares, which are a cross between unsecured debt
and equity.
The vehicles regularly issued new series of preferred shares in
relatively small batches, sometimes just EUR30 million, according
to filings. Each series of securities was marketed to small groups
of Banco Espírito Santo clients via the bank's branches, according
to one of the people familiar with the investigation. The small
number of clients meant that, under Portuguese rules, there didn't
need to be a fund prospectus detailing the composition of the
securities, the person said.
Portuguese regulators believe the vehicles were designed to
appeal to retail customers. "Aforro" and "poupanca" mean "savings"
in Portuguese. "Top Renda" means "Top Income." Bank branch managers
told retail customers that the products were as safe as deposits
but with better returns, the person said.
The sale of preference shares allowed the vehicles to keep
buying Espírito Santo debt. In February, for example, EuroAforro
sold EUR182 million of preference shares, according to a corporate
filing. It used the proceeds, as well as cash and money received
from selling other unspecified assets, to buy EUR476 million of
Banco Espírito Santo debt and about EUR82 million of EG Premium
preference shares, the filing shows.
Credit Suisse had agreements dating back to the mid-2000s with
EuroAforro and Top Renda to handle the issuance of up to $2.5
billion of each of their preference shares, according to corporate
filings. Those programs were still active as recently as last year,
filings indicate. Credit Suisse also has been responsible for
Poupanca's preferred-share sales, according to filings.
Credit Suisse also was responsible for paying the three
vehicles' operating expenses, including legal and audit fees and
administrative costs, according to filings. Those expenses totaled
tens of thousands of dollars a year.
Portugal's markets regulator late last year started examining
the offshore vehicles' products after hearing from Banco Espírito
Santo customers who were confused about what they had invested in,
according to the person familiar with the investigation.
By early summer of this year, regulators had determined that
about EUR2 billion of the vehicles' products were currently held by
Banco Espírito Santo customers, the person said. Much of that had
been sold to customers earlier this year, months after Portugal's
central bank ordered Banco Espírito Santo to curtail its ties to
other Espírito Santo entities.
Bank of Portugal Governor Carlos Costa said late last month that
Banco Espírito Santo would have to buy back some of those products
from clients, causing EUR1.25 billion in losses for the bank. Those
losses helped topple the bank, which was bailed out early this
month.
Mr. Costa said Eurofin was involved in the placement of
securities to clients that caused the EUR1.25 billion loss. He also
said the central bank is investigating why Banco Espírito Santo
apparently didn't comply with orders to reduce exposure to other
Espírito Santo entities.
Write to Patricia Kowsmann at patricia.kowsmann@wsj.com, Margot
Patrick at margot.patrick@wsj.com and David Enrich at
david.enrich@wsj.com
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