Money Stuff, by Matt Levine: First Republic- April 27 /4
And:
A defendant in the case, who spoke on condition of anonymity, denies paying bribes—his firm paid Helsinge “consultancy fees”—but says that exchanging information on rival bids and tenders was “the way of doing business” in South America at the time.
Ah, yes, great, great.
But the other part of the Businessweek story is that this story of corruption and bribery — and Morillo’s instant messages allegedly proving it — fell into the hands of David Boies, the famous American lawyer, who saw that Morillo and his clients had stolen billions of dollars from Venezuela and decided to try to get that money for himself:
Excited by the evidence in their possession, various combinations of Boies, [Morillo’s rival Wilmer] Ruperti, Blondie (the private investigator) and [investor Bill] Duker (the moneyman) met over the summer of 2017 in various offices and on Duker’s 230‑foot sailboat, Sybaris, named for an ancient Greek city famous for its excess. …
First they needed to persuade the Maduro administration to let them bring a claim on PDVSA’s behalf. … Ruperti introduced Boies and Duker to Nelson Martinez, Venezuela’s newly installed oil minister, and Reinaldo Muñoz Pedroza, the country’s attorney general. On July 12, 2017, the parties came to an agreement: Blondie, Duker and the lawyers would get 66% of the proceeds, leaving 34% for PDVSA.
So they set up an entity — PDVSA US Litigation Trust — to sue Morillo and his clients in Florida federal court, and to pay any winnings two-thirds to the lawyers and one-third to PDVSA. They sued, and the defendants’ first line of defense was, basically, “look, you say that we stole billions of dollars from PDVSA, but why do you get to sue? You aren’t PDVSA; you’re some weird new trust. If we stole from PDVSA, let PDVSA sue us.”
Back in court in Miami, before the proceedings could turn to the matter of whether Helsinge and its customers had committed any crimes, Boies needed to demonstrate that the trust had standing—the legal right to bring a case. In most lawsuits, an injured party files a complaint and the two sides argue over its merits. Here you had an opaque New York vehicle claiming to represent Venezuela’s state oil company, which itself was controlled by a corrupt dictator subject to sanctions. Beyond that, it was unclear from the preliminary filings who controlled the trust and who stood to benefit. In July 2018 the defendants filed a motion to have the case dismissed on the grounds that the trust was illegitimate.
This defense was helped by the fact that nobody from PDVSA could really come to court to explain that the trust was legitimate, because (1) Venezuela was subject to increasingly strict US sanctions that made it hard for Boies to work with PDVSA and (2) the Venezuelan government didn’t make it particularly easy either:
What followed was a kind of courtroom farce, as Boies Schiller Flexner’s increasingly desperate efforts to demonstrate the trust’s bona fides fell apart under scrutiny. Defense lawyers sought to depose Venezuelan signatories to the litigation agreement among the various parties, but none could be pinned down. One had simply vanished. Another, Martinez, the oil minister, had recently been arrested in Venezuela and charged with corruption. “Jailed? Did I hear jailed?” the judge asked, trying to keep up. When PDVSA’s general counsel did finally commit to going to the US to be deposed, two dozen attorneys booked flights and hotels, only for the witness to pull out at the last minute, apparently under orders from Maduro himself.
The plaintiffs’ position was further undermined by how poorly news of the litigation was going down in South America. As part of the discovery process, Boies Schiller Flexner was ordered to hand over the agreement letter laying out the 66%-34% split. It was pilloried on Venezuelan state television. On April 24, 2018, the National Assembly, home to what remains of the country’s opposition, published a decree describing the trust as “a mechanism to divert the funds and resources” of Venezuela.
Ultimately this defense worked, and the judge dismissed Boies’s lawsuit. I love that a famous US lawyer learned of Swiss companies defrauding a Venezuelan company out of billions of dollars, and his natural first reaction was to go to a US federal court to get it to order those companies to give him the money instead. “If a US lawyer notices anyone stealing any money anywhere in the world, that money belongs to him, and a US court will enforce his rights to it” is not 100% wrong as a description of US law, which explains a lot about the extraterritorial application of US law, the hegemony of the dollar system, and the entrepreneurial American legal culture. But it is not 100% right either, and it did not work out for Boies.
Anyway, elsewhere in euphemisms for bribes, here is the Economist with a helpful collection:
One approach is to talk about something other than money. Some officials, for example, like to keep citizens well abreast of their food and drink preferences. “I really want to drink a Nescafe,” declares an airport security guard six times as he frisks your correspondent in Burkina Faso. In Uganda traffic police find ways to mention their favourite soda. In South Africa such requests are so common that bribes for driving offences are known as “cold drink money”.
I guess if you’re a cop at a traffic stop you can’t really ask for a consultancy fee.
Succession
I have occasionally tried to understand the capital structure, valuation, corporate governance and shareholder base of Waystar Royco, the Roy family’s publicly traded conglomerate on the TV show Succession, but I quickly find myself frustrated by some contradiction that doesn’t make much sense, and then I remind myself that it’s a TV show and nobody cares about the absolute verisimilitude of its corporate bits. (Who is on the Waystar Royco board? Why are there no independent directors? Who cares!) Anyway at FT Alphaville last week Louis Ashworth gave it a go; he got farther than I ever have but he gave up too, and my advice is that it isn’t worth it.
Things happen
SVB’s new owner fights to rebuild brand and stem outflows. Moody’s Downgrades 11 Regional Banks, Including Zions, U.S. Bank, Western Alliance. New Wall Street ‘fear gauge’ to track short-term market swings. The Crypto Detectives Are Cleaning Up. The Impending Fight for Private Equity Buyout Lending. CME plays down rival to LME nickel market. UK Aims to Avoid Repeat of Liz Truss’s Market Mayhem With LDI Reforms. Partner pay at top US law firms hit by dealmaking drought. J&J Consumer-Health IPO Process to Kick Off Key Test for Moribund New-Issue Market. A Schwab Divorce From Bank Could Unlock Value, JPMorgan Says. Gemini’s Plan for Derivatives Exchange Adds to Crypto’s Flight From the US. “The market considers the one-month bill a safe haven. … The three-month is more in the crosshairs.” How Vanuatu allegedly lost its mackerel rights — and fought back. “Afterward we had dinner at Bennigan's; on the menu chalkboard, under Quiche of the Day, Jello [Biafra] scrawled ‘YOU.’”
If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks!
[1] This number comes from the company’s first-day declaration (PDF), Document 10 in the bankruptcy docket.
[2] A footnote to this sentence in the declaration cites Money Stuff.
[3] There are also about $1 billion of unsecured bonds outstanding, and talk about nostalgia: They were issued in 2014 to fund a stock buyback, and include about $600 million of *30-year bonds*, due in 2044, with a 5.165% interest rate. They were rated A-/Baa1 when issued. Different times!
[4] Its closest competition is when Hertz Global Holdings Inc. sold stock to meme-stock investors *in bankruptcy*, which was incredible, but (1) the US Securities and Exchange Commission shut that deal down almost as soon as it launched, so it never raised much money and (2) Hertz was trying to reorganize in bankruptcy, not liquidate; it succeeded and the equity actually recovered, so buying (and, thus, selling) the stock was not *that* crazy. To be clear, that is still a possibility here — “Bed Bath & Beyond has pulled off long shot transactions several times in the last six months, so nobody should think Bed Bath & Beyond will not be able to do so again” — and I will feel dumb and amazed if the people who bought Bed Bath stock on Friday at $0.29 end up making a fortune on the trade.
[5] This is a little loose, and there are scenarios where some equity owner might put in more money in a bankruptcy-type situation in order to *keep control of the company*. “An equity owner throws in more money and comes out with zero stake in the company" is … less common.
[6] No, no, it’s still trading; it was at about $0.19 or so at noon today. Really this should say “… and (2) now is even more clearly going to be worthless,” but all hope is not technically lost.
[7] Bloomberg reports: “‘The idea that you can continually support your company even in the face of constant dilution of your investors just isn’t a long-term, viable corporate-finance strategy,’ said James Gellert, CEO of ratings firm Rapid Ratings. ‘Bed Bath & Beyond had a seeming disregard for common equity holders.’”
/4 of 4
Money Stuff, by Matt Levine: First Republic- April 27 /3
In 2017, Snap Inc. went public by selling non-voting stock; only founders and insiders would get any votes at all. Investors complained, and also bought the stock, because they didn’t want to miss out on a hot initial public offering. (It’s down more than 40% since its IPO, oops.) But then some index providers — FTSE Russell and S&P Dow Jones — changed their rules to exclude or limit dual-class stocks from many of their indexes. The investors had solved their collective action problem; they had found a way to impose economic penalties on companies with dual-class stock.
It didn’t work. Companies kept going public with dual-class stock. They didn’t care that much about missing out on the indexes; their founders were willing to pay the economic price to keep control. (In particular, companies don’t generally get added to the S&P 500 the day they go public; a lot of index demand is not for shares in the IPO but later on, meaning that it doesn’t directly affect the IPO price.) This means that the investors’ solution ended up being bad for them: They credibly committed to not buying dual-class stock of hot companies, hot companies kept going public with dual-class stock, index funds couldn’t buy those stocks, and they were sad.
The solution was to give up. Last week S&P Dow Jones announced that dual-class stocks are fine again: “Effective April 17, 2023, all companies with multiple share class structures will be considered eligible candidates for addition to the S&P Composite 1500 and its component indices,” including the S&P 500. Here’s a Davis Polk & Wardwell LLP client memo from last week:
In response to Snap Inc.’s IPO in which only non-voting shares were offered to the public, the Council of Institutional Investors and others had lobbied the major index providers to bar non-voting shares from their indices, arguing that absent this change, passive investors such as index funds would be forced to invest in non-voting shares that erode public company governance. As a result, since July 31, 2017, S&P Dow Jones has excluded companies with multiple share classes from the indices comprising the S&P Composite 1500.
The decision to revisit index eligibility criteria comes after a consultation process that S&P Dow Jones ran with market participants from October to December 2022.
In 2017, investors noisily complained that they were being forced to buy dual-class stocks, so S&P kicked the dual-class stocks out of the indexes. In 2022, investors noisily complained that they were being forced not to buy dual-class stocks, so S&P let them back in.
Oil rigging
I loved Liam Vaughan’s and Lucia Kassai’s Bloomberg Businessweek story last week about corruption in Venezuelan oil auctions, in part because it is two almost entirely separate stories of corruption. For starters, there are the Venezuelan oil auctions. Venezuela’s state oil company, Petróleos de Venezuela SA, would sell various oil products in auctions, and big oil trading firms would hire a consulting firm named Helsinge, run by a guy named Francisco Morillo, to help them win the auctions. The way he allegedly helped them win was (1) he bribed PDVSA insiders to tell him about the other bids, (2) he shared those bids with his clients, (3) the clients topped those bids by a penny and (4) they paid him enough to cover the bribes with some profit for himself:
In one series of chats from March 14, 2006, Morillo, using the screen name George White, guided three prominent commodity traders—Maarraoui at Vitol, Gustavo Gabaldon at Glencore and Maximiliano Poveda at Trafigura—through auctions for fuel oil and a product called vacuum gas oil, which is used to make gasoline. At 9:51 a.m., nine minutes before the offers were due, Morillo shared details of the bids PDVSA had received for the vacuum gas oil—information PDVSA says is supposed to be confidential. Five minutes later he informed the three traders, via separate chats, of a late bid for the fuel oil.
The traders didn’t enter every auction, but when they did bid, the information Morillo had provided let them know at what price to do so. On March 20, 2006, after learning about offers from BP Plc and two other companies, Maarraoui placed a bid to buy gas oil at 0.8¢ per gallon more than the next-highest bidder. Two days later, Poveda won a liquefied petroleum gas auction after being told about two rival offers and besting them by a cent.
These conversations, a handful among thousands, demonstrate how valuable Helsinge’s service was to its customers—and how potentially devastating it was to the Venezuelan people. If Morillo’s clients had been forced to enter the market blind, they likely would have placed some bids at $5 or $10 per metric ton higher than they needed to, as the chats show their competitors did. Instead the traders were able to win auctions they entered by a dollar or less, saving as much as $1.5 million on a typical 150,000-ton cargo. According to the Boies complaint, they’d pay Helsinge about $300,000 on a shipment of that size. PDVSA declined to provide data to Businessweek on the outcome of its auctions, or to comment for this story, but given that the company conducted dozens of auctions each month as buyer and seller, and that Helsinge was in business for 15 years, it’s conceivable Venezuela lost out on several billion this way.
Also, if you keep doing this, eventually you’re going to drive everyone else out of the auctions, further depressing prices:
Traders from two oil companies told Businessweek that they’d stopped participating in PDVSA’s auctions because they were sick of losing to the same players. “Putting together an offer takes time. You need to figure out the economics, freight, insurance, the hedge, then submit to your compliance, get signatures from God knows who before you’re able to submit a number,” says one of the individuals, who asked not to be identified. “After a while we just gave up. It became clear to us that something funny was happening.”
This part of the story includes some classics of the “don’t put it in writing” and “don’t refer to bribes by cutesy nicknames” genres:
As well as routinely passing along information, [PDVSA commercial and supply unit manager Rene] Hecker talked to Morillo about the need to encrypt their conversations and about an offshore company he’d set up in Panama. In one message, Hecker sent Morillo banking information for his father-in-law, known as Gigante, writing in the subject line, “chamo elimina estos archivos despues please” (“dude delete these files later please”). Before Christmas 2004, Gigante received two payments totaling $400,000, Morillo’s bank statements show.
/3
