Carrefour suing PWC, alleging fraud

BUENOS AIRES (MarketWatch) — In what could be one of the biggest fraud cases in Argentine history, French retailer Carrefour SA (12017.FR) has alleged in a series of lawsuits that accounting firm PriceWaterhouseCoopers and one of its most high-profile Argentine clients conspired to defraud it in the sale of a local supermarket chain.

Carrefour has claimed in four separate criminal and civil suits that the directors of Norte Supermarkets former owner, Argentine investment firm Exxel Group, instructed their accountants at the chain to inflate the company’s earnings before interest, tax, depreciation and amortization. This resulted in the chain’s price tag being overvalued by an estimated $120 million, Carrefour says.

A parallel ledger was created, it claims, in which 1,000 supplier invoices were systematically undervalued via a series of fake discounts registered in the end-month book-closings.

Since Norte was valued according to the standard nine-times-EBITDA method common in Argentina at the time, Carrefour argues that the false entries meant that the value of the remaining 49% stake in the supermarket chain that it acquired to take full control of the chain in 2001 was not worth the approximately $270 million that was agreed. Rather it was worth $150 million, according to Carrefour.

PriceWaterhouseCoopers’ Argentine associate, Hartneck, Lopez and Co., the Exxel Group’s auditor for several years, signed off on the supermarket chain’s accounts in 2001.

Representatives from PwC in Argentina declined to comment for this article and Exxel officials or lawyers were not immediately available.

Carrefour filed its first suit in April 2004. It was a straight fraud charge against a group that included the Cayman Islands-based Exxel, various directors of Exxel and Norte, and a firmed named as “PriceWaterhouseCoopers Hartneck, Lopez and Co.” The claim is for damages estimated at $120 million.

That case, which is winding slowly through Argentina’s labyrinthine and overburdened court system and which is reaching a so-called “testing period,” was until now kept out of the public’s attention.

However, after local magazine Noticias published a long expose on the case this week, Carrefour decided to launch a public relations offensive and to provide details of its filings.

As part of that effort, Carrefour Argentina communications director Fabio Favri said Tuesday that his company has filed three other suits, including a fraud claim aimed directly at PwC for alleged efforts to shield itself from liability, since the original suit in April, 2004.

Up until it took complete ownership in April 2001, Carrefour controlled 51% of Norte but left all the operational management up to its then-partner Exxel. By that stage, the Argentine buyout fund, which was headed by Uruguayan investor Juan Navarro and which had expanded at a breakneck pace during the heady days of Argentina’s expansion in the 1990s, was facing collapse as its vast asset portfolio took heavy hits from the country’s financial crisis.

Then, when Carrefour’s people took over the day-to-day management, Favri said, “we discovered a business without documents.” An entire database of accounting entries and emails had been destroyed, he claimed.

Fortunately for Carrefour, he added, a whistleblower inside Norte later came forward with a backup he had created that set out an email and paper trail for Carrefour’s investigators to follow.

The Noticias article said the Exxel Group officials argued that Carrefour’s claim has no merit because the French company had itself participated in dozens of management and shareholder meetings and had approved the financial accounts of Norte with the aid of its own auditor, KPMG.

However, the presence of the whistleblowing witness, who Favri declined to identify, appears to have given Carrefour a great deal of confidence in its case.

“This is not a case where you would say it’s an interpretation of what’s happening,” Favri contended. “What we are stating about the claims is that we have absolute proof for everything. It’s not as if you can say ‘my point of view is this and your point of view is that.”‘

PriceWaterhouseCoopers is implicated in the case, Favri said, in part because an accountant for its Argentine associate Harteneck Lopez and Co., Gabriel Rolando Martini, who signed off on the 2001 accounts, later admitted in a 2004 hearing for the initial case that “certain irregularities” occurred in the bookkeeping before the sale went through.

Since then, Favri said, PwC has shifted Harteneck Lopez’s clients over to its own account and has made Martini a direct PwC partner.

Carrefour is arguing, he said, that this was a fraudulent move to turn Harteneck Lopez into an insolvent “shell” to protect it from liability. This is the focus of the most recent lawsuit filed against PwC last month.