Portugal Telecom has been ordered to pay a fine of $1.25 million to settle U.S. charges that it failed to disclose it had more than €1.6 billion invested in commercial paper before it was acquired by Brazilian telecom group Oi.
The paper was issued by Ricardo Salgado’s Espírito Santo International and Rioforte Investments, two Grupo Espírito Santo subsidiaries, writes Matthew Heller on the CFO.com website.
According to the U.S. Securities and Exchange Commission, these investments were not disclosed prior to the completion of the Oi deal in May 2014, even though the Espírito Santo International commercial paper represented 82% of Portugal Telecom’s short-term investments at the end of 2013.
After Portugal Telecom disclosed the Rio Forte investment in June 2014, its shares dropped more than 11% in U.S. trading. Rioforte defaulted on its debt the following month.
“Credit risk is material information for investors, and Portugal Telecom failed to ensure that the risks of its Grupo Espírito Santo investments were fully and accurately disclosed in its public filings,” commented Michele Layne, director of the SEC’s Los Angeles regional office.
The Securities and Exchange Commission alleged that PT’s year-end 2013 financial statements were misleading and inaccurate as they mischaracterised the €750 million investment in Espírito Santo International commercial paper as “debt securities issued by PT Finance and Portugal Telecom.”
The Commission said in an administrative oder, the paper was not “issued by Portugal Telecom but rather subscribed to by Portugal Telecom (or its subsidiary PT Finance).” Also, Espírito Santo International was not identified as the issuer.
After the Espírito Santo International paper matured in February 2014, Portugal Telecom invested €897 million in Rio Forte paper. The Espírito Santo International investment was not disclosed until August 25, 2014, when Portugal Telecom added clarifying notes to its December 31, 2013, financial statement.
As a result of the disclosure failures, “investors were unable to form an overall picture of the nature and extent of risks arising from these financial instruments,” said the Securities and Exchange Commission.
Portugal Telecom’s former board members Zeinal Bava, Henrique Granadeiro, Luís Pacheco de Melo and Amílcar Morais Pires face fines of up to €5 million each for lying to Portugal's Stock Market Commission.
Many of the former-directors of PT also are being sued by PT, renamed Pharol. In Bava's case the claim is that he "never ensured that such internal control systems were in place that would prevent investments that violated the statutes, regulations and policies of the company."
The court submission adds that "it is well understood that he (Bava) did not, nor intended to reveal, financial reporting documents of such investments that he well knew were unlawful."
Bave meanwhile struggles by on 36 monthly installments of €150,000 - his pay-off from Oi. This is on top of the estimated €50 million he amassed while overseeing the catastrophic collapse in the value of PT shares.
