Espirito Santo Offer Documents Said Reviewed by Regulator

Portugal’s securities regulator is reviewing whether financial information used to prepare Banco Espirito Santo SA’s share-sale prospectus two months before the lender’s collapse was truthful, according to a person with direct knowledge of the inquiry.

The regulator is looking at documents describing Banco Espirito Santo’s finances as part of a preliminary inquiry into the rights offering, said the person, who requested anonymity because the probe is private.

Banco Espirito Santo, once Portugal’s biggest publicly traded lender by market value, raised 1.04 billion euros ($1.4 billion) from investors in June even as it warned of “material irregularities” in a parent company’s accounts. Investors who bought stock in the offering -- managed by Banco Espirito Santo’s investment-banking unit, Morgan Stanley and UBS AG -- relied on the offer document for details on the firm’s finances. Shareholders have since been wiped out.

Banco Espirito Santo was split in two with deposits and healthy assets becoming Novo Banco in a bailout by the central bank’s Resolution Fund announced Aug. 3.

Bank of Portugal officials weren’t immediately available for comment. BES Investimento, Morgan Stanley and UBS were so-called global coordinators of the share sale, while KPMG was the company’s auditor. Officials at the companies declined to comment.

The banks that managed the rights offering haven’t been accused of any wrongdoing and aren’t under investigation.

‘Critical Judgment’

A probe into Banco Espirito Santo’s rights offer may ensnare the advisers that prepared the capital increase, including the investment banks, said Joana Gomes, a partner at Caiado Guerreiro e Associados who specializes in commercial and corporate law.

Information relating to public offers of securities should be comprehensive, true, current, clear, objective and lawful, according to Portugal’s securities rules. If the information used to draft the prospectus is proven to be untruthful, intermediaries that assisted with the offer, members of the company’s management and auditors can be found liable, according to the rules.

“I would expect them (the banks) to have a critical judgment” of the information they receive, Gomes said.

Banco Espirito Santo was bailed out after it disclosed potential losses on loans to other Grupo Espirito Santo companies and regulators ordered the lender to raise more capital.

Creditor Protection

Portugal’s Securities Market Commission was under “enormous pressures to approve the prospectus quickly,” Carlos Tavares, the chairman of the regulator, known as CMVM, said in parliament July 24. The bank’s advisers told the Lisbon-based watchdog that “if it wasn’t approved on a certain date that would be a calamity, the whole operation would collapse. That was something we couldn’t accept.”

In its May 20 prospectus, Banco Espirito Santo warned of irregularities in Espirito Santo International SA’s accounts and said the “serious financial situation” at that parent company could be damaging to the bank’s reputation.

The bank said its biggest shareholder, Espirito Santo Financial Group SA, indirectly controlled by ESI, had implemented measures to safeguard potential situations of default that could have an effect on Banco Espirito Santo.

Espirito Santo International sought creditor protection on July 18 and Rioforte, which indirectly owns 49 percent of ESFG, followed with a similar request July 22. ESFG also said that its Portuguese unit had filed for insolvency and that another of its fully-owned subsidiaries had sought creditor protection.

Forensic Audit

Banco Espirito Santo reported a 3.6 billion-euro first-half net loss on July 30 after setting aside 4.25 billion euros to cover souring loans to other members of the group linked to the Espirito Santo family.

The central bank said there were indications of “seriously harmful acts of management” at the lender and a failure to comply with the central bank’s directives. It said it’s reviewing the actions of various individuals, including Ricardo Salgado, 70, who was replaced by Vitor Bento, 60, as chief executive officer last month.

In an Aug. 4 statement, Salgado said he wouldn’t comment until he sees the results of the Bank of Portugal’s forensic audit.

Investigations related to Grupo Espirito Santo were ongoing, the Portuguese Prosecutor General’s Office said in a July 18 e-mail, while declining to provide more details.

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