What is there to learn from the (little known) case of Folli Follie

What is there to learn from the (little known) case of Folli Follie

"That a country like Italy, which with Barbara Spinelli headed a pan-European electoral list to Alexis Tsipras in 2014, and with Luciana Castellina, Syriza candidate in the Piraeus constituency, also participated in the Greek political elections in 2019, ignores everything of the Folli Follie epic is not beautiful ”. Italics by Teodoro Dalavecuras

On May 1, 2018, Quintessential Capital Management LLC of New York (QCM), an "activist" fund management company headed by Italian Gabriele Grego, formerly a volunteer paratrooper of the Israeli armed forces, publishes a report on one of the largest listed companies in the Athens Stock Exchange, the FF Group, better known as Folli Follie, a luxury brand built around trendy jewelery and watches at attractive prices, which in the space of relatively few years had acquired global projection and notoriety, establishing itself also in Asian markets, in particular in China.

Founded in 1982 by Dimitri Koutsolioutsos together with his wife, listed in 1997, ten years later it had a turnover of over 700 million euros, and of 1.419 billion at the end of the following decade. The market capitalization is over 1.2 billion.

An extraordinary success story, especially in a country, Greece, which in the last eight years had gone through an economic crisis of biblical dimensions, with an unemployment rate rising to 25% and the collapse of a large part of the banking system.

As for Grego, his company's report comes with an unequivocal title: "The Greek Parmalat?", Where the question mark has the sole purpose of creating a minimum of suspense: after thirty pages it ends in a succinct way, in the sense literal of the term, that is with a kind of plaque: “We are convinced that the elements produced justify serious concerns about the health and prospects of FF Group. Our checks on the actual network size, digital presence, distributors, other stakeholders and auditors all converge on the same conclusion: business in Asia may be a fraction of what it appears to be. The implications for the listing are clear: in our opinion it could be significantly overvalued ”.

Even a measured conclusion, one might say, if we consider what the report tells (but it is only an example), about Chung & Partners, the local auditors of "FF Group Sourcing Limited" (Chinese sub-holding of FF Group with a turnover of about 1 billion dollars): “we visited the Chung & Partners headquarters in Hong Kong and found a small office with two people”. Even more eloquent is the way FF ​​Group justified the use of this mini auditing firm in a 2015 conference call: “We are satisfied with our Hong Kong auditors because they do a job that is much more than what the Big Fours do and they are much less expensive, they also check the inventories, the accounts of all points of sale, factories and logistics centers. In short, we are very satisfied ”. The QCM report comments: "It is not clear how a two-person team in Hong Kong can verify the stocks and accounts of all the outlets of a company that operates in several Asian countries with hundreds of stores." But these are details, almost notes of color, the gist of the report is condensed into a number: the turnover of the Asian branch, which in the consolidated accounts of FF Group published less than a week earlier, on April 26, contributes over 1 billion to consolidated revenues, according to the estimates of the ratio "is worth" around 50 million.

On the stock exchanges where the FF Group bonds are traded, 450 million euros maturing between 2019 and 2021, when the QCM report arrives , the exchanges stop. In the following days it is still possible to sell the bonds, but with a 40% discount on the nominal. International banks that had placed FF Group's debt in clients' wallets are frantically contacting them to inform them of the situation and ask for instructions.

In Athens, meanwhile, the authorities of the stock exchange and the "Commission for the Capital Market", the Greek Consob, react with British phlegm, as would have been said before the arrival of Boris Johnson in Downing Street. The Commission, on 7 May, invites the FF Group to have its consolidated accounts audited by an international auditing firm. As for the Stock Exchange, on 25 May it was decided to suspend the listing of the FF Group securities until the audit by Ernst & Young ("EY") is completed, but only because the issuing company itself requests it through the Commission with an annoyed press release, motivating the request with the "continuous and coordinated dissemination of misleading information, which unjustifiably created an intensely negative climate". But the wait is destined to last: on June 15, almost 40 days after the "invitation" of the Commission for the Capital Market, the audit is still on the high seas: the FF Group communicates through its web page that EY, “for her reasons” is no longer available to carry out the assignment but only a partial assignment previously conferred to her; on 19 September EY announces the breakdown of relations with FF Group due to the "lack of collaboration" of the principal company.

As for the statutory auditors of the FF Group, on 18 July, they shake off their apparent numbness and "withdraw" the consolidated report published on 26 April. In the meantime, the task of auditing the 2017 consolidated was entrusted to Alvarez & Marsal (with whom, however, as it later emerged, the FF Group "collaborated" too much). The report by Alvarez & Marsal, resigned on September 26, can be summarized in a few but eloquent numbers (in millions of dollars): inventories 33.9 against the 581.7 indicated in the consolidated report published exactly 5 months earlier; trade receivables 99 against 719; bank availability 6.4 against 296.8; revenues 116.8 against 1,112.3; negative equity of € 2,012.5 million against equity of € 1,8131.9 million resulting from the published consolidation. In short, not a hole but an immeasurable chasm.

At this point, however, even the most patient reader will legitimately ask why this two-year-old story is being told.

There are two reasons for this. The first is that this story has met with a singular lack of interest on the part of the international media from the beginning and has been completely ignored by the Italian ones. The second is an interim report (full-bodied: 220 pages) by the international auditing firm Pricewaterhousecoopers (PwC) delivered at the end of November 2020 to the judicial authority of Athens and which became public domain in the following weeks.

First of all, it must be recognized that the QCM was ungenerous towards our Parmalat by titling its report of May 1, 2018 "The Greek Parmalat?". With all its flaws, Parmalat was an overly indebted company, casually managed and characterized by an exaggeratedly creative use of the scanner, but with a tangible commercial and industrial content, so much so that the French Lactalis had to put several billions of euros on the table to conquer it. . Calisto Tanzi paid the penalty for bad management both on a personal and patrimonial level and, a few weeks after the outbreak of the scandal, he had to leave the control levers of his group. Nothing comparable to the surreal parable of Folli Follie.

The story of Folli Follie, as it begins to emerge from PwC's interim relationship, is a string of accounting and entrepreneurial horrors. It is a very instructive catalog of what could be done – certainly until 2018, for the future we will see – with a company listed on the stock exchange in a Euro country, subject to a myriad of EU directives and procedures aimed at ensuring transparency. and proper management.

Not only was the FF Group used, according to what emerges from the PwC report, as the purse of the founder's family (still at the end of April 2018, € 550 thousand in cash were withdrawn from the social coffers "for business purposes of a confidential nature", and between on 4 and 17 May, 2.7 million euros are transferred to the personal accounts of Dimitri Koutsolioutsos and his nephew, in total half of the group's bank balances resulting from the Alvarez & Marsal report). Not only in 2008 the fictitious sales (made with the method, not exactly original, of the "carousel", "girotondo" or "merry go round" if you prefer: in practice sales to entities that are secretly and in some cases not even secretly controlled) of the group amounted to 17% of the total, a percentage which reached 62% in 2017, the last year before the "loss of innocence" (forgive me the euphemism). Not only these fictitious sales, these imaginary revenues, had produced far from imaginary taxes for the shareholders of FF Group, paid in Hong Kong in the order of hundreds of millions of hard dollars. Not only that – this also emerges from the PwC report – until the end of 2019 Giorgi Koutsolioutsos continued to give instructions to the management of PwC although the virtual bankruptcy of the group was confirmed at least from 26 September 2018, thanks to the numbers disclosed by Alvarez & Marsal, an “independent” company actually chosen by the Koutsolioutsos family, as PwC documents in the report. Not only in the accounts published by the FF Group some of the 45 subsidiaries were listed as resident in the United Kingdom, while they were companies incorporated in the well-known fiscal-corporate paradise of the British Virgin Islands. All in the light of day but no one had noticed until Grego raised the alarm signal (and many, at least in Greece, not even after). The icing on the cake: from the PwC report it also emerges that exponents of many of the entities involved in the roundabout of fake sales were often the two partners of Chung & Partners, the auditing firm of the Asian sub-holding, of which – he is not wrong from his point of view – Giorgi Koutsolioutsos had declared himself "very satisfied" in the conference call referred to above.

PwC was unable to complete its work because the principal company did not pay part of the compensation due (apart from this accounting "detail", the report spreads out on the difficulties faced by the management of the company which essentially hindered in every way the auditor's inquiries: of 23 company representatives that PwC had asked to interview, only 7 made themselves available, some, including former directors, were found to be “unavailable” for the FF Group).

In short, matter for a case history not only for business schools; also a good opportunity to reflect in depth on the alluvial production of regulation that has inflated, in recent decades, the financial statements of large auditing firms and the compliance budgets of listed companies, but does not seem able to bring to light – not even in a Eurozone country subjected for years to the strict supervision of the Troika – blatant corporate fraud, the kind that a simple diligent economic-financial journalist should be able to uncover (the fact that the chairman of the audit committee of a company that capitalized well beyond 1 billion euros in the small Athens scholarship were a dentist, father-in-law of the CEO Giorgi Koutsolioutsos should have raised some questions), but he must entrust a relative cleaning of the market to the activist funds of the American school whose profits, however substantial, remain a small fraction of the cost surplus generated by the proliferation of imposed procedures to operators; but this is not the place to explore a theme of such a great moment.

There would remain the curiosity to understand the reasons for the very slow reaction of the Greek authorities to the explosion of the crash (QCM, in its report of May 1st 2018 had already documented how half of the sales points in Asia declared by Folli Follie did not give any sign of life and how almost all of the declared turnover of the Asian sub-holding should be considered fictitious, a figure that became official at least from September 26; the judicial report ordered by the Monochromatic Court of Athens was entrusted to PwC on November 21, 2018 but the relative provision was notified to the PwC itself two months later; the contract with the FF Group, which obviously carried the burden of the report, was concluded on 25 June 2019; on 11 December 2019 – and we arrived more than 19 months after the first emergence of the crash – the Capital Market Commission resolved to ask PwC to communicate any elements that emerged from its investigation against members of the board of administration).

The interim report of the auditors / experts offers some answers to this question: in essence it refers, on the basis of internal e-mail exchanges between Giorgi Koutsolioutsos and the head of "security" of FF Group at the beginning of May 2018 and other documents, that immediately after the release of the QCM report the concern of the Koutsolioutsos concerns the stability of the political covers, and in this regard the security man reassures the CEO: the political "cover" of the group remains solid. He reports that "Maximou" (the "Chigi" of Athens) is informed; whereas the Commission will avoid undesirable or premature moves; that certain "needs" will have to be taken into account. The name of Alekos Flambouraris, an elderly politician of the radical left, minister and above all political mentor of Alexis Tsipras, circulates.

In Athens we are starting to talk on the one hand of the Court of Ministers and on the other of "speculations" by the government to divert attention from the mismanagement of the pandemic (to be honest in Europe we have seen much worse). As for me, I am too old to expect anything tangible to come out at the level of "ministerial justice". It should not be forgotten that Tsipras's successful political recipe involved not only an alliance with the internal opposition of Nea Demokratia, the one headed by Kostas Karamanlis, but also a coalition cover in terms of parliamentary coalition on the far right side of Panos Kamenos , Defense Minister of the Syriza-Anel government.

We will see.

In any case, the silence and the apparent lack of interest of the Syriza-Anel government and the media connected to it for the affair remain on record; the slow motion movements of the "competent authorities" – from the Capital Market Commission to the notifying messenger of the court. And the decision of Titan, the main Greek group operating in the cement sector with a production capacity of 27 million tons and production plants in 10 countries (from the United States to Turkey) to choose as the main trading market for its shares, also remains in the file. , from 23 July 2019, Euronext Brussels, with parallel listing to Euronext Paris and Athens, where it was listed since 1912 and where today its presence in the list is symbolic.

Well, that a country like Italy, which with Barbara Spinelli headed a pan-European electoral list to Alexis Tsipras in 2014, and with Luciana Castellina, Syriza candidate in the Piraeus constituency, also participated in the Greek political elections in 2019, you ignore all of the Folli Follie epic is not beautiful. In my own small way, it seemed right to remedy this shortcoming.


This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/cosa-ce-da-imparare-dal-caso-poco-noto-di-folli-follie-ff-group/ on Wed, 06 Jan 2021 06:20:00 +0000.