XP brokerage firm in hot water over accounting irregularities

. Mar 09, 2020
IPO XP Nasdaq "BE BOLD," says an ad for XP's Nasdaq IPO. Photo: Shutterstock

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This week, we cover the fraud accusations against brokerage firm XP Inc. The military deal signed by Jair Bolsonaro and Trump. And how Covid-19 will hold back Brazilian IPOs.

Accused of foul play, XP Inc. faces class action

Stocks of brokerage firm XP Inc.

on Nasdaq dipped 13 percent following the publication of a <a href="https://b94742ca-8101-4639-ae40-08569fcbd131.filesusr.com/ugd/a6c7f3_66308a18098d4901877997178683f43b.pdf">report</a> by The Winkler Group, an investment consultancy. It announces its short-selling position on XP due to &#8220;accounting irregularities, inadequate financial disclosures, and discrepancies between the company’s IPO prospectus and internal audits.&#8221;</p> <p><strong>Why it matters. </strong>This could be the start of a very expensive legal battle for XP, just three months after its <a href="https://brazilian.report/business/2019/12/09/ipo-decade-xp-investimentos/">splashy initial public offering</a>. Soon after the report went public, two high-profile investors&#8217; rights law firms (Block &amp; Leviton and The Rosen Law Firm) have announced investigations into XP for a possible class action, asking investors to contact their offices.</p> <figure class="wp-block-image"><img loading="lazy" width="1024" height="502" src="https://brazilian.report/wp-content/uploads/2020/03/xp-stocks-1024x502.png" alt="xp stocks" class="wp-image-32568" srcset="https://brazilian.report/wp-content/uploads/2020/03/xp-stocks-1024x502.png 1024w, https://brazilian.report/wp-content/uploads/2020/03/xp-stocks-300x147.png 300w, https://brazilian.report/wp-content/uploads/2020/03/xp-stocks-768x376.png 768w, https://brazilian.report/wp-content/uploads/2020/03/xp-stocks-610x299.png 610w, https://brazilian.report/wp-content/uploads/2020/03/xp-stocks.png 1074w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>XP stocks on Friday</figcaption></figure> <p><strong>Accusations.</strong> The report raised serious questions about the brokerage firm&#8217;s financials:</p> <ul><li>XP&#8217;s assets would be overstated by USD 44 million;</li><li>An internal audit would have revealed a BRL 167-million discrepancy between the annual revenue reported in one audit, against the following year’s audit of its core asset;</li><li>The report claims XP fired its auditor after it discovered weaknesses in internal controls;</li><li>The Winkler Group also pointed out a December 2019 XP conviction for using algorithms that benefited the company&#8217;s dealings to the detriment of its clients. Regulators considered that the brokerage firm did not respect fiduciary obligations, and dished out a fine of over BRL 10 million.</li></ul> <p><strong>Rebuttal.</strong> In a <a href="https://investors.xpinc.com/static-files/d7900132-643e-434b-b3f5-fdc262d69999">note</a> to investors, the company dismissed all accusations, saying they come from investors with an agenda—The Winkler Group is short-selling XP stocks, that is, it bets on the failure of XP stocks.</p> <blockquote class="wp-block-quote"><p><em>The report is full of errors along with points that are immaterial and/or irrelevant. For example, the report demonstrates a lack of knowledge about the different accounting rules (Bacen GAAP —Brazilian Central Bank standards versus IFRS—international financial reporting standards) and uses inappropriate comparisons (XP CCTVM individual balance sheet – our broker-dealer entity versus the XP group’s Prudential Conglomerate consolidated balance sheet – which includes other XP subsidiaries).</em></p></blockquote> <p><strong>&#8220;IPO of the decade.&#8221;</strong> Brazil&#8217;s largest digital investment platform raised over USD 2.2 billion in its December 2019 IPO—the ninth-biggest in the world.</p> <p><strong>Other class actions.</strong> According to a 2019 report by Nera Economic Consulting, investor litigation has become increasingly more common in the U.S. In 2018, 441 federal securities class action suits were filed—the fourth consecutive year of increased numbers. In 2015, <em>Reuters</em> reported that Brazil is the country with the second-highest number of companies being sued, only behind China.</p> <p>Players such as Braskem (petrochemicals), Eletrobras (energy), Vale (mining), Gerdau (steel), Bradesco (banking), and oil &amp; gas giant Petrobras have all been sued. In the latter case, Petrobras reached a settlement of USD 2.95 billion—the largest amount ever paid by a foreign entity in the U.S.&nbsp;</p> <hr class="wp-block-separator"/> <h2>The military deal signed by Bolsonaro and Trump</h2> <p>On Sunday, The Jair Bolsonaro administration signed an unprecedented military deal with the U.S. in a push to increase the Brazilian presence in the world&#8217;s largest defense market. The bilateral deal was inked in the U.S. Southern Command headquarters, in Doral, Florida.</p> <p><strong>Why it matters.</strong> Brazil was designated a &#8220;major non-NATO&#8221; ally by the Trump administration in March 2019—but that doesn&#8217;t mean much without deals like this. Besides giving Brazil an entry in the U.S. market, it could facilitate access to the other 28 NATO countries.</p> <p><strong>RDT&amp;E.</strong> The so-called <a href="https://brazilian.report/power/2020/03/07/jair-bolsonaro-donald-trump-dine-over-defense-deal/">Research, Development, Test &amp; Evaluation (RDT&amp;E) deal</a> allows the U.S. and Brazilian governments to sign defense projects and hire Brazilian companies to carry them out. The deal would also allow Brazilian contractors to make use of U.S. laboratories and technologies in a model of shared intellectual property.</p> <p><strong>Upside.</strong> The partnership with the U.S. could grant Brazil access to a USD 100-billion technology development fund. It could also help the country develop its defense industry to more modern standards.</p> <div class="flourish-embed flourish-bar-chart-race" data-src="visualisation/1204083"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>Yes, but … </strong>The deal will only come to fruition after both countries&#8217; legislative branches pass it. And that could be a problem for Mr. Bolsonaro.</p> <p><strong>5G.</strong> The White House used the occasion to once again try to coax Brazil into banning Chinese telecoms giant Huawei from its upcoming 5G auction. A senior Trump official told <em>Reuters</em> that Brazil&#8217;s stance on the issue could &#8220;get in the way of further cooperation.&#8221;</p> <p><strong>Defense exports.</strong> Brazil currently exports defense products to 85 countries. In 2019, sales abroad amassed USD 1.23 billion.</p> <p><strong>Non-committal.</strong> During an event on Saturday at Mr. Trump&#8217;s Mar-a-Lago residence, President Bolsonaro said the U.S. would not carry out his counterpart&#8217;s threats to slap higher taxes on Brazilian steel products—but Mr. Trump said he could not make any guarantees to this end.</p> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>After the collapse of Opec&#8217;s production deal and Russia and Saudi Arabia engaging in a full-on price war, oil futures collapsed more than 30 percent on Sunday night, the worst drop since 1991. Investors must keep an eye on Petrobras; the state-owned oil company&#8217;s ADR traded in New York crashed 10 percent on Friday, even <em>before</em> Brent crude prices took a nosedive. As Petrobras is one of the main shares of Brazil&#8217;s Ibovespa index, investors must brace for a rough day—or week.</p> <p style="text-align:center"><em><strong>Natália Scalzaretto</strong></em></p> <hr class="wp-block-separator"/> <h2>Covid-19 should delay Brazilian IPOs</h2> <p>Stock markets are in sell-off mode everywhere—a trend that Brazil has not escaped. Since February 21, companies listed in São Paulo lost a combined BRL 565 billion in market value. During that span, the benchmark Ibovespa index dipped 14 percent. That has made many companies expected to hold their initial public offerings jittery about going public in 2020, with the market&#8217;s drop making valuation processes all the more difficult. After having their IPO request approved by Brazil&#8217;s Securities Commission (CVM), companies have up to seven months to go public—and many companies will wait until the last minute.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/1537332"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <hr class="wp-block-separator"/> <h2>Looking ahead</h2> <ul><li><strong>Protests.</strong> On Saturday, President Jair Bolsonaro <a href="https://twitter.com/BolsonaroSP/status/1236302482629963778?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1236302482629963778&amp;ref_url=https%3A%2F%2Fbrasil.elpais.com%2Finternacional%2F2020-03-07%2Fbolsonaro-e-recebido-por-trump-na-florida-enquanto-reforca-crise-com-congresso-no-brasil.html">incited people to protest</a> against Congress and the Supreme Court, set to take place on March 15. &#8220;It&#8217;s not against Congress, [or] against the judiciary, it is in favor of Brazil. [We will] show all of us that the one leading Brazil is the population.&#8221; The protests will be an ultimate test of the president&#8217;s strength against the other branches of government—and could escalate the political crisis further. For many experts, <a href="https://brazilian.report/podcast/2020/03/04/explaining-brazil-98-should-congress-impeach-jair-bolsonaro/">Mr. Bolsonaro has committed an impeachable offense</a> by trying to interfere with the independence of Congress. On Sunday, House Speaker Rodrigo Maia tried to extend an olive branch to the president, asking him to lead a joint effort to mitigate the <a href="https://brazilian.report/newsletters/brazil-daily/2020/03/06/economy-coronavirus-dollar-real-covid-19/">impacts of the coronavirus outbreak on the Brazilian economy</a>.</li><li><strong>Surgery.</strong> During an interview with a comedian, President Bolsonaro said he will undergo a fifth surgery following a <a href="https://brazilian.report/power/2018/09/06/bolsonaro-stabbed-rally/">stabbing attack on September 6, 2018</a>. He did not disclose any details about the procedure, but mentioned: &#8220;it should be the last one.&#8221;&nbsp;</li><li><strong>Fake news.</strong> Members of Congress have started to gather signatures in order to extend the works of a parliamentary hearings committee on the spread of misinformation by political actors. Set to wrap up its activities on April 13, the committee was able to <a href="https://brazilian.report/newsletters/brazil-daily/2020/03/05/low-gdp-numbers-dreadful-decade-brazilian-economy/">link the office of Congressman Eduardo Bolsonaro to a page which spreads misinformation</a> on Facebook. The committee has been used by lawmakers as a way to create discomfort for the president—and more links to the First Family could emerge if investigations dig deeper. An old Brazilian adage says that &#8220;we know how hearings committees start, but never how they end.&#8221;</li><li><strong>Industry.</strong> On Tuesday, Brazil&#8217;s official statistics agency publishes the country&#8217;s industrial output for January—and expectations are not high. Data collected by news service <em>Broadcast</em> shows that analysts forecast a growth rate anywhere between -2.2 and +0.4 percent. Brazil&#8217;s GDP numbers have shown that the industrial sector grew by only 0.5 percent last year—and such sluggishness is one of the main roadblocks to the country&#8217;s economic recovery.</li></ul> <hr class="wp-block-separator"/> <h2>In case you missed it</h2> <ul><li><strong>Coronavirus.</strong> Until Sunday evening, Brazil had confirmed 25 Covid-19 infections, with another 663 suspected cases. According to health authorities, 21 patients contracted the virus abroad—while four local transmissions have been confirmed. Brazilian researchers are <a href="https://brazilian.report/society/2020/03/03/brazilian-researchers-mapping-coronavirus-genome-contain-outbreak/">mapping the Sars-CoV-2 virus&#8217; genome at record pace</a>—which is important to help researchers understand the path of the virus and how long it has been present in a given region. By obtaining this information, health authorities can adopt better-informed measures to contain the outbreak.</li><li><strong>GDP.</strong> The Brazilian economy <a href="https://brazilian.report/business/2020/03/04/lowest-gdp-growth-3-years-highlights-brazil-dire-need-reforms/">grew 1.1 percent in 2019</a>—the lowest rate since the country emerged from recession. The numbers cap off what is set to be Brazil&#8217;s worst growth decade in 120 years, unambiguous proof that the country has been utterly unable to recover from the end of the commodities super-cycle of the 2000s. Among emerging economies, Brazil only fared better in 2019 than Mexico, Turkey, and South Africa.</li><li><strong>Budget.</strong> The government and Congress reached an agreement that keeps the president&#8217;s office in control over how and when parliamentary grants are paid out of the federal budget—an important whipping tool used by governments. In exchange, the government agrees that these grants are mandatory expenses and must be greenlit every year. The <a href="https://brazilian.report/newsletters/brazil-daily/2020/02/12/bolsonaro-budget-change-congress-amazon-council-argentina-diplomacy/">dispute over budget control</a> has been at the center of Jair Bolsonaro&#8217;s latest quarrel with Congress—and led him to incite supporters to protest against lawmakers.

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