The wall Street Journal

How Europe's Bank Crisis Swamped Pescanova Seafood Empire

REDONDELA, Spain—The downfall of Manuel Fernández de Sousa, who built Pescanova SA PVA.MC -19.26% from a provincial Spanish fishing company into a multinational giant, is a cautionary tale of the still-rippling European banking crisis.

His troubles began at a Feb. 27 board meeting where Pescanova's two newest directors grilled him about the company's proposed financial results.

 wo days earlier, Mr. Fernández had convened the new directors and other big shareholders to warn the company faced a €50 million ($65.6 million) cash crunch. Why, the new directors demanded at the board meeting, was Pescanova preparing to release 2012 results that showed a big profit and lots of cash? "The numbers didn't make sense at all," said one of the two, François Tesch, whose firm held almost a 6% Pescanova stake. The two directors refused to sign off on the numbers, and Mr. Fernández didn't release them.

That confrontation triggered events that led Pescanova to seek bankruptcy protection. Authorities later stripped Mr. Fernández—who is being investigated for allegedly falsifying accounts and selling shares before the bad news broke—of operating control. On Wednesday, Mr. Fernández resigned.

Mr. Fernández said he didn't want to "represent an obstacle for the bankruptcy administration ahead of the negotiations that have to be carried out with creditors."

Drilling deep into the scandal at one of the world's largest seafood companies is like a core sample from the depths of corporate distress across southern Europe as the continent's credit dried up. The layers show companies that borrowed heavily and grew rapidly before the credit bubble burst. Some of these companies are now enmeshed in investigations over allegedly illegal practices.

Former executives of Monte dei Paschi di Siena SpA, BMPS.MI -1.36% a 541-year-old Italian bank, are under investigation for allegedly fraudulent derivatives transactions carried out to ease financial pressures after the costly acquisition of a rival bank. 

Greek tycoon Lavrentis Lavrentiadis enjoyed a rapid rise before 2008, but the government recently jailed him on fraud charges related to loans a bank he controlled allegedly made to financially stressed companies in his empire. Mr. Lavrentiadis has said he is innocent. Lawyers for one of the three ex-Monte dei Paschi executives under investigation, Gianluca Baldassarri, denied wrongdoing, and lawyers for the other two didn't return messages seeking comment.

In the case of Pescanova, a recent KPMG audit claimed the company secretly amassed a debt of €3.28 billion, about twice the amount it had disclosed in financial statements. An investigative judge called it a scheme to present "an unreal image of [the firm's] economic and asset situation."

In a June interview, Mr. Fernández, who served as executive chairman, acknowledged the debt was higher than previously reported and said there were flaws in how Pescanova and its auditors, BDO España, kept the books.

"Management did produce mistakes. BDO did produce mistakes," said Mr. Fernández. He acknowledges selling some of his shares, but says he then lent more than €9 million in proceeds to help the company out of a liquidity crunch. In a later court filing, Mr. Fernández said none of his actions were part of any "deliberate fraudulent scheme," and were done in good faith to keep his company afloat. BDO declined to comment.

With Mr. Fernández gone, who will end up running the company is unclear. The board of directors didn't name a new chairman. Daily operations remain in the hands of the bankruptcy administrator, Deloitte. Meanwhile, some of the company's affiliates in Latin America have entered into bankruptcy proceedings in local jurisdictions, putting prime assets at risk of being sold off to pay creditors.

Mr. Tesch, one of the directors, said the board meeting lasted seven hours without a lunch break. He said the audit left Mr. Fernández with no other option than to leave. "It was just a devastating report," Mr. Tesch said. Mr. Fernández retains a seat on the board.

Pescanova's fall, the third largest bankruptcy in Spanish history, comes as the country is reeling from a wave of alleged financial crimes that have inflicted heavy costs on shareholders and taxpayers. As elsewhere in Europe, allegations of corporate misdeeds are hindering the country's efforts to regain the confidence of financial markets and climb out of recession.

Besides the Pescanova affair, Spanish prosecutors are conducting investigations of alleged irregularities at seven banks that lent aggressively during the real-estate boom in the early 2000s then needed a total of more than €30 billion in government bailouts when the economy contracted. All the banks have denied wrongdoing.

Pescanova's decline was especially jolting because it is a global player with more than 10,000 employees in 26 countries and 2011 sales reported at €1.67 billion. Its retail mascot, a tango-dancing prawn named Rodolfo Langostino, is as familiar to Spaniards as Charlie the Tuna is to Americans of a certain age.

Fernando Ruiz Lamas, a finance professor at the University of La Coruña in Pescanova's home region of Galicia, said Pescanova "never made the transition from family business to public company."

Mr. Fernández, son of the founder, put his son and his brother on the board. Both are under investigation, authorities say.

In April, Pescanova commissioned accounting firm KPMG to do a forensic audit. It said it found the fishing company hid debt in far-flung affiliates whose books were never consolidated within the main holding company. It also found that Pescanova used bogus invoices from shell companies to obtain short-term financing from banks or factoring firms, which buy invoices and then collect payments.

Founded in 1960, Pescanova pioneered the use of factory ships, which freeze the catch on board. Over the past 15 years, Mr. Fernández launched a costly diversification into aquaculture, building seafood farms in Portugal, Ecuador and Chile.

Banks "were offering more money to you than you could develop," Mr. Fernández said. He said credit dried up after Europe entered crisis in 2008, and it has been a struggle to fund his company.

In mid-2011, a savings bank from Galicia, retrenching due to Spain's recession, sold off a stake in Pescanova and gave up two slots on the board. Taking the bank's place were Mr. Tesch, representing Luxembourg-based investment firm Luxempart, and José Carceller, representing Barcelona-based brewer Grupo Damm.

"All the lights were green from the banks, from the financial analysts, from the auditor," Mr. Tesch said. But Messrs. Tesch's and Carceller's early enthusiasm would soon change.

In the middle of 2012, Mr. Fernández surprised the new directors with a plan to raise capital by issuing more stock. They said they agreed on the condition that Mr. Fernández appoint them to the board's auditing committee.

After the €125 million stock issue was completed in August, Mr. Fernández told the directors they would have to wait until shareholders could vote on a proposal to expand the committee at the April annual meeting. Mr. Fernández said in a recent interview that was because he didn't want to force a current auditing committee member to resign. Mr. Tesch had doubts: "There was strong resistance, and I found it a little bit strange."

Things would soon get stranger. Mr. Fernández came to Luxembourg for a meeting with Luxempart's board on Feb. 15, and projected a 2012 profit approaching €40 million, better than prior estimates, Mr. Tesch said.

But then on Feb. 25, Mr. Fernández called Messrs. Tesch and Carceller, along with other large shareholders, for an emergency meeting to discuss the €50 million liquidity squeeze. Mr. Fernández said in the interview the shifts in the outlook were a consequence of volatile negotiations with lenders and firms to which he was trying to sell some of Pescanova's Chilean assets.

Finally came the Feb. 27 board meeting, which Mr. Carceller said produced the "bombazo," or bombshell, that would bring Pescanova's problems out into the open.

Messrs. Tesch and Carceller spent the morning debating the 2012 financial statement with Mr. Fernández, who sat at the center of a horseshoe-shaped table. The statement showed strong earnings and nearly €150 million in cash—without any suggestion of the liquidity crisis Mr. Fernández had briefed them on two days earlier, participants in the meeting said.

Messrs. Tesch and Carceller said they faced a dilemma. If they agreed to sign the report, they might have been subject to prosecution for attesting to false information. But refusing to sign could expose the company's troubles and hurt the value of their investments.

They refused. "If we had signed those papers, this would have gone on and on with more debt and more problems," Mr. Tesch said later.

In retrospect, Mr. Fernández said, the financial statement should never have been presented to the board. Part of the blame was BDO's, he said, but "management is supposed to produce the right figures and to avoid that anybody makes mistakes." BDO isn't being investigated, authorities say.

Late on Feb. 28 Pescanova sent a communiqué to the stock commission saying it would put off filing its 2012 financial statements, until it either sold the Chilean business or sought bankruptcy protection.

The stock commission halted trading in Pescanova, allowed it to resume a few days later, and then halted it again, with the stock having lost 66% of its value. Luxempart and Damm estimate losses of €52 million and €28 million, respectively, on their Pescanova investments.

In mid-March, Mr. Fernández announced that there were discrepancies "that could be significant" in the previously reported size of its debt, and several weeks later Pescanova filed for bankruptcy.

Besides Mr. Fernández, five current or former members of the board, including Mr. Fernández's son and brother, are being investigated by a national court judge for allegedly falsifying accounts. Some top executives also are under investigation. Mr. Fernández, two other directors, and the father of a third ex-director, are being investigated for insider trading allegations. With the exception of Mr. Fernández, the executives and directors couldn't be reached for comment.