Swiss Cheese

Swiss engineering group ABB revealed the discovery of what it called a “sophisticated criminal scheme” in its South Korean subsidiary which it expects will result in a $100 million pre-tax charge.

ABB Chief Executive Ulrich Spiesshofer described the alleged fraud as “shocking news” which he said could dent the power equipment and industrial firm’s reputation. “The entire ABB group – all 132,000 of us – will have to live with the consequences,” Spiesshofer told staff in a letter after the company said it had uncovered significant embezzlement and misappropriation of funds in its South Korean subsidiary. ABB, which already faces an investigation into suspected bribery and corruption in Britain, has been under shareholder pressure due to a shrinking order book, although Spiesshofer won some breathing space when the firm posted the first uptick in new business in nearly two years in the fourth quarter of 2016.

Separately, ABB said it nominated Lars Forberg, managing director of Cevian Capital, for election to its board. A call by Cevian, ABB’s second-largest shareholder, to spin off its power grids business, was rejected by ABB last year. The Swiss company said the alleged theft was limited to South Korea, where it employs around 800 people and generated sales of $525 million in 2015. “The treasurer of the South Korean unit is suspected of forging documentation and colluding with third parties to steal from the company,” ABB said.  The treasurer, named by a source in Korea as Oh Myeong-se, disappeared on Feb. 7 and ABB subsequently discovered significant financial irregularities.  “In February we became aware of suspected financial irregularities in South Korea and we immediately launched an investigation,” ABB spokesman Saswato Das said.  “Given the size of the scheme, the investigation may expand to third parties inside and outside of ABB in South Korea.”

ABB estimated it would take a pre-tax charge of about $100 million and may delay the publication of its 2016 annual report.  Zuercher Kantonlbank estimated the loss was equivalent to roughly 4 percent of ABB’s 2016 net profit of $1.96 billion and raised questions about corporate governance at ABB. However, ABB’s stock barely moved on news of the potential charge, with some traders welcoming the nomination of Cevian’s Forberg to the board.

The disclosure marks a setback for ABB, which in recent weeks announced a string of large orders in its power-grids unit including a $640 million project to deliver an electricity transmission link in India. Its share price has risen over 7% so far this year. Separately, ABB earlier this month said it had unearthed alleged improper payments following an internal investigation into its past dealings with oil-services provider Unaoil Group. U.K. authorities have launched an investigation, which ABB is cooperating with. In a research note, analysts at Morgan Stanley said they didn’t expect the theft reported Wednesday to have much of an effect on ABB’s 2017 earnings. “The headlines are clearly not appealing, and there may be some legitimate investor questions about oversight,” the analysts wrote. The company said the situation was limited to South Korea, where it employs 900 workers.

The fraud is the second such disclosure this month after the Swiss maker of power grids and robots said it’s being investigated by the U.K. Serious Fraud Office after the discovery of improper payments related to another criminal probe. The cases add to the pressure on Chief Executive Officer Ulrich Spiesshofer after activist investor Cevian Capital AB pushed for a breakup of the company. Cevian co-founder Lars Forberg has been nominated for a seat on the board, ABB said in a separate statement.

While the South Korean case “is unfortunate, we do not expect any major lasting impact,” Vontobel analyst Panagiotis Spiliopoulos wrote in a note to clients. The shares fell 0.3 percent to 23.08 francs at 11:45 a.m. in Zurich. The suspected theft will lead to a pre-tax charge of about $100 million on previously reported, unaudited 2016 results, ABB said, adding that it’s collaborating with law enforcement authorities and has hired independent forensic specialists.

ABB’s legal woes add to challenges posed by its second-biggest shareholder, Cevian, which called for a spin off of the power grids business on the grounds the Swiss industrial company is too complex and difficult to run. In October, Spiesshofer defied the investor and announced ABB would hang on to the business. Cevian’s other co-founder, Christer Gardell, has since vowed to keep pushing ABB for a breakup.  Cevian’s board nomination at next month’s annual shareholders’ meeting would give the investor with a stake of about 6 percent an insider’s view of the business. ABB said its other board members will stand for re-election except for Robyn Denholm and Michel de Rosen. “I look forward to working with management and the colleagues of the board to enhance ABB’s long-term competitiveness and value,” including through the successful implementation of ABB’s strategy, Forberg said in the ABB statement. A Zurich-based spokesman for Forberg declined to comment further on the nomination.

The move is “slightly surprising” given Cevian has not publicly supported ABB’s decision to keep its power grids division, according to Morgan Stanley analysts, adding that it indicates Forberg will support ABB’s strategy.