The Solutions 30-Muddy Waters case in 6 questions

Posted on 23 Dec. 2020 at 13:25Updated 23 Dec. 2020 at 13:43

Solutions 30 peaked on December 8 at 19.90 euros. That was before the company faced harsh and serious accusations from an anonymous report, accusing it of links to the Italian Mafia and accounting errors. These accusations were, the next day, relayed by the famous short seller, Muddy Waters, known in France for having targeted Casino and the galaxy of Jean-Charles Naouri. Solutions 30 share has lost 51% of its value in ten days.

1. Solutions 30: what is it?

Solutions 30 is a company specializing in solutions for new technologies. She installs Linky electricity meters and fiber optics in private homes. It has 7,000 salaried employees and 4,000 subcontractors in Europe, two thirds of which are in France. Founded in 2003 by its CEO, Gianbeppi Fortis, the company, which is headquartered in Luxembourg, has grown rapidly. With a turnover of more than 680 million euros in 2019, an annual growth of more than 30% over ten years, it has surfed on the rise of the digital economy and the energy transition. It was – until now – one of the favorite stocks of small and mid-cap funds. Listed on the stock market in 2005 with a capitalization of 4.5 million euros, the group was valued at 1.5 billion euros last July when it was transferred to the regulated market of Euronext Paris, before integrating, in September, the SBF 120.

2. Why has the Solutions 30 share fallen by more than 50% since December 9?

Between Wednesday, December 9 in the morning and December 18 in the evening, Solutions 30 lost 55% of its market capitalization (ie 1 billion euros). The stock’s listing was suspended on December 11 and 14. At the origin of this stock market plunge, the publication of an anonymous report on December 9. This anonymous report was sent by email and via Twitter to financial analysts, managers, and then to the company. He accuses Solutions 30 in particular of having links with people who have been the subject of criminal convictions related to money laundering. The accounts would also contain errors, and profitability and cash flow would not match the nature of the company’s business.

Muddy Waters, who makes no secret of being a short seller on the stock since May 2019, seized the opportunity created by the publication of this anonymous report on Solutions 30 to point out the “deceptions” of the specialist in services to telecommunications companies and energy.

3. Who is Muddy Waters tackling Solutions 30?

Muddy Waters is a short seller, founded by Carson Block, named in 2011 as one of the 50 most influential people in finance by Bloomberg Markets Magazine. He is betting on the fall in stock market prices. On the markets, Muddy Waters enjoys a certain credibility, because for more than ten years, he exposed the fraudulent practices of several listed companies, in particular Chinese. Among his feats of arms: in 2011, he revealed a gigantic fraud at the forestry group Sino-Forest, listed in Canada, whose first shareholder was none other than the American billionaire John Paulson. The action plunged, the authorities seized the file and Sino-Forest went bankrupt soon after.

In France, Carson Block is known to have denounced, in December 2015, unsustainable indebtedness in Casino holding companies (Rallye has been placed under safeguard procedure). The short seller and the distributor have entered an extraordinary battle. Casino brought a complaint against X for price manipulation, dissemination of false or misleading information and insider trading. After four years of investigation, the Autorité des marchés financiers (AMF) sent back to back Muddy Waters and Casino, the group of Jean-Charles Naouri. Result: no sanction for either of them, but a reminder of the market rules.

4. What is Solutions 30 accused of?

Solutions 30 is accused, by the anonymous report which came out on Wednesday, December 9, then by Muddy Waters, the next day, of having links with the mafia, via Angelo Zito, the ex-manager of an appraisal company accountant in Luxembourg, the Fiduciaire du Kiem with which the company, which has its headquarters in Luxembourg, has worked. The latter admitted in an interview with Zone Bourse having served in prison in Italy for six months, as a preventive measure. Then have been sentenced for “mafia association” to 18 months suspended sentence. He said he warned Solutions 30 from the start of their business relationship.

Solutions 30 is also singled out for accounting errors and certain financial arrangements. Muddy Waters wonders about the purchase of certain empty shells, which are now subsidiaries of the group. Another question: the conditions of the takeover, then the sale of two companies (BSI and BRSI), in which one of the members of the supervisory board, Francesco Serafini, held an interest. While he played the role of intermediary during the acquisition of 10% of these companies by Solutions 30, they would have been greatly overvalued. The acquisition of CPCP would also have been recorded in the accounts at a price higher than that recorded by the seller.

5. What is the company’s response?

The company categorically denied all of these allegations. She posted on her site what, according to her, “Put an end to all the suspicions that this information was intended to give rise to”. She answered more than 50 questions posed by the anonymous report and by Muddy Waters.

On its possible links with the mafia: initially, the company admitted to having worked with an employee of the accounting firm, the Fiduciaire du Kiem, of which one of the managers, Angelo Zito, was allegedly cited in legal cases between 1998 and 2000, in connection with the Mafia. But the latter was released in 2000. Solutions 30 claimed not to have been aware of the businessman’s troubled past, in contradiction with Angelo Zito, who said he always informed his clients of his past.

The group recalled that it had been the subject of regular audits of its major customers, including at regional level. Management specifies that it has carried out several actions to improve transparency, in particular at the time of its transition to IFRS and the transfer of its listing on Euronext.

Solutions 30 announced the appointment of external experts to “To analyze, in complete independence, the campaign carried out, the damage suffered and the merits of the responses provided”. These missions were entrusted to Didier Kling, president of the Paris Chamber of Commerce and Industry and former president of the National Chamber of Financial Expert Advice, as well as to a “leading” business intelligence firm. The company alerted the AMF, mandated lawyers to file a criminal complaint for false report and dissemination of false information.

6. And after?

Muddy Waters disputes the appointment of expert Didier Kling. He wants the investigation to be carried out by a Big Four (one of the four major global audit firms: Deloitte, EY, KPMG or PwC. Because according to him, only an external audit giant will be able to verify all the company financial data. Also according to Muddy Waters, “The scope of the investigation announced by Solutions 30 seems woefully insufficient to ensure that the financial statements are not intentionally wrong. When companies impose a narrow scope on an investigation, they increase the likelihood that investigators will find no evidence of wrongdoing. This technique is analogous to that which consists of searching only in the living room of a contraband house and not elsewhere “.

Finally, the American activist wants only independent directors to be involved in the investigation “Given the seriousness of the accusations involving the management”. “If Solutions 30 has nothing to hide, there can be no excuse for not conducting a credible investigation”, Carson Block concludes.

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