How An Alleged €150 Million Check-Kiting Scam Bankrupted Leo Burnett In Greece

Jim EdwardsMar 4, 2013, 18:35 IST

Publicis groupe / YouTubePublicis CEO Maurice LevyLast year, when ad agency Leo Burnett's Greek subsidiary suddenly filed for bankruptcy, most people chalked up the failure to the economic crash that humbled that country. But that's not why the agency collapsed, two sources tell us. Rather, the agency's chairman was allegedly operating a Ponzi-style check-kiting scam that fell apart when the TV company it was colluding with went out of business. This left Leo Burnett's subsidiary holding millions of euros in worthless checks that couldn't be cashed, according to the senior vice president charged with sorting out the mess. It's not clear how much Leo Burnett owes creditors, but some reports have put the total owed by all companies in the scheme as a high as €500 million. The agency says it's about €150 million. Normally, when financial scandals hit ad agencies, management does its very best to not talk about them. To Leo Burnett's credit, however, Mathias Emmerich, a senior vice president at Leo Burnett's parent company, Publicis Groupe, answered some tough questions when we interviewed him earlier this week. He's as angry as his creditors at the way Leo Burnett's Greek management scuttled the company by operating what he calls a "very stupid, very insane" bogus media credit scheme. (Emmerich has also been named by a different Greek creditor in a complaint alleging that the agency walked away from its bills. That move was procedural, Emmerich tells us, because he is one of the Publicis executives who has been trying to clean up the mess.) Both Publicis and one of its creditors, Antenna TV, have filed criminal complaints against the former Leo Burnett subsidiary chairman, Petros "Peter" Venetis, and the case is working its way through the Greek legal system. Venetis could not be reached for comment. He was fired in 2012. The executive director of Antenna TV, the station he was working with, has reportedly been accused of failing to pay €1.2 million in sales taxes. Leo Burnett is not some small shop that did an inadvisable deal. It's a global colossus. Founded in 1935 in Chicago, it now has 10,000 employees in 96 offices around the world. It counts Procter & Gamble and Samsung among its clients. Publicis CEO Maurice Levy, the French advertising titan, is its ultimate boss. That such a venerable agency brand should flame out of existence in what remains one of Europe's biggest media economies was — until last year — unthinkable. Publicis GroupePublicis svp Mathias EmmerichHow Leo Burnett collapsed in Greece Here's how it happened, according to Mathias and Antenna TV COO Alexander Holland, one of the media companies left holding Leo Burnett's unpaid bills. Around the second quarter of 2011, Publicis discovered that Leo Burnett in Greece was buying and reselling TV ad airtime with another Greek company, Alter TV, Emmerich says. Burnett would buy a block of airtime from Alter and the resell it back to Alter at a profit, or sell it on at a profit to its own clients. This practice is called acting as a "media broker" rather than a buyer. The bet is that the agency, by buying in bulk and in advance, can get the airtime cheaper than it could if it waited for its clients to actually place orders. It can make a profit when it sells the airtime to its clients later. It's a practice that remains fraught with ethical conflicts, because it can place the agency's profits ahead of the client's best interests. The part of the scheme that doesn't make sense, of course, is why Alter would buy back airtime for more than it initially sold it for — unless it had new clients willing to pay a premium on that price, too.

Alter TVAn Alter TV showPost-dated check-swapping The scheme allegedly contained a double advantage for Leo Burnett, Mathias says. Later that year, he discovered that both Alter and Leo Burnett were making their purchases using post-dated checks, so that money was owed but did not immediately change hands. Burnett's checks were then used by Alter to secure new financing from the Greek banking system or to pay Alter's providers. At the end of 2011, with the Greek economy in free fall, Alter went bankrupt. That left Alter's creditors holding uncashed checks written by Leo Burnett. But those checks were written on the assumption that Leo Burnett would be able to cash the checks it had gotten from Alter. With Alter unable to pay Leo Burnett, and Leo Burnett unable to make good on its outstanding checks, the whole scheme came crashing down, Mathias says. "It was a big fraud, a very big fraud. More than 150 million euros originating in the Greek market. It was a classic pyramid fraud. The whole system collapsed." Mathias says Venetis was the mastermind — "I fired this guy" — and Publicis brought a legal complaint against him immediately. But, he says, the problem was endemic in Greece. " A good number of agencies were victims of this fraud." Antenna TVAntenna TV's ANT1 News show"We are in deep shit." A this point, in 2012, Mathias and Publicis decided to come clean to all the media companies to whom it owed money, in an attempt to work out a deal to pay off Burnett's debts, albeit at a discount on the amount owed. "We are in deep shit," Mathias said TV companies were told. "There has been a massive fraud in the Greek market and to mitigate the risk we agree to pay partly what is due." Almost all the TV networks took a "haircut" on their bills, Mathias says, except Antenna TV. "They thought this scheme was not generous enough." Holland, the Antenna COO, agrees that the offer was not generous enough, but that's all he agrees with Mathias on. "Leo Burnett has been one of our largest clients over the years. They told us, 'Oh, we found out there might be a problem. We want to offer you a haircut but we don't know how [much it will be]. We'll call you back. Burnett initially offered to pay a 26 percent reduction on the money it owed, Holland says. Later, the haircut was raised to 35 percent, and then 40 percent. Antenna balked. The company was told, "All we care about is our international clients, most notably P&G," Holland says. "Take that or nothing." flickr/justalexanders"All Greeks are crooks" Then, crucially, Holland says, as the negotiations went sour, a Leo Burnett executive was heard to say, "All Greeks are crooks anyhow." "Not all Greeks are crooks," Holland says. "They fly in and say, 'Oops, we're bankrupt!' ... [and then] 'all Greeks are crooks.'" At the same time, the agency assured them, "Yeah everything will be fine. [They were] continually taking bookings from us and running slots," Holland says. At that point, it became a matter of both principal and financial rationality, Holland says, and Antenna refused to take the deal. Emmerich denies that anything like that was said: "I have no memory of such a stupid sentence." Holland believes Publicis remains on the hook for Burnett's debts. In fact, Publicis runs a sister agency in Greece that continues to do business. Multinational corporations shouldn't be allowed to welch on their bills, Holland says. Volume discount scheme Further muddying the water is the Greek system of volume discount rebates for media buyers. Holland says that at the end of each year, TV companies return to agencies a percentage of their total spending as an inducement to continue spending. Some of the money is kept by the agency and some of the bonus is passed back to the clients. This is a controversial practice, and can be against the law in the U.S. if it is not clearly spelled out in client contracts (it's the client's money that earned the rebates, not the agency's, after all). "Yes there is a year-end bonus arrangement with most of the agencies," Holland told us. It's not a completely transparent process. We contract with the agency, basically. What they do with it is up them based on their contracts with clients." There is no indication that this practice was going on at Leo Burnett, but agencies have gotten into trouble on this issue before. Interpublic Group and McCann once settled an SEC probe over $250 million in improperly booked volume discounts, from Europe, back in 2008. The case against Leo Burnett is still pending in the Greek court system. Mathias says he is confident that he, and his employer, will be vindicated. All the other TV companies took the deal, he notes, Publicis itself was the first to raise the alarm, and the company lost an agency in a major market in the process. "It's an ugly story," he says.

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How An Alleged €150 Million Check-Kiting Scam Bankrupted Leo Burnett In Greece