German company allegedly cons Warren Buffett out of €643m

May 19, 2020

by a searcher from Carleton College in Leesburg, VA, USA

Watch out, searchers! It can happen even to the most experienced. The acquired company photoshopped fake invoices to bolster a grossly inflated EBITDA:
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US investor may have paid over four times too much for firm now being investigated for fraud

A German manufacturing company is being investigated for fraud after allegedly conning the legendary US investor Warren Buffett into paying at least four times over the odds for its business by Photoshopping company orders and invoices.

In February 2017 a unit of Buffett’s Berkshire Hathaway Inc paid €800m (£715m) to buy Wilhelm Schulz, a family-run manufacturer of stainless steel based in Krefeld, western Germany – a rare foray into the world of family-run mittelstand companies for the tycoon, estimated to be the fourth-wealthiest person in the world.

After an anonymous tip-off by a whistleblower in May the same year, however, the US holding company began to question whether key documents had been doctored to create the impression of a booming business.

In reality, the company Buffett had just purchased was struggling and at risk of bankruptcy.

On 9 April a New York arbitration court ruled that the German company had systematically led investors astray in the run-up to the purchase and then tried to cover its tracks afterwards.
“This is not a close case,” the panel said in a 132-page ruling. “The evidence strongly points to fraud, and there is little in the record to suggest otherwise.”

Internal documents cited by the German newspaper Handelsblatt suggest some of Wilhelm Schulz’s employees inflated the company’s Ebitda – earnings before interest, tax, depreciation and amortisation – by simply scanning in letterheads of third companies and Photoshopping them to create fake orders and invoices.

At least 47 business deals that had helped create the impression of a company on the up were completely fabricated, said Handelsblatt.

More at: https://www.theguardian.com/business/2020/may/19/german-company-allegedly-cons-warren-buffett-out-of-643m and at Handelsblatt. Maybe someone with better German skills than me can find it there?

Reply by a searcher
from Claremont McKenna College in Los Angeles, CA, USA

This seems bizarre. If the accounting team at the target was able to scam a legitimate QoE process then the QoE firm completely failed the investor group. If Berkshire agreed to close without a real QoE or even a simple proof of cash, that is a huge oversight and wildly irresponsible. To start a side thread, who are people using for SF size deals in terms of accounting diligence/QoE partners? I come from middle market PE and had great experiences with a number of sub big 4 firms, but likely still too expensive/robust for a sub-$15mm EV deal.

Reply by a searcher
from Yale University in Toronto, ON, Canada

My first reaction - the fraud has got to be more sophisticated than that. But then Warren is also known to strike deals based a lot on people and their reputation. So may be he didn't get it checked by a forensic accountant.

Is forensic accounting part of search fund due diligence process? Could that have flagged a fraud like this?

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