Thursday, August 1, 2019

CEO Daily: Scandals Blunt Investor Confidence

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August 1, 2019

Good morning. It's Jeremy Kahn here, filling in for Alan.


While many investors were fixated on the U.S. Federal Reserve yesterday, emerging market investors had two different accounting scandals to contemplate. In India, business commentators were riveted by the apparent suicide of V.G. Siddhartha. He'd built the enormously successful Coffee Day chain, but he was apparently under pressure from Indian tax investigators, according to The New York Times . The case is being seen as a parable for much of what ails India's tax system: a Rube Goldberg complex that is unable to get the wealthy to pay their fair share despite occasionally resorting to extortionate tactics, while often encouraging corruption and having the undesirable side effect of scaring away foreign investment.


In China, markets continue to be roiled by an investigation into Ruihua Certified Public Accountants, one of Chinese biggest auditors, according to Wednesday's Financial Times . China's securities regulator began probing the firm after it missed billions of dollars of overstated profits on the books of a company it audited. Now the regulator has suspended planned IPOs for some 20 other Ruihua clients, while another 50 have voluntarily halted IPOs or fundraising. The damage has even impacted the new tech-focused Star Market and many investors and analysts are comparing the situation to Arthur Andersen's collapse in the U.S. in 2002.


The "Ruihua Incident," comes as China is trying to attract more foreign investment into the country's domestic stock markets. MSCI has recently increased the allocation of domestically-listed Chinese stocks in its flagship emerging markets index, a move that is forecast to bring in an additional $100 billion in capital. The accounting scandals will no doubt make those foreign investors mighty nervous. But the story could be read as good news—it shows the government is willing to do what it takes to clean up the market, even if it involves short-term pain, rather than turn a blind eye to the problem.


More news below, and for more analysis and background on the Fed's decision to cut rates for the first time since 2008, read this story by Fortune's Erik Sherman and watch this excellent short video from Fortune senior editor-at-large Shawn Tully.


Jeremy Kahn


jeremy.kahn@fortune.com


@jeremyakahn


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TOP NEWS


Candidates Clash at the Democratic Debates   


The second night of the Democratic debates zeroed in on the differences between the candidates. Need a quick briefing? Fortune's Luke Johnson runs through the areas of debate, from healthcare to immigration to climate change. Fortune 


A Brexit Spending Spree


Facing the prospect of a no-deal Brexit, Boris Johnson's government has decided to start spending. On Thursday, Chancellor Sajid Javid is expected to announce £2.1 billion ($2.5 billion) in extra funding—on top of that already allocated—to try and soften the blow, and deal with potential shortages of basic necessities, like medicine. It's quite a turnaround: Javid's predecessor had pledged to limit spending on a potential no-deal and the Conservative government has made deep cuts to lessen the deficit. FT 


The Cost of Electric  


The season of German auto earnings continues. One takeaway? Preparing for electric cars has not come cheap. On Thursday, BMW stuck to its profit outlook but said earnings for the second quarter had fallen by 20%, largely due to currency fluctuations and the costs of updating factories and manufacturing systems to make electric cars. And across the board, manufacturing in Germany has begun to feel the strain of trade tensions. Reuters 


Alphabet's Got Cash 


Google parent company Alphabet has surpassed Apple for the company with the world's largest corporate cash stockpile—after the iPhone maker held the crown for a decade. The two companies have been moving in opposite directions over the last six years: Apple has faced pressure to reduce its reserves and pay out more of its cash, with the result that its holdings of cash and marketable securities have dropped by $61 billion; Alphabet's reserves have risen by $20 billion in the same period. FT 



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Content From Deloitte

Back-to-School Shopping Trends


Between August and September this year, research indicates shoppers will spend nearly $15 billion on school supplies. Deloitte's 2019 back-to-school report looks at the season's top shopping trends, including when, where, and how parents are likely to shop.


Read more


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AROUND THE WATER COOLER


 

The Aluminum Billionaire  


A Chinese billionaire charged with orchestrating byzantine schemes to smuggle aluminum into the U.S.—and evade tariffs in the process—has been indicted by the Justice Department. An arrest warrant has been drafted for Liu Zhongtian, founder of Chinese aluminum giant China Zhongwang Holdings, though the magnate is believed to still be in China. The timing is a little tense: in case you've forgotten, the U.S. and China are in the midst of a trade war. WSJ


Epstein's Ranch 


The New York Times has this undoubtedly creepy story about how Jeffrey Epstein, now facing charges of sex trafficking underage girls, also hoped to "seed the human race" by impregnating women on his ranch in New Mexico. He told multiple friends and even scientists about his plans. This is also a story about how Epstein managed to enmesh himself not just among Manhattan and Wall Street elites, but among scientific circles, despite having no training himself—partly by dangling the prospect of research money. New York Times


IBM Faces an Age Discrimination Suit


In a deposition, a former vice president at IBM alleges that the company fired up to 100,000 older employees—all in an effort to be "cool" and in line with other tech giants. That's just one of several age discrimination suits the company is facing, including a class-action suit. That also follows a ProPublica investigation that found that IBM had fired 20,000 employees who are 40 or older in the last five years. The company said in response that it has reinvented IBM over the last five years, and that it hires 50,000 employees a year. Fortune


The Alleged Capital One Hacker Didn't Bother To Hide


Who is Paige Thomson, the alleged Capital One hacker known by the name "erratic" online? And why did she hack the system in the first place? While her motives still aren't clear, friends and online acquaintances paint a portrait of a deeply troubled woman who struggled with her mental health and also sometimes stalked and harassed former friends. She also did not try to hide her hack—in fact, in messages on Slack channels, she appeared to be expecting or hoping to get caught. AP


This edition of CEO Daily was edited by Katherine Dunn. Find previous editions here, and sign up for other Fortune newsletters here.


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