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An Airline Investment in Uruguay Becomes a Catch-22 An Airline Investment in Uruguay Becomes a Catch-22
(5 days later)
It might have been the volcano.It might have been the volcano.
In mid-2012, a series of misfortunes — a litigious Brazilian union, a surge in jet fuel prices and a change in government as well as a volcanic eruption — combined to send Uruguay’s national airline, Pluna, into a tailspin.In mid-2012, a series of misfortunes — a litigious Brazilian union, a surge in jet fuel prices and a change in government as well as a volcanic eruption — combined to send Uruguay’s national airline, Pluna, into a tailspin.
The collapse of the airline also wrecked the investment of the private equity firm that was the airline’s majority owner. But the damage to the private equity firm was much more than financial.The collapse of the airline also wrecked the investment of the private equity firm that was the airline’s majority owner. But the damage to the private equity firm was much more than financial.
“We are writing to you from an Uruguayan prison, where we have just completed our seventh week,” the three founders of the private equity firm, Leadgate, wrote in a February 2014 letter to their investors.“We are writing to you from an Uruguayan prison, where we have just completed our seventh week,” the three founders of the private equity firm, Leadgate, wrote in a February 2014 letter to their investors.
More than a year later, one of the three, Matías Campiani, an American-educated Argentine businessman who was the chief executive of Pluna, remains jailed in a medium-security prison north of Uruguay’s capital, Montevideo.More than a year later, one of the three, Matías Campiani, an American-educated Argentine businessman who was the chief executive of Pluna, remains jailed in a medium-security prison north of Uruguay’s capital, Montevideo.
A Uruguayan judge and prosecutor have been investigating the collapse for the airline for three years, pursuing accusations of wrongdoing. But in a peculiarity of the Uruguayan justice system, no formal charges have yet been brought against the three men.A Uruguayan judge and prosecutor have been investigating the collapse for the airline for three years, pursuing accusations of wrongdoing. But in a peculiarity of the Uruguayan justice system, no formal charges have yet been brought against the three men.
Officials from the Uruguayan government declined requests for comment.Officials from the Uruguayan government declined requests for comment.
But the private equity executives have plenty of defenders who say that local politics are to blame for the jailing of the three Argentines.But the private equity executives have plenty of defenders who say that local politics are to blame for the jailing of the three Argentines.
“These guys were ideal scapegoats,” said Gustavo Herrero, executive director of the Harvard Business School Latin America Research Center. “These guys were ideal scapegoats,” said Gustavo Herrero, the former executive director of the Harvard Business School Latin America Research Center.
The story of Leadgate’s investment in Pluna is a cautionary tale about what can happen when a privatization opportunity gets caught in a dangerous web of business and Latin American politics.The story of Leadgate’s investment in Pluna is a cautionary tale about what can happen when a privatization opportunity gets caught in a dangerous web of business and Latin American politics.
Mr. Campiani and two other founders of Leadgate declined to comment for this article, citing the legal situation in Uruguay. But interviews with their associates, legal experts and members of the Uruguayan business establishment tell the tale of a promising investment gone terribly awry.Mr. Campiani and two other founders of Leadgate declined to comment for this article, citing the legal situation in Uruguay. But interviews with their associates, legal experts and members of the Uruguayan business establishment tell the tale of a promising investment gone terribly awry.
 Mr. Campiani, Arturo Álvarez-Demalde and Sebastián Hirsch founded Leadgate in 2004 to buy and turn around distressed companies in Latin America. After studying and working abroad, it was a return to the region they knew best. Mr. Campiani, Arturo Álvarez-Demalde and Sebastián Hirsch founded Leadgate in 2004 to buy and turn around distressed companies in Latin America. After studying and working abroad, it was a return to the region they knew best.
With a master’s degree in industrial management from Carnegie Mellon University in Pittsburgh, Mr. Campiani had worked at Alcoa. His partners held M.B.A.s from Harvard Business School and Columbia University in New York, and had worked at companies including Siemens in Germany, McKinsey & Company and Procter & Gamble.With a master’s degree in industrial management from Carnegie Mellon University in Pittsburgh, Mr. Campiani had worked at Alcoa. His partners held M.B.A.s from Harvard Business School and Columbia University in New York, and had worked at companies including Siemens in Germany, McKinsey & Company and Procter & Gamble.
The three men met at an Argentine-themed barbecue in Munich and decided to form Leadgate.The three men met at an Argentine-themed barbecue in Munich and decided to form Leadgate.
The firm made its first investment in Uruguay in 2005, buying Parmalat Uruguay from the troubled Italian dairy company as it sold assets in the wake of an accounting scandal. The Leadgate team restructured $32 million in debt, successfully negotiated with the government and unions, shored up milk production and returned the company to profitability.The firm made its first investment in Uruguay in 2005, buying Parmalat Uruguay from the troubled Italian dairy company as it sold assets in the wake of an accounting scandal. The Leadgate team restructured $32 million in debt, successfully negotiated with the government and unions, shored up milk production and returned the company to profitability.
In 2007, Leadgate sold Parmalat Uruguay to a Venezuelan company, Grupo Maldonado, for a profit and began looking for the next investment.In 2007, Leadgate sold Parmalat Uruguay to a Venezuelan company, Grupo Maldonado, for a profit and began looking for the next investment.
“Matías is a representative of the good private equity practices in Latin America,” said Mr. Herrero, the Harvard Business School professor, who co-wrote a case study of Leadgate’s work with Parmalat. The study, he said, “continues to be taught at H.B.S. as a turnaround case.”“Matías is a representative of the good private equity practices in Latin America,” said Mr. Herrero, the Harvard Business School professor, who co-wrote a case study of Leadgate’s work with Parmalat. The study, he said, “continues to be taught at H.B.S. as a turnaround case.”
 The next investment was Pluna, which the Uruguayan government had taken over after its previous controlling owner, the big Brazilian airline Varig, filed for bankruptcy in 2005. Once nationalized, Pluna had faltered. A union leader had been made chief executive, maintenance and business development had lagged, and in 2007, the company had lost $42.7 million on sales of just $90 million. The next investment was Pluna, which the Uruguayan government had taken over after its previous controlling owner, the big Brazilian airline Varig, filed for bankruptcy in 2005. Once nationalized, Pluna had faltered. A union leader had been made chief executive, maintenance and business development had lagged, and in 2007, the company had lost $42.7 million on sales of just $90 million.
After an auction in 2007, Leadgate prevailed, acquiring 75 percent of Pluna for $15 million. The government retained the remaining 25 percent stake and two of seven seats on the board.After an auction in 2007, Leadgate prevailed, acquiring 75 percent of Pluna for $15 million. The government retained the remaining 25 percent stake and two of seven seats on the board.
The goal of the private equity firm was to replicate the success of Copa Airlines, a Panamanian carrier that had transformed itself into a Central American powerhouse.The goal of the private equity firm was to replicate the success of Copa Airlines, a Panamanian carrier that had transformed itself into a Central American powerhouse.
Under Leadgate’s management, Pluna recruited executives from American Airlines and British Airways, bought several new Bombardier jets, centralized its hub in Montevideo and opened new routes. Within two years, Pluna tripled both passenger count and revenues, and narrowed losses.  In 2010, the Canadian airline Jazz took a stake in Pluna, valuing the company at $60 million, a threefold increase for Leadgate in three years. Under Leadgate’s management, Pluna recruited executives from American Airlines and British Airways, bought several new Bombardier jets, centralized its hub in Montevideo and opened new routes. Within two years, Pluna tripled both passenger count and revenues, and narrowed losses. In 2010, the Canadian airline Jazz took a stake in Pluna, valuing the company at $60 million, a threefold increase for Leadgate in three years.
Then its fortunes began to unravel. In 2011, Argentina imposed stiff capital controls to protect its dollar reserves after a sharp decline. Pluna, which sold half its tickets out of Buenos Aires, suddenly had difficulty tapping that cash, making it hard to pay salaries and buy fuel. The weak Argentine currency also meant travel to Uruguay fell.Then its fortunes began to unravel. In 2011, Argentina imposed stiff capital controls to protect its dollar reserves after a sharp decline. Pluna, which sold half its tickets out of Buenos Aires, suddenly had difficulty tapping that cash, making it hard to pay salaries and buy fuel. The weak Argentine currency also meant travel to Uruguay fell.
Soon afterward, the Puyehue volcano in Chile erupted, snarling air travel out of Buenos Aires and further eroding Pluna’s sales across the region.Soon afterward, the Puyehue volcano in Chile erupted, snarling air travel out of Buenos Aires and further eroding Pluna’s sales across the region.
Help might have come from the Uruguayan government, but in 2010, a new president had come into office: José Mujica, a former guerrilla fighter who had been jailed for 13 years during Uruguay’s military dictatorship.Help might have come from the Uruguayan government, but in 2010, a new president had come into office: José Mujica, a former guerrilla fighter who had been jailed for 13 years during Uruguay’s military dictatorship.
Mr. Mujica succeeded Tabaré Vázquez, who had sold Pluna to Leadgate. And under Mr. Mujica’s administration, the government began demanding punitive terms from Pluna, despite its ownership stake.  Mr. Mujica succeeded Tabaré Vázquez, who had sold Pluna to Leadgate. And under Mr. Mujica’s administration, the government began demanding punitive terms from Pluna, despite its ownership stake.
In 2012, Argentina’s government began subsidizing fuel costs for local airlines including Pluna’s main rival, Aerolíneas Argentinas. The Mujica administration declined to match the subsidies.In 2012, Argentina’s government began subsidizing fuel costs for local airlines including Pluna’s main rival, Aerolíneas Argentinas. The Mujica administration declined to match the subsidies.
Then, as Pluna was struggling to recover from a loss in revenues, Uruguay’s state oil company, Ancap, changed the terms of its agreement with Pluna. Payments were due much earlier than they had been, creating a cash squeeze for the airline.  Then, as Pluna was struggling to recover from a loss in revenues, Uruguay’s state oil company, Ancap, changed the terms of its agreement with Pluna. Payments were due much earlier than they had been, creating a cash squeeze for the airline.
But the most damaging development in 2012 was the bankruptcy proceedings of Varig, the failed Brazilian airline that once controlled Pluna.  For years, Brazilians who lost their jobs as a result of the bankruptcy filed claims against any potential creditor, including Pluna.  But the most damaging development in 2012 was the bankruptcy proceedings of Varig, the failed Brazilian airline that once controlled Pluna. For years, Brazilians who lost their jobs as a result of the bankruptcy filed claims against any potential creditor, including Pluna.
The Leadgate partners knew about the risk. When the firm won the auction to buy Pluna, it got the Uruguay government to sign an agreement to handle any indemnity issues. At first, the claims were relatively small, amounting to $20,000 here, $30,000 there. But in June of 2012, Brazilian courts awarded two former Varig pilots $500,000 each.  If every Varig employee received such a settlement, Uruguay faced $3.5 billion in claims, the Uruguayan government calculated. The Leadgate partners knew about the risk. When the firm won the auction to buy Pluna, it got the Uruguay government to sign an agreement to handle any indemnity issues. At first, the claims were relatively small, amounting to $20,000 here, $30,000 there. But in June of 2012, Brazilian courts awarded two former Varig pilots $500,000 each. If every Varig employee received such a settlement, Uruguay faced $3.5 billion in claims, the Uruguayan government calculated.
Leadgate’s partners arranged for a new $30 million line of financing. Uruguay’s representatives on the Pluna board, however, voted against allowing the airline to take on the debt.  Leadgate’s partners arranged for a new $30 million line of financing. Uruguay’s representatives on the Pluna board, however, voted against allowing the airline to take on the debt.
Faced with a cash shortage and the inability to take on debt, Leadgate returned its 75 percent stake in Pluna to the Uruguayan government on June 15, 2012. The Leadgate partners and their investors received nothing in return.  Faced with a cash shortage and the inability to take on debt, Leadgate returned its 75 percent stake in Pluna to the Uruguayan government on June 15, 2012. The Leadgate partners and their investors received nothing in return.
Shortly after that, the airline union went on strike. Just days later, the government shuttered Pluna after 75 years and liquidated it. In the bankruptcy filing, the government named external factors unrelated to management as the sole cause of Pluna’s demise.Shortly after that, the airline union went on strike. Just days later, the government shuttered Pluna after 75 years and liquidated it. In the bankruptcy filing, the government named external factors unrelated to management as the sole cause of Pluna’s demise.
 For Mr. Campiani and his two partners, that should have been the end of it. As part of their return of Pluna to the government, they had signed a contract indemnifying them from any third-party claims and approving their work. For Mr. Campiani and his two partners, that should have been the end of it. As part of their return of Pluna to the government, they had signed a contract indemnifying them from any third-party claims and approving their work.
The three men moved to Florida, dissolved Leadgate, and began working on independent projects.The three men moved to Florida, dissolved Leadgate, and began working on independent projects.
But after Pluna’s collapse and liquidation, members of Mr. Mujica’s party filed complaints about purported misdoings and criminal activity in the sell-off of Pluna’s planes. After reviewing the complaints, Judge Adriana de los Santos, a specialist in organized crime, and the public prosecutor Juan Gómez, also an expert in organized crime, expanded an investigation into the airline’s collapse.But after Pluna’s collapse and liquidation, members of Mr. Mujica’s party filed complaints about purported misdoings and criminal activity in the sell-off of Pluna’s planes. After reviewing the complaints, Judge Adriana de los Santos, a specialist in organized crime, and the public prosecutor Juan Gómez, also an expert in organized crime, expanded an investigation into the airline’s collapse.
In December 2013, Mr. Campiani, Mr. Álvarez-Demalde and Mr. Hirsch were asked to return to Montevideo to testify as part of the investigation. They had done so once before, without incident.  In December 2013, Mr. Campiani, Mr. Álvarez-Demalde and Mr. Hirsch were asked to return to Montevideo to testify as part of the investigation. They had done so once before, without incident.
This time was different. The Leadgate partners were accused of fraud and they were held in a small jail for the night. The next day, they returned to the courtroom. Instead of sitting freely, as they had the day before, they were held in an area behind bars.This time was different. The Leadgate partners were accused of fraud and they were held in a small jail for the night. The next day, they returned to the courtroom. Instead of sitting freely, as they had the day before, they were held in an area behind bars.
The public prosecutor presented a 45-page preliminary accusation, contending that Leadgate had mismanaged Pluna. Among the supposed wrongs: After Pluna’s bankruptcy, the state-owned oil company Ancap tried to cash unredeemed checks from Pluna that had been signed by Mr. Campiani when he was chief executive. The checks bounced, leading Ancap to assert that Mr. Campiani was knowingly stealing.  The public prosecutor presented a 45-page preliminary accusation, contending that Leadgate had mismanaged Pluna. Among the supposed wrongs: After Pluna’s bankruptcy, the state-owned oil company Ancap tried to cash unredeemed checks from Pluna that had been signed by Mr. Campiani when he was chief executive. The checks bounced, leading Ancap to assert that Mr. Campiani was knowingly stealing.
Mr. Campiani’s lawyers have maintained his innocence, arguing that an unsophisticated judge and prosecutor had misunderstood common business practices.Mr. Campiani’s lawyers have maintained his innocence, arguing that an unsophisticated judge and prosecutor had misunderstood common business practices.
The judge, however, decided that the men would be tried on accusations of serial fraud, and a formal trial would commence. In the meantime, they would be held, instead of released on bail, because of the potential for “social alarm.”The judge, however, decided that the men would be tried on accusations of serial fraud, and a formal trial would commence. In the meantime, they would be held, instead of released on bail, because of the potential for “social alarm.”
To date, however, no formal charges have been filed against any of the Leadgate partners.To date, however, no formal charges have been filed against any of the Leadgate partners.
“It’s purely political deception,” said Luis Moreno Ocampo, an Argentine lawyer and a former prosecutor of the International Criminal Court who has reviewed the case. “The government has nothing against them. They went to jail for no reason.”“It’s purely political deception,” said Luis Moreno Ocampo, an Argentine lawyer and a former prosecutor of the International Criminal Court who has reviewed the case. “The government has nothing against them. They went to jail for no reason.”
Mr. Álvarez-Demalde, now 42, was freed in April 2014. Mr. Hirsch, 44, was released in February. Both men returned to Florida to try to restart their business careers.Mr. Álvarez-Demalde, now 42, was freed in April 2014. Mr. Hirsch, 44, was released in February. Both men returned to Florida to try to restart their business careers.
But Mr. Campiani, now 47, remains incarcerated in Campanero, unsure of his fate.But Mr. Campiani, now 47, remains incarcerated in Campanero, unsure of his fate.
He shares a cell with five other inmates. The wing of the prison where he resides features a mural of a field and sky, giving the appearance of an open space stretching into the beyond.He shares a cell with five other inmates. The wing of the prison where he resides features a mural of a field and sky, giving the appearance of an open space stretching into the beyond.
Though they live behind bars, prisoners at Campanero enjoy certain amenities. Mr. Campiani has a cellphone. Occasionally, he is able to leave the prison for a day with a police escort. During one such respite, he went to a Buddhist monastery for eight hours to meditate. On another outing, he went to a friend’s ranch for a barbecue and horseback riding. He taught his block mates how to play Ultimate Frisbee.Though they live behind bars, prisoners at Campanero enjoy certain amenities. Mr. Campiani has a cellphone. Occasionally, he is able to leave the prison for a day with a police escort. During one such respite, he went to a Buddhist monastery for eight hours to meditate. On another outing, he went to a friend’s ranch for a barbecue and horseback riding. He taught his block mates how to play Ultimate Frisbee.
 Mostly, however, he is waiting. While his partners have returned to their families, Mr. Campiani is thousands of miles from his wife and two children. They visited once, for 10 days at Christmas. But Mr. Campiani has advised them not to return, fearing that his wife could be arrested. Mostly, however, he is waiting. While his partners have returned to their families, Mr. Campiani is thousands of miles from his wife and two children. They visited once, for 10 days at Christmas. But Mr. Campiani has advised them not to return, fearing that his wife could be arrested.
Former Pluna employees contend that the Leadgate executives are innocent.  Former Pluna employees contend that the Leadgate executives are innocent.
“There was no evidence of fraud,” said Martin Harrison, the former chief operating officer of Pluna who is now an aviation consultant in London. “The numbers were turning around, but they basically fell afoul of the political situation there.”“There was no evidence of fraud,” said Martin Harrison, the former chief operating officer of Pluna who is now an aviation consultant in London. “The numbers were turning around, but they basically fell afoul of the political situation there.”
Even government officials have been vocal in their support of Mr. Campiani and his partners.Even government officials have been vocal in their support of Mr. Campiani and his partners.
“Leadgate has very bad press, but their management was a management that increased destinations, reduced liabilities, increased the number of passengers, and improved the positioning of the airline in the region,” the country’s minister of transport, Victor Rossi, said in a 2012 interview with El Observador, a newspaper in Montevideo.  “Leadgate has very bad press, but their management was a management that increased destinations, reduced liabilities, increased the number of passengers, and improved the positioning of the airline in the region,” the country’s minister of transport, Victor Rossi, said in a 2012 interview with El Observador, a newspaper in Montevideo.
He later reiterated this view, saying, “I would have never shut down Pluna.”He later reiterated this view, saying, “I would have never shut down Pluna.”
Other factors worked against Leadgate. The populist government of Mr. Mujica mistrusted the partners of a private equity firm.Other factors worked against Leadgate. The populist government of Mr. Mujica mistrusted the partners of a private equity firm.
“So far we have always lost with the capitalists,” the then president said. About the Leadgate partners, he said, “It is difficult to get a grip on them because they are slippery like eels.”“So far we have always lost with the capitalists,” the then president said. About the Leadgate partners, he said, “It is difficult to get a grip on them because they are slippery like eels.”
In March, Mr. Vázquez was again elected president and his moderate faction returned to power.In March, Mr. Vázquez was again elected president and his moderate faction returned to power.
Despite the exit of Mr. Mujica, Mr. Campiani remains incarcerated, as his colleagues were, because of the peculiarities of the Uruguayan judicial system. Uruguay is one of only a few democracies in the world where citizens can be legally held without charges for years at a time.Despite the exit of Mr. Mujica, Mr. Campiani remains incarcerated, as his colleagues were, because of the peculiarities of the Uruguayan judicial system. Uruguay is one of only a few democracies in the world where citizens can be legally held without charges for years at a time.
 Since the Leadgate partners were imprisoned, the government has continued to take testimony from witnesses, trying to build its case against Mr. Campiani and his colleagues. But of the 41 witnesses called so far — including President Vázquez and top government officials — none have described any illegal activity by the three men. Since the Leadgate partners were imprisoned, the government has continued to take testimony from witnesses, trying to build its case against Mr. Campiani and his colleagues. But of the 41 witnesses called so far — including President Vázquez and top government officials — none have described any illegal activity by the three men.