RNO Renault SA

A secret probe unearthed alleged pay scheme, luxury homes

By Sean McLain, Phred Dvorak, Sam Schechner and Patricia Kowsmann 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (December 17, 2018).

The house that helped trigger the downfall of Carlos Ghosn is a rose-colored mansion in one of Beirut's most expensive neighborhoods.

Its walls were adorned with portraits of the automobile titan, who with his second wife had personally supervised the $15 million purchase and renovation of the property, people close to Mr. Ghosn say. Two ancient sarcophagi, unearthed during the remodeling, were visible through a glass floor leading to a wine cellar.

Earlier this year, a team of Nissan Motor Co. executives working without Mr. Ghosn's knowledge discovered that the Beirut house and other properties had actually been purchased by Nissan, using a network of shell companies. Nissan, which Mr. Ghosn has led since 1999 in an increasingly uncomfortable alliance with France's Renault SA, also paid for the building's renovation, according to people familiar with the matter.

The discovery of Nissan's role in financing Mr. Ghosn's jet-setting lifestyle ignited a powder keg of frustration and discontent that had long been building -- and may have pre-empted a plan by Mr. Ghosn to move against management at the company himself.

This account, based on interviews with dozens of Nissan veterans and people close to the investigation, shows that accusations of hidden pay and lavish spending on the company dime were intertwined with a deep sense of discontent over Mr. Ghosn's long reign over the auto maker. Nissan employees had groused that Nissan profits were propping up Renault, and many feared Mr. Ghosn was preparing a Renault takeover of its bigger Japanese partner.

For months, a group of Nissan executives secretly gathered information on Mr. Ghosn, laying the groundwork for a Nov. 19 strike against the executive and a top aide, Greg Kelly. The group even persuaded Mr. Kelly, who is based in the U.S., to fly to Japan on the same day Mr. Ghosn was expected. The maneuvering allowed Japanese prosecutors to swiftly arrest both men, then raid company offices and his Tokyo apartment in the space of hours, say people familiar with the events.

When Nissan CEO Hiroto Saikawa, who was Mr. Ghosn's handpicked successor, held a town hall at headquarters to explain what had transpired, the assembled employees broke into applause, according to people who attended. The sentiment against Mr. Ghosn in Nissan had been building "like a volcano," says one person familiar with Nissan's probe.

It was a swift reversal for a man once revered as the savior of Nissan, and one of the auto industry's most powerful leaders. After his November arrest, Nissan quickly removed Mr. Ghosn as chairman, and Renault, where Mr. Ghosn was chairman and CEO, put interim leaders in place. On December 10, Japanese prosecutors charged Mr. Ghosn with understating his compensation in Nissan's financial reports. Renault is now pressing Nissan to call a shareholder meeting to deal with "significant risks" to the alliance.

Mr. Ghosn's Japan-based attorney didn't respond to requests for comment. A person familiar with his legal defense said Mr. Ghosn continues to maintain his innocence.

Meanwhile, Mr. Ghosn remains in detention, and under Japan's criminal system, he could remain locked up well into 2019 as prosecutors add charges and he awaits trial.

Prosecutors haven't filed charges or raised suspicions related to Mr. Ghosn's expenses or his use of company property. But the Nissan-owned home he used in Beirut, and another in Rio de Janeiro, have become the subject of court battles, after Nissan took control of them and changed the locks. Members of Mr. Ghosn's family have sued for access to retrieve personal belongings, artwork and cash.

Mr. Ghosn's family argues that his arrest and allegations of his misuse of company funds are part of a broader battle for control.

"The truth is his arrest is a result of a corporate dispute between Renault on one side and Nissan and Mitsubishi on the other," the family's lawyers said in court filings in Brazil, adding: "The surprising arrest of Carlos Ghosn is part of a sordid strategy by Nissan to undermine the Renault alliance."

Mr. Ghosn's children believe that the perks he enjoyed at Nissan should be weighed against the turnaround he led at the company and the wealth he created for others at the company over the past two decades, according to a person close to the Ghosn family.

"For as long as we can remember, we heard from our father every Sunday -- no matter how busy he got with work," according to a written statement from Mr. Ghosn's four children, who used to joke that Nissan was his fifth child. "It's now been four Sundays since we've been able to speak to him. We miss him so much."

"The cause of this chain of events is Mr. Ghosn's misconduct," a Nissan spokesman said in an emailed statement. "During the internal investigation into this misconduct, the Tokyo Prosecutors Office began its own investigation and took action."

A spokesman for Renault declined to comment.

After helping to engineer Renault's $5.4 billion bailout of an ailing Nissan in 1999, Mr. Ghosn stitched the firms into a technology and platform-sharing alliance that later added Mitsubishi Motors Corp. to become the world's largest, collecting compensation from each that totaled roughly $17 million in 2017, according to the companies' public filings. While that is well above the salaries of his Japanese competitors, it is below that of American executives in his line of work, such as General Motors Co. Mary Barra's $22 million.

For Mr. Ghosn, the properties, private planes and other perks were part and parcel of his life's work, often spent on the road, away from his family. Until his arrest, Mr. Ghosn spent at least 100 days a year in the air, according to flight records and a person close to his family.

Only a handful of Nissan executives realized the extent to which the company was footing the bill for Mr. Ghosn's use of the properties, people familiar with the matter say.

The most costly assets at Mr. Ghosn's disposal were the series of private jets that Nissan had purchased over the last 18 years, each decked out with a vanity-plate registration number: N155AN.

The latest, a Gulfstream G650 with a list price of $64.5 million, according to trade publication Corporate Jet Investor, is fitted with a bedroom where he often sleeps, according to a person close to the Ghosn family.

"This kind of lifestyle can take a toll on you, both physically and socially. It is not without a price to pay, and you have to manage that, " Mr. Ghosn wrote in a recent autobiography posted on Nissan's website. "It helps that I can sleep well on an airplane."

This year the plane he uses departed from at least 35 different airports on over 80 travel days as he crisscrossed the globe. In the seven weeks before Mr. Ghosn's arrest, the plane departed Beirut eight times, according to flight records.

Inside Nissan, Mr. Ghosn's lifestyle stood in contrast with the cost-conscious management style he championed to boost the bottom line. After the allegations surfaced that his lifestyle was funded by Nissan, the sense of betrayal deepened.

"Transparency and frugality were the Nissan way," says one former Nissan executive. "I want to ask: 'Where did transparency go? Where did frugality go?' "

Mr. Ghosn came from relatively humble origins. His paternal grandfather moved from Lebanon to Brazil at the age of 13 with nothing but a suitcase, and started a handful of businesses in the country's interior, where Mr. Ghosn was later born, according to Mr. Ghosn's autobiography. When Mr. Ghosn was 6, his father sent him to Beirut, where he lived with his grandmother, mother and siblings.

His life in Beirut was modest, according to a person close to his family. Mr. Ghosn first went to a restaurant at the age of 15 or 16 and saw grapes as a luxury item. In his later years, Mr. Ghosn took pleasure in buying and displaying the fruit.

After attending two elite engineering schools in Paris, Mr. Ghosn joined French tire manufacturer Michelin. In 1996, Mr. Ghosn was hired by Renault SA, the French auto maker, and moved to France with his family. By the late 1990s, Nissan was on the brink of bankruptcy. Renault came to the rescue with a $5.4 billion bailout that Mr. Ghosn pushed for. The deal gave Renault a controlling 37% share in Nissan, later increased to 43.4%, while Nissan purchased a 15% stake in Renault.

Moving to Tokyo in 1999 as Nissan's chief operating officer, Mr. Ghosn got the nickname "7-11" for the long hours he worked. He closed factories, slashed staff and cut off inefficient suppliers. When those steps let Nissan hit targets on profit and debt reduction a year ahead of schedule, he was feted in Japan as a management genius and featured in his own comic-book series.

In 2005, Mr. Ghosn added the CEO's role at Renault. That is when Nissan bought for his use one of the apartments flagged in the recent investigation: a 4,300 square foot apartment located in Paris's 16th arrondissement, one of the city's richest, for $4.1 million, according to property records and the person familiar with the Nissan probe.

Three years later, the company bought 1,200 feet more space in the same building to create a multistory apartment, the person said.

Security concerns helped motivate the purchase, the person close to Mr. Ghosn's family said. Two decades earlier, a Renault CEO had been murdered in Paris by left-wing terrorists.

Japanese executives fretted that Mr. Ghosn was increasingly absent. Still, he was making far more than others at Nissan. In the fiscal year that ended in March 2009, Nissan paid him $15 million -- more than twice what the other nine top executives of the company were making together -- according to a person familiar with Nissan's probe.

When Japan changed corporate-disclosure rules in 2010 to require that all executives receiving more than about $880,000 had to reveal their compensation, Mr. Ghosn was worried about public-relations fallout, according to the person. He and other executives were already taking a pay cut amid a global recession. Mr. Ghosn nudged what he had to disclose lower still by asking Nissan to pay him the equivalent of about $7.8 million and postponing the payment of nearly $2 million, the person said.

The change was handled by Mr. Kelly, then in charge of the CEO's office and human resources, whom colleagues describe as a fierce Ghosn loyalist and troubleshooter. It rested on an interpretation of a gray area of the new disclosure rules, concerning how to treat deferred compensation. Nissan's audit firm, Ernst & Young ShinNihon LLC, didn't agree with the company's proposed interpretation of those rules, says a person familiar with the matter. Mr. Kelly had an opinion from outside experts supporting him, Mr. Kelly's lawyer says.

Even so, Mr. Ghosn's publicly disclosed compensation topped Japan's charts and caused a furor at Nissan's shareholders' meeting. Mr. Ghosn defended his salary by saying Ford Motor Co.'s Alan Mulally made nearly twice as much.

Prosecutors suspect Mr. Ghosn continued to defer increasingly large portions of his compensation from then on -- totaling more than half of what he said he was owed in recent years. Messrs. Kelly and Ghosn constructed detailed spreadsheets to keep track of the mounting IOUs and how they might be paid after Mr. Ghosn's retirement from Nissan, said people familiar with the internal probe.

Only a handful of people at the company knew what was going on, Nissan says. There was no compensation committee of the board to oversee executive pay, and Mr. Ghosn had almost sole authority to decide how much money top officials made.

Then there were the perks. At the end of 2010, Nissan created a company named Zi-A Capital BV in the Netherlands, which Mr. Kelly told Nissan's board would be used to make venture investments, according to company filings and people familiar with the matter. Zi-A, which eventually got $82.8 million in funding, became the vehicle through which Nissan would buy additional homes, including the one in Beirut, through multiple layers of shell companies registered in offshore locations.

Around that time, Mr. Ghosn separated from his first wife Rita -- who wore recycled clothes and loved playing bridge -- and began his new relationship with his current wife, Carole -- who has a taste for designer dresses and fancy events, according to the person who has known Mr. Ghosn for years.

A lawyer for Rita Ghosn declined to make her available for an interview or answer questions on her behalf.

In 2012, Mr. Ghosn's sister Claudine Bichara de Oliveira helped negotiate the purchase of a four-bedroom, beachfront apartment in Rio de Janeiro's Copacabana neighborhood, according to a person familiar with the deal. A second-tier subsidiary of Zi-A named Hamsa 1 Ltd. paid $5.7 million for the apartment, making it company property.

Mr. Ghosn would sometimes stay in the Rio apartment while in town for business, according to the person close to the family. But it was also a site for Ghosn family holiday gatherings, capable of hosting about 10 people at a time, according to a person familiar with Mr. Ghosn's trips to Rio and two of the building's doormen.

"The most poetic moments for our family are the walks along Copacabana beach, where we have an apartment," Nadine Ghosn, one of Mr. Ghosn's three daughters, told the Brazilian edition of Vogue magazine.

In the fall of 2016, several months after Mr. Ghosn remarried, he and his new wife held a celebration to mark the event, as well as Mrs. Ghosn's birthday, at one of the palaces on the grounds of France's Château de Versailles, according to a person who attended. About 120 guests in black-tie attire sat at long tables adorned with candelabras under a giant chandelier. Pastries were piled higher than attendees' heads. Golden trays spilled over with grapes.

Around that time, Nissan bought Mr. Ghosn a faster and more spacious corporate jet, the Gulfstream G650, according to Federal Aviation Administration records. Mr. Ghosn's children would at times accompany their father on the jet, provided he was already heading in the same direction, said the person close to the family. "Being on the plane is a way to spend time with their dad," the person said.

After Mr. Ghosn remarried, the jet also started making more frequent trips to Beirut, flight records show. The Beirut trips created extra costs because Nissan wouldn't leave the plane on the tarmac there out of security concerns. Instead, the flight crew would fly 120 miles to Cyprus, and return when it was time to pick up Mr. Ghosn, according to flight records and people familiar with the matter.

"When he came, it would be a convoy," said a local barber who works near the Beirut house. "There would be state security and intelligence jeeps accompanying him. He is a very big man."

Back at Nissan, grumbling about Mr. Ghosn's management grew. Some Nissan veterans worried Mr. Ghosn was promoting non-Japanese executives faster than their local peers.

As Mr. Ghosn pushed Nissan and Renault to cut costs by sharing parts and manufacturing platforms, engineers squabbled about whose technology and factories to use. Nissan staffers felt revenues from the Japanese company, which had grown bigger than its French controlling shareholder, were being used to prop up Renault.

Last year, a Nissan employee confronted Mr. Ghosn at a shareholders meeting and told him the company felt like "a wholly owned subsidiary" of Renault. "For the last 18 years, can you give me one fact illustrating your statement?" Mr. Ghosn answered angrily. "There is not one reality corresponding to what you're saying."

A person close to Renault said it was "excessive" to say Nissan propped up the French company. "If you speak to people at Renault they would say that Mr. Ghosn favored Nissan," the person said. "The success of the alliance is about balance. Is this difficult to achieve? Yes."

Little did Mr. Ghosn know that the forces that would eventually topple him were gathering. Nissan's audit firm, Ernst & Young, continued to raise questions each year about Zi-A Capital, the entity through which the homes for Mr. Ghosn were purchased, says a person briefed on the matter. Those flags came to the attention of Hidetoshi Imazu, a quiet manufacturing veteran at Nissan who became compliance auditor for the board in 2014 -- a job that involves policing the actions of directors, according to people familiar with the probe.

Mr. Imazu was trying to figure out what Zi-A was doing, but was stymied by the chain of shell companies it used in places like the British Virgin Islands, two of the people said.

So around June, Mr. Imazu sought help from one of Zi-A's directors, a Malaysia-born British-educated lawyer named Hari Nada, who was running global compliance as well as the CEO's office, two of the people said.

Mr. Nada was a protégé of Mr. Kelly and had been listed as a Zi-A director since 2012, along with Mr. Kelly, according to company filings. He took Mr. Imazu to talk to Zi-A's third director, Toshiaki Onuma, a longtime support staffer for Mr. Ghosn who handled paperwork for the deferred compensation, according to corporate documents and a person with knowledge of Nissan's probe.

As the three compared notes, Mr. Imazu began to get a fuller picture of the money Nissan was spending on Mr. Ghosn and the amount of deferred compensation, which by this year totaled around $80 million, according to prosecutors' allegations and people familiar with the probe.

The group reached out to lawyers who could help them interpret what they were seeing and figure out whether any of it constituted criminal activity by Mr. Ghosn or others inside the company, said people with knowledge of the probe. Among the lawyers were ex-prosecutors who helped the executives take advantage of a new law that took effect in June and allowed criminal suspects to bargain for leniency in exchange for helping authorities.

By the end of the summer, the Nissan group had consulted informally with Japanese prosecutors, and in early October, those prosecutors decided they had a case, according to people familiar with the probe. Mr. Imazu and his group drew up a formal whistleblower report, stating that a Nissan unit was being used to provide homes for Mr. Ghosn at no cost, and that the directors' compensation information on financial filings was incomplete, one of the people said.

Only then did they bring everything to Mr. Saikawa, who had taken over as Nissan's CEO in 2017 as Mr. Ghosn's handpicked successor, the person said. Mr. Saikawa had known nothing of the group's maneuverings. Initially, Mr. Saikawa expressed incredulity at the allegations against his mentor, according to the person. Mr. Saikawa established a formal investigation that reported to him directly, the person said. Mr. Nada began collecting documents related to the properties, flying to Rio to seek deeds, according to emails viewed by The Wall Street Journal.

Mr. Nada also began laying the groundwork for an elaborate operation to seize Mr. Ghosn as well as evidence to help the prosecutors' case.

Nissan's investigators didn't want to confront Mr. Ghosn directly since they were fearful that he would have the power to crush the probe once he found out, say several people with knowledge of the matter. Instead, they planned with prosecutors to detain Mr. Ghosn right after he landed at Tokyo's Haneda airport on Nov. 19, ahead of the month's board meeting. Mr. Nada choreographed schedules to ensure that everyone prosecutors would want to question was at Nissan's office at around the time of Mr. Ghosn's arrest, said people familiar with the events.

The team of Nissan investigators now needed to get Mr. Ghosn's alleged co-conspirator, Mr. Kelly, to Tokyo. Mr. Kelly had been living in semiretirement in Florida since 2015, according to people familiar with the matter.

Mr. Nada called Mr. Kelly and told him he was needed for the board meeting, the people said. Mr. Ghosn was planning to call a vote to reshuffle the company's top management -- including removing Mr. Saikawa as CEO and reinstating Mr. Kelly in a management position, according to people familiar with the plans.

Mr. Nada insisted that Mr. Kelly, who normally attended Tokyo board meetings by videoconference, come in person on a private jet. Mr. Nada assured Mr. Kelly he would be back in the U.S. in time for a scheduled back surgery.

Mr. Kelly's plane arrived at Tokyo's Narita airport in the early afternoon of Nov. 19, according to flight records and people familiar with that day's events, shortly before Mr. Ghosn touched down at Haneda airport. As soon as Mr. Ghosn was taken into custody, Mr. Kelly's driver received a phone call and pulled into a rest area. Mr. Kelly was handed over to Tokyo prosecutors, said one of the people.

At 10 p.m. an unusually emotional Mr. Saikawa held a press conference.

"Beyond being sorry -- I don't know how to say this -- I feel strong anger and despair," he said.

As Mr. Ghosn's detention nears the one-month mark, the legal skirmishes are continuing.

After a lawsuit filed in Lebanon, Mrs. Ghosn and one of Mr. Ghosn's daughters won access to the Beirut mansion, the person close to the family said. The family has since removed everything that the family paid for, such as some family photos and clothing, the person added.

In Brazil, Mr. Ghosn's daughter Caroline contended in a lawsuit there that Nissan cannot take possession of what is inside the Rio apartment because it was given to Mr. Ghosn for use as a home. On Thursday, Caroline Ghosn entered the apartment with officers of the Brazilian court and Nissan's lawyers to open two safes and a small lock box in the apartment. One of the safes contained roughly $20,000 in Brazilian currency, another contained an empty wallet that a representative of the Ghosn family said was an unwanted gift given to Mr. Ghosn by his sister.

At Nissan, employees are adjusting to life without Mr. Ghosn. In Japan, prosecutors have a conviction rate of more than 95% once a defendant is indicted. But even if he is acquitted, the sense that he took advantage of his position atop the company remains.

Outside a Nissan factory south of Tokyo, one 42-year company veteran who now works for an affiliate says it is a shame what happened with Mr. Ghosn.

"In the beginning I thought it was natural that he got a billion yen," or nearly $10 million, he said, crediting Mr. Ghosn with Nissan's revival. After Mr. Ghosn's arrest, the employee says, "I don't have hard feelings, but his time is over."

--Yoko Kubota, Nazih Osseiran, Paulo Trevisani, Nick Kostov, Mark Maremont, Chester Dawson and Jim Oberman contributed to this article.

Write to Sean McLain at sean.mclain@wsj.com, Phred Dvorak at phred.dvorak@wsj.com, Sam Schechner at sam.schechner@wsj.com and Patricia Kowsmann at patricia.kowsmann@wsj.com

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December 17, 2018 02:47 ET (07:47 GMT)

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