2019 won't be any easier for Ghosn, alliance

TOKYO — Carlos Ghosn's legal tribulations in Japan, where the CEO of Renault remains in jail, will make for a dramatic 2019 — for Ghosn, for Nissan and also for Renault.

Ghosn is scheduled to appear in court for a hearing this week in Tokyo, making his first public appearance in nearly two months. The ousted chairman of Nissan and Mitsubishi has been in jail without bail since Nov. 19, charged with financial improprieties.

But the strange Japanese drama will now heat up for all parties.

Ghosn faces mounting legal woes in Japan. Renault is in limbo, awaiting word on Ghosn's fate and wondering how to deal with Nissan. And Nissan is pushing sweeping post-Ghosn reforms that could further stress the strained alliance with Renault and Mitsubishi. The heads of the Japanese and French companies, mired in distrust and uncertainty, are barely talking about the massive rift that has opened between the carmakers.

A watershed event will likely be Ghosn's trial, expected as early as this year. A person familiar with his defense says Ghosn denies wrongdoing and plans to redeem his broken reputation from the stand. The trial is expected to focus on the first of his criminal charges — that he underreported $43.5 million in deferred compensation.

But on top of that indictment, Ghosn was additionally arrested on separate allegations that he shifted approximately $16.9 million in personal swap contract losses to Nissan and had Nissan pay $14.7 million to a business associate who allegedly helped Ghosn handle the red ink.

A Tokyo court has approved Ghosn's detention through Friday, Jan. 11, as prosecutors collect evidence and build their case against him, relying on a Japanese practice of interrogating suspects for hours every day in the absence of their lawyers.

On Jan. 11, prosecutors must either indict Ghosn on the additional charges or let him go. As is often the case in the Japanese system, they might also arrest him again on different, but tangentially related, grounds to continue holding him.

More ominously for Ghosn, Nissan has expanded its probe into potential wrongdoings, and that investigation may lead to new charges against him or possibly against other executives. Under the microscope, according to people familiar with the issue, is whether malfeasance occurred at Renault-Nissan BV, the joint venture in the Netherlands owned 50-50 by Nissan and Renault.

The swap loss suspicions, on which Ghosn was arrested Dec. 21, focus on Ghosn's relationship with Saudi businessman Khaled Al Juffali, people familiar with the matter say.

Ghosn set up a swap contract with Japan's Shinsei Bank in 2006 to protect the value of his yen-based salary when converted into dollars, the people say. But when the global financial crisis struck in 2008, the yen unexpectedly appreciated, leaving Ghosn's account nearly $17 million underwater, they said.

Shinsei Bank wanted to close the account, leaving Ghosn with a massive personal loss, unless he could pony up a deeper line of credit. His answer, allegedly, was to transfer that loss temporarily to Nissan's books.

In the meantime, he arranged for Juffali to step in and use his own assets as collateral for a new line of credit with Shinsei, according to one person familiar with the investigation.

At that point, Nissan transferred the account back to Ghosn, according to this narrative.

Nissan alleges that Ghosn then used what's known as a CEO reserve fund, normally used for unbudgeted, one-time expenditures, to pay a company owned by Juffali in four installments totaling $14.7 million over the four fiscal years from 2009 to 2012. Nissan suspects that was payback for Juffali's assistance in arranging the credit line that helped Ghosn handle his swap losses.

A person familiar with Ghosn's defense says he did nothing wrong for two reasons. First, Nissan didn't actually suffer any losses because Ghosn later took the account back from Nissan.

The defense also argues that Nissan's payments to Juffali's business were for legitimate expenses, such as smoothing business at Nissan's Middle East retail channels.

If prosecutors decide to indict Ghosn on these additional breach-of-trust charges, it could complicate his legal strategy and cloud any hope of being granted bail before trial.

Fellow Nissan director Greg Kelly, accused of being the architect of Ghosn's contentious deferred compensation plan, also was arrested Nov. 19, but he was released on bail Dec. 25.

After posting bond of ¥70 million ($639,000), Kelly immediately checked in to a Tokyo hospital, where he remained to evaluate his options for local medical treatment of a spinal condition, said his U.S. attorney, Aubrey Harwell. The conditions of Kelly's bail forbid him from leaving Japan, and Kelly would like to have surgery before the trial. If treatment goes smoothly, Kelly could be heading to trial as early as March or April, Harwell said.

The ongoing drama means Renault will face 2019 navigating an uncertain future with Ghosn — still the company's nominal CEO and chairman.

A special committee made up of outside experts and the Nissan board's independent directors is tasked with recommending improvements. Meanwhile, the outside directors are struggling to reach consensus on a replacement for Ghosn as Nissan's next chairman.

The process could drag on for months and test the limits of the automakers' 20-year-old alliance.

"When the fundamental improvement of our corporate governance through the governance committee so requires, the revisit of the alliance agreement could be made," one person familiar with Nissan's thinking said.

"Under the current peculiar condition whereby the former chairman was arrested, it is doubtful that alliance agreement is valid."

Publicly, Nissan still is committed to the alliance.

"The permanence of the alliance is a fact, and not something anyone opposes," a Nissan spokesman said. "The functions of our companies are converged to the point that separation is unthinkable and would harm both companies."

But if the partners want to salvage what has long been hailed as the auto industry's most successful cross-cultural partnership, better communication will be a key new-year priority.

Nissan has been eager to make its case of malfeasance directly to Renault board members. But Renault has pushed back, asking Nissan to direct its evidence through corporate legal channels.

Initial communication between the companies was through letters. But in late December, Saikawa finally met at the headquarters of Renault-Nissan BV in Amsterdam with Renault's Thierry Bollore, now standing in for the jailed Ghosn as deputy CEO.

It was the first face-to-face for leaders of the two companies since Ghosn's arrest.

Nissan did not elaborate on what the two leaders discussed but issued a statement saying Saikawa characterized the talks as "positive" and "productive."

How the two companies communicate and handle an extraordinary shareholders meeting will be a hot topic in 2019.

Nissan will have to convene a meeting for shareholders to vote on removing Ghosn and Kelly from the board. But first, it wants to establish some common ground with Renault.

"We want to communicate and reach a mutual understanding," a person familiar with Nissan's strategy said.