JENS ERIK GOULD
The New York Times
March 07, 2007
David Richards, president of the investor group Skye Ventures, says the bonds may be worth $1 billion and raise issues of Venezuelan credibility. Waldemar Cordero Vale, since retired, says he never signed the bonds.
CARACAS, Venezuela, March 6 — The plot would seem to come right out of
a novel in which the reader does not know whom to believe.
A group of investors from Columbus, Ohio, spends $100 million in 2004 to buy zero-coupon bonds — debt that pays interest at maturity — from a Venezuelan state bank that went bankrupt in the 1980s. A few months earlier, in October 2003, Venezuela's solicitor general ruled that the bonds were valid. But when the investor group tried to redeem the debt, it could not, and learned only later that the solicitor general had reversed herself in December 2003.
That is the basic story line in an international financial dispute that is playing out in Federal District Court for Southern Ohio. The investor group, Skye Ventures, is suing Venezuela for its refusal to honor the bonds, which it says are now worth as much as $1 billion.
The dispute over the bonds, which bear the name of an extinct state agricultural development bank, the Banco de Desarrollo Agropecuario, or Bandagro, has not recently been discussed in public by the government of Venezuela, where President Hugo Chávez rarely lets any issue involving the United States pass.
But it could well become a cautionary tale, whether for investors in emerging markets or for Venezuela — which, Skye says, may be liable for up to $6 billion if all the bondholders press their claims.
There are signs that Venezuela has taken the case seriously. Its chief lawyer in the case, Esther Bigott de Loaiza, has close ties to top government officials. But she was ousted late last year after she was named in a lawsuit, now dismissed, that said Venezuela had paid her $18 million in the case. Ms. Bigott de Loaiza declined several requests for an interview, saying only that she had left the case "in the ninth inning, with Venezuela winning 9 to 0."
Last week, Venezuela fired its American lawyers, the Florida-based firm of Ruden McClosky. Armando E. Lacasa, a lawyer in the Miami office who was assigned to the case, said this week that Venezuela had not given him an explanation for its action. He did say Venezuela had not yet paid Ruden for the two years of work it did on the case.
Waldemar Cordero Vale, who was president of the bank when the bonds were supposed to have been issued in 1981, said in an interview that he never signed them. He asserts that a Panamanian investment group that sold the paper to Skye participated in a scheme with Venezuelan officials to share the payment. "It's the biggest fraud in the history of Venezuela," said Mr. Cordero Vale, who now takes care of a farm on the Venezuelan plains.
Lawyers at Ruden McClosky had also raised questions about the Panamanian group, which they say was managed by James Pavanelli and had unsuccessfully sought payment on the bonds since the late 1980s. They pointed to documents bearing the letterheads of Interpol and various Italian courts that said Mr. Pavanelli was suspected of trying to transport fake Bandagro bonds in 1988 and was convicted of fraud in connection with the bonds in Italy in 2003.
An Interpol spokesman declined to comment. The F.B.I. said it had no information about Mr. Pavanelli.
Skye disputes the Venezuelan assertions. Its president, David Richards, said, "If you consider the idea that their theory is that a U.S. firm with prominent investors has a method of creating investments by bribing foreign officials and buying their bonds, then suing in U.S. courts, well it is fairly preposterous, isn't it?"
Skye contends that when Bandagro went bankrupt in 1981, Venezuela assured investors that it would assume and pay the bank's debts.
The Federal District Court ruled last year that Skye's ability to sue Venezuela in the United States would hinge more on whether the first opinion by the solicitor general, Marisol Plaza, was valid than on the authenticity of the notes. The ruling gave Skye an advantage in the case because it turned attention away from evidence suggesting that the bonds were fake. Depositions in the case had been set for later this month, though Mr. Lacasa of Ruden said Venezuela had asked the court for a 90-day delay so it would have time to hire new lawyers.
The Finance Ministry did not respond to interview requests. Ms. Plaza told a local newspaper, El Nacional, that her first opinion was merely an internal document never meant to be made public and that bondholders had stolen a copy.
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Mr. Richards, who would not disclose the names of his partners, said his investor group included a billionaire principal of a private equity firm and a Fortune 500 executive. He said he expected that the verdict would reinforce the power of the American courts to protect American investors. And he warned that Skye could go after Venezuelan assets in the United States, like the Citgo oil company, if Venezuela lost and still refused to pay. Legal experts said, though, that taking aim at state-owned companies could present obstacles for creditors.
Skye paints the case as a litmus test for the Chávez government's willingness to pay its obligations, arguing that a refusal may damage its creditworthiness in international markets.
"If he doesn't pay these bonds that I bought on the basis of a decision of his highest legal officer," Mr. Richards said, "what's to say he doesn't have to pay every bond?"
But the group's investment in Venezuela is far from representative of most investor activity in Venezuelan debt.
In fact, credit-rating agencies have a stable outlook for Venezuela's debt, mainly because the Chávez government has benefited from high oil prices and has foreign reserves and other funds totaling some $50 billion. That has helped the government maintain a solid record of making payments.
"On a numbers basis, Venezuela is doing much better than its peers," said Richard Francis, a credit analyst at Standard & Poor's.
Still, Mr. Chávez has generated concern in much of private industry here since January, when he announced the nationalization of the electricity and telecommunications industries, whose flagship companies were partly owned by American businesses. The president is tightening state control over the economy and says he is driving Venezuela toward socialism.
"These nationalizations affect the private sector working in Venezuela, but the government's capacity to pay is still the same," said Hilario Ramírez, associate director for Fitch Ratings in Venezuela.
Legal experts say the Bandagro case is unusual because the underlying validity of the bonds is in question, while most cases seek to enforce bonds whose legality is not being contested.
The case could increase the due diligence burden on investors if there is persuasive evidence that the notes are authentic, and Venezuela wins anyway, said Anna Gelpern, an associate professor of law at Rutgers University, Newark, and an expert on emerging markets debt. The verdict will not have much effect on investors, she said, if the paper is proved to be false.
Whether a government legal officer's "opinion is sufficient to turn a fake into a real bond is a serious question mark," Ms. Gelpern said.
Brokerage firms, former lawmakers and local economists interviewed for this article — many of them sharply critical of the government — agree that the bonds are indeed fake and that Venezuela should not pay.
A 2003 National Assembly investigation of the case supplied by Francisco Rodríguez, a lawmaker at the time who is now on the faculty of economics at Wesleyan University in Connecticut, found no record of the debt issue in any government institution.
And before Skye bought the bonds, previous finance ministers issued statements warning of the circulation of fraudulent Bandagro debt. Mr. Cordero Vale said Skye never contacted him about the bonds' authenticity before buying them.
Skye responds that it conducted five months of exhaustive due diligence before purchasing the bonds. It says it learned at that point of the solicitor general's first finding but was never told of her reversal.
Skye has hired a Los Angeles public relations firm specializing in crisis management, Sitrick & Company, whose clients include Rush Limbaugh and Halle Berry, in an effort to galvanize favorable public opinion.
Robert R. Bottome, editor of a Caracas economic magazine, Veneconomía, who has followed the Bandagro bond case since the notes appeared in the 1980s, is among the critics here who accuse Venezuela's legal team of mishandling the case. "They couldn't have handled it worse if they had really wanted to lose the case," he said.
Analysts like Mr. Ramírez of Fitch contend that the Venezuelan government wants to prevent the case from affecting its standing in the international markets, and would therefore be likely to settle if it stands to lose the case and any subsequent appeals. Others, like Miguel Octavio of BBO Servicios Financieros, a Caracas brokerage firm, say that Venezuela's willingness to honor its foreign obligations ultimately depends on whether oil prices remain high enough to keep government coffers full.
"Chávez has paid off debt because he can," Mr. Octavio said. "The day he needs money, we'll see if he changes his mind."