Brazil Corruption Trial Chills Lula Legacy as Party Vote Suffers

Brazil’s Supreme Court today begins hearing final arguments in a corruption case that threatens to tarnish the country’s most popular president and undermine support for the ruling Workers’ Party ahead of local elections.

After years of closed-door proceedings, justices and lawyers for the first time will publicly air charges against 38 defendants, including former President Luiz Inacio Lula da Silva’s chief of staff, accused of helping the PT embezzle public funds used to bribe lawmakers. The scandal, which led to calls for Lula’s impeachment in 2005, is known as the “mensalao,” Portuguese for the “big monthly payment” allies allegedly received in exchange for backing the government.

A former shoeshine boy, Lula oversaw Brazil’s fastest economic expansion in 25 years in 2010, capping off an eight- year presidency during which 35 million people rose out of poverty. A verdict condemning his lieutenants could diminish his legacy after he left office with an 87 percent approval rating.

“It’ll trigger a historic revision of the Lula government and may shatter his image as a semi-God,” Joao Augusto de Castro Neves, analyst at Eurasia Group, said by telephone from Washington. “His role in Brazilian politics is fading and the trial may accelerate that process.”

Cash in Underwear

Chief prosecutor Roberto Gurgel called the mensalao the most “daring and scandalous” corruption scheme ever uncovered in Brazil, according to a copy of a brief filed to the Supreme Court last month, Folha de S. Paulo newspaper reported last week. The high court and prosecutor’s office would not verify the content of the brief, which has not been made public.

The cash-for-votes scheme was exposed in 2005 by Roberto Jefferson, leader of one of several allied parties the Lula government relied on to pass legislation. The scandal gained momentum when the then-treasurer of Lula’s PT, Delubio Soares, acknowledged that the party didn’t report certain campaign contributions and an adviser to the brother of then-PT president Jose Genoino was arrested with $100,000 in his underwear.

Lula’s handpicked successor, Dilma Rousseff, isn’t accused of wrongdoing, and saw her approval rating soar to 77 percent after taking a tough stand on corruption by firing six ministers accused of graft and influence-peddling.

Rousseff Spared?

Still, the trial could damage her party when Brazilians go to the polls in October to elect more than 5,550 mayors, said Ricardo Guedes, head of Belo Horizonte-based polling firm Sensus.

That’s because the 66-year-old Lula remains the PT’s top campaigner, even though this is the first election in more than a decade when he isn’t in power or on the ballot.

Also weighing on voters is a slowing economy that record low interest rates and government tax breaks have so far failed to revive. The biggest emerging market after China expanded an annualized 0.8 percent in the first quarter, half the pace of the U.S. Gross domestic product expanded 2.7 percent and 7.5 percent in 2011 and 2010 respectively.

The elections are a barometer for the PT’s support that will help determine the balance of national power ahead of presidential election in 2014, when Rousseff, 64, will face voters if she seeks a second term. Lula has said he would only run for a third term if she declined.

“I don’t see voters pinning this case on Dilma,” Guedes said by telephone from Angola. “But without a doubt a sentence or sharp censuring by the court will hurt the PT.”

In Sao Paulo, Brazil’s biggest city and business capital, Lula’s former education minister, Fernando Haddad, is running in third place with 7 percent support, according to a poll taken July 19-20 by Sao Paulo-based polling firm Datafolha.

Lula Apology

In a taste of the negative campaigning to come, the opposition Brazilian Social Democracy Party put on its website a video calling the mensalao the “scandal that Brazil doesn’t forget” and containing footage of Lula apologizing to the nation.

“Democracy loses when the trial is used for electoral purposes,” Marco Aurelio de Carvalho, a PT lawyer who co-signed a petition asking the country’s top electoral authority to delay the court ruling, said by telephone from Sao Paulo.

While some defendants have acknowledged they played a role in the lesser electoral crime of not reporting campaign contributions -- a widespread practice in Brazilian politics -- all deny ever tapping state funds or paying bribes.

Jail Terms

Supreme Court justices are expected to rule in September on charges that also include racketeering, money laundering and illegal currency transactions. Some of the crimes carry maximum sentences of 12 years in jail. Eight of the 11 justices were appointed by either Lula or Rousseff.

Lula in 2005 said that he was betrayed by close aides who engaged in “unacceptable practices.” After his re-election in 2006, the former lathe operator changed tack and said the mensalao was an attempt by the opposition to oust him from power.

Rousseff emerged from the political vacuum left when the scandal toppled Lula’s chief of staff, Jose Dirceu. A former PT chief who took up arms against Brazil’s 1964-1985 military dictatorship, Dirceu is charged by the prosecution with masterminding the fundraising scheme through a network of banks and advertising firms that had government contracts.

The trial, which heard testimony from over 600 witnesses in five years, has been marked by controversy. Supreme Court Justice Gilmar Mendes told local media in May that Lula in a private meeting pressured him to delay a ruling. Lula acknowledged meeting with Mendes but denied acting inappropriately.

Lula declined to comment on the trial, according to an e- mail from his press aide. Rousseff’s press office refused comment in an e-mail, saying it was a matter for the judicial branch. Dirceu on his blog has repeatedly denied any wrongdoing.

A tough sentence in the case could convince many Brazilians, especially in the country’s growing middle class, that impunity and corruption isn’t inevitable, said Ben Ross Schneider, the director of the Brazil program at the Cambridge- based Massachusetts Institute of Technology.

“It would be a watershed,” Schneider said in an interview. “There have been many scandals in Brazil, but few trials.”

To contact the reporter on this story: Raymond Colitt in Brasilia Newsroom at rcolitt@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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