Sept. 3 (Bloomberg) -- Venezuelan brokerages seized by the government will be permanently closed and probably liquidated by the end of the year, securities regulator Tomas Sanchez said.
“I can tell you now that all of the firms that were taken over will be closed,” Sanchez, 42, said in an interview in his office in Caracas on Aug. 31. “I can’t recertify a disaster-filled brokerage. One way or another they’re going to exit the market.”
President Hugo Chavez took control of 43 brokerages this year, including the country’s largest trading firm Econoinvest, and jailed 12 directors in a bid to regulate the foreign currency market. Chavez accused the companies of setting artificial exchange rates, laundering money, fueling capital flight and subverting his goal of creating a socialist nation.
The securities regulator has audited more than half of the 110 brokerages that operated in the country and expects less than 20 to remain in business by year-end, Sanchez said. The government investigated debt sales on suspicion that brokerages were failing to verify the origin of funds, he said.
The government is closing nine institutions in addition to the 43 taken over and plans to sell the assets of those companies, Sanchez said.
Juan Carlos Carvallo, a lawyer for Econoinvest directors, said his clients are innocent and the government hasn’t taken steps to protect the money clients invested with the firm.
Chavez shut the unregulated currency market in May after the exchange rate plunged to as weak as 8.2 bolivars per dollar causing inflation to spike to a two-year high. Companies and individuals used brokerages to obtain dollars when they couldn’t get permission from the government to buy at the official rates of 2.6 and 4.3 bolivars per dollar.
“The market got off track and needs to return to its natural role,” Sanchez said. The capital market should trade shares and corporate bonds of private companies, he said.
Sanchez previously worked in the deposit guarantee fund, known as Fogade, and was named securities regulator in December. Sanchez was involved in drafting the new capital markets law and is working on creating a public bond market.
The government banned brokerages from buying and selling dollar-denominated bonds and government debt in bolivars since the closing of the market, restricting investment opportunities for their clients and spurring a wave of unemployed traders in Caracas.
The central bank was given exclusivity in the trading of dollar securities and set up an electronic bond trading platform for companies to buy dollars at 5.3 bolivars per dollar for imports. The market, known as Sitme, has traded $1.6 billion since opening on June 9.
In addition, the government will launch a public bond market this year where state-run companies will be able to sell debt.
Econoinvest, the largest brokerage in the country, will be closed and have its assets sold in the next two months, Sanchez said. The government may begin to repay the company’s 44,000 clients in four months as its directors await trial on charges of illegally trading dollar securities, he said. The trial is expected to start on Sept. 13.
‘Nest of Mafiosos’
The government focused only on uncovering irregularities at Econoinvest and should have paid the 300 million bolivars owed to investors after the takeover in May, Carvallo said. Chavez called Econoinvest a “nest of mafiosos” and broadcast a video on national television showing security camera footage of employees leaving the office with files, computers and art work.
The directors have only been accused of illegally trading dollar securities and association with delinquency, and not falsification of identities, as Chavez had claimed, Carvallo said.
“All the financial institutions operated the same way as Econoinvest,” Carvallo said in an interview in his Caracas office last week. “If they say that Econoinvest’s operations were illegal, they’ll have to drag the whole financial system along as well.”
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