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Chavez Bond Brokerage Purge Fails to Stem Venezuelan Inflation

Hugo Chavez
Hugo Chavez, Venezuela's president, speaks at a meeting during the COP15 United Nations Climate Change Conference at the Bella Centre in Copenhagen, Denmark, on Wednesday, Dec. 16, 2009. World leaders will arrive in the Danish capital of Copenhagen over the next three days to agree on a pact to fight global warming. There may be nothing to sign. Photographer: Chris Ratcliffe/Bloomberg *** Local Caption ***Hugo Chavez .

Herman Sifontes used to manage more than $200 million in client assets as the head of Venezuela’s largest brokerage. Then, in the spring of 2010, he was arrested and his firm was shut down as part of a purge of brokers by President Hugo Chavez.

Today, according to his sister, Nathalie, Sifontes is studying Chinese history in the basement of a military prison and teaching guards English from his cell, Bloomberg Markets magazine reports in its January issue.

Chavez, ruler of the oil-rich country since 1999, has publicly blamed bond traders for accelerating inflation and devaluing the bolivar, Venezuela’s currency. In 2010, the country’s inflation rate was 27.2 percent. In just one month, from March to April of that year, consumer prices rose 5.2 percent.

On May 25, 2010, Sifontes and three of his partners at Econoinvest Casa de Bolsa CA were taken into custody by federal police. Within days, seven other brokers were arrested. Three weeks later, the financiers were formally accused by government prosecutors of illegal currency trading.

Tomas Sanchez, president of Venezuela’s National Securities Commission, said in a June 2010 interview with Bloomberg News that the brokers, who traded currencies on the bond market, were setting arbitrary exchange rates and crippling the economy.

“These were financial thugs,” he said.

‘Nest of Mafiosos’

On Venezuelan television in July 2010, Chavez described Sifontes and his associates as “a nest of mafiosos.” He also accused them of purchasing securities under false identities, though no such charges were ever formally lodged against them.

Since the government crackdown, more than 50 brokerages have gone out of business. Meanwhile, the economy has failed to pick up. Gross domestic product growth is expected to be 2.8 percent in 2011, according to the International Monetary Fund. That compares with an average 4.5 percent for Latin America and the Caribbean.

As of November, the annualized inflation rate stood at 27.6 percent, the highest among 78 countries tracked by Bloomberg. In an attempt to slow inflation, Chavez froze the prices of 18 personal care items from deodorant to toilet paper on Nov. 22 as part of a law that will seek to regulate as many as 500,000 prices in the economy.

While the economy grew 4.2 percent in the third quarter, key areas such as food production contracted 9 percent, adding to inflationary pressures. Amid a slow economic recovery, uncertainty shrouds Venezuelan politics.

Six More Years

Chavez announced in June that he had been diagnosed with an undisclosed form of cancer. A 57-year-old ex-soldier who has overcome a number of barriers -- including a poverty-stricken upbringing and two years in prison after a failed coup d’etat against the government in 1992 -- Chavez has said his illness will not deter him from seeking a third six-year term in the October 2012 elections.

As the election approaches, the government still has financial resources that can help Chavez at the polls. Venezuela, South America’s biggest oil producer, can borrow money, albeit at high interest rates. During 2011, the government sold a record $7.2 billion of bonds to give the economy a boost, including stimulus spending on agriculture, public housing and job creation.

Sifontes and the other brokers were arrested at a time when the economy was hit by high inflation and an increasingly weak bolivar. In January 2010, Chavez announced a 50 percent devaluation of the currency, the first such measure in five years. The government then set two official exchange rates. One for essential imports such as food, medicine and machinery, which stood at 2.6 bolivars to the dollar, and a second rate for all other transactions, which stood at 4.3 bolivars to the dollar.

Plunging Bolivar

There was, however, another legal means of trading currencies: the bond market of which Sifontes and Econoinvest were a part. During the first five months of 2010, the fluctuating exchange rate on the bond market plunged 26 percent, reaching a record low of 8.2 bolivars to the dollar on May 11.

Venezuelans who purchased bonds to obtain dollars deposited their money in foreign bank accounts. These funds could be held as savings or used to pay in dollars for imports. Bond trading was not only legal at the time; the government participated in it by issuing bonds of its own.

In late 2009 and early 2010, Central Bank President Nelson Merentes made it clear that the government believed the country’s brokerages were instrumental in Venezuela’s economic decline, according to Eduardo Fortuny, then a board member of the Venezuelan Association of Brokerage Houses.

Private Meetings

In private meetings with the group, Merentes called on the brokers to halt the bolivar’s slide or risk a possible confiscation of their businesses, Fortuny says. Merentes declined to comment on Fortuny’s account.

One week before Sifontes was arrested along with his Econoinvest partners Miguel Osio Zamora, Juan Carlos Carvallo and Ernesto Rangel, the government suspended private trading in dollar-denominated bonds and imposed new controls that gave only state agencies, not private brokers, the right to trade in them.

“There’s no economic reasoning for the weakening of the bolivar,” Chavez said on state television. “This is a huge fraud against the republic.”

As of early December 2011, Sifontes and his colleagues had yet to go to trial. Under Venezuelan law, they can be held for up to two years before getting their day in court. The only time Sifontes has formally addressed his guilt or innocence since his arrest was during a preliminary hearing on Jan. 16, 2011.

Court Testimony

While the hearing was closed to the public and the media, an official court video recording of the proceedings obtained by Bloomberg News shows Sifontes saying bond trading was a legitimate business.

Indeed, one of his clients was the state-owned oil company, Petroleos de Venezuela SA, he says; another was the state telecommunications company, Cia. Anonima Nacional Telefonos de Venezuela, or Cantv.

“We did nothing wrong,” he says on the tape. “I’m completely innocent. We didn’t act behind the government’s back.”

On the recording, Sifontes can be seen showing a PowerPoint presentation to the judge.

“We had government support for our operations after they established and promoted an open, alternative market as a public policy,” Sifontes says.

‘Arbitrary Measure’

To find Sifontes and the other brokers guilty would be a travesty of justice, says Luis Valdivieso, Sifontes’s lawyer.

While the new controls on trading became effective on May 18, 2010, the government is seeking to prosecute the brokers for trades they had been making since the mid-2000s, when Chavez liberalized foreign-exchange transactions as part of what he once called the “democratization of capital markets.” “Every person who bought and sold securities to obtain dollars in Venezuela since 2004 would also be guilty of the same crime,” Valdivieso says.

A Ministry of Planning and Finance official declined to comment on the case. Questions e-mailed to Finance Minister Jorge Giordani weren’t answered.

On Nov. 14, Chavez defended his decision to shutter the capital markets and denied that it was an arbitrary decision.

The opposition “says that Econoinvest was the flagship company, the best of the best,” Chavez said. “They insist that I took an arbitrary measure against them, but they defend corruption.”

Grandstanding Gesture

The brokerage crackdown was a typically grandstanding gesture by the Chavez government, says Boris Segura, a Latin America strategist at Nomura Securities International Inc. in New York.

“They wanted to send a signal to the rest of the market: If you don’t behave, you’re going to go to jail,” Segura says.

Sifontes was a likely target, given his prominence in the Venezuelan business community as executive director of Econoinvest, which had 937.2 million bolivars ($218.2 million) in assets before the government placed it in receivership following the crackdown.

Married, with three children, Sifontes, 48, had worked in finance for 20 years.

Sifontes learned that the government was closing in on him when he was having lunch in the upscale Caracas neighborhood of Las Mercedes. He received a call from the Econoinvest office on his mobile phone, according to Gabriel Osio, Miguel’s brother.

Government Raid

Sifontes was informed that a group of government officials, including two public prosecutors, 14 detectives and eight inspectors, were carrying out a raid on the office, seizing computers and documents and interviewing some of the firm’s 600 employees, Gabriel Osio says.

Gabriel Osio, 44, was president of Econoinvest’s executive committee. He was also president of the Venezuelan Association of Brokerage Houses and vice president of the Caracas Stock Exchange. That day, he was eating at a restaurant in the Los Palos Grandes neighborhood, closer to the office, with his brother Miguel, 42, Econoinvest’s legal director; Rangel, 42, managing director; and Carvallo, 42, sales and marketing director.

Gabriel, who was recovering from dengue fever, says he left the lunch early. He says his brother, Carvallo and Rangel returned to the office, where they joined Sifontes and were taken into custody at about 8 p.m.

Gabriel says he subsequently fled Venezuela to Florida and is seeking political asylum in the U.S. Miguel urged him not to return to Venezuela, Gabriel says: “My brother told me to stay out of it.”

Fleeing Brokers

Osio says dozens of brokerage executives fled the country in the coming weeks, some because they were named in arrest warrants and others who feared they could be next.

From his Miami base, he says he’s managing the finances of Econoinvest’s holding company, Econoinvest Capital SA, which continues to operate some businesses, including a Panama-based brokerage.

Chavez’s naming of more radical officials like securities regulator Sanchez and finance minister Giordani before the crackdown was a signal of things to come, Osio said.

“Everything changed with the new finance minister,” he said.

The buzz of the bond market is a far cry from Sifontes’s new home, a prison in the working-class Caracas neighborhood of Boleita operated by the Directorate of Military Intelligence. As the months tick by, Sifontes and his fellow inmates, Miguel Osio Zamora, Carvallo and Rangel have tried to keep busy, Nathalie Sifontes says.

Her brother has been taking online courses from Madrid-based Universidad de Alcala.

Prison Life

“I think that thanks to his studies, he hasn’t felt the full weight of being behind bars,” she says.

Carvallo has learned Italian, Nathalie Sifontes says. Rangel lifts weights and manages his Guataca Producciones recording label, which promotes contemporary Venezuelan music. The men visit a sunny terrace once a week for exercise before returning to the harsh fluorescent lights of their separate prison cells, she says.

Two months before his arrest, Herman Sifontes reviewed Niall Ferguson’s 2008 book, “The Ascent of Money: A Financial History of the World,” for Venezuela’s Institute of Finance and Business. Ending his review on the institute’s website, Sifontes pointed to what he thought was the book’s great lesson: “Democracy, in its broadest sense, must incorporate the business world.”

‘Venezuela’s Problem’

Under Chavez, the Venezuelan government operates by different rules, Sifontes said in his videotaped court testimony.

“The government has created conditions so that the people don’t believe in the bolivar and prefer to have dollars,” he said. “This is Venezuela’s political, economic and sociological problem.”

Even a politician as powerful as Hugo Chavez can’t, it seems, make the markets bend to his will, no matter how often he changes the rules and how many brokers he throws in jail.

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