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A case of dubious Venezuelan debt

January 05, 2006 | Financial Times


Bonds issued by a Venezuelan agricultural development bank that went bust 23 years ago have become the centre of a test case of the power of the US courts to protect investors in emerging markets.

The case could yet turn into a serious embarrassment for the Venezuelan government, led by President Hugo Chávez, or it could merely end up as a cautionary tale for emerging market investors.

In 1981, Venezuela’s Banco de Desarrollo Agropecuario (Bandagro) issued $1bn in promissory notes, governed by the law of Switzerland. Ever since, reports have periodically surfaced that forged Bandagro bond certificates were circulating.

The Venezuelan government assumed responsibility for Bandagro’s genuine liabilities after its collapse, turning any dispute over Bandagro paper into a political issue. With interest, the total cost of redeeming all the bonds originally issued could reach $6bn, more than the government’s total annual financing needs.

In mid-2002, a Panamanian-registered company called Triad FFC sought to redeem a batch of Bandagro notes that, Triad claimed, was worth about $1bn. Triad said it acquired the notes in 1987. Chances of retrieving something from the bonds seemed good for a while, as Oscar Guzmán Cova, the Venezuelan finance ministry’s legal counsel, determined that Triad’s bonds were valid, a decision initially supported by a legal opinion in October 2003 from Marisol Plaza, Venezuela’s attorney-general.

But by the end of 2003, Ms Plaza appears to have issued a second legal opinion stating that the Bandagro bonds were forgeries, and thus valueless. At about the same time Mr Guzmán was dismissed from his job at the finance ministry. Waldemar Cordero Wale, the former Bandagro official whose signature appears on the bonds, stated publicly that he had not signed them.

Skye Ventures, a private investment fund for high net worth individuals based in Columbus, Ohio, then was offered the bonds by Triad. Skye specialises in “special situation” investing, buying securities at deep discounts.

David Richards, Skye’s chief executive officer, said that Triad did not have the resources needed to prise out payment from Venezuela. After five months of due diligence, involving trips to Switzerland and consultations with Venezuelan judges, Skye bought bonds with a face value of $100m, and a claimed current value – because of accumulated interest – of about $600m.

Ms Plaza’s ruling gave them some confidence that with the resources at their disposal they could succeed where Triad had failed. “There was a strategy of ignoring the obligation, and that would likely have been successful” against Triad, according to Mr Richards.

Skye demanded payment, was rebuffed, and brought a lawsuit in Ohio in 2004 alleging that the Venezuelan government was compelled under its own laws to recognize Ms Plaza’s first decision as final and unappealable.

The bonds’ murky history, and the open defiance by Chávez of the US might suggest that Skye’s chances are limited. But Skye has mustered a strong team of lawyers. Roman José Duque Corredor, a law professor and former Venezuelan supreme court justice, supplied an affidavit in which he argued it was “beyond any doubt” that Ms Plaza’s first ruling was “imperative, absolute and binding”.

The judge in Cleveland is expected to rule soon on whether the attorney-general’s first opinion should have been binding, or whether Venezuela can be allowed to undertake investigation into whether that ruling was tainted by fraud.

Mr Richards believes the “highly suspicious” second opinion, which ran to only four pages, unlike its predecessor, which ran to more than 50, will be “proven bogus”. It was not given to the court until May 2005, never appeared during legal discovery in 2004, and Ms Plaza did not allude to it in a 2004 newspaper interview about the case.

Skye hired its own forensic experts, who swore the signatures on the bonds were genuine.

Venezuela then produced an affidavit from the attorney-general, a copy of which was obtained by the Financial Times, in which Ms Plaza asserts that the December 2003 legal opinion “expressly clarified” that the October 2003 “inter-administrative opinion” did not act as the certification of any Bandagro notes because the documentation provided her at the time had been “insufficient and incomplete”.

Ms Plaza added that an expert police analysis of the bonds proved that the notes, the signatures, the seals and the bond paper itself were false. She argues, therefore, that the December 2003 legal finding revokes the October one, declaring the “impropriety” of the claim.

Mr Richards says, however, that she is referring to a previous tranche of Bandagro notes that were claimed in 1998. “Since our notes were not inspected by anyone in 1998 – they were held in custody – we know this is not true,” he said.

Although the odds appear to be stacked against him, he is not giving up. “There’s no doubt that Bandagro issued $1bn in bonds in 1981. And there’s very little evidence that any of them were ever retired,” he said. “I just didn’t think they would try to pull something like this magical second decision.”

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