THE CARD JOKER

Tables of contents 1

Writen by: R. Del Naranco

«The Card

Joker»

Rafael del Naranco

THE CARD JOKER

Or the Story of a Bank Management Style

® Editorial de Investigaciones Periodisticas

Second Edition, June, 1997

ISBN 0-4297-0581-6

Cover design by

Rodrigo de Guerrero

Printed in the United States of America, 1997

«. . .despite the investments made to get the crisis over with, the financial assistance given and the «migrations» of deposits from banks in the hands of the Government to institutions taken over by the Government, there were large debts incurred, as to which no one is accountable for handling this assistance or the migrations. . .»

Carmelo Lauría.

Chairman of the Finance Committee

Venezuelan House of Representatives

El Universal.

May 28, 1997

«. . .of every hundred bolivars given to Banco Latino,

seven (7) was recovered. In other words, ninety-three

(93) bolivars was lost. . . over 300 billion bolivars

was invested, and it will be sold piecemeal, and only

a minute portion of the investment was recovered. . .

At this time, I fail to understand why Banco Latino will

be broken up. Of all the investments made in this institution, only 7% will be recovered. . .»

Gustavo Tarre Briceño.

Former Finance Committee Chairman.

Venezuelan House of Representatives.

El Universal.

May 28, 1997

Prologue

The banking/financial crisis that began in 1994 with Banco Latino’s resounding collapse has been one of the world’s toughest and intense, exceeded only by Chile’s banking crisis, from 1981 thru 1983.

IMF and World Bank specialists have conducted in-depth research on world banking crises throughout the eighties, evaluating their intensity by comparing their duration, the number and percentage of affected institutions and the cost of the crisis in relation to the Gross Domestic Product (GDP).

Chile’s crisis was tantamount to 20% of its GDP. Argentina’s crisis involved 13% of its GDP, while Venezuela’s amounted to 14% of the GDP generated in the country throughout 1994. The Venezuelan Government transferred funds to the financial system by way of assistance granted by Fogade (the Government’s Deposit Insurance Fund) amounting to one trillion one hundred ninety-eight billion bolivars.

In sheer monetary terms, Venezuela’s banking crisis involved a higher cost than the renowned 1929 «crack» that unleashed the so-called Great Depression in the thirties. This fact in and of itself provides an idea of the breadth of the collapse of Venezuela’s financial system.

The different causes for a crisis of such magnitude are still being discussed today. Reasons originating in banking/financial system management (poor management, insolvency, high portfolio debt, bad investments, high risk concentration, etc.) and resulting from the economic environment (unstable currency, high inflation, high rates, chronic Government deficits, plus a few others), as well as different political components (change in government, vindictiveness, rumors targeting some institutions) account, by and large, for this phenomenon. In addition, the financial system as a whole did not enjoy the opening started by Carlos Andres Perez in 1989, and bank regulation was —and some say it still is— provenly inefficient, corrupt and run directly by the bankers themselves.

Today, the aftermath of the crisis that began in 1994 with the collapse of Banco Latino lingers on. A phenomenon of such magnitude can’t be reversed in just a couple of years. At this time, there’s still a handful of small financial institutions risking their survival in the midst of this crisis, and their days may be numbered as large foreign banks (Banco Santander, Bilbao Vizcaya, Chase, J.P. Morgan, etc.) set up a presence in the country for retail banking competition on terms that scores of domestic banks will not be capable of matching.

Back in the eighties, a similar phenomenon took place in the Southern Cone. Argentina, Chile and Uruguay watched as their financial systems collapsed in the midst of full openings (such as Chile’s) and troubled periods of political and economic instability.

In these nations, huge interest rate differences —higher domestic and lower foreign—, together with exchange rate fluctuations, promised very high returns and attracted a considerable influx of capital, which, in turn, caused quick monetary expansion and difficult domestic demand control. Lack of effective regulation allowed some real cases of bank carelessness. As per World Bank estimates, non-performing assets in Chilean banks amounted to 79% of their equity and reserves in 1982 and over 150% in 1983. More or less similar figures and ludicrous rates (over 100% in the last days of Banco Latino) were seen in Venezuela.

Monetary authorities in these three Southern Cone countries were forced to rescue collapsing banks. Such monetary expansion weakened ongoing adjustment programs. Argentina and Chile reestablished direct financial sector controls. In Venezuela, the Caldera administration set up once again controls over basic currency fluctuations, exchange rates and interest rates. It didn’t do anything that had not been done before to deal with financial crises of such magnitude, including the action taken by the highly touted and overtly liberal Pinochet administration in Chile.

It remains to be seen whether Venezuela’s financial system learned something from the 1994 crisis and its ensuing «wave» of collapsing banks. The mix of finances and politics has proved to be explosive, unstable and dangerous throughout History. This financial crisis has brought on profound consequences still being borne by Venezuelan Society as a whole, such as high inflation, unemployment, small returns on investment and prevailing recession.

This book provides an in-depth explanation of the process that led to the government takeover of Banco Latino and delves into the motives of Gustavo Roosen, the ultimate driver of Venezuela’s banking crisis. The reader will form his/her own opinion of why this man is known as «The Card Joker».

Ramón Maceiras

A Story to be Told

In Venezuela, the twentieth century will be marked by the banking crisis that began with the government takeover of Banco Latino and ended as it dragged in 17 other banks and their hundreds of affiliated or related companies, causing the country more damage than a civil war in terms of the corporations, buildings, employees and customers hurt by it, without an actual solution being reached in the best interest of the country.

Interestingly enough, the collapse of different banks, particularly that of Banco Latino, served to create several sacred creatures that rose over the graves of the banks and ended up pulling strings self-servingly, in addition to becoming role models of efficiency built with clay and plaster, which shall be judged by History and destroyed by Time.

Terming these events a «financial crisis» would be tantamount to locking up an elephant in a bird cage because despite its economic component, politics certainly played a role of utmost importance therein, and in the final analysis, it may have been the most significant reason for unleashing this conflict.

Amongst other things, it was an effort by many newcomers and opportunists that envied those who had achieved high profits through bank management. Later, they replaced them, but didn’t do a better job, killing with their own hands the goose that laid the golden egg, without extracting from it their coveted wealth-seeking positions.

All those who believed that the country would gain something from the government’s takeover of the banks made a big mistake, and this is proven by the Government’s bleeding itself dry through FOGADE, its Deposit Insurance Fund, as it handed out two hundred billion bolivars that instead of reaching its scheduled allocation, ended up in the same stream that was sucking into an ocean of corruption years of customer savings to cover up the holes being left by the crisis induced by the ridiculous decision to exclude Banco Latino from the Clearing House by preventing the arrival of funds owed by Centro Simon Bolivar.

The notion that the Ramon J. Velazquez Administration, then in power in Miraflores —the Venezuelan White House—, had no intention of providing Banco Latino with any assistance whatsoever results from its failing to apply Article 314 of the LGBYIOF, which specifically states as follows:

«During the three years subsequent to the date of effectiveness of this Act, the Fund may provide any banks and financial institutions not taken over by the Government with financial assistance in such cases where this is required for safeguarding the stability of the financial system, subject to a vote in favor thereof by no less than 5 members of its (FOGADE’s) Board of Directors and a favorable opinion by the Venezuelan Central Bank. . .»

This article would have sufficed in and of itself to show the politization of Banco Latino’s problem. Seen in this light, there are several ingredients in the situation involving domestic banks; surely, there was an economic component, but in the case at issue, substantive political interests prevailed, irrespective of anything else. The repetition of the word «political» in this case serves to understand everything that took place later, as explained throughout the contents of this book.

A provisional government without any actual knowledge of the mechanics of finances and manipulated by political interests, such as that of Ramon J. Velazquez in the throes of its last days in power, decided to pardon a drugtrafficker as thoughtlessly as it «lowered the boom» on Banco Latino, thus marking the beginning of the end of the top twenty five percent that enjoyed the strongest financial position in the country.

Being Venezuela’s second major bank, Banco Latino had more than enough property and assets to avoid bankruptcy, proving that the problem was more political than financial. Its assets were huge enough to provide it with the ability to be fully accountable to its depositors and savers, but it became doomed when it was hit by the government’s takeover, and this was endured together with not only 3,000 employees that finally succeeded in receiving payment, but all the people who had entrusted it with their money and whose lives came to a stop as of such time, while waiting for a clear and coherent decision by the Government.

If the government takeover would not have taken place, other formulas could have been applied without such a high cost for those engulfed by this whirlpool: People who had earned their money by working or selling real estate whose profit was inferior to cash proceeds.

At that time, it was argued that no more time should go by and that president-elect Rafael Caldera should take office without waiting until February 3, given the provisional nature of the Ramon J. Velazquez administration and subsequent to the December 1993 elections. Only twelve days had elapsed in 1994, the same number in which the General Bank Act had been in effect, when it endured its baptism of fire as it was unable to stop the financial crisis whose coming had been felt since the early nineties.

This law had come too late to deal with the twistings that banking itself had accumulated throughout recent years. During this time, bank regulation was complacent and failed to do its job, allowing the growth of small, medium and some large-sized banks with questionable financial standing, poor equity and a long list of generally accepted practices which led to their irretrievable failure.

In the midst of this crisis, there were misfortunes involving the elderly who relied on the financial system that received their deposits from pensions, trusts and proceeds of the sale of their real estate to place them in accounts yielding higher profits with less risk than that from fighting with tenants.

However, to keep the record straight, each and every single depositor recovered his or her funds in the particular case of Banco Latino, achieving this within the time frames set to deal with these circumstances at that time. This situation solved one of the most serious problems in any bank taken over by the Government: The Human Aspect.

In the case of the international affiliates, with the exception of the sale of Banco Latino, N.V. to Banco Provincial, which is under judicial review, all depositors recovered their funds as well. Banco Latino Internacional paid one hundred percent of its deposits from its own funds, and Banco Latino de Colombia was sold at a huge profit in excess of four million dollars for Banco Latino de Venezuela, and depositors were not affected whatsoever.

The 1993 elections served as a restraint on the problem in a country whose president had been ousted from office by the Supreme Court for the first time and in political turmoil causing a change in government. After the elections, this topic was discussed openly once again, and rumors about the insolvency of certain banks were an essential ingredient to season the 1993 Christmas dinner.

After the Government took over Banco Latino, which received no offer for financial assistance, and the other sixteen banks, whose takeover took place in different stages, many events transpired and several seizures occurred as a result of defaults by those who were leading these institutions. Their customers were checking account holders and savers, and Fogade reacted late on the belief that Banco Latino was up to date, in principle, on all its payments of deposits of up to one million bolivars and then even those of up to less than five million, finally providing a payment of ten million. Deposits in excess of ten million were paid with bonds maturing in 2007, but they started to get paid in February, 1997.

As time went by, some providential characters turned up, as per the Government’s belief. They were in charge of applying several formulae to salvage the savers’ and Government’s monies, but in some cases, results were not as good as expected.

Now the storm has passed, but the damage still lingers, and those who occupied the position of administrator of an institution taken over by the Government often skewed results to the area which interested them the most or made incomplete disclosures of the assets they found as security.

Many mysteries surrounding the Government’s takeover of banks have been solved in a short time, and many political and economic analysts concluded that the government takeover of Banco Latino could have been avoided.

CHAPTER I

WHERE IT ALL BEGAN

Subsequent to the January 1994 Latino crisis, the government takeover of several banks —such as Amazonas, Baicor, Barinas, Construccion, La Guaira, Metropolitano, Maracaibo, and Fiveca, a finance company—, shortly after the government takeover of Banco Venezuela and Banco Consolidado and in the wake of the government takeover of Banco Andino, Banco Republica and Banco Progreso, ending in January with the collapse of Banco Italo Venezolano, Banco Principal and Banco Profesional, while most in the banking industry thought that 1996 would be a year for gaining force and strength, others believed that no matter the scenario at hand, it would not be as positive as expected in the absence of a basic change in the Government’s economic policy.

According to the International Monetary Fund, there was a variable involving the trickling arrival of foreign banks, since only two Dutch institutions came in subsequent to the opening: ING Bank, which became established in Venezuela with the assistance of Pedro Tinoco in partnership with Banco Latino, represented by INTERUNION BANK, and ABN Amro. In the meantime, Citibank, Banco do Brasil, Banco Tequendama and Banco Ganadero were already in operation, the latter two being from Colombia, together with Bilbao Vizcaya (BBV) and Santander, the currently established Spanish banks. This agreement with the IMF shows that most banks surviving this crisis had to recapitalize and take the necessary steps that would force them to become more operational. Therefore, the advantage of the presence of foreign banks stems from forcing Venezuelan banks to disencumber their assets, strengthen their equity and face competition with financially sounder institutions equipped with upgraded management, and especially, gain the market’s confidence in order to have it forget the events transpired in such an important industry in the last two years, which left a virtually unremovable scar.

TIMETABLE OF BANKS TAKEN OVER BY THE GOVERNMENT

Nineteen ninety-four was a «black» year for the Venezuelan banking industry. The rumors that had gone around since early December, 1993 about the fate of Banco Latino became stronger, gaining substantial intensity as of the time President Carlos Andres Perez was ousted from office in May of that year. After being replaced by Ramon J. Velazquez, he and his team, headed by Ramon Espinoza, based on false rumors also unfoundedly maintained by the former chief of the presidential staff, led the institution to a precarious position, deciding its government takeover on January 13, 1994. As is well-known, no financial institution can withstand the departure of 40% of its deposits. However, Latino held on for almost two months until its takeover marked the first resounding blow of a crisis that would last for almost two years.

Nevertheless, after 84 days of a rambling government takeover riddled with complaints from customers of the Avenida Urdaneta branch and an ongoing assailment of its private sector managers, with more than 450 bench warrants, Latino reopened its doors as a government bank on April 4 after it was duly taken over.

But the effects of the crisis spilled over to other banking institutions, given the lack of confidence the public began to have as a result of ambiguous Government decisions that prompted a series of rumors which spread like wildfire and had their full impact on June 14, 1994.

A separate chapter could be written on the story involving these rumors. Seven banks and one financial institution were taken over by government agencies after receiving all the support denied to Latino.

But that wasn’t the end of it. Almost two months later, on August 7, 1994, it was Banco de Venezuela’s turn, which, nonetheless, remained open and operating under Government control.

A month later, Banco Consolidado had the same fate. It also remained open and in operations, but under the Government’s aegis.

On November 11 it was Banco Andino’s turn, an institution that would generate a big scandal thereafter when it was reported that the Government had been protecting Bernardo Celis, its then Chairman of the Board, a Convergencia Party senator who was appointed chairman of the Congressional Finance Committee, which, ironically enough, was the financial assistance watchdog.

December was marked by the huge scandal involving the failure of Grupo Latinoamericana-Progreso, whose Chairman of the Board, Orlando Castro Llanes, cried out the slogan «We are here and we’ll remain here» to differentiate himself from other bankers who had left already. Its collapse dragged in Banco Progreso and Banco Republica. In the meantime, Orlando Castro left the country as well, but he was arrested in Miami and tried in New York City because of his link to a Banco Progreso/Puerto Rico operation.

The aftershocks of the banking earthquake continued to be felt in 1995. Thus, in February of that year, the Government took over Banco Principal, Banco Profesional and Banco Italo Venezolano, three banks in one-single shot, while Banco Republica came under Government control. The cycle was complete on August 22 with the collapse of Banco Empresarial, whose main offices were in the State of Zulia.

The list could not be longer and more graphic, since 17 banks, one finance company and two large corporate groups collapsed as the public watched in amazement. Only five were saved from this attempt (Banco Latino, Banco Consolidado, Banco Venezuela, Banco Republica and Banco Andino) because the Government decided to convert them to government-owned banks, while waiting to restructure them and sell them at a very high cost for the Nation.

LATINO’S ORIGINS

When it collapsed, this bank has been operating in the country for 40 years. Banco Frances e Italiano, its initial name, was changed to Banco Sudameris after the Government determined that foreign investors could not hold more than 20% of its equity. When the 20% foreign interest disappeared, it became Banco Latino.

At that time, in 1975, its shareholders sought help from Pedro Tinoco in order to have him run this financial institution. Tinoco had just finished his term as Minister of Finance of the first Caldera administration and suffered a serious setback as presidential candidate for the Desarrollismo Party in the December, 1973 elections that resulted in Carlos Andres Perez’s taking office, a politician with whom Tinoco had a good relationship.

Tinoco accepted the position of Chairman of the Board of this bank, running it for nearly 15 years, until 1989, when he was appointed Central Bank president at the outset of Carlos Andres Perez’s second presidential term. At that time, Antonio Ugueto Trujillo became in charge of Latino until September, 1972, when Gustavo Gomez Lopez was appointed Chairman of the Board on the motion of an ill Tinoco at the General Stockholders’ Meeting.

In the early nineties, Latino became the country’s second bank, since it had deposits of 144.927 billion bolivars in December, 1993, exceeded only by Banco Provincial, and in turn, it was the institution holding the largest public savings sum, with nearly 20% of the market, and the leader in trusts. Banco Latino had a very aggressive policy in its product market. It was the big innovator, offering checkbooks for left-handed people and accounts for the young, as well as excellent communication strategies for them. Its deposit diversification was such that it was present to some extent in every Venezuelan household.

THE BEGINNING OF LATINO’S CRISIS

The Bank was a key component within a larger conglomerate known as Grupo Financiero Latino, including Banco Hipotecario de Occidente, Latino Sociedad Financiera, Fundacion Corrado Lucherino, Latimer Inversiones, Fondo Latino de Activos Financieros, Almacenadora Latina (Almalatin), Adualatin, Mutuactivo, Valores Latino, General de Seguros (sold later to Consolidado), Latimar and Arrendadora Latino. These companies were not owned directly by Latino, but by two related companies: Latimer Inversiones and Inversiones Inmobiliarias Latimer.

The fact is that Latino began to grow spectacularly as of 1989, jumping from fourth to second in almost every survey conducted by the industry’s consulting firms. The Bank’s enemies attributed such growth to the significance of Pedro Tinoco’s being the president of the Venezuelan Central Bank, saying that the Bank’s managers were friends of the Perez administration. Later, there was a similar situation involving Banco del Orinoco, whose Chairman of the Board was Julio Sosa, Caldera’s Minister of Finance.

However, several documents show that public sector trusts were formed a few years before Tinoco started as president of the Venezuelan Central Bank, and while Latino’s government deposits increased, Banco Provincial and Banco Venezuela had a much larger percentage of them.

Actually, after Carlos Andres Perez had been forced to resign from the presidency to be tried by the Supreme Court, Ruth de Krivoy, the then-president of the Venezuelan Central Bank, advised Pedro Rosas Bravo, the Minister of Finance, of the financial position of domestic banks on May 19, 1993, highlighting, amongst other things, the substantial decay of the financial system. In November, 1992, both the Minister of Finance and the Bank Superintendent were alerted to these same facts, as they were informed of the acute liquidity crisis concentrated at that time on a group of seven commercial banks, to the extent that at such time, this group of banks had a clearance of 17.657 billion bolivars in the red. On the basis of such negative performance, three of those banks had a reserve deficit of 8.759 billion bolivars on November 30, 1993, and five were forced to resort to receive credit assistance from the Central Bank. Altogether, they had a negative balance of 24.879 billion bolivars at that time.

LATINO WAS LED TO ITS CRISIS

On December 21, 1993, Esperanza Martino, Fogade’s Chairperson, Roger Urbina, Bank Superintendent, and Ruth de Krivoy, Central Bank President, were summoned to an emergency meeting to specifically discuss the need to aid Latino, thus avoiding its imminent government takeover. The aid amounted to 6 billion bolivars, secured by an equity recapitalization of 15 billion. The stockholders provided a significant portion of the money, but refused to continue injecting capital unless there was a statement by the Government putting a stop to the rumors affecting the bank’s liquidity.

The Government’s inflexible attitude had led to Gustavo Gomez Lopez’s resigning as Bank Chairman of the Board on December 18, feeling that he was an obstacle to the aid. The position was taken by Giacomo Leon, a man with substantial banking experience, having been with the institution throughout its 40 years of existence.

The rumor became stronger in January, to the extent that Compania Aeropostal sent a fax to all its branches, ordering them not to accept any Banco Latino checks. Clearing house balances were deeper in the red every day, and the bank resorted to every possible fund, so that it would not fail to pay depositor funds, being in the red in excess of 8 billion per day.

On January 4, Central Bank President Ruth de Krivoy advised President Ramon J. Velazquez of Latino’s severely run down financial position. Suspiciously enough, she hid from him that Article 314 contained the legal recourse for resolving this situation and safeguarding the financial system. Nonetheless, Krivoy reported on January 14 that the Bank had been excluded from the Clearing House. On the 16th, Ramon Espinoza, the presidential chief of staff, together with Carlos Rafael Silva, Minister of Finance, the authors of the rumors detrimental to the Bank —according to some groups— and the individuals who always took cabinet stands against any solution to the problem, announced that «subsequent to a savage rumor campaign», the Government had decided to take over Banco Latino. The solutions proposed by the Central Bank’s Board of Directors included that other banks should give their support to Latino, while knowing that they were in the same or even worse position, meaning that this proposal was known to be wrong from the start.

The only proposal accepted was the assignment of some Government bonds held by the Venezuelan Central Bank itself, resulting from a debt Centro Simon Bolivar had to Banco Latino, which was in excess of the amount required for Clearing House coverage. The required resolution and acceptance at a 4:00 P.M. meeting set for this purpose were the only thing pending. As told by Ruth de Krivoy, the story is that Centro Simon Bolivar’s Chairman of the Board arrived 15 minutes late, the most expensive 15 minutes in the Nation’s History.

From the time of the government takeover to April 4, 1994, when Latino reopened its doors under Gustavo Roosen, the Financial Crisis Presidential Commissioner, first as chairman of the Government Takeover Supervisory Board, then as the Bank’s Board Chairman, and later as the shadow of Alfonso Espinoza when he was Chairman of the Board, until his departure in March 1996, Latino’s story is worthy of Ripley’s «Believe or Not».

ROOSEN’S TERM AS BANK CHAIRMAN OF THE BOARD

The two-year time frame in which Gustavo Roosen was designated to run Latino for its alleged rehabilitation is a period where it can be said that the Institution was truly bankrupt, as promoted and sponsored by the Government. This story is so bizarre that it must be told.

During this period, this financial institution received 300 billion bolivars in assistance, and instead of recovering, waste, poor service, agreements with foreign law firms —the main topic of this book— that received millions of dollars for work that was never known about because not one-single penny was recovered, with the excuse of collecting the money Gomez Lopez had allegedly taken, were the order of the day. Actually, upon the Bank Superintendent’s finally succeeding in auditing the institution chaired by Roosen, a series of irregularities were found that could be signaled as the Institution’s real bankruptcy when he submitted his report on August 31, 1995, one year and four months after the Caldera administration’s financial «one-man team» had taken over the reigns of Latino.

Sudeban’s officers clearly indicated that «this audit does not exempt the mangers of this financial institution from their liability to perform Internal and External Audits which are appropriate for the Institution, in accordance with current principles.»

Amongst some of the features in Roosen’s term as Bank Chairman of the Board, the Sudeban people pointed out some internal audit flaws, stating specifically that «Trust operation flaws found are so significant that they are tantamount to weaknesses which compromise the collateral for and current estimate of the value of all assets held in trust.» Some of the weaknesses were as follows: There was a difference in the inventory of these assets; item amounts that did not belong in such assets were journalized unlawfully; the process for regular investment portfolio checks was delayed and hindered.

In addition, it was said that if the problems mentioned by the Sudeban inspectors persisted, «this could result in variables or adjustments having a negative influence in trust operation capital and thus, the Bank’s own operational stability.» According to a disclosure, custody certificates issued by the Central Bank (for 22.7 billion bolivars) never identify the trustee as the owner of said certificates. Banco Latino just turns up as their holder. This made it impossible to distinguish and/or determine which certificates involved the Bank’s own operations and which ones were issued as a result of trust services rendered.

The report states that during Roosen’s term as Bank Chairman of the Board, the Bank kept no security portfolio record of instruments contained in Security, Administration and Investment Trusts, and flaws were noted in CANTV trust assets, such as «while Agreement No. 0398 for 15,714,286 shares of CANTV stock was entered in the ledger at a value of Bs. 3.591 billion, upon reviewing its provisions, they show that it is valued at Bs. 579.9 billion. There is no knowledge of the existence of any other agreement which could account for such a significant difference.»

The Sudeban officers had nothing available enabling them to learn what became of the 3 billion bolivar difference. Additionally, the Bank Superintendent himself said subsequently in a Congressional hearing that the audit had been extremely difficult because there was a lot of resistance at the Institution to providing any information.

«On the other hand, —the report continues— the securities purchased for 53 billion bolivars under the trust agreements do not identify any settlor (CANTV) whatsoever as their holder; and as to the Monetary Stabilization Certificates (the «TEM’s») for 198 billion bolivars, while they were purchased between August 1 and August 18, 1995, they were sent 30 days late by the purchasing agent, constituting a drawback, since the above-mentioned securities are bearer-issued and negotiable.»

It may be inferred from this that the alleged purpose of Roosen’s stewardship was to favor groups, corporations and related companies by authorizing loans, contracts and payments of all sorts of fees, while marked by neglect of both the business and its customer base, as well as by a suspicious disregard for the most basic principles of bank management.

DEPOSIT MIGRATIONS AND DROPS.

Banco Latino had 94.734 billion bolivars in total deposits in December, 1994. And actually, the start of saver deposit migrations to Government-controlled banks (Latino, Venezuela, Consolidado, and Republica) was initially noted in January, 1995.

As a result, the Bank’s deposits doubled that month as compared to the preceding month, amounting to 189.002 billion, reaching 269.480 billion bolivars, its top figure, in March, 1995. However, despite the huge amount of money received, the institution showed no signs of recovery. On the contrary, its position worsened to the extent that deposits decreased slowly, but surely, reaching 205.194 billion in December of that year, in other words, a drop of 64 billion in just nine months.

In short, as Chairman of the Government Takeover Supervisory Board and later as Chairman of the Board of Banco Latino, Roosen received over 300 billion bolivars in assistance, more than twice the amount of deposits from the public. This is tantamount to saying that it would have been able to pay all cash deposits and then have some money left over, all without using the institution’s assets. Nonetheless, he did not use this assistance to pay all of the deposits. There is the presumption that he diverted such funds to loans in violation of finance assistance agreements.

In the meantime, the Bank’s bureaucracy grew despite efforts by Fogade and Sudeban to implement the rehabilitation plan. Actually, it was said in December, 1995 that the main office had deposits amounting to 100 billion bolivars, the same amount in deposit with the institution’s 120 branches nationwide. As a result, it was demanded that a restructuring plan be implemented immediately to do away once and for all with the institution’s bleeding. But no one took heed to these pleas, since the president and his people were full bent on what they called «the struggle against the fugitive banker», ordered from the Venezuelan White House itself, the Miraflores Palace. Roosen’s purpose was not to achieve the institution’s recovery or rehabilitation. The corporate culture called for going after «Gomez Lopez and his Group», as Legal Department Vice-President Eva Hobaica herself would say. The bank no longer existed. There were lawyers walking by the teller windows. However, they were not there to deposit anything, but to cash hefty checks, which were approved even in violation of the most basic accounting principles, as inferred from the Superintendent’s report.

THE CASE OF FOREIGN LAW FIRMS

The hiring of U.S. law firms to try to recover some of the money which was allegedly taken by Gomez Lopez and his Board of Directors attracted a lot of attention, since it was the first time that law firms had been retained and paid a hefty dollar sum in the midst of a foreign currency exchange control system, even if their efforts proved fruitless. As anyone can imagine, many people hit the ceiling because of this. As a result, it was determined that some of those law firms, with branches in Caracas, were linked to Latino board members.

This led to the involvement of the Office of the General Comptroller of the Republic and a report dated March 14, 1996 by Alberto Lopez Oliver, its representative in the U.S., indicating that «civil case contingency fee arrangements have been commonly accepted in the United States for a long time in lawsuit proceedings,» stating additionally that «he will not fail to consider that given the Venezuelan Government’s extremely difficult financial position, that the banks’ position was chaotic, that the Government had been forced to take over bank properties in an emergency, there were better reasons, in the best interest of the Nation instead of that of the attorneys, for arranging for contingency fees based on the wealth recovered for the Republic, as I timely pointed it out when the Prosecutor General did this.»

Twelve days later, the same Comptroller Office representative rejected some statements made by Francisco Palma, who was Roosen’s personal lawyer, a Banco Latino board member and an officer at one of the heavily-favored law firms, indicating that the law firm of Ginsburg Feldman & Bress —which had been retained by Latino— engages in lobbying, as per the information obtained from «Lexis-Nexis» (an Internet subscription information system with a substantial data base). Curiously enough, this «public» service is actually included by Ginsburg Feldman & Bress in the agreement with the Bank as the most ideal to access legal information, at a hefty cost.

Roosen’s attorneys rejected Jay Schafrann, who had been proposed by the Comptroller’s Office, claiming that their representative, Eugene M. Propper, was the best man for the job.

As a result, Alberto Lopez Oliver stated the following in his memorandum to Comptroller General Eduardo Roche Lander: «Additionally, this representative merely reviewed the Martindale-Hubell Law Directory, mentioned by attorney Francisco Palma in his memorandum, and it was inferred from this review that Mr. Eugene M. Propper does not turn up in any Legal Ability Rating and General Recommendation Rating for his Washington/District of Colombia jurisdiction, while attorney Jay Schafrann is shown with the highest rating granted in the Directory: Legal Ability Rating = A (from Very High to Preeminent), General Recommendation Rating = V (Very High).

Actually, attorney Luis Alberto Romero Sequera filed two consecutive complaints, requiring that Ivan Dario Badell, the Attorney General of the Republic, order an investigation to determine whether the operation for providing U.S. dollar payments to the law office of Ginsburg Feldman & Bress, located at 1250 Connecticut Avenue Northwest, Washington, D.C. 20036, complied with the legal requirements set by the foreign currency exchange control system prevailing in the country at that time.

While represented by U.S. citizens Eugene M. Propper, Dwight D. Meier and David B. Tatge, this law office acted in synch with two Banco Latino officers, attorneys Francisco Palma Carrillo and Maria Eva Salazar Hobaica. Presumably, these legal professionals, as well as Fogade and all other parties involved, knew of the existence of foreign currency exchange control in Venezuela. As a result, they can’t claim ignorance of the Law as an excuse.

This notwithstanding, Attorney General Badell ignored Romero Sequera’s first complaint, who waited a month to file the second, underscoring as criticism that the failure to start the applicable investigation was in contrast with the stiff measures announced by the Government against any ordinary citizen who violated foreign currency exchange regulations. Thus, privileges were being granted in conflict with the country’s constitutional principles when ignoring the violation committed by the above Government institutions.

Actually, Roosen retained a huge number of law firms that were close to him and his board members to implement all sorts of lawsuits and research. These law firms took 10 billion bolivars, in addition to something like 1.5 billion bolivars in tax evasion.

WHAT WILL BE LATINO’S COURSE?

In the meantime, subsequent to Rolando Salcedo’s being at the helm of Latino, some of the principles required by Fogade and the Bank Superintendent were applied. As a result, over 50 branches were auctioned off at the outset and others were placed with interested banking institutions in fulfillment of the General Privatization Plan, which was to be approved respectively by Fogade, the Financial Emergency Board, Sudeban an any other applicable Government agency.

This proved that Latino had significant assets, which sufficed to continue its operations. The sale of its foreign affiliates, branches and collateral provided as payment by its customers gave it enough liquidity to redeem the bonds handed to depositors who had over 10 million bolivars seven years prior to their maturity date.

This Plan provided for general legal and financial guidelines which had to be implemented by Banco Latino and a series of related companies in order to end this process in approximately four months. Two basic phases or stages had to be carried out at the same time in order to liquidate and break up Grupo Latino.

The first included a merger of managing and accounting by issuing a Banco Latino, Banco Hipotecario de Occidente and Consorcio Inversionista Latino consolidated balance sheet. As a result, mutual debts would be offset, and all existing assets would be grouped under one-single institution. In addition, there were plans to form a new bank for privatization, which would be fully rehabilitated both financially and legally.

The second stage involved converting the current bank into a residual corporation. In turn, non-performing assets would be given to a managing company (Fondo Inmobiliario) in charge of managing, developing and selling buildings, having its own management and funds, and it would become privatized upon payment of Grupo Latino Capitalization Plan liabilities, represented as surplus, by exchanging Fondo stock for Unsecured Bonds at a value determined by the Institution’s Board of Directors.

Roosen and his team blocked this plan’s implementation, since it would clearly show that there was inept management during his term as Bank Chairman of the Board. On more than one occasion, Roosen offered to privatize the Institution, but these were electoral promises, since he never kept them. For his part, Rolando Salcedo tried to overcome Roosen’s obstacles, but he was forced to resign when the auction was called off after having set its date and preparing this whole operation. Roosen had won. Salcedo left, and the country would continue bearing the consequences.

[English Language Invoice]

Invoice sent by Ginsburg Feldman & Bress for professional fees for September. Payment is being authorized by Maria Eva Salazar Hobaica and Rosa Virginia Tinedo.

CHAPTER II

THE SHOWCASE LAWSUIT

Shown as a great initiative aimed at cracking down on Banco Latino bankers and board members who allegedly used Government funds, a news headline turned up one day on different print media indicating that Banco Latino, S.A.C.A., Banco de Maracaibo, and the Deposit Insurance and Bank Protection Fund (Fogade) had sued a group of important figures in the U.S. for alleged damages to the Public’s wealth.

The suit was brought against Gustavo Gomez Lopez, Claudia Febres-Cordero Gomez Lopez, Maria Teresa Pulgar, Folco Falchi, Mary Roffe Silberman, Arturo Malave, Adolfo Malave, Fernando Lauria Romero, Eloy Montenegro, Maria Angelica Pulgar, Rosa Maria Rojo Peña, Alejandro Rivera, Giacomo Leon, Antonio Ugueto, Manuel Arcaya, Rafael Enrique Abreu, Mario Palenzona, Pedro Gilly, Heberto Urdaneta and some companies. They were charged with activities in connection with Banco Latino, where some of them were board members until this institution was taken over by the Government in January, 1994. It should be borne in mind that Mrs. Claudia Febres Cordero was not a bank board member, and others, such as the Malaves and Abreus, were merely customers. In addition, these people were being criminally charged in a case filed with the Third Banking and Public Wealth Safeguarding Court for the Caracas Metropolitan Area.

The U.S. lawsuit, however, was just an attempt at conducting an opinion campaign to have the public believe that efforts were being made to recover the assets and salvage the image of the banking institution, taken over by the Caldera administration in an unclear and not too convincing maneuver. The fact is that when the Government plaintiffs took the initiative, they showed that they lacked the appropriate legal advice to transact an action which the law reserves exclusively for the Government Attorney’s Office; otherwise, they did this on the basis of the legal impunity existing in Venezuela when violators of the law are in power or have presidential protection.

Article 95 of the Organic Law on Safeguarding the Public’s Wealth provides that «the Government Attorney’s Office has the authority and is under the obligation to file charges in bringing a civil action for the redressment of damages and that of any applicable interest as a result of any alleged criminal acts detrimental to the Public’s wealth with which any defendant may be charged,» and the Government Attorney’s Office did this on October 18, 1996, when it issued a statement on the Banco Latino case and instituted a civil action on the order of 77 billion bolivars.

As a result, the Government Attorney’s Office or its representatives are the only ones with legal standing to file actions for damages in connection with Safeguarding the Public’s Wealth. Thus, in principle, this «showcase lawsuit» is a violation of the law and constitutes duplicity of actions, as explained later.

The clearest showing of the purpose of the lawsuit may be found in the agreement signed with Manning Selvage & Lee, which was hired exclusively for publicizing this lawsuit at a high dollar cost, once again, when a foreign currency exchange control system was in place. Roosen didn’t hire a U.S. public relations firm to publicize the benefits of the institution, but to tell the World that there had been fraud at Banco Latino, while paying with Government money. Apparently, the purpose was to cover up what was going on at the Bank at that time under his stewardship.

In the attached letter, Roosen orders payment of the $10,000 advance, but strikingly enough, the bank draft by Latino’s corporate treasury advances the money with «funds originating in the International Treasury», and this was journalized as legal fees.

Monies from a bank’s International Treasury are only used for its business activities because these are customer funds. Payments of letters of credit and transfers constitute regular operations, as shown later. The board members will have to explain why they used those funds to pay a marketing expense particular to the Institution and failed to tell the truth about the nature of this payment.

In an unprecedented action, the Government used millions of dollars to pay for a lawsuit against former Latino board members without any legal basis.

«Such targeting is unwarranted,» —as maintained by attorney Roberto Sequera, who mentioned this lawsuit in his complaint— «given that most banks that collapsed or were taken over by the Government have or had affiliates in the United States and other countries of the world. What is the reason then for this vicious attack only and exclusively on former Latino board members?»

It is worthy of note that Banco Latino Internacional was seriously affected by the flight of deposits caused after its main office in Caracas was taken over by the Government, forcing managers to resort to U.S. bankruptcy-type protection. In January, 1995, the trial judge ruled that the Institution was perfectly able to continue its banking operations and gave it the green light to keep operating, this being the first case in the history of international banking in the Americas.

The bank reopened its doors as usual and paid all of its deposits from its own funds. Finally, it was purchased by Suntrust/Miami, generating a significant profit for Venezuela.

Given this fact, one may wonder what was the reason for so much waste and squander on a lawsuit lacking a legal basis, where no one was affected, unless there are other non-banking interests, as it, in fact, seems to have been. All these millions of dollars should have been used for solving domestic problems that considerably affect the Venezuelan people.

«They don’t provide any guarantee, but Latino pays
for everything. . .»

The outrageous expenses incurred by the Venezuelan Government were unprecedented, and they became a bomb, having its trigger mechanism in Banco Latino, whose takeover by the Government has been repeatedly depicted as politically-originated.

When remembering the 1994 financial crisis, Mrs. Ruth de Krivoy, former president of the Venezuelan Central Bank, said this in an interview published in daily newspaper El Universal: «Only Banco Latino collapsed, the second largest, but in the eyes of the public, its collapse constitutes an unusual act of retribution for political reasons. . .»

While remembering back to the days when there were rumors of a coup prior to the December, 1993 presidential elections, some opinion fora turned into conspiratorial meetings to prevent the voting process, flavored by a crisis in the Nation’s financial system and whispered in small political circles, to the extent that widespread concern was caused in the banking industry.

While barely hanging on to power, the Velazquez administration feared the unleashing of a conflict of unforeseeable consequences. As a result, it decided to take action and met respectively with representatives from the Bankers Association and Banking Board.

But there was ongoing discussion of a plot involving powerful banking figures, high-ranking military leaders and even Radames Muñoz, the Minister of Defense himself. Names turned up in the press, and it was suggested that Gustavo Gomez Lopez could be in on the destabilization plan.

At the same time, there was a rumor that while receiving advice from a group interested in discrediting Banco Latino to expedite its collapse, the Government had started several maneuvers that had its board members deeply concerned.

Allegedly, the people interested in this were those favoring Rafael Caldera as presidential candidate, who had a good chance of being elected. Back then, it was said that Gomez Lopez’s biggest sin was his bankrolling of a large portion of Osvaldo Alvarez Paz’s election campaign, another presidential candidate for Copei, the Social-Christian Party.

Miguel Angel Capriles Ayala, publisher for the powerful Cadena Capriles, who, from being Caldera’s enemy went on to give him his full support in the last elections, said —because the president himself told him— that «Gustavo had only given him a lousy ten million bolivars.»

Thus, the retribution that Mrs. Krivoy mentioned indirectly could be related to this event, which reflects Caldera grudge against his former Copei colleagues, who dared to have one of their top men (Alvarez Paz) run against him in a crucial electoral process, such as that of December, 1993.

Caldera’s hostility for Gustavo Gomez Lopez became public when as president-elect he summoned all bankers to a meeting on Friday, December 18, 1993, at his Tinajero home, while specifically asking Victor Gil, Banco Internacional’s Chairman of the Board, who was very close to him, to have Gomez Lopez not attend the meeting.

Later, as soon as Caldera’s second term started, there was this persecution against former Latino board members, as some sort of an extension of the hate, to settle a few pending scores. Just the act of paying $250/hour to some U.S. lawyers to do the «dirty work» constitutes the real fraud.

The agreement signed with the law firm of Ginsburg Feldman & Bress started to originate whopping bills in dollars, but in addition, they did not guarantee that the lawsuit would be won, although it was stated very clearly that they would «charge for everything».

The document specifies that the attorneys and their assistants charge $250 an hour, warning that «everything will be paid for» in the event of any rate increase by the law firm.

Additionally, it mentions other charges assessed on the contracting parties (Banco Latino, Banco Latino Internacional, Consorcio Inversiones Latino, Banco Maracaibo and Fogade) for filing, transcribing, telephone calls, photocopies, witness expenses, postage, computer services, trip expenses, overtime, etc., all of which being «charged at a price exceeding our direct costs to cover our administrative expenses and overhead.» (See the EXHIBIT section to review the agreement, as signed). And Latino would pay for everything from government funds because this had been decided by Gustavo Roosen, as shown in the letter addressed to then Fogade Chairman Enrique Nucete on May 25, 1995.

Government Attorney Ivan Dario Badell was present when attorney Francisco Palma Carrillo announced in a news conference that a lawsuit had been filed in the U.S. against former Latino board members. His presence gave this a solemn air, but this was largely contrary to law, which only affords the Government Attorney the authority to file a civil suit, as stated earlier.

This event was also attended by presidential chief of staff Andres Caldera, who stated that the Government had a great deal of interest in the Latino case. This was another unequivocal showing of the problem’s political ingredient.

On the media, Roosen publicly offered that there would be a decision within 120 days, meaning that the bank executives would be in jail by October, 1995. Nothing has started yet after almost two years and a 10 million dollar expense.

To a large extent, the operations of Agricola La Castellana are the backbone of the lawsuit, but this company currently reached a payment agreement with the Board of Directors, chaired by Rolando Salcedo, which was actually oriented to achieving the Institution’s recovery.

These farming company’s officers were excluded from the Miami lawsuit. Other sued customers are reaching agreements with the Institution, and it shouldn’t be surprising that their exclusion may also come at anytime.

The hirings of the attorneys and the public relations firm have become a scandal whose particulars only began to be investigated in March, 1996 when finally, after the above-mentioned complaints, the Government Attorney’s Office acknowledged receiving the memoranda sent by attorney Luis Alberto Romero Sequera, meaning that the investigation was opened back then, but nothing has happened up to this time. The tentacles of power were evident once again.

THE LAW FIRMS’ WINDFALL

Many believe that Banco Latino’s board members resorted to the speculative Brady Bond market to obtain the more than 2 billion bolivars it paid to U.S. law firms, particularly to Ginsburg Feldman & Bress, from September 8, 1994 to February 8, 1996.

In March, 1995, independent congressman Luis Rosendo Hernandez filed a complaint with the Nation’s Congress against Latino board members where he shows that millions were paid to foreign law firms without the approval of the Foreign Currency Exchange Technical Office (OTAC).

This congressman warned that «since the control does not exist because the money was not authorized by OTAC, unjustified payments to these law firms could exceed 2 billion bolivars.»

At that time, Luis Rosendo Hernandez submitted a list of the monies paid during such period and reported that Ginsburg Feldman & Bress received the sum of 901,600,000 bolivars (at the official exchange rate of 290 bolivars to the U.S. dollar), while the law firm of Baker & McKenzie received 2,600,000 (however, this agreement complied with Comptroller Office specifications and was supervised by the General Prosecutor’s Office, as per this congressman).

But it’s well worth it to learn of a more detailed listing of the events compromising Gustavo Roosen in payments to U.S. lawyers from as early as September 9, 1994 to February 8, 1996 (See the EXHIBITS), amounting to US$4,736,862.77.

The above-described payment was authorized by Roosen and Eva Salazar Hobaica, together with Rosa V. Tineo, subject to authorization by Latino’s Executive Committee, on November 6, 1995.

All this evidence is a serious indication that economic crimes were committed, as provided in Article II (Exhibit 7) of the Foreign Currency Exchange Act and stated in the complaints filed by attorney Luis Alberto Romero Sequera, who gives the reminder that any public or private sector officer will be criminally prosecuted, believing that Article 8 of this Law is applicable to this case, which reads: «Anyone allocating foreign exchange legally purchased from the competent authority to a purpose different from that for which it was approved shall be punishable by a term of imprisonment ranging from six (6) months to four (4) years and a fine of one (1) to three (3) times the equivalent value in bolivars of the sum of foreign exchange purchased.»

Additionally, this prestigious attorney states in his complaint that other articles of this Law may be applicable, raising the above sentence to five years, by one third in another case and doubling the fine. All this while bearing in mind that the Latino board members did not actually purchase this foreign currency for importing services, for which they should have followed the established procedure, but rather, it was obtained from the Venezuelan Central Bank to conduct bank operations.

Further, the Law provides for restitution of the foreign exchange, but most importantly, the law states very clearly that all foreign currency exchange crimes come under ordinary jurisdiction. As a result, any Chairman of the Board and board member of a Government-controlled banking institution, such as Banco Latino, may be prosecuted, without resorting to the cumbersome Safeguard jurisdiction process, as per attorney Romero Sequera.

Now, the hiring that has attracted the most attention in the country’s legal circles has been that of Baker & McKenzie, mainly because there is an obvious connection between this law firm and Francisco Palma Carrillo.

As per the letter sent by Rolando Salcedo to the Congressional Committee that reviews any alleged irregularities committed by Roosen during his term as Chairman of the Board of Banco Latino, the following are the persons who authorized payments to the different law firms:

a) In early 1994, Francisco Palma, Bank Legal Counsel.

b) Hely Fernandez, the then Executive Vice-President, authorized payment of advances on professional fees, as per the legal counsel’s request.

c) Jesus Herrera, Vice-President of Corporate Finances, and Daniela Colmenares, Corporate Treasury Manager.

d) Starting in May, 1995, Maria Eva Salazar Hobaica, Legal Department Vice-President, authorized, ordered and approved payments.

e) In November and December, 1995, the Executive Committee, as well as in January and March, 1996.

f) There is no specific authorization by the Board of Directors delegating in anyone the approval and payment of fees.

Another letter addressed to the House on the same day, but discussing fees paid to attorneys in Venezuela states:

a) In 1994 and starting in April, 1995, payments were authorized by the officers at the Office of the Vice-President for Affiliates named Jose Manuel Aguilera, the Vice-President, and Pedro Pablo Ascanio.

b) Beginning in April, 1995, Maria Eva Salazar Hobaica approved, authorized and ordered any payment.

c) In 1996 (new management), the Executive Committee.

Additionally, even though this was not stated in this letter, Mrs. Nancy Mago also authorized fee payments while she occupied her temporary position for more than one month.

10572

BANCO LATINO, S.A.C.A

Avenida Urdaneta

Centro Financiamiento Latino

Caracas, Venezuela

1-1 999

210

002/ Date: Caracas, 12/28/95

Pay to the

Order of: ******GINSBURG FELDMAN AND BRESS****** $***429,889.53

**FOUR HUNDRED TWENTY-NINE THOUSAND EIGHT HUNDRED EIGHTY-NINE

AND 53/100 DOLLARS

THE BANK OF

NEW YORK

[Illegible address]

[Rubber Stamp: US$429889.53

Banco Latino C.A.

For: /signature/ [Illegible]

/signature/ [Illegible]

010572 021000018 8900097302

CHAPTER III

AUSTERITY, A JOKE

From the time it took office, president Caldera’s administration has sustained that it is an «austerity Administration», and as a result, it has conducted advertising campaigns based on any action taken for such purpose. Even his son, Andres Caldera, former presidential chief of staff, was considered an important aide to his father, especially because of the staff «cuts» he made while holding his position.

Nonetheless, austerity seems to be a joke in Venezuela, since this is only for the population that has lost considerable purchasing power and experienced a 40% reduction in their ability to consume goods, while being hit by a serious economic crisis. Rafael Caldera has the honor of having led the country to the highest inflation rate in Venezuela’s history, being at 103% on December 31, 1996.

Very few ministers and Government institutions have subjected themselves to Caldera’s standards for cutting back expenses. As a result, the million dollar spending spree, promoted by the two terms of Banco Latino board members where Gustavo Roosen held high positions, kept on going without running into any obstacle in its way.

The basis for this gigantic scandal is not only the hiring of the U.S. law firm of Ginsburg Feldman & Bress, conflicting with the foreign currency exchange system, as stated earlier, but the illegal terms in the agreement that was signed, providing for one-sided rights to said firm for the purpose of charging professional fees and expenses; unlimited rights to incur expenses lacking advance justification and reimbursable forthwith by the Venezuelan Government. In addition, the Government was forced to pay any other legal professionals hired in the State of Florida on the decision of the aforesaid law firm, and it was further provided that Ginsburg Feldman & Bress was entitled to withhold from Latino any documents, monies and assets in general to secure payment of its fees.

Alarmingly enough, the liable contracting parties, particularly Roosen, who had considerable experience in the Latino case because of his involvement in its Government takeover and his actions on the two Board of Directors of that Institution, allowed this irregular procedure, which constitutes a mockery of the austerity proclaimed by the Government, and, in turn, violates the most basic terms in any agreement.

If the action was being brought in the State of Florida, there is no explanation for the Venezuelan Government’s decision to retain Ginsburg Feldman & Bress, with main offices in Washington, D.C., in other words, at a distance of more than 600 miles from the court where the suit was filed.

Anyone can imagine the exorbitant expenses that our Government had to incur as a result of taking to Florida a team of attorneys, investigators, experts, secretaries, aides, detectives and other officers.

All of this would make some sense if it wouldn’t have been possible to get a group of attorneys to handle the action in the venue where «the acts or omissions» took place. But everyone knows that there are major internationally prestigious law firms established in the State of Florida.

Nonetheless, it should be noted as well that the Government paid for the steep tickets, transfer expenses and trips between Caracas and Washington, as shown in fee payment records, which reflect payments of hours worked by foreign attorneys who came to the country and set up their office at Banco Latino headquarters, on Avenida Urdaneta, in Caracas.

All this bleeding in dollars was disbursed by a bank that was floored in the midst of «bankruptcy», as per the latest financial report issued on December 31, 1995, having lost 1.5 billion bolivars in equity, according to public information existing at that time.

In order to report this fraud in direct detriment of the Public’s wealth, attorney Luis Alberto Romero Sequera told Attorney General Ivan Dario Badell for the third time about the need to conduct an in-depth investigation to find out who was responsible for this.

In his complaint, Romero Sequera asked the Government Attorney’s Office to look into the hiring of «Public Relations Offices» in the State of Florida for the public promotion of attorney Eugene Propper on such organization’s media. As stated earlier, Propper is a member of the law office of Ginsburg Feldman & Bress. Moreover, he reported the existence of an agreement signed by Jim Grey and Ted Lowen, representatives of Manning Selvange and Lee, a New York advertising firm, represented in Miami by the earlier-mentioned Julio Garcia. It should be noted that Paragraph 2 of this agreement provides that «cost of public relations activities depends mainly on the time taken to honor requests. Specifically, the activities discussed with Eugene Propper, of the firm of Ginsburg, Feldman & Bress, include the disclosure on U.S. media of a lawsuit (beginning on June 16, 1995) and the immediate coordination of a campaign on major U.S. media, including The New York Times, The Wall Street Journal, The Washington Post, The Miami Herald and the main television networks. In addition, we will be keeping a watchful eye during the initial phase of the campaign with a schedule of answers to any adverse reaction which may be brought on by the lawsuit’s publicity.»

«I don’t believe —as argued by the complainant— that these advertising agents are required for collection efforts; they are needed only for selling a large-scale product or supporting political initiatives.»

Under a foreign currency exchange control system, such as that which existed in Venezuela, no public official, not even if he were named Gustavo Roosen, was authorized to sign any foreign currency-denominated agreements and much less publicize an ongoing lawsuit, unless other interests were being pursued. This action in and of itself constitutes a crime provided in the Foreign Currency Exchange Act, and this is in addition to the clauses on future unlimited expenses, unilateral rights to charge and establishment of fees for other attorneys in the State of Florida.

Dollar payments made by Banco Latino S.A.C.A. without OTAC’s authorization amount to US$4,736,862.77 (see the complete list in the «EXHIBIT» section).

Latino board members managed the institution as if it had been another Venezuelan Central Bank by making payments in foreign currency and applying an official exchange rate without advance authorization, as per attorney Romero Sequera. As a result, he charges them with using this institution’s international accounts for the payment of services provided by foreign law firms that were alien to the Bank’s money-brokering commercial operations.

He explained that the International Treasury «is a commercial banking institution for the purpose of making collections and payments of international operations, such as letter of credit funding, interbank commissions on international operations, commercial transfers, etc.»

Romero Sequera concludes by stating that International Treasury funds originate mainly from foreign trade related customer operations, even more so in an economy with foreign currency exchange control. Consequently, the payment of services by the above-mentioned Treasury constitutes a technically incorrect and illegal use of the funds handled in that account within the Institution.

THE COMPTROLLER’S OFFICE WAS IGNORED

The irresponsibility existing in the country is significantly impressive when an institution headed by a man like Gustavo Roosen, known for his track record in the private sector (Grupo Polar) and as former Minister of Education, ignores the Office of the Comptroller General of the Republic, which warned in timely fashion that the firm that mainly benefitted from these payments (Ginsburg Feldman & Bress) was in conflict with the interests of the Nation.

Alberto Lopez Oliver, the representative of the Office of the Comptroller General of the Republic in the United States, sent another memorandum to Comptroller Eduardo Roche Lander indicating the serious flaws in the agreement:

«The Firm neither guarantees results nor couples its fees thereto; that is to say, the Government is under the obligation to pay all legal expenses, even if not one single penny is recovered.

«The expenses are broken down in an unusual manner and do not include any investigations or related legal actions, which must be negotiated separately. Fees have no limit and expenses are unilaterally set by this U.S. firm. Venezuela will be charged a price exceeding cost of service expenses.

«‘. . .We (meaning the Firm) reserve the right to request financial advances as security for our invoice charges. You (meaning Latino) agree to pay all invoices which the Firm may submit to you within ten days from the date of their receipt'» (excerpt from the memorandum).

What’s unbelievable about all this is that despite the Comptroller’s Office’s questioning, this law firm continued receiving large foreign currency-denominated sums.

At a given point in time, Latino board members felt that their actions had been uncovered, and while they were good users of the power originating from their influence-trafficking in high Government circles, they sought to divert attention. Alfonso Espinoza, the then-Chairman of the Board of Latino, told the media about the benefits of the U.S. lawsuit.

In fact, Espinoza explained to the media that the suit brought in Florida served to have Mario Palenzona «agree to demands for payment; and as a result, he made payments amounting to two million dollars.» However, this is not the case, as stated by attorney Romero Sequera, who uses the brief he sent to Attorney General Badell to explain that Alfonso Espinozas’s statements were false.
As a result, he urged the Government Attorney’s Office to look into this manipulation aimed at confusing public opinion, since «it is a known fact that Mario Palenzona reached agreements with Banco Latino Internacional for reasons totally unrelated to the whoppingly expensive allegations made by the U.S. law firm in its complaint.»

THE CASE OF MARIO PALENZONA

Due to the government takeover of Banco Latino and its group of companies in Venezuela and its resulting crisis, Banco Latino Miami petitioned for Chapter 11 for protection from deposit flights on January 11, 1994. The petition was granted, and pursuant to U.S. law, the Bankruptcy Court ordered in January itself a freeze on any accounts and deposits maintained by any board members of Banco Latino Internacional to respond for any eventual damages originated from their actions. On November 29, 1994, this Court accepted Banco Latino Internacional’s Rehabilitation Plan. As a result, this institution was no longer under Chapter 11. Nonetheless, account freezes were not lifted because this is done only when each individual requests it from the company, whose authorization is required. Otherwise, a protracted and controversial legal action must be filed. The suit against former Latino board members was filed in May, 1995, when more than a year had passed from the time the freeze was ordered. No action was taken against any defendant in this lawsuit. The law firm of Ginsburg Feldman & Bress was also retained after the date of the filing for Chapter 11 (granted in January, 1994), in December, 1994. As a result, it never acted in this proceeding. It is worthy of note that the attorneys who assisted Banco Latino Internacional in this action was the office of Valdes Fauli, Cobb, Bischoff, Kriss & Mandler, as reflected in the respective agreement received by the Speaker of the Senate on June 14, 1996.

Palenzona’s corporate group and the persons related to him maintained deposits with Banco Latino Internacional amounting to nearly US$6,000,000.00. All of them were «frozen» by the order issued when Chapter 11 was granted. The Group legally moved for the lift of the accounts’ freeze. Banco Latino Internacional proposed a settlement to them, subject to Bankruptcy Court approval, containing a series of reciprocal concessions, including, but limited just to Palenzona’s paying US$2,000,000.00. In exchange for this, for instance, it lifted the block, allowing the withdrawal of over US$3,500,000.00, and gave him a general release, discharging him from any liability for his actions as board member of Banco Latino Internacional, not only as to the suit brought in 1995, but with respect to any other reason originating from his actions as board member. Additionally, Banco Latino C.A. and FOGADE obviously gave him a release for such actions, resulting in their abandonment of the suit in the United States.

Therefore, it can’t be said that the settlement sum of the Banco Latino Internacional Chapter 11 Case was recovered by the law firm acting in the case involving the lawsuit brought against the former board members of the Miami bank. Claiming that such results were achieved by a law firm retained after some of these events transpired and the issuance of the applicable Order would be a self-serving manipulation of fact to account for (in all other respects and even very little at that) the squander of a sum close to 4.7 billion bolivars paid for professional fees to that very same law firm and its subcontractors. Moreover, the law firm of Valdes Fauli Cobb et al. charged fees for the same services, as per its agreement. As a result, if this manipulation were sought, the Bank would have provided payment twice, to two different people, for these same activities, which would surely be a lot more serious.

Thus, Badell was given the lead that diversion maneuvers were being thought up to offset the strong impact from the scandal involving the hiring of foreign attorneys. Actually, the main purpose was to avoid any significant criminal, civil and administrative liability issuing from these resolutions by Banco Latino’s Board of Directors, chaired by Gustavo Roosen and Alfonso Espinoza, and board members Francisco Palma Carrillo and Eva Salazar Hobaica, as well as Fogade and Banco de Maracaibo’s Government Takeover Supervisory Board.

Attorney Romero Sequera requested a Special Prosecutor for conducting this investigation, since he believed that these actions were very serious. As a result, he demanded that the applicable steps be taken as soon as possible. (The list of fees paid to the different foreign law offices may be found in the «EXHIBITS» section).

CHAPTER IV

THE MILLION DOLLAR TAX EVASION

A Legal View

While managed by Roosen, Banco Latino retained several domestic and foreign law firms that would conduct investigations and research and provide the bank with legal advice. These offices include the law firms of Ginsburg Feldman & Bress and Ackerman Senterfit & Edison P.A. The documentation for these retainers was received by the Comptrolling Committee. Their fees were in excess of ten million dollars (US$10,000,000.00) or nearly 4.7 billion bolivars. This sum was paid in the short span of one year, and up to this time, there have been no results whatsoever. Banco Latino’s attorneys and board members (many of them also hold a law degree, just like Roosen, its former Chairman of the Board) decided to ignore their tax liability. This is particularly striking and serious in the case of a bank with the magnitude that Latino succeeded in having. In fact, an institution that was second in the market at the time its managerial activities were taken over by the Government is by its very nature an extremely important and qualified tax broker. Thus, the Government itself often hired these banks as Collections or Receipts Agents. As a major banking institution, the one under discussion generates and pays income taxes, sales taxes and all sorts of contributions.

Its operations are complicated, since some are taxable and others are tax-exempt. It is a major employer and disburser of wealth generated by its employees, advisors and third-parties in general. Therefore, banks are institutions usually monitored by the Tax Administration, having sophisticated and advanced systems and departments for detecting and quantifying any tax liability that should be paid, withheld, collected or received by both the institution and its customers, employees, advisors and general public.

Failing to comply with these processes or selectively abolishing them for tax evasion purposes is a very revealing action totally aimed at promoting irregularities as those under discussion in this book, apart from being objectively considered a crime. In short, this is some of the damage inflicted on Banco Latino S.A.C.A. under Roosen and Espinoza.

1) There was complete breach of the Wholesale Sales and Luxury Tax Act. As to this, it should initially be borne in mind that this law has been in effect since May 24, 1994, a period of more than one year before Banco Latino paid the earlier-indicated exorbitant fees and failed to comply with the tax provisions in this law. The intent and purpose of the Sales Tax applicable to this situation is to levy alienations of any personal property or service or imports of any goods and services, as stated in Article 1 thereof. This tax must be paid by any individual or corporation and by all public or private institutions performing any activity defined as taxable within the Law in their capacity as importers of goods or services and providers of independent services.

Any taxes generated by these activities must be passed by the professional service provider on to the recipient of the service, who is the bearer thereof (in everyday language, this means that he pays for it), as set forth by Law. Article 3 of this Act establishes very clearly that the sales tax on services received is paid by «any public sector enterprises legally formed as a business corporation, autonomous institutions and other decentralized federal, state or municipal government institutions, as well as those institutions created by them when engaging in any taxable acts» contained in this Law. Therefore, all Government enterprises, including, for instance, PDVSA, VENALUM, and banks, such as Banco Industrial de Venezuela, bear (pay for) the Wholesale Sales Tax and do so religiously, with no question whatsoever.

As said earlier, the tax disburser is the person providing the professional service. However, when the service provider is a foreign person, in other words, a person not domiciled in the country, the service recipient is liable for its payment, pursuant to Article 5 of this Act. Article 42 of this Act further indicates that «Taxpayers and liable parties otherwise provided in this Decree are under the obligation to report and pay this tax in the place and manner and on the date set forth in the Regulations.» This means that two are under this obligation in these cases: the service provider (who would violate the law as well, if he does not disburse it) and the recipient (this would be Latino). As is well-known, the then-current sales tax was 12.5% of the service price. Therefore, just for this item, there would be three hundred sixty million bolivars (Bs. 360,000,000.00) in tax revenues from the sums mentioned as paid to foreigners for professional services rendered. Moreover, it is worthy of note that professional fees generated by these overseas-hired firms are taxable acts, as provided by this Act in Articles 8 and 9, whenever these are performed, provided, used or utilized in the country.

In the case under discussion, any activities involving professional fees paid to law firms and other foreign firms are subject to the Luxury and Wholesale Sales Tax Act, since these services are included in the provisions of this Law, and most of this agreement was performed within the country in benefit of a domestic bank. Actually, on the one hand, the invoices sent to Congress reflect that several individuals from the law firm of Ginsburg Feldman & Bress traveled to and remained in Venezuela, providing their professional services for many days and hours. Thus, for instance, Invoice No. 95268534, dated June 23, 1995, shows that A) Page 9: From May 22 thru May 31, attorney Eugene Propper claims to have traveled to and stayed in Caracas, where, just on that occasion, he worked for 79 hours, which, at $250/hour, would come to US$19,750.00. B) Page 10: From May 5 thru May 31, attorney Dwight Meier traveled to and stayed in Caracas, where, just on that occasion, he worked for 168 hours, which, at $225/hr., comes to US$37,800.00.

On the other hand, irrespective of any physical work performed, the purpose of the agreement is to recover damages from Latino’s former board members. If this task were to meet with any success, any recovery would be obviously used by the bank within the country. This is provided as a taxable act in the above-mentioned Law.

In conclusion, in the case at issue, for nearly a year and in an ongoing fashion, every single month, Banco Latino, together with the U.S. firms, violated the law when failing to pay any Wholesale Sales Taxes. Moreover, this violation is striking because the people in charge of selecting and paying for these exorbitant sums are attorneys for the most part: Mrs. Eva Salazar Hobaica, Esq., Legal Dept. Vice-President (authorized payments); Mr. Francisco Palma, Esq., Legal Counsel and Board Member (Mrs. Hobaica’s immediate supervisor); Mr. Gustavo Roosen, Esq. (Bank Chairman of the Board); Mr. German Garcia Velutini, Esq. (Board Member). Presumably, all these people are knowledgeable in the banking area, and they should be otherwise considered extremely qualified in the legal and economic areas. Finally, to keep the record straight, most law firms hired in Venezuela by Banco Latino, C.A., such as Baker & McKenzie, Pescifeltri Diaz Cañabate & Asociados, Araque Reina de Jesus & Asociados, Ivan Varela, D’Empaire y Asociados and Gomez Rojas y Asociados violated the Luxury and Wholesale Sales Tax Act. Alternatively, some other Venezuelan law firms did invoice and pay for this tax, without any objection by the Bank. This also makes you wonder, since they were fully aware of such unequitable treatment.

2) No income tax withholdings were made as per Article 78 of this Law, which reads: «. . .any non-mercantile professional fees paid or credited to individuals not residing in Venezuela or corporations non-domiciled in the country shall be subject to withholding, irrespective of their payer.» Article 9 of Decree 507 provides that 34% shall be withheld from fees paid to corporations non-domiciled in the country.

Obviously, the law makes no distinction as to the place where services are provided when establishing this blanket obligation to withhold taxes. In addition, any person that may have received consulting wages or fees knows that the applicable withholding is an essential obligation. Further, as explained earlier, professional services by law firms such as Ginsburg
Feldman & Bress were rendered and provided in Caracas, at the Bank’s own offices on Avenida Urdaneta. Thus, it can’t even be claimed that even a partial tax withholding is inapplicable based on the precept of territoriality. It is worthy of note that in addition to the exorbitant sums on these invoices, these are very specific as to places, «exaggerated work rate» and activities. As per the withholding rate indicated for foreigners, one-single act of evasion in this regard could amount to one billion twenty million bolivars (Bs. 1,020,000,000.00). The above remarks are also applicable to this in relation to the reason for which Banco Latino, a company that has more than sufficient employees and processes to detect, withhold and pay taxes, just happened to be remiss in paying not one type of tax, but all applicable to this situation.

As to the different types of liability, the Income Tax Act, the I.V.M. Act and the Organic Tax Code set forth very clearly that the person who should have borne or withheld the tax is jointly and severally liable for paying said sums in both cases. Moreover, the Law discusses the different types of liability of board members and any higher officer or officers who order or authorize payments without requiring any withholding. In this case, the individuals who authorized payments would be Eva Salazar Hobaica and Francisco Palma, Legal Department Vice-President and Legal Counsel respectively, and former Chairmen of the Boards and board members Gustavo Roosen, Alfonso Espinoza, German Garcia Velutini, Edgar Dao, Jacques Vera, and Nelson Olmedillo, plus a few others.

Otherwise, it is worthy of note that being derelict in these formal tax obligations does not only constitute tax fraud, but a crime against safeguarding the Public’s wealth, inasmuch as, on the one hand, a loss would be inflicted on the equity of the bank (a government institution), amounting to the sums of money it must pay because of its dereliction, and on the other, this actually inflicts a loss on the Nation’s Treasury, which has not been able to receive payment of a hefty sum in taxes on the part of foreign companies and some domestic firms.

In the case of the foreign institutions, it’s a lot harder to recover from them any outstanding sums without having to incur new and onerous legal expenses in order to sue them overseas, thus repeating the sad story told. Finally, the tax code provides that tax fraud crimes involve aggravating circumstances when these are committed by government employees and officials, such as the former Latino board members and officers.

On February 18, 1997, the Supreme Court of Justice issued a decision on the conflict of jurisdiction arisen from the complaints filed against Gustavo Roosen’s stewardship. This case will be looked into by the Court for Safeguarding the Public’s Wealth.

A Practical View

In the name of the fight against corruption, irregularities are increasingly committed in Venezuela, confirming that this scourge is more widespread on upper echelons and generates an ongoing series of acts of corruption towards intermediate and lower levels.

It’s extremely negative for the country to be amongst the world leaders in corruption. Nonetheless, it seems that the fight against this evil is more complicated than presumed in the Government’s campaign, including its Anticorruption Commissioner, who hasn’t shown any substantial achievements.

The preachings by the Office of the Comptroller General of the Republic don’t seem to be enough either. Its incumbent submits an annual report to the Nation’s Congress reflecting the manner in which administrative irregularities grow in Government institutions. But everything just translates to a collection of anecdotes. Investigations are promised, but never started, and those whose progress results from pressure by the media and other sectors within the country usually go unfinished.

President Rafael Caldera arrived for the second time in the Miraflores Palace —the Venezuelan White House— promising a nationwide ethical revision which would involve an imminent defeat for corruption. This was one of his most significant standards in the electoral campaign.
Nevertheless, surveys and other specialized research show that corruption has grown in his Administration.

Therefore, —and this is repeated, even if stated earlier— no wonder there are such juicy transactions out in the open under the color of fighting corruption, such as that carried out by Banco Latino when it brought a lawsuit in the United States against former board members of this banking institution to benefit U.S. lawyers with million dollar professional fees, failing to pay the Luxury and Wholesale Sales Tax to the Nation’s Treasury and withhold any income tax, an duty provided by Law on any professional service payer.

Attorney David Castro Arrieta moved the Criminal Public Wealth Safeguard Trial Court Judge of the Judicial District for the Caracas Metropolitan Area to start a «notitia criminis» investigation to determine whether a crime was committed, and in the event this were established, the identity of any perpetrators, accomplices and accessories.

The complainant mentioned the specific cases of the well-known and above-mentioned charges by the U.S. law firms of Ginsburg Feldman & Bress and Baker & McKenzie which were repeatedly in breach of the duties to the Nation’s Treasury for more than one year.

In his brief, attorney Castro Arrieta furnishes a piece of evidence in the form of a story published in the daily newspaper El Nacional on May 6, 1996, showing a memorandum sent by Francisco Palma Carrillo, a member of the then Latino Board of Directors (also a member of the Baker & McKenzie law firm), to Hely Fernandez, the Institution’s Executive Vice-President, on January 20, 1995, which contained as follows: «I am enclosing herewith an invoice for US$53,986.97 from the law firm of Ginsburg Feldman & Bress and one for US$86,531.48 from KPMG. Both of these invoices must be paid with a check made out to Ginsburg Feldman & Bress, since they will take care of paying KPMG. Moreover, another US$50,000.00 check should be issued to Ginsburg Feldman & Bress. This is an advance on the payment for third-party professional services rendered by said law firm.»

As to the above instructions, there are copies of the checks drawn on Latino overseas accounts in the absence of any obstacle or monitoring. These amount to 24,834,006.20 and 64,638,487.00 bolivars respectively at the then current exchange rate of Bs.460.00 to the dollar.

Additionally, these documents don’t show any income tax withholdings or Sales and Luxury Tax payments. Moreover, the office of the Chairman of the Board of Banco Latino paid US$480,423.06 (220,994,607.60 bolivars) to the firm of Ginsburg Feldman & Bress for another invoice which also fails to include any provided tax withholdings, even though it was approved by attorney Maria Eva Salazar Hobaica, as indicated by her handwritten initials («OK.EH»).

WAS THE JUDICIARY MANIPULATED?

There is such an ongoing series of serious scandals in the country that they go unnoticed. One is bigger than the other in a never ending merry-go-round which undermines the ethical foundations of the Nation, whose public and often private sector officials are the principals of unlawful acts that go unpunished.

Impunity has become entrenched for those in power, and they use it shamelessly. Strikingly enough, former Banco Latino Board Member Francisco Palma Carrillo was a partner in the firm of Baker & McKenzie, one of the law firms that benefitted from the million dollar windfall set up for the payment of professional services.

But the Bank had everything planned. The Hon. Eunice Leon Visani, Acting Safeguard Court Judge, is the aunt of Maria Eva Salazar Hobaica, the person who authorized most law firm payments.

Actually, amongst the documents checked, there was one invoice sent to Jose Manuel Aguilera at Banco Latino by the firm of Baker & McKenzie, mentioning a charge of Bs.249,090.00 for expenses for «informational-type meetings and telephone conversations. Meeting with the Hon. Judith Brazon, Third Criminal Banking Court Judge, involving the action.»

No other than a transnational firm charges the Venezuelan Government for a meeting with the judge trying the case of Latino, a Government bank!

This fact, together with the invoice and everything else, could show that this law firm was influencing the Judiciary (particularly the Judge investigating the case at that time) and prior to the issuance of several bench warrants.

The invoice showing the word «approved», written by attorney Hobaica, includes no indication of any applicable tax withholdings or mention of any Luxury and Wholesale Sales Tax. Additionally, this approval contains no tax payment instructions.

Having an affiliate in the country, just the above law firm’s invoices sent to Banco Latino during the preceding year amounted to 28 million bolivars.

THE LIST OF BENEFICIARIES

Headquartered in Washington, D.C., the law office of Ginsburg Feldman & Bress is shown as the top recipient of all professional fees paid overseas. Irrespective of their receiving most sums invoiced for professional services rendered, they did the same thing with regard to fees for other subcontractors or persons for whom they brokered.

Pursuant to Venezuelan law, it may be inferred from this that this law firm was a Withholding Agent for any taxes incurred as a result of the other subcontractors paid by Ginsburg Feldman & Bress.

Payable by Banco Latino, S.A.C.A., the firm provided advice to Banco Latino, S.A.C.A., Fogade and other residents of the country on bringing an action for damages against former Latino board members.

In order to provide their services, attorneys from the above law firm spent a substantial portion of their time working in Venezuela. Firm employees and jurists came to Venezuela repeatedly, while staying for weeks or months in Latino’s offices.

Senterfit and Edison, Baker & McKenzie, Holland & Night, Gunster Yoakley and KPMG are other non-domestically domiciled firms on whose behalf Francisco Palma Carrillo ordered payment to Ginsburg Feldman & Bress.

Headquartered in Chicago, Baker & McKenzie is the home office for that bearing the same name established in Venezuela, in which Palma Carillo is a partner, the person who recommended and executed the agreement with Ginsburg Feldman & Bress.

As to KPMG, it is a U.S. accounting or auditing firm that has numerous associates or affiliates throughout the world, just like Baker & McKenzie. Alcara Cabrera Vasquez & Asociados, Banco Latino’s external auditor, is the KPMG affiliate in Venezuela.

With offices in Venezuela, the law firms of Pescifeltri Diaz Cañabate Perales y Asociados, Escritorio Grunburg, Baker & McKenzie, Araque Reyna, De Jesus Sosa Viso & Pittier, Torrez Gil Plaz Araujo y Asociados, Ivan Valera Delgado, Salaverria Reyes y Ramos and Carlos Eduardo Gomez y Asociados and a few others should be devoted a whole paragraph to themselves.

Attorney Castro Arrieta’s complaint moves the judge to start an investigation of both the above Venezuelan firms and the Bank in connection with meeting their tax liability. For such purpose, he suggests that an itemization be requested of each and every invoice for professional services rendered paid to Banco Latino.

SOCIEDAD CIVIL
Baker & McKenzie
Valencia Edif. Aldemo, Av. Venezuela Puerto Ordaz
Edif. Torre H, Piso 3 El Rosal Edif. General de Seguros
Calle 139, con Av. 110 Caracas – Venezuela Altos Banco Principal
El Viñedo Apartado Postal 1286 Av. Las Americas
Edo. Carabobo Telephone Numbers: 953-7094 953-1333 Edo. Bolivar
Tel. 041-228472 2229 19 Caracas 1010A Tel.: 086 – 228109 233557
Venezuela
Telex: 23133 ABOGA VC
Cable: ABOGADO
RIF No. J-001156734-8

¿ BANCO LATINO C.A. ? DATE: 23/MAY/95 INVOICE 20361/0050665

CENTRO FINANCIERO LATINO
PISO 23, AV. URDANETA
ESQ. ANIMAS A PLAZA ESPAÑA
CARACAS.

¿ ATT. MR. JOSE MANUEL AGUILERA?

FEES FOR PROFESSIONAL SERVICES RENDERED

during APRIL, 1995

– CRIMINAL MATTER.

ON-SITE REVIEW OF COURT ACTION. DRAFTING AND CONTINUOUS

FORWARDING OF INFORMATIONAL FAX COMMUNICATIONS.

INFORMATIONAL-TYPE MEETINGS AND TELEPHONE CONVERSATIONS.

MEETING WITH THE HON. JUDITH BRAZON, 3RD CRIMINAL BANKING

COURT JUDGE, INVOLVING THE ACTION.

HOURS WORKED:

Partners 1.0

Junior Associates 4.4

Legal Assistants 9.9

TOTAL…………….15.3

TOTAL FEES: Bs. 117,600.00

TELEPHONE, PHOTOCOPYING, LOCAL TRANSPORTATION,

PUBLICATIONS, GOVERNMENT REGISTRY OF BUSINESS

CONCERNS, TELEFAX.

TOTAL COSTS: Bs. 130,490.00

TOTAL INVOICE: Bs. 248,090.00

/Handwritten: approved

Eva Hobaica/

Baker & McKenzie invoice reflecting the meeting with

Judge Judith Brazon. This invoice was approved by Maria

Eva Salazar Hobaica.

CHAPTER V

PAYMENT «THROES»
The dollars taken out by Banco Latino to pay foreign law offices or auditor firms didn’t just pop up out of nowhere, but they were taken from the money deposited by the public and provided by Fogade as capital and financial assistance.

Therefore, Gustavo Roosen and his entourage owe an explanation to the Venezuelan citizenry for such action, which constitutes a taxable act in accordance with the Luxury and Wholesale Sales Tax Act.

The hefty invoices paid by the U.S. law firms generate a tax which, on the one hand, is to be billed for, and on the other, transferred to any service recipient, who will get an offsetting tax writeoff.

As to fees paid to law firms established in Venezuela, it is a fact that in every single case, given their magnitude (always in excess of 12,000 tax units), their services were rendered, performed, utilized and used in the country, both by their provider and recipient. As a result, this tax must be paid and billed for. Others that were more honest did withhold and pay their taxes. However, the complaint filed by attorney Castro Arrieta highlights that the biggest breach by Banco Latino S.A.C.A.’s counsel and board members involved the foreign jurists, inasmuch as while they were service providers, they were not domiciled in Venezuela.

Article 5 of this Act sets forth that «The buyer or purchaser of any personal property and the service recipient, as the case may be, have tax payment liability whenever the seller or provider of the service is not domiciled in the country.»

Therefore, liable parties are bound by Law to report and pay this tax both monthly and immediately. In such case, Banco Latino should have required the inclusion of the Luxury and Wholesale Sales Tax and see to it that it was paid, as required by Law.
But it failed to do so, thus generating a boomerang effect in detriment of its own equity, since it was losing the 13.5% tax writeoff generated by nearly 3 billion bolivars in invoices, amounting to 375 million bolivars in Latino asset losses.

Other «throes» resulting from board member ineptness is the loss of substantial revenue by the Nation’s Treasury. Latino’s officers and board members are completely liable for this loss, since the service payer has joint and several liability in the case of overseas resident companies.

Moreover, this created more detriment for the Treasury because, as per the Organic Tax Code, Banco Latino’s liability includes the payment of any penal interest generated by default, computed at the prevailing market rate, and any sum for indexing or adjusting for currency devaluation and interest, thus worsening the scope of the damage inflicted on Latino’s equity as a public institution. Additionally, this would not serve to recover any tax write-offs lost by this banking institution, an irreparable harm caused by the dereliction in the duty to require a reference to taxes paid on the invoice and the failure to do so during the applicable taxable year, resulting in their irretrievable loss. The physical redressment for this injury to the Nation’s Treasury does not exclude criminal liability for these willful actions by the parties liable for them, who are the Bank’s board members and officers, together with the firm of Ginsburg Feldman & Bress.

Clearly, the actions by Gustavo Roosen and other officers of this banking institution, who ran it at will, allowed these fraudulent acts either directly or indirectly. Nonetheless, if he and the other persons authorizing payments are legal experts, inasmuch as they are attorneys, it’s beyond comprehension why they failed to discharge these manifest duties, which are known to everyone and significant for the Treasury, as indicated by attorney Castro Arrieta.

Moreover, this attorney states in his brief that he was struck by the fact that jurists from a country having a tax tradition, such as the United States, never looked into their tax status, not even Baker & McKenzie, a firm that was closely related to Latino through board member Francisco Palma Carrillo.

And asking what were the attorneys at the Bank’s Legal Department doing is an appropriate question, given all the work delegated to law offices.

NOT EVEN TERRITORIALITY SAVES THEM

Assuming for the sake of argument that the U.S. law firm of Ginsburg Feldman & Bress does not pay any taxes because of its status as a foreign entity, the Law sets forth very clearly that «imported services are taxable whenever they are rendered, utilized or used in the country, irrespective of their being contracted for or paid abroad.»

There is enough evidence to show that Eugene Propper and many of his attorneys and employees traveled to and remained in Venezuela for substantial time. Actually, they entered the country as tourists at the time there was a signed agreement binding them to practice a professional activity within the country for a manifest profitable purpose. It was known that these people conducted surveys, held meetings with different Bank officers, subpoenaed witnesses, coordinated legal and bank safety activities and met with external auditors, loan officers and related companies.

Acting as head of the group of U.S. lawyers, Propper coordinated his work with external Banco Latino attorneys belonging to the Venezuelan law firms of Pescifeltri Diaz Cañabate & Asociados and Baker & McKenzie, as well as with Legal Department Vice-President Eva Salazar Hobaica and attorneys on the island of Curaçao, the best way to sue in several countries on the same debts.

Further, it stated that these attorneys, experts and investigators would interview a large number of people related to Banco Latino S.A.C.A. prior to its government takeover to elicit valuable information from them. These meetings took place at the main offices of the Bank, located on Avenida Urdaneta, in Caracas.

Actually, the complaint by attorney Castro Arrieta sets forth that they offered «U.S.-type deals» to citizens with outstanding bench warrants in exchange for their testimony or cooperation. Of course, if the invoices for fees submitted by these professionals were reviewed, it could be verified that they actually provided their services here for the most part. Therefore, these acts are taxable, as per the Luxury and Wholesale Sales Tax Act.

TREBLED ACTIONS AND A MYRIAD OF INVOICES

In his eagerness as persecutor, Gustavo Roosen started a large number of actions against Gustavo Gomez Lopez for the sole purpose of padding up the invoices, since they are often the same as those brought earlier.

Gomez Lopez was sued in Curaçao for one billion dollars exactly on the same basis as that for the suits filed in Miami and Caracas. Clearly, each law firm issues its own invoice.

The Law provides that no one may be tried twice for the same act. Actually, there may be a basis for inferring that their intent is illegal enrichment.

A CRIME AGAINST SAFEGUARDING THE PUBLIC’S WEALTH

Up to this time, there has been mention of the acts which constitute tax fraud against the country, issuing from the failure to discharge formal tax duties. But in addition, they are a crime against Safeguarding the Public’s Wealth because Banco Latino was inflicted a loss on its equity, amounting to the money it must pay as a result of its dereliction; however, a loss was also inflicted on the Nation’s Treasury because it was not able to receive the payment of hefty tax sums from the foreign law firms and some domestic law offices.

But all this is not enough because tax laws provide that tax law crimes become aggravated when these are committed by government employees and officials, such as the former board members and employees of Banco Latino, as found by the Supreme Court of Justice in its recent decision.

As a result, the actions by Latino’s management and board members could be within the scope of the Organic Law on Safeguarding the Public’s Wealth, since its equity is deemed «public», its board members are considered «public officials» and thus subject to criminal and civil liability.

In the case of Banco Latino’s fraud, the different types of liability fall directly on the members of the Board of Directors and Government Takeover Supervisory Board who authorized the agreements with the law firms that received payments resulting from irregularities. But moreover, those vice-presidents and managers who authorized and provided these payments are included in this as jointly and severally liable.

The above-mentioned liable persons may be tried for negligent embezzlement, as provided in Article 59 of the Organic Law on Safeguarding the Public’s Wealth, which sets forth a penalty of three months to one year of imprisonment.

But one of these individuals, Francisco Palma Carrillo, who, in addition to being a Latino board member, was a partner in one of the law firms (Baker & McKenzie) that received illegal fee payments, should be viewed in the light of Article 287 of the Criminal Code, which provides for a penalty of two to five years of imprisonment for any conspiratorial conduct for the purpose of committing crimes, even if these were not committed. By and large, and with regard to such negligent embezzlement, the motion for starting a «Notitia Criminis» investigation filed by attorney Castro Arrieta underscores that it should be borne in mind that the potential parties involved are legal experts and that there were repeated payments resulting from irregularities, constituting a crime.

«It should be borne in mind —as per the brief— that Eva Salazar Hobaica and Francisco Palma Carrillo are attorneys with a well-known track record, as well as members of two boards of directors, just like Gustavo Roosen, the former Chairman of the Board of the institution, and that there are former board members, such as German Garcia Mendoza Velutini, who would have never made the decisions he made at Banco Latino when running his family’s bank.»

Banco Venezolano de Credito has always been though of as an extremely conservative bank. It has not become involved in Venezuela’s development, and its passive attitude has irritated many sectors.

The other important matter that should be taken into consideration is the fact that banks have sophisticated systems for detecting the different types of tax liabilities and a qualified staff for discharging these duties.

As a result, being the second in the country and the leader of its Financial Group, with more than forty years in the banking industry, the mistakes made by Banco Latino are unaccountable, while having state-of-the-art equipment to ensure the discharge of the different types of tax liability.

Therefore, it may be inferred that any possible transgression of provisions as routine as those on taxation involves tampering with administrative, accounting and system procedures, which could all be determined in a pre-indictment investigation.

Another crime mentioned in a «Notitia Criminis» and worthy of investigation is that involving any possible corruption of officers who may have received any compensation or other unowed profits either for themselves or others.

Attorney Castro Arrieta states that the payment of fees by a Government bank to attorneys from a law firm which is the workplace of the officer of the bank that pays such hefty fees, which were not appropriately reported as income tax, «constitutes a strange circumstance».

In addition, he states that obviously, the acting attorney and the other members of the Board of Directors provided earnings «to a third-party», thus, leading to an analysis of the provisions in Article 65 of the Organic Law on Safeguarding the Public’s Wealth.

«We could be in the presence of some huge earnings at the expense of the Treasury,» —as added by attorney Castro Arrieta— «since the recipients of these payments stood to benefit when their true earnings were not accounted for while failing to bill for the Luxury and Wholesale Sales Tax and in the absence of any income tax withholdings, in addition to the prejudice caused by them because of this dereliction.»

THE PARTIES TO BE SUBPOENAED

In addition to obtaining all the documents set forth in his brief, attorney David Castro Arrieta suggested to the Court that he subpoena those legal professionals who furnished their services to Banco Latino —as per reports on the media—, so that they can testify whether or not there were any tax payments. The attorneys included on this list are as follows:

– Alejandro Alfonso Larrain Reaco, the owner of the firm of Baker & McKenzie in Venezuela, a partner in the transnational company bearing the same name.

– Francisco Palma Carrillo, senior partner in the above-mentioned firm. He was a Banco Latino C.A. board member and a member of the Boards of Directors that hired the law firm of Ginsburg Feldman & Bress and the other attorneys.

– Mario Pescifeltri Martinez or Joaquin Diaz Cañabate, owners of the firm of Pescifeltri Diaz Cañabate Perales y Asociados. Manuel Perales, unnamed partner in the firm, was Latino’s Corporate Comptroller for ten of the last eleven years preceding its government takeover. This law firm furnishes advice to Ginsburg Feldman & Bress, and it reportedly received 50 million bolivars for professional fees in 1995.

– Manuel Torres Nuñez or Rodolfo Plaz Abreu, Master Partners in the firm of Torres, Gil Plaz, Araujo y Asociados. Being Banco Latino’s tax advisor, this firm should testify whether it actually billed for these taxes and on the advice it provided to Banco Latino in this regard.

– Benjamin Grunberg. This personal firm has provided advice to Banco Latino in excess of ten years.

– Ivan Varela Delgado is listed as an apparent mercantile and labor advisor, a person who received over 10 million bolivars from the Bank, as per the media.

– Luis Alfredo Araque, owner of or senior partner in Araque Reina de Jesus Sosa Viso y Pitier.

– Eugene Propper, a member of the U.S. law firm of Ginsburg, Feldman & Bress. He is to shed light on this tax omission, but also on any possible violation of other laws, such as those involving his entry in Venezuela for the purpose of working without requesting a permit or obtaining appropriate visas.

– Maria Eva Salazar Hobaica, former Legal Department Vice-President of Banco Latino S.A.C.A., who performed and is directly responsible for the above actions.

– The members of the two preceding Board of Directors of Banco Latino S.A.C.A. and its last Government Takeover Supervisory Board:

– Outgoing Board, chaired by Alfonso Espinoza and comprised of Gustavo Roosen, Francisco Palma Carrillo, Nelson Olmedillo, Carlos Emerson, Carlota Parodi Nuñez and Alejandro Uzcategui.

– Preceding Board, chaired by Gustavo Roosen and comprised of Francisco Palma Carrillo, German Garcia Velutini Mendoza, Nelson Olmedillo, Jacques Vera, Luis Fernando Sanchez, and Carlos Emerson.

– Last Government Takeover Supervisory Board, chaired by Gustavo Roosen and comprised of German Garcia Velutini Mendoza, Edgar Dao, Celso Dominguez, and Jacques Vera.

(Official Coat This card is valid for six [American Airlines
of Arms of the months after date of issue. Logo]

Republic of Venezuela)

Republic of VENEZUELA

DIEX 2 Form

CPN 5562405 Entry Card

1. Last Name 2. Surname 3. Issuance No.

Propper No. 140 977009

4. First Name 5. Middle Name 6. Identity Card No.

Eugene Michael Venezuelan

Alien

7. Sex 8. Age 9. Occupation Code 10. Nationality

M X 48 Atty US

F

11. Passport No. 12. Type of Visa 13. Length of Stay

013127585 Tourist 12 Days

14. [Illegible] 15. Place Issued

16. Address in Venezuela

Hilton Hotel

17. Issuer’s Name (Official Use Only)

18. Validator Stamp & 19. Air 23. Air

Issuer’s Signature 20. Carrier 21. Destination

22. 24. Carrier 25. [Illegible]

26.

Exit Entry

[Rubber Stamp: VENEZUELA

[Illegible] 008

Immigration

DEX

Aug. 21 [Illegible]

[Illegible]

Venezuelan Entry Card for Eugene Propper, of the firm of

Ginsburg Feldman & Bress, showing a TOURIST Visa

for when he gainfully practiced his legal profession.

CHAPTER VI

THE NEW BANKERS EXCEEDED

THEIR PREDECESSORS

Back in 1994, during the months subsequent to the financial crisis, no one could imagine that all the «breast-beating» in segments linked to both the Government and the Venezuelan economy were just scenes from the play that finally became the alleged «crackdown» on corrupt bankers.

While holding the stock in collapsed institutions, the Bank Insurance and Protection Fund (Fogade) decided to appoint Boards of Directors entrusted with protecting the large number of funds taken over by the Government to bail out these banks. These Boards were made up of individuals with a high degree of responsibility, honesty and professionalism. At least, this is what we Venezuelans were told, while having low credibility «defenses» and being tired of finding out about so much ongoing corruption.

While proclaimed by President Rafael Caldera from the time he took office as the new Administration’s cornerstone, austerity was the paramount standard for these Boards of Directors.

So apparently, while dripping in all the mud originated in the people’s contempt, fugitive bankers would be replaced by exceptional model citizens, but that wasn’t the case. Soon enough, the new bank managers proved to be more deceptive and inept, in other words, crooked —some even going overboard— than the former owners of the banks taken over by the Government.

The media started to play their role as Community interest watchdog, and irregularities were quickly brought into the limelight, but no one was shaken by this, not even the applicable judicial authorities, since this was not in detriment of the interests of private bankers this time, but those of Government institutions, such as Fogade and the Financial Emergency Board.

Perhaps, Mr. Gustavo Roosen takes the cake when it comes to irregularities during his questioned tenure as head of Banco Latino S.A.C.A., while acclaimed by those behind him.

One irregularity for which «corrupt bankers» received substantial criticism is engulfed in all the anomalies that started to tarnish the image of immaculate post-Government takeover managers, this being the «doctoring up» of or tampering with institutional balance sheets, and Gustavo Roosen was the best example of this.

A complaint filed by attorney Divo H. Saldivia Leon with the Prosecutor for the Fifth Government Attorney’s Office for the the Caracas Metropolitan Area’s Judicial District stated that there was fraud on Banco Latino’s balance sheets for 1995, being extremely significant as to the institution’s assets, to the extent that its financial statements as of August 31, November 30 and December 31 for said year do not reflect the Institution’s real financial position.

Mr. Saldivia Leon’s brief maintains that this tampering did not just result from happenstance or even less from an inadvertent mistake, but rather, this was done with «specific criminal intent»; that is to say, a whole scenario was contrived to cover up the real position of the Bank.

While this is a serious act, Latino decision-makers acted with amazing impunity when they rejected, repeatedly obstructed or prevented the completion of the audits attempted by the Bank Superintendent’s Office.

And this attorney further states that «they ignored every single observation and requirement stated by the Bank Superintendent’s Office.»

Who endorsed this unlawful conduct by the officers of this Bank? To what extent can there be any argument for the political or economic validity of this conduct, which is in conflict with banking practices? These are the key questions in the complaint.

To gain an understanding of the myriad of balance sheet violations by Banco Latino’s board members, a piecemeal review must be conducted, starting with an explanation of the reserve fund shortages estimated on the basis of the value of the Institution’s assets.

As a result, it may be inferred from the evidence which was submitted that the banking institution’s decision-makers did not provide for reserve funds in accordance with applicable banking practices. This irregularity became uncovered in the Superintendent’s Office audit report, dated August 31, 1995, but reserves continued to be willfully concealed on subsequent balance sheets, which means two things, according to this jurist: first, such balance sheets do not reasonably reflect the Bank’s financial position, and second, this operation was performed in disregard of the warning contained in the above-mentioned audit report, thus making it clear that there was intent, persistence, purpose and recurrence as to maintaining any tampering or concealment.

The above-mentioned document states that the reserve fund required for the accounts in «Credit Portfolio and Other Assets» was 53,734,289.00 bolivars, but on the date in question (8/31/95), the Bank just kept a reserve fund of 37,754,954.00 for such item, resulting in a reserve fund shortage on the order of 15,979,335.00 bolivars.

Given this fact, the Bank Superintendent’s Office stated that Banco Latino «is to increase its asset contingency reserve fund by the uncovered sum of Bs.15,979,335.00, pursuant to Article 165 of the General Law on Banks and Other Financial Institutions.»

In order to understand the seriousness of this action, this banking institution’s equity capital and reserves amounted to 11,516,481.00 bolivars on August 31, 1995, in other words, the adjustment requested was in an amount exceeding that of its own equity capital and reserves.

The Superintendent’s Office ascertained the negative implications for Latino when it concluded that the Bank’s assets had been completely lost at that time: «The asset valuation reserve fund shortage of 15,979,335.00 as of 8/31/95, coupled with net worth reductions of 24,894,000.00 and the losses of Bs. 143,089,000.00 determined in the trust area, impact the current capital reserves of Bs. 16,147,318.00, placing the Institution’s position within the scope provided in Article 169 of the General Law on Banks and Other Financial Institutions.»

While the decision by the Superintendent’s Office was subject to challenge, there was no complaint by any of Latino’s managers, and they merely ignored in an irresponsible manner the requirements by the Bank Superintendent’s Office.

During his appearance before the Nation’s Congressional Comptrolling Committee in July, 1995, Franciso Debera, the Superintendent himself, explained that when he assumed his position in March of that year and after the decision to convert Latino from a Government owned to a regular bank, his office made some observations, particularly because they thought that the Institution had to be capitalized and that its non-performing assets, internal audit and administative practices had to be examined, «. . .the decision was to let the Bank keep going. Now, what were the changes and what did we find in subsequent audits? As far as reserve funds go, there was no doubt that its position had not improved on the 28th, but instead, it had become worse, and this is reflected in our last report, issued on February 28.» (excerpts from Debera’s congressional appearance).

The total indifference displayed by its accountants, external auditors, accounting area officers or managers shows that there was a clear order to disregard the directions by the Superintendent’s Office, whose records and reports have evidentiary value, pursuant to the General Law on Banks and Other Financial Institutions.

As per attorney Saldivia Leon, the Court examining the complaint can issue the applicable bench warrants just on the basis of the reports.

WHAT COULDN’T BE DOCTORED UP

Doctoring something up involves flaw corrections, aspect enhancements, and weak/negative point cover-ups. Otherwise, ask any cosmetology specialist. As a result, it’s mighty strange that Roosen and his group of «doctors» did not seek a way to avoid their being «nabbed» for their tricks, allowing such clear falsehoods on the balance sheets.

Upon reviewing the above-mentioned audit report, it may be found that this Latino crew acted with unprecedented impunity in Venezuela, as seen below:

«The ledger for account 1701, referred to as «Deferred Credits», deserves special credit, having serious flaws, since it fails to show the current ledger balance because it does not include any balances deferred as a result of portfolio restructuring, portfolio purchases, offset money market operations and deferred overdrafts, which are prepared separately.»

And it states that one of the most significant flaws in Banco Latino’s accounting system is that credit portfolio ledgers do not reflect any payments of principal in the case of customers that don’t have enough funds in their checking accounts to pay off their interest. As a result, the negative balance shown is «overestimated».

The explanation continues as follows along these lines: «On 6/30/95, the Bank wrote off 45,210,724,000.00 bolivars from the Credit Portfolio, which was thought to be unrecoverable, charging this to the respective reserve account. This notwithstanding, no applicable entry was made in Account 7406, referred to as «Bad Debt Write-Offs», which had an entry of just 29,343,883,000.00 bolivars during September of the current year, there being 15,866,841,000.00 bolivars in non-journalized credits.»

This means that even though a substantial portion of its Credit Portfolio was irrecoverable, Banco Latino did not reflect this on its balance sheet in a maneuver that sought to conceal the real position of the Institution with regard to the sum of its outstanding credits.

The sums indicated in the report substantially exceed Banco Latino’s equity capital and reserves. As a result, Saldivia Leon stated that there was such tampering with its accounting that the balance sheet as of June 30, 1995 and those approved thereafter with the same omission do not reasonably reflect the Institution’s financial position, which action is a crime in and of itself.

THE WELL-BALANCED OPERATION MOCKERY

As argued by attorney Divo Saldivia Leon, anyone related to banking knows that generic accounts or «junk» accounts —as they are also termed in the lingo— are resorted to more often than not for doctoring up a balance sheet.

Moreover, he states that any banker with shady practices mirrors them in the 7.00 account, designated as «Other Assets», or concocts any other non-financial income originated from bank brokering activities whenever he does not wish to write off or form a reserve fund with anyone or more of his asset accounts.

Once again, Gustavo Roosen is a good example of this type of machinations. In early 1996, it spread like wildfire that Latino had recovered to the extent that it had happened to have a well-balanced operation.

But to uncover a trick of this sort, we must go back to December 31, 1995, when Banco Latino’s balance sheet showed a negative operating balance of 11,783,923,764.83 bolivars. But such negative result became commingled with the banking institution’s «other income», which, as if by magic, amounted to that very sum, Bs. 11,783,923,764.83, «to the penny, like clockwork».

The explanation for this crooked practice to conceal the Institution’s run down position is accounted for in a portion of Superintendent’s Office Memorandum No. 6223, dated 12/22/95.

«During the audit, it was impossible to ascertain the degree of realization of both the secondary/related operations income and the other income included in the sample selected, inasmuch as for this evaluation, the Institution did not furnish enough information, as previously requested on the memoranda dated November 10, 13, 16, and 21 of the current year.»

Moreover, the manipulation by Banco Latino’s management of ordinary income figures is a very serious matter, entering several receivables as such and additionally submitting as income several items whose validity was not successfully ascertained by this regulating body. The report states that Latino chose to journalize over 20 billion bolivars as income, of which 11 billion had not been received, in other words, more than half.

Therefore, the complainant infers that over half of this income is fraudulent because it was never available to the bank, and this was reflected on its records as having been received, and even worse, it used those funds without their ever existing.

Thereafter, there was mention on different media that Banco Latino charged Fogade for the above fraudulently journalized income, as per Saldivia Leon, and he additionally stated that even if this fact were true, the Bank’s loss (which was not projected on its financial statements) would amount to 16 billion bolivars, showing that the balance sheets as of June 30, November 30, and December 31, 1995 were fraudulent.

The following is another interesting quote taken from the document’s findings and used by this attorney in his complaint:

«Its run down assets caused a financial income shortage (7.502 billion bolivars), generating a negative profit margin which is offset by the Institution with income from uncollected receivables (23,173,000,000 bolivars) originating from its debt to Fogade. It may be inferred from this that even when the figures reflected on the financial statements show a positive accounting result, this is not the case, because the above income has not been physically received, yielding negative operating results of 25.604 billion bolivars.»

Attorney Saldivia Leon proclaims: «Your Honor and Mr. Government Attorney, we fail to understand how or why the Superintendent’s Office, in view of its own heretofore- transcribed statement, did not go to the police to have them raid Banco Latino in order to arrest the perpetrators of such malfeasance.»

GUSTAVO ROOSEN’S LAUNCHING PAD

Being a typical modern-day manager, Gustavo Roosen is well-aware of how powerful an image can be. As a result, he was the mastermind of the advertising campaign that showed the existence of «Latino’s miracle», which was nothing but another sham. Actually, many staff-members complained that the Marketing Department, led by Mariadela Linares, applied pressure to have them sign a sympathy letter, thus validating Roosen’s squandering stewardship.

Since he took over Banco Latino S.A.C.A., first as Chairman of the Government Takeover Supervisory Board and then as Chairman of the Board of Directors, he invested a whopping sum of money to conduct a radio, press and tv campaign for the purpose of projecting to the public the genesis of a «role model bank».

Both his substantial managerial ability and his qualified management team were «sold» specifically on the ads.

So much fuzz on the broadcast media, while Latino was going «bankrupt» and tried to conceal its negative results with highly doctored balance sheets. But the charm was extremely short-lived, and this manager’s launching pad was non-operational.

The congressional appearance by Bank Superintendent Francisco Debera on July 17, 1996 raised many dubious issues involving this «role model» bank.

Congressmen took special note of the issue of the misleading advertising that intended to rave about a bank on the verge of disaster. Particularly, there was much criticism of Roosen’s allocating over 1.2 billion bolivars in pre-purchased television time for his «showing off». During the debate, Representative Luis Rosendo Hernandez said that: «In comparison with private institutions, this is the bank that buys more pre-purchased advertising on tv channels. New Chairman of the Board Rolando Salcedo Thielen said that he had to assign pre-purchased ads to OCI because of their significant volume.»

In addition to having the president’s protection, Roosen secured his control through massive advertising purchases, giving his «arguments» a lot of clout. Strikingly, a bank in such terrible position had enough funds to buy this space.

Obviously, he was diverting funds to conceal and cover up his intentions. While having the floor, Hernandez also stated that «Now, this role model bank is accepted as a role model of everything that shouldn’t be done in a financial system; clearly, there was an attempt to deceive the Venezuelan public; clearly, the factual contents of these campaigns were fraudulent, and some people must be responsible for this.»

On December 31, 1995, Banco Latino’s union representatives sent a letter to the Board of Directors and its then-Chairman Alfonso Espinoza, reflecting very clearly all the mistakes that were being made at the Institution. Taken from this letter, the following paragraph clearly speaks for itself:

«We fail to understand why if Banco Latino used to manage the biggest and most significant trust portfolio in the country, showing the Bank’s effectiveness and efficiency, it purchased new software at a substantial cost to manage a much smaller portfolio; moreover, two companies were hired to take charge of training our trainees, incurring an unnecessary expense, in our belief, since the Bank’s infrastructure is suitable for this, as it has thus shown. An authorized agency, such as INSBANCA, could have been used for all this. In addition, it should be further said that the Bank «HAS NOT» held any competitive examinations for or requested any credentials from the Institution’s skilled employees to have them apply for a myriad of positions created, causing a substantial expense increase by bringing in new high-salaried employees. As a result, employees could hardly be asked to work hard or make any sacrifices.»

CHAPTER VII

A BAD REASONABLE MAN

OF ORDINARY PRUDENCE

President Caldera’s Administration spared no effort in furnishing any support needed by the new bank managers who replaced the former owners of the collapsed institutions. This support was not only financial, but it transcended to the political arena, as evidenced by the fact that even though time proved that they turned out to be worse managers than the «corrupt bankers», they go on their merry way, without having to answer legally.

Characters that caused huge government fund losses because of their dismal performance remain in their positions or occupy other high ranking positions in the public limelight, while exempted from legal, political and social requirements.

Within this context, the case of Gustavo Roosen is extremely well-known. The Government Takeover Supervisory Board he chaired was given cash funds that exceeded by 100% any Banco Latino deposits (sight, savings, term, money market, trust fund, liquid asset funds -consortium- and other affiliates) that existed at the time it was taken over by the Government, and additionally, he handled the assets included in its private equity (the loan portfolio and its applicable collateral; investments in securities and stock; banks in Colombia, Miami, and Curaçao; government bonds; personal property; buildings, plus a few other items).

Surely, Roosen and anyone facing a similar crisis had a very tough situation. But there is no explanation for such dismal performance, when he was given more than 350 billion bolivars in cash; in other words, over 100% of what Banco Latino had to return to the public, as indicated earlier, in addition to all the assets of the institutions. So here we have accusers and persecutors being after the head of the fugitives, the «corrupt bankers», but however, they ignore the protection enjoyed by other important figures that seem to be untouchable despite their criminal acts.

Not even the Bank Superintendent’s Office could handle the politically-superior Roosen and his group. He never furnished the information requested by this regulatory agency and just spent fraudulent income like a drunken sailor and published doctored balance sheets.

There was never a stop to the destructive actions by Roosen’s team. The report by the Superintendent’s Office for August, 1995 contains indisputable evidence of a violation of the Trust Fund Act. In principle, it must be said that the Superintendent’s Office stated directly that the balance sheet for Banco Latino’s Trust Division is fraudulent.

«. . .according to received supporting memoranda dated 1/23/95 and 12/8/95, there is evidence that the Institution wrongfully entered some amounts that do not belong in such assets, thus limiting the degree of objectivity and reliability that should be reflected on a Trust Fund Balance Sheet.»

The violations committed by Roosen and company involve the duty to maintain Bank and Trust Fund assets separate and manage everything as a «reasonable man of ordinary prudence», as well as the ban on investing in companies where managers have an interest.

To begin with, as disclosed in the above-mentioned report, the Superintendent’s Office conducted an audit where it found that «the place where custody certificates lie in the vault is not separated from trust fund assets or securities purchased through its own operations.»

Moreover, it stated that as a result of security vault repair problems at Banco Latino «all trust operation securities, as per the Securities Manager, were taken to the Venezuelan Central Bank and placed in its custody.»

But it also highlights that custody certificates issued by the Venezuelan Central Bank never identify the trustee as the owner of these securities (22.7 billion bolivars), just showing Banco Latino as their holder, preventing any distinction and/or differentiation as to which securities correspond to the Bank’s own operations and which originated from trustee services rendered.

Obviously, this «reasonable man of ordinary prudence» managed these funds with excessive imprudence while being in conflict with the duty imposed upon him by Law.

Incomplete accounting and non-accounting information on trust fund operations make it impossible to find out thoroughly «any data and features of entered operations; for instance, the information requested for the audit was furnished a month and a half after starting the audit of said area.»

Clearly, there is administrative chaos at Latino. There is no exact way to determine the use or application of funds originated from each trust, «inasmuch as the amount for assets held in trust becomes a «kettle fund» that is equally shared by all trust funds, thus making it impossible to determine exactly the costs and income applicable to each of them,» as literally stated in the audit report.

The mess is such that the trust fund portfolio is often based on matured securities, causing the loss of any interest income which would accrue as of such maturity or drawing date; and probably, the settlor is the bearer of this cost, which is either concealed from the customer or absorbed by the Bank, increasing its losses.

And nobody understands how after two years of paying different consultants more than one billion bolivars, it is a known fact that «the Institution did not furnish any supporting or corroborating documentation for the original agreements of such operations» as to 92.6% of all trust funds on which loans were granted.

ON THE «HOPEFUL ROADS» TO CANTV

As time went by, feeling he was a front page celebrity, Gustavo Roosen cherished the idea of reaching the top in the form of becoming the CEO of Compañia Anonima Nacional de Telefonos de Venezuela (CANTV), the Venezuelan telephone company. To achieve this, he would get in the good graces of anyone he could, and while doing this, he used his position as Banco Latino Chairman of the Board and board member for manipulations in benefit of the phone company.

The fact is that Roosen violated the provision of the Trust Fund Act that forbids any investments in companies where managers have interests.

Clearly, he overlooked this provision in order to be appointed as CANTV’s CEO, and from his position in both government institutions, Banco Latino and the phone company, he would manipulate stock and funds in his own benefit and in detriment of this banking institution and its Trust Department customers.

The report sets forth that Banco Latino purchased CANTV stock from funds available to trustees, inasmuch as said stock is in Banco Latino’s name, never in CANTV’s name, this being a flagrant violation of the Trust Fund Act.

The document reads that «while Agreement No. 0398 for 15,714,286 shares of CANTV stock was entered in the ledger at a value of Bs. 3.591 billion, upon reviewing its provisions, they show that it is valued at Bs. 579.9 billion. There is no knowledge of the existence of any other agreement which could account for such a significant difference.»

Additionally, it states that it is worthy of note that the Institution does not have the required audit processes to verify the book and/or market value of the CANTV stock held in trust and then value appropriately the agreement at issue.

Even though the Superintendent’s Office failed to mention this, the agreement is overvalued by 3.012 billion bolivars, which is equal to more than 25% of the Bank’s assets, based on the principle —which was rejected by the Superintendent’s Office— that this banking institution does have assets. Clearly, Latino’s Trust Division was so indulgent with this flaw that it allowed such a high percentage of the Institution’s assets’ becoming affected.

Likewise, the Superintendent’s Office report also discloses that the negotiable instruments purchased for 53 million bolivars under the Trust Agreements «do not identify at any time that settlor CANTV is their holder. Moreover, the said instruments were furnished eight days after the audit, remaining matured (as of July, 1995) and unredeemed for cash.»

This means that these securities were issued to Banco Latino, which, as a result, is their holder or purchaser.

PLUNDERING OF GOVERNMENT FUNDS

As per the analysis contained in the audit reports by the Bank Superintendent’s Office, the fraudulent use of government funds on the part of at least two members of Banco Latino’s Board of Directors and two top executives is also detectable. These officers’ actions meet the requirements used by Banking Criminal Courts and the Safeguard Court of Appeals to issue and uphold their bench warrants for this crime.

Having been a member of Banco Latino’s Government Takeover Supervisory Board and Board of Directors, Francisco Palma Carrillo is one of the above-mentioned directors who might be prosecuted. Given his position with the banking institution, he exerted influence so that Latino would hire the law firm of Baker & McKenzie and have it benefit from significant payments for professional fees both in bolivars and dollars.

Palma Carrillo is a senior member of and partner in the above-mentioned law office, which had received up to December, 1995 the sum of Bs. 27,786,959.40 and US$15,838.20 for services rendered. At that time, Baker & McKenzie was the third that received the most money of the 17 hired by Latino.

Thus, Mr. Palma simultaneously held the positions of representative of the Government’s interests on the basis of his employment with Banco Latino and representative of his own financial interests as member of the law office of Baker & McKenzie.

In coordination with attorney Eva Salazar Hobaica and officer Rosa V. Tinedo, Mr. Palma certified payments in excess of 300 million dollars (about 1 billion bolivars) to the firm of Ginsburg Feldman and Bress, including payments to Baker & McKenzie associates.

Proof of this is contained on page 12 of Invoice No. 95268534 for $480,423.06 paid to the above-mentioned law firm headquartered in Washington.

It is also certain that Gustavo Roosen used his position of Chairman of the Board and Board Member of Banco Latino for personal gain by manipulating Trust Division records and using trust settlor funds to make investments in securities and stock in the company where he has interests and is Chairman of the Board.

Additionally, Roosen ordered payments to «other domestic institutions» without specifying them and in the absence of agreements to recover such payments, as shown in the letter mentioned earlier.

In order to pay comfortably with Government funds, Roosen used a double standard. On the one hand, he would tell Banco Latino that payments would be eventually reimbursed by the other institutions that they were suing, and on the other, he would indicate to those institutions that they should not pay anything, since Latino would bear all the expenses.

The outrageous use of Government money by manipulating Banco Latino funds is a typical case of corruption because the members of the Board of Directors and top officers of that institution used their positions extensively to control any accounting information that it furnished to the authorities, the public and the depositors to benefit themselves from compensation increases and bond redemptions.

These bonds and compensation ended up in the hands of the Bank’s board members and officers on the basis of the «doctored» balance sheets which they themselves submitted and signed. In other words, Latino was cunningly swindled by the Boards of Directors chaired by Roosen and Alfonso Espinoza.

Article 466, Section 5 of the Criminal Code states: «. . .6 to 18 months of imprisonment for anyone who defrauds another under the pretext of an alleged compensation to public officials. . .»

AN INEPT CHAIRMAN OF THE GOVERNMENT TAKEOVER SUPERVISORY BOARD

Honoring Banco Latino’s Recovery Plan, for which the Government Takeover Supervisory Board, chaired by Roosen, received 350 billion bolivars is much like a windfall received by the Bank’s board members themselves, and 214 billion bolivars, that must be returned to the Government, were lost.

While the Superintendent’s Office required that it be paid immediately, this loss —ranging in the millions— was made possible by an inefficient Government Takeover Supervisory Board. As per the report, the funds are broken down as follows:

-Migrations: 157 billion
-Migration Interest: 26 billion
-Financial Emergency Act Receivables: 15 billion
-Losses as of 8/30/95: 16 billion

TOTAL AMOUNT: 214 billion

Such heavy spending shows considerable bank management ineptness, as stated in the Superintendent’s Office report dated December 22, 1995.

«The above-mentioned position reflects a Financial Structure that is not supported by profitable current assets of an operating Financial Institution, causing a difference between the degree of realization of its assets and its liabilities, forcing it to resort to costly indebtedness through overnight loans. . .»

These mistaken decisions by Roosen and his team to become filled with liabilities without any liquid assets to offset them has no relation to preceding managers, to the former owners.

The difference lies in that the former managers were denied Government support, and their mistakes were labeled «crimes».
The report is filled with examples of Roosen’s undoubtedly high degree of managerial ineptness. For instance, Banco Latino reflected on its financial statements as of November 30, 1995 income from interest on the finance of migrations for 26.173 billion bolivars, «which conflicts with the Institution’s financial position because this [interest] is not settled monthly or paid in cash, forcing the Bank to resort to the interbank market and the Venezuelan Central Bank to meet the costs of its liabilities and withdrawals of deposits by the public, thus incurring high finance charges. . .»

Roosen made some wrong calls. To name one, Transformation Expenses had grown by 17.38% on June 30, 1995 as opposed to December 31, 1994, and amongst these, wages and other personnel expenses (3.688 billion bolivars) had swelled by 79.98%.

«Additionally, —as stated in this document— «Operating Expenses at 5.195 billion bolivars are not in accord with the position of this non-profitable financial institution, amongst these, consultant expenses show a figure of 1.022 billion bolivars containing accruals for the two most recent biannual periods up to 11/30/95.»

These expenses include those paid to domestic and foreign companies for consulting services «which have not generated any foreseeable specific actions for implementing plans and policies leading to the Bank’s gradual and definite recovery. . .»

Moreover, Roosen’s people made the highly serious mistake of doing away with systems and audits for no reason whatsoever, but the fact that these had been implemented by the «former» owners.

The report states that «after the Government took over the Bank, purchase committees were discontinued.»

This audit also detected that prior to the Government’s taking over the Bank, there was a committee that regulated software and hardware purchases, «and it has not been reorganized, stopping any existing communication between the Business Units and the Vice-President of Technology.»

This examination highlights the «inexistence of and non-compliance with audits and procedures, ensuingly increasing costs, causing unnecessary expenses, underestimating or generating unawareness of the financial or operating impact and fraud exposure.»

It’s alarming that those liable for this disaster remain calm and collected after the Superintendent’s Office made this evaluation of managerial performance after the Bank was taken over by the Government.

But this time no one has moved a finger to do anything. For instance, Fogade is bound by law to set up rules whenever it furnishes any financial assistance to a bank or institution that was taken over by the Government in order to protect deposits from the public and safeguard any funds allocated to such assistance.

When the Government Takeover Supervisory Board was given funds amounting to nearly 350 billion bolivars, Fogade either failed to set up any rules or never complained of their having been breached because it always turns up as a delinquent debtor and never as the custodian of huge sums awarded by Congress.

The House set forth expressly that the funds it was providing were allocated exclusively to returning deposits to the public and implementing a Latino recovery plan, but neither for financing a reckless operation like «the migrations» nor supporting a squandering management team.

Besides, the Bank Superintendent’s Office did not set any penalty on these managers despite the high number of irregularities shown in the reports under discussion, dated 8/30/95 and 12/22/95.

What about Banco Latino’s external auditors that certified the doctored balance sheets as of December 31, 1995? Nothing is said of them, even though the General Law on Banks and Other Financial Institutions sets forth as follows:

«Any external auditors who breach the duties imposed on them by this Law shall be excluded from practicing this profession independently, as provided in Article 161, Section 20, by the Office of the Superintendent of Registered Public Accountants for a period of up to ten years.»

Interestingly enough, bench warrants have only been issued for external auditors auditing Banco Latino before its Government takeover.

The Government Takeover Supervisory Board, chaired by Gustavo Roosen, and the Boards of Directors, chaired by this same man and Alfonso Espinoza, led Banco Latino to an unviable operational and financial position, being incapable of generating any business in a highly-competitive market. The Courts should make them accountable in the same terms as the currently labeled «corrupt» Venezuelan bankers.

PESCI FELTRI, DIAZ – CAÑABATE, PERALES & ASOCIADOS

COUNSELORS AT LAW EDIFICIO XEROX – 7? PISO

AV. LIBERTADOR CON CALLE AVILA TELEPHONE NOS. 261.06.25 (MASTER)

MARIO PESCI FELTRI M. URB. BELLO CAMPO APARTADO 66229 – ALTAMIRA 10

JOAQUIN DIAZ-CAÑABATE B. CABLES: MAPERASO – CARACAS

FAX: 262.17.61

R.I.F. J-00131995-6 VENEZUELA

CARLOS ZURITA DE RADA

DIEGO M. PERALES DE STEFANO

JOAQUIN DIAZ-CAÑABATE S.

MARIA PIA PESCI FELTRI S. COURIER MAILING ADDRESS

RAFAEL DIAZ-CAÑABATE S. BUZOOM A-CCS 0632

FLAVIA PESCI FELTRI S. P.O. Box 02 – 8637

HECTOR E. CAROOZE RANGEL Miami (Florida) 33102 – 8537

U.S.A.

TAX ADVISOR:

MANUEL PERALES GIL

Caracas, February 1, 1996

BANCO LATINO, C.A.

Caracas.-

Attn.: Mrs. MARIA EVA SALAZAR HOBAICA, ESQ.

Dear Sirs,

While enclosing its copy herewith, we received the memorandum sent by the DEPOSIT INSURANCE AND BANK PROTECTION FUND (FOGADE), which is self-explanatory, in connection with the usual auditor reports on litigation and in-court and out-of-court claims.

As a result, of all the cases assigned to this Firm by that Institution, we would appreciate your telling us, as per your belief, the ones we are to file a report on with the Fund and how extensively.

As there is nothing further, we remain,

Respectfully yours,

For: PESCI FELTRI, DIAZ CAÑABATE,

PERALES & ASOCIADOS

/signature/ [Illegible]

CARLOS ZURITA DE RADA

Letter to Maria Eva Salazar Hobaica from Carlos Zurita, a Partner in the Law Office of PesciFeltri, Diaz Cañabate, Perales y Asociados.

CHAPTER VIII

AN IGNORED BANK SUPERINTENDENT

The detailed report filed by Bank Superintendent Francisco Debera on July 17, 1996 is dramatic given its disclosures involving Banco Latino’s management flop, and especially, the insignificance afforded to this regulator by the Institution’s Roosen/Espinoza stewardships and their top level Government protectors.

Francisco Debera gave an accounting of the manner in which the Superintendent’s Office was scaled down through decisions that lessened its authority and power to do its job effectively. Nonetheless, he maintained that he fought and tried to play a useful role in the financial crisis by requiring essentially that banks should tell the truth and not hide their losses or any sort of problem from their customer base. In short, he asked for a halt to any doctoring up of facts, no matter how harsh these could be.

The high point in Debera’s appearance before the Congressional Comptrolling Committee, chaired by Representative Paulina Gamus, was his referencing repeatedly to his getting little or no information on Banco Latino’s in-house problems from Gustavo Roosen’s stewardship and his core team made up of Francisco Palma Carillo, Eva Salazar Hobaica, German Garcia Velutini, Jacques Vera and a few others: «They would resist to and use dilatory tactics on providing the information requested by the Superintendent’s Office.»

Debera indicated that requests for information were submitted urgently, but there was never an answer, being ignored time and again. Information was asked for on October 18, 1995, November 10 and 21 and then on December 22 and in January and February, 1996.

It was during the post-Roosen/Espinoza stewardships when the Superintendent’s Office succeeded in getting its hands on the agreements that show not only the huge sums in foreign currency paid to the American lawyers, but that their hiring involved telephone calls.

As per the Superintendent, the law office of Ginsburg, Feldman & Bress had received US$4,989,000 up to that time (on the date of the Superintendent’s appearance), in other words, over 2.355 billion bolivars.

The disorganization and anarchy in the hiring process originated from the bad example given by Board Member Francisco Palma Carrillo. He would retain his own law firm of Baker & McKenzie and order hefty dollar payments on its behalf. As a result, the lawyers that worked for him did the same thing on their tier, orchestrating with some other associates of theirs a trail of millions of dollars.

Obstructing and covering-up information from this regulator are tantamount to criminal intent —a design to act

crookedly—, even though the superintendent did not label this maneuver during his appearance.

MIGRATIONS CAME IN WITHOUT ANY RESISTANCE

Another feature of the House debate involving representatives Gonzalo Perez Hernandez (MIN), Luis Carlos Serra Carmona (AD), Luis Rosendo Hernandez (Independent), Roy Daza (Causa R), Walter Aranguren (Convergencia), Jesus Perez (Causa R), and interim head/secretary Leonel Ferrer was migrations to Banco Latino to the tune of 156 billion bolivars. These came in and were passively accepted by its board members, without asking for their counterpart, thus forcing the Institution to use its own funds to pay for withdrawals by holders of migrated accounts.

«Is there any explanation for a restructuring bank’s accepting a 156 billion dollar burden resulting from commitments to savers, without having such funds available?» was the question posed by representative Gustavo Perez Hernandez during the debate.

This involved more expenses for the Bank, which inflated its payroll under the pretext that then it had to service 200,000 new savers. As a result, it hired over 400 people that were required, as per Latino board members, to deal with such wave of customers brought in by the different migrations.

«Who can we blame for this request for more Venezuelan Government funds, increasing bank operating costs to provide better service after these migrations? Who can we blame for such blunders?», asked Perez Hernandez.

Superintendent Debera said that he was not able to identify at that time the people that could be blamed for this, «I think it was the bank and the Board,» while adding something that received considerable criticism, «I wasn’t Bank Superintendent at that time.» This statement seemed to be an excuse to avoid any conflict with power structures because all the problems involving the banking issue Debera was dealing with actually took place before he held his position.

«What happened was that assets were not migrated immediately, and they were given to different banks, that’s the issue,» as explained by Francisco Debera, adding that it’s obvious that «there was a delay, the Institution became unbalanced for a while, contributing to the bank’s not being operational, forcing us to suggest a drastic decision by saying that the organization was no longer viable. First, because it got shut off from sources of funds, since it was impossible to support a non-performing institution at a huge cost. . .»

It may be inferred from this statement that the Superintendent believes that migrations not only hurt Banco Latino, but also the other banks these originated from: Banco Italo, Banco Principal, Banco Progreso, Banco Empresarial.

All the above-mentioned harm, the delay in adopting management and financial decisions and actions that created the imbalance that led to huge operating costs and non-performance is the ingredient that shows the ineptness and negligence of board members Roosen and Espinoza, as well as those of their fellow board members, being punishable under the Financial Emergency Act.

The unusual thing about this is that while all board members were bankers and finance experts, they got caught up in an awkward transaction where liabilities were received in the absence of assets. It is worthy of note that these migrations were concocted by Gustavo Roosen as presidential commissioner to create this crisis.

A FORSAKEN CUSTOMER BASE

Banco Latino’s huge customer base existing before the financial crisis had some dismal luck. New managers never thought of the people that for years had been getting a given service they were used to, while being in the belief that they were also entitled to demand it because they had a sense of belonging that Latino’s own advertising had instilled in them.

However, instead of developing the existing customer base and managing both the assets they had and the huge funds they had been given to restructure this Institution, the new team started to make some wrong calls and dictate the policy that all costs were to be borne first, without having a clear idea of any sources of income.

The basis for this behavior is that Latino’s management thought that funds would be coming in, together with better conditions, but this surely delayed any urgent decisions required at that time calling for keeping the institution in operation, achieving its balance and then conducting a privatization study, as inferred from Francisco Debera’s congressional appearance.

«Bank decisions became delayed, I don’t know if this was done expecting that Fogade would be paying the money (200 billion bolivars resulting from migrations).»

Apparently, management was of the opinion that if the Fogade millions came in, they could implement a plan to promote institutional growth and provide loans, in other words, to operate. But this didn’t take place. If anything, payroll costs jumped to the extent that the number of employees reached 4,700 in a bank having a 1 billion bolivar monthly overhead. It was an awesome burden, since it didn’t generate any income, as stated earlier.

In the meantime, Latino’s huge customer base was forsaken and badgered, ending up on the road to migration after it was «shared» as spoils by the banks comprising the Government Takeover Supervisory Board.

On the other hand, customers that actually intended to pay their debts were scared away or routed through costly and impossible avenues. Institutional recovery efforts under Roosen were limited to little, if anything. This has been reported in open letters. Seemingly, the «toll booth» technique became a regular thing, impacting the Institution’s recovery.

A CLUB OF ACCOMPLICES

One of the things Debera repeated the most in his report was that securing the information required by this regulator was a virtually impossible task. As a result, this prevented him from detecting in a more accurate and timely fashion any irregularities uncovered when there was access to information.

Debera said that «we obtained much of the information we have from this manager (Rolando Salcedo) because it was very hard to get it earlier.» This meant that the information was available at the bank, and if the preceding manager did not provide it, this was because he had the intent to cover up any actual records, losses resulting from poor management, accounting procedures and irregular payments to lawyers, as well as bogus balance sheets. With regard to the December 1995 balance sheet, the Superintendent said that the Board journalized and published balance sheets based on «unreceived income» from Fogade and that his agency could only threaten them with making adjustments if they sought to redoctor up the balance sheets using non-existing income.

Debera told that he had «clashes» with the Espinoza-headed Board «because I had to get what I needed, but I saw that he actually wanted to get things done, but it seemed that the system, the structure, did not provide him with the information.» Instead of helping Espinoza, this reflects that he could be involved in some complicity or cover-up within the unacceptable irregularity involving a bank’s refusal to hand in basic information to an agency such as the Bank Superintendent’s Office.

«If we ascertain —as per Debera— the idea we had earlier that there was a system that performed okay. I don’t know what happened. I don’t know if the staff was not supervised or new people weren’t assigned, but the fact is that we ascertained the outcome: We did not have reliable information as requested.»

Based on the August 1995 report, the Superintendent’s Office prepared a special report specifying everything they detected and concluding that Banco Latino was not viable. This warranted a very harsh answer by Roosen and company, stating that the Superintendent’s Office «was being too demanding», and on one occasion, they told Debera ironically that «we are delighted by your requests, as if this were any other bank.»

As a result, the Superintendent said as follows: «I have one single Bank Law and only one mandate. I can’t have one for a private bank and another one for a government-owned bank.»

As he explained, the Superintendent’s Office always proposed to Gustavo Roosen and Alfonso Espinoza during their respective stewardships that the public be shown a clear picture and that all actual losses be stated as such. «In fact, I insisted on having balance sheets submitted with their actual losses by January, 1996,» and balance sheets began to be published showing 5 billion bolivars in losses.

According to Debera, this took place after putting up a very strong fight in December, 1995, «and it was decided that all the profit apparently shown should be allocated to reserves, and it was zero even after this; it wasn’t actually zero (since there were more hidden losses), and we succeeded in showing this. . .»

Noticeably, there was use of power in the form of manipulation by the Roosen/Espinoza-headed Boards to get privileges enabling them to do as they pleased, without complying with any audits and procedures or observing the law.

As remembered, one of the first decisions by the Government Takeover Supervisory Board was to unceremoniously fire nearly 2,000 people who had been with Latino for an average of ten years and had complete knowledge of this banking institution’s operation because their training required substantial investments of time and resources. Nonetheless, the new administration chose to get rid of «the old guys» and provide others with the privilege of taking them on board, even if they were not ready to replace them.

At the time Banco Latino was taken over by the Government, its staff amounted to nearly 3,500 people who managed directly over 10% of commercial banks (25% indirectly) and 35% of mortgage banks. Additionally, they had a significant share in other segments of domestic financing and its related companies.

Gustavo Roosen ordered two large-scale bank employee layoffs. The first was in March, 1994, and the second was in April, May, June, and July 1996. But noticeably, his stewardship incurred substantial operating expenses to maintain an institution that instead of brokering just «persecuted and spent».

Costs of fringe benefit payments and useless staff structuring analyses amount to millions that can not be submitted as part of the costs incurred by private managers of Banco Latino prior to its being taken over by the Government, as currently sought.

CHAPTER IX

THE «BROKEN» BANK ROOSEN TURNED IN

An idea of the collapsed state Gustavo Roosen left Banco Latino in can be portrayed by just looking at the report filed by Rolando Salcedo, his successor as chairman of the board of this institution, who started in his position on April 2, 1996, and by June, he was already asked by the table Subcommittee of the House of Representatives’ Standing Comptrolling Committee to attend a special meeting in the Nation’s Congress.

To «open fire» in Salcedo’s introduction at his protracted appearance, he stated that the new Board of Directors, chaired by him, found an institution having extreme illiquidity.

A bank –he said– that had both rediscounts and advances from the Venezuelan Central Bank in an amount almost as much as 50 billion bolivars, «and the same day I was appointed, I was formally put on notice that the Venezuelan Central Bank had reached its peak as to providing Banco Latino with assistance.»

In other words, Roosen’s legacy was a «hot potato» passed on to Salcedo, who was welcomed with the dreadful news that Latino could no longer count on the assistance that the Venezuelan Central Bank had given to this institution up to that time. All due to Roosen’s and his team’s stupid management decision on the so-called migrations.

Actually, Salcedo provided the reminder that this illiquidity resulted from non-payments of migrations, whose liabilities, but not its assets, were transferred to Banco Latino, generating a large-scale withdrawal of such funds, thus causing this institution to become increasingly indebted in the interbank market and to the Venezuelan Central Bank by making rediscount and advance operations.

«When the bank was turned over to me, it barely had enough cash for four days. Luckily, it was just before Easter Week and this was successfully dealt with. In four days I had just as many meetings with the Financial Emergency Board until a solution was reached because the Nation’s president interceded.»

The situation was so critical that there were just two alternatives: either the National Guard was ordered to provide branches with protection because there was no money to pay, the Venezuelan Central Bank would furnish some assistance or a solution was sought to find the 50 billion «in order to stop losing almost three million bolivars per month, which were the bank’s financial losses in filling this gap,» said Salcedo.

The solution reached the Venezuelan Investment Fund (FIV) to the tune of 50 billion, in the form of a Fogade bank-owned portfolio. By the way, he explained, this operation was conducted in the best interest of both the Fund and Latino. «As far as the Fund is concerned, since they placed some money at 54%, having a maturity date of June 20, and sold those dollars at 520 bolivars, this was the first day that currency exchange operations were conducted and they made an excellent deal, and so did we because we got 3 billion bolivars of our backs.»

And after this initial heat, Salcedo and his team became engaged in preparing Banco Latino’s restructuring plan for its immediate privatization. It was proposed to the Financial Emergency Board and began to be implemented by selling 74 offices and 3 windows, allowing the downsizing of the cost structure of the institution, whose financial income was not enough to even cover its payroll.

However, the Board of Directors that Roosen chaired often announced the bank’s restructuring and even spent huge sums on consultants and advertising campaigns that promised a role model bank, the country’s best and most efficient.

The hiring of the international consulting firm by the name of Andersen Consulting stands out in these dealings. This firm would be ideal to find a method to privatize and restructure the bank.

A USELESS BILLION

Andersen Consulting first signed a contract with the Government Takeover Supervisory Board to do work for Latino’s reopening and then, the subsequent boards of directors asked that it do different management consulting work for restructuring and running the institution.

The last contract —as disclosed by Salcedo— was for organizing a recovery organization. All of this adds up to nearly one billion bolivars in payments to Andersen Consulting for these services.

Banco Latino’s current Board invited over some representatives of said firm not only to find out the work they did, but to evaluate its usefulness in helping them face the difficult position they had inherited. But the information was inaccurate and extremely lacking.

Andersen Consulting was asked to develop some manuals for the bank’s reopening, a restructuring design, something absurd for Venezuela, although it seemed to have worked in other countries. Additionally, it developed procedural manuals for the opening of a recovery organization, which, by the way, was a real eye-catcher because it was an illegal project specifically forbidden by Venezuelan law.

«Unfortunately, this research was completely useless to what we are doing,» said Salcedo, indicating that he didn’t know who signed the contract, while thinking that Roosen executed it initially and then Espinoza.

He also made it clear that Andersen Consulting had been paid nearly 300 million in 1994, close to 500 million in 1996 and the rest in 1996, «before we came in.»

When representatives bombarded him with questions, Rolando Salcedo explained how he succeeded in getting Banco Latino again in the black after it was in the red subsequent to Roosen’s razing everything to the ground, as a hurricane, leaving a closing balance that showed a loss of two billion as of the last day in March.

In April, after Salcedo had just taken over as chairman of the board, «we reflected 7 billion in losses, which were the two billion that had accrued plus another five billion resulting from verification of the bank’s balance sheets,» he said.

He stated that the operation with the Investment Fund netted a loss of 1.6 billion bolivars, but «this loss enabled us to save 4.8 billion in overnight financing costs, in other words, a lot was recovered.»

It was merely an attempt at getting to the institution’s real position, he said, and «I know that bankers don’t like to publish balance sheets showing losses, but unfortunately, losses, if any, have to be assumed, so we published the balance sheets for April indicating 7 billion in losses.»

PAYING THE «JOKERS»

The different advertising agencies, consulting groups, foreign and domestic law firms and highly specialized technical assistance providers were paid generously during Roosen’s stewardship. Many contracts are still open for which payments are received from the new authorities. Up to February 8, 1997, nearly four million dollars had been paid just to U.S. law firms.

«I got into something done in the past,» was Salcedo’s defense when told that the Public’s Wealth Safeguard Act sets forth that once his term is through, a manager for a given period is liable for reporting anyone preceding him; otherwise, should he not report him, he assumes their liability because he had the legal time frame to remark on anything improper.

Rolando Salcedo stated that he didn’t know the reasons that prevailed for hiring several foreign law firms, including, but not limited to Ginsburg Feldman & Bress, but he argued that «nobody changes horses in midstream», thus, he had to keep on working with said firm. When asked if he would have made these hirings, he answered: «I think lawyers should perform those duties. Bankers are for handling financial situations, not for acting in the legal area. Our banking approach has been to focus on what we do best, this is an industrial principle, which merely consists of managing the financial institution and privatizing it, we have focused in that direction.»

However the U.S. law firm of Ginsburg Feldman & Bress continued its actions freely and received hefty fees that Latino agreed upon without saying a word.

Salcedo explained in this regard that «up to this time, the practice is to list expenses, you check them and in most cases, you believe that what you’re getting is fine. The invoice’s good faith is presumed.»

Due to the hiring fever prevailing in Roosen’s stewardship, Latino’s Board is still paying for invoices dating from his term, amounting to a substantial sum in bolivars because they are dollar-denominated.

THE UNDERWORLD OF THE HIRINGS

When Salcedo and his team took over the bank’s management in April, they found huge differences amongst the different existing agreements. There were those signed with foreign lawyers, and there were agreements with attorneys from Caracas and other parts of the country, as well as those with Saper, a group of lawyers from the autonomous service of the Office of the Prosecutor General of the Republic. As reported, the newly arrived ran into hourly-based agreements executed with nearly 10 foreign law firms. Moreover, there were also agreements signed with lawyers from other parts of the country and with Saper attorneys; those for the latter were not hourly-based, but pursuant to amounts sued for, where lawyers must be paid 2.5% of the amount sued for prior to the Trial Court’s judgment. Along those same lines, Roosen did not hesitate in pre-purchasing television time. Apparently, Latino’s blazing Chairman of the Board planned to saturate the market with advertising for the «role model bank» that later turned out to be the superbankrupt bank.

Since this awesome investment was neither warranted nor included in the plans of the Board chaired by Rolando Salcedo, he did two things: «On the one hand, any non-used time expiring in June was sold to the Central Information Office (OCI),» which was acceptable to the tv channels because it was the same shareholder, in other words, the Venezuelan government. Then, pre-purchase payments were stopped right in May, «because we can’t keep paying 100 million bolivars every month, much less for time that we won’t be using,» as made clear by Salcedo. And second of all, negotiations were conducted with other Government agencies to assign them the above-mentioned television time at the same cost.

CHAPTER X

IS IT THE END. . . OF EVERYTHING?

(RATHER, IT’S ONLY BREAKTIME)

These pages have reflected the performance of a specific bank management style within the complex world of Banco Latino as of the time it was taken over by the Venezuelan Government for political reasons, albeit a financial basis, thus starting the biggest economic and political crisis that the country has lived through since last century, when Jose Rafael Revenga had the idea of requesting from Grand Colombia’s Congress the establishment of a Bank of Venezuela, in Caracas, something that didn’t materialize because of the antagonism existing between both regions and the long War of Emancipation.

Given this, we can say that the full history of the country’s banking industry remains to be written, where loyalty and betrayal go hand in hand, thus originating a strange underworld full of lust for money, resulting in the phrase that some attribute to Lenin, while others ascribe it to Bertolt Brecht: «Founding a bank (or managing, we would add) is a lot more serious than robbing it.»

Much has taken place from the first Venezuelan banking crisis that began in 1843, when the press called bankers names like «profiteers» and «usurers», until this age, where banking institutions have risen and fallen, as per the way political winds blew in the country. The falls of financial empires have yet to be written thoroughly, where the names of «great men from the Valley» are always mentioned, and behind them, as «phantoms of the opera», those of the presidents in office and their assistants or lackeys.

The history of the fall of a myriad of credit institutions in a century and a half where there were great adventurers, such as the Frenchman Paul Bolo, a/k/a/ «Bolo Pacha», is so fascinating that it openly reflects the reason for many of our economic and political evils. Well, I won’t get tired of repeating it. The banking problem is more political than anything, no matter how you look at it, and whoever has any doubts about it can resort to a rich existing bibliography that, however, as most events in our recent history, is dormant in an unwarranted sleep that is best depicted as «indifference».

Thus, throughout the years, as of the middle of the last century, we have witnessed the collapse of banks such as Colonial Britanico, Nacional de Venezuela, Caracas (the phoenix fell and rose from the ashes several times), Agricola e Hipotecario (Juan Vicente Gomez’s idea), Comercial de Maracaibo, and the initial arrival of the large international banks, such as the Royal Bank of Canada, National City Bank of New York (the current Citibank), Banco Holandes, and the American Mercantile Bank.

This was the first wave, but many more would come, having their peak as of 1920, when the Government promoted Banco Venezolano de Credito, Banco Mercantil y Agricola, and in 1928, with their main offices in Maracay, from which dictator Juan Vicente Gomez ruled Venezuela as his large hacienda, two new institutions originated, Banco Obrero and Banco Agricola y Pecuario, having had, in their own way, a noticeable role in some of the country’s development.

The worldwide financial crisis of 1929 affected the country’s foreign banks, and their control of the machinery fell in the hands of two entities that would really cling to it, like a «vice» or «yolk», until the present, meaning the Government and private capital. It’s not that these didn’t exist earlier, but since the Government in office was the promoter or engine of the entirety of the Nation’s economy, using its large oil supply, small groups or families joined the «Great Manna» to vegetate in its shadow for the most part.

Ever since the large scale «black gold» exploitation during the twenties, the Executive has been the sole capitalist in Venezuela, but it created, in turn, in the words of Arturo Uslar Pietri «a negative effect», whose result is crystal clear: we are galloping on an economic and social crisis (one doesn’t exist without the other) that hasn’t let one-single Venezuelan value standing still.

«Such disastrous policy» —as per Uslar— «can’t be depicted in any other manner but as an immense national failure, lacking every single basic public service, with a high growth of impoverished areas on the outskirts of cities and an overall crisis.»

«The most negative effect of the manner in which the Venezuelan Government spent such huge sums, with such a contradictory result, was that of creating a false economic and social reality, where generally unprofitable and loss-causing Government enterprises prevailed in their entirety, together with a staggering growth of government jobs and both subsidies and protection to allegedly social and economic activities, without any rhyme or reason. . .»

«The entire government stopped being productive, in the real sense of the word, in order to become a humongous and most diverse package of aid, protection and handouts that kept looking like economic and social activities from the outside.»

These noted writer’s words should certainly serve as the high point of the fledgling banking crisis, which may have begun, to some extent, from 1968, with the collapse, in different stages, of Banco de los Trabajadores, Banco Nacional and Banco de Descuento y Comercio, to its current state, when affiliates of large foreign banks come in, as in 1917 (81 years later), to buy the leftovers of the remains of the largest disaster endured by Government funds, with more than half of the banks either affected or no longer in existence, since banks may have a lot of things, but they operate with money that at times could be called another specific term.

The management style displayed by Roosen and his team during the never-ending Banco Latino crisis —since it doesn’t seem to have any apparent solution, even if this institution were privatized— is consistent with the approach normally used by the Nation’s Executive to face the country’s problems, a method that lacks creativity on the most part and involves bankrolling a huge economic cost.

To the largest extent possible, these pages are intended to provide evidence and later become the basis for another more thorough presentation that will include the country’s «Great Banking Earthquake», whose blame, if any, is to be shared and shared alike amongst inept governments, unscrupulous bankers, mediocre managers, greedy and grudging politicians and a mass media that played their own cards, as per their own financial interests within the system’s maze, disregarding the citizenry’s right to be informed.

This job —that of the press, radio and tv— is left to the journalists themselves. Let them research this problem to uncover why a story that took place the same day was portrayed very differently to the reading audience. Was it free speech? Let’s be a bit fairer. It was a matter of different interests in cahoots.

This is the only way to understand the maneuvering that led to the creation of the «card joker».

This is not the end, since the above is just the introduction. The Book of Truth is yet to come.

[Inside Back Cover]

[Photograph]

Journalist Rafael del Naranco is the editor of Caracas’s «Elite» magazine and an international political analyst for daily newspaper «El Mundo». The Mass Media «Moises Sananes» Award stands out amongst his numerous awards and prizes for his work. He is an ongoing columnist on Spanish and Latin American print media. His literary works include «Cuentos de Ciares» («Ciares’s Short Stories») and «Cartas a Patricia» («Letters to Patricia», in five editions), the latter work having achieved him distinction as a writer in his own right, as per specialized critics; «Historia de Kuwait» («History of Kuwait»); «Apuntes sobre Rafael del Riego» («Notes on Rafael del Riego»); «CAP, el hombre de la Ahumada» («Carlos Andres Perez, the Man from la Ahumada»); and «El triángulo de corrupción» («The Corruption Triangle») [Spain, Italy, and Venezuela], a book that was impounded by two courts. One even banned the media from mentioning it.

«The Card Joker» is an investigative piece, the work of a journalist interested in learning the minute details of the management style in a bank whose collapse brought on the fall of Venezuela’s financial system, enabling some law firms, however, to cut the financial deal of the decade.

Back cover The

Card

Joker

While catapulted by his merit in having been Marketing Director for Empresas Polar, the largest Venezuelan monopoly, Gustavo Roosen has held all sorts of positions, covering up each of his dubious successes by making a spectacular jump to another position gotten on the basis of his cunning management style that has been questioned by some segments within his own environment.

His having been the Minister of Education that sold the most flour, bread and beer through «food» stamps that could be exchanged for «some cold brew» qualified him for making an acrobatic jump to the position of CEO of Petróleos de Venezuela. While running an industry that he was totally unfamiliar with, he showed that he knew a lot about Education.

Surprisingly enough, as Rafael Caldera became President of the Republic of Venezuela, this character made another fatal jump from being Petróleos de Venezuela’s CEO to becoming Banco Latino’s Chairman of the Board and lo and behold to Financial Crisis Presidential Commissioner.

Once gain, as bank Chairman of the Board and Finance Czar, he proved to be extremely knowledgeable in Education.

No one has said a word, neither those who should have disclosed his true performance as incumbent minister, nor those who claim to have endured his whimsical stewardship of PDVSA, nor those who should look into his actions and omissions in this humongously costly crisis. All of them kept mum.

This is the first published documented assessment of Gustavo Roosen’s managerial «work» as head of a company: Banco Latino.

These pages only reflect the documented truth based upon official documents, media-published bank in-house papers and ascertainable evidence from individuals of unquestionable credibility. There isn’t a word about his private life, but the discussion, however, deals with his public activity as analyzed in that light.

Additionally, there is an exposé of the complaints that no one understands why Prosecutor General Ivan Dario Badell puts on ice and ignores, that should be discussed by the Comptroller General of the Republic to fulfill his goal of penetrating corruption by bank crisis «gentlemen», that are «passed around» from one court to another within the currently proverbial conduct displayed by special judges and that the Government covers up under the guise of the fight against corruption.

This non-literary analysis shows the different violations of the Bank Act, the foreign exchange rate system, the current financial policy, the Public Wealth Safeguard Act and the Criminal Code.

Can a jump by this «harlequin/sportsman» confuse Venezuelans once gain and can he embroil ethics while being behind CANTV, the powerful phone company, as he is cheered by politicians, Congress, judges and the Venezuelan middle class?

If this takes place, we will be instituting a sad phenomenon: THE CARD JOKER.